Pricing models for Cloud

The below article was in The451 yesterday and I agree.

Personally I think that pricing models are going to be a big competitive differentiator in the future – some vendors will move slow, some won’t move at all and others will “get it” and adapt.

Without sounding like shameless self promotion, but Nimsoft is already doing this. Even for us, we had to have the “difficult” conversations internally, but we put flexible models around Cloud in place about 9 months ago and have been working from them successfully since. Email me, or add a comment and I’ll tell you more about what we are doing.

Is software licensing slowing virtualization and cloud adoption?

Analyst: Dan Kusnetzky , Rachel Chalmers
Date: 24 May 2010

A few hidden, but very important, aspects of virtualization and cloud adoption are software licensing and business terms and conditions. We hear it again and again from end users in the enterprise: licenses and terms and conditions are too complex, too expensive and too onerous. This presents a significant barrier to the adoption of server and desktop virtualization, as well as a major inhibitor to the adoption of cloud computing.
Software licensing has been challenging and a point of contention between suppliers and consumers for decades. A major part of the problem is that suppliers and their customers have different needs and goals. So they can find themselves in conflict, or find these needs and goals are entirely incompatible.

Suppliers
Suppliers typically have the following requirements:
They want compensation for the value they provide. Their perception of that value may be quite different from the customer’s perception.
Suppliers want to maximize their revenue – that is, grab all the money on the table, without going over the line and creating a customer base angry at overpriced products.
Suppliers want to motivate their customers to use more and more of their products and services. This often means offering packages of products and services, or creating product suites, that provide a substantial discount over purchasing the components separately.
When and where possible, suppliers hope to block out competitors.

Customers
Customers often have quite a different and conflicting set of requirements:
Customers want maximum flexibility to architect, build and then deploy whatever IT-based solutions they require wherever, and whenever, they choose, without facing licensing restrictions.
They want to purchase only what is absolutely needed. If a given piece of software is deployed multiple times on the same physical machine, customers typically don’t view paying the full license fee for each instance as fair or equitable. For suppliers, this can be infuriating, since a physical host is as arbitrary a cutoff as anything else. If a customer derives value from multiple instances of products, suppliers would like multiple revenue streams – even if those instances are running inside virtual machines (VMs) on a single server.
Customers want to design solutions to fit their needs without facing licensing or business terms that prevent them from taking that step. For example, they don’t want to be told that a particular piece of software cannot be licensed to run inside of a VM.
Customers expect software from all their various suppliers to interoperate easily.

Historical licensing models
Historically, client or desktop software has been licensed differently than server software. Multi-tier applications, application frameworks and data management tools have been licensed differently than either client or server software.
Client software licensing: Client software has been offered using one of four different models: licensed to specific machines, licensed to specific named users, broad site licenses, and cross-organization licenses. In the case of system- or user-based licensing models, each instance of a software package would require a separate license.
Server software licensing: The licensing of server software is based on somewhat similar models, but with important differences. Some suppliers take the per-system licensing model and offer a number of distinct variations. As with client software, server software can be offered on a per-system basis. This software may have different fees and license restrictions based on processing power categories, number of processors or sockets, processor architecture (X86 or single-vendor processor architecture) or by host operating system.
Some suppliers charge a per-client ‘system access license,’ even if that client does not run software from that supplier. Suppliers often offer both site licenses and organization-wide licenses. As with client software, software licensed on a per-system basis would require a separate license for each instance of the software in use.
Multi-tier software licensing: Software having multiple tiers (e.g., some combination of user interface component, application server components, data management components and storage components) has been offered in a number of ways. In some cases, the entire package is made available under a single license, regardless of the number of components required to support the customer’s workload. In other cases, each component is licensed separately. So if five components were deployed, five licenses would be required. If 10 components are in use, all 10 would need to be licensed separately.

Base assumptions that may now be wrong
Many of today’s licensing schemes appear to depend on several base assumptions: that environments change slowly; that change is usually transactional growth not a reduction; and that once placed in an environment, things stay where they are and don’t move. Virtualization and cloud computing demonstrate that these base assumptions are no longer accurate.
Another basic assumption – that coders require compensation for their work – has also come into question, thanks to open source. Customers now have many options for free and open source alternatives to proprietary software, at no cost. Subscription relationships based on the availability of upgrades and support may offer a healthier long-term model for how suppliers and customers interact. Here, the goals of suppliers and customers may be better aligned. Suppliers have less incentive to gouge on price, and customers have more leverage to end a relationship that is not yielding real value.

Impact of virtualized environments
Virtualized environments are likely to change rapidly.
They will expand and contract as the workload and the economy requires.
Virtualized applications or application components may move from place to place to achieve SLAs or to address outages.
Multiple copies of a specific application or component might be in use on the same physical system. If a larger workload is imposed on the network, new instances of applications or components might be started. As the workload decreases, applications or components may be stopped.
Software may run in untraditional places – client software may be hosted on servers. Server software may be hosted on desktop or laptop systems.
It is clear that many established software license models do not address how customers are using software now, nor the impact of virtualized or cloud computing environments. A key component of licensing is that the supplier and the customer agree on the value being provided by a product. It’s not clear that vendors’ views of value and clients’ views of value are aligned in all cases. When they are not, conflict arises.

Impact of cloud computing on licensing
As organizations move to ever more virtualized environments and then ‘into the cloud,’ many things can change the traditional customer/supplier relationship. Service providers may now be the license holder, rather than the ultimate end user. They may also be the primary consumer of service contracts, rather than the ultimate end user. Suppliers that ignore this trend do so at their own peril.
It is clear that most major suppliers of technology (but certainly not all) have started to closely examine their software licensing architecture and the business rules they impose on customers using their products. It is also clear there is no simple answer that fits every scenario. What is apparent is that the playing field has changed. The rules must also change, or suppliers may find their best customers have moved on.
In a utopia, licensing models would fit the following requirements: fair and equitable to both the supplier and the customer; enabling innovation not stifling it; and no longer imposing arbitrary limitations on where something executes or how it is used. Furthermore, licensing should be easy to understand and track, and offer true value-based pricing. The industry certainly hasn’t gotten there yet. Those that find the right approach for their products are likely to be the industry leaders tomorrow.

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