This is the second part of a series focused on how service-oriented architecture is changing the financial landscape of the software industry. The change in how software is being adopted and packaged was the topic in Part 1 of the series.
Two rising tides—service-oriented architecture and open source software—are forcing vendors to rethink how they charge for software.
"This will be one of the big issues for the next five years," said Joshua Greenbaum, principal of Enterprise Applications Consulting. But as of yet, he added, "there is no consensus on how to deal with it."
The traditional licensing model of big upfront costs for typically more capability than an organization needs to get started does not jibe with the incremental adoption mode favored by those going down the SOA road. And once those architectures are in place, organizations will be looking for smaller, reusable services they can dynamically link and change in composite applications versus the large soup-to-nuts applications they have been forced to buy in the past.
"The expectation is, once organizations have implemented an SOA, they will be looking for more incremental upgrades versus a full upgrade," said Sandy Rogers, a research director at IDC.
And with the option to mix in open source components, the need to license a proprietary product to build out an SOA may become less compelling.Nothing is free
Yet CIOs shouldn't necessarily start rubbing their hands together with glee at the thought of licensing changes that will translate to big IT savings. With the source of their revenues at stake, vendors are scrambling to come up with pricing models and value-add that make sense for this new world.
The current thinking "starts to favor a utility model more, but the vendors are flipping back and forth between value-based and utility-based pricing," said Greenbaum. From a revenue standpoint, he expects the next five years to be mostly "business as usual" as organizations get SOA infrastructure in place. "For most vendors, their customers are going to have to write a big check to get their service architecture infrastructure in place. So there will be an initial uptick in revenue in the more classic sense," he said. "But going forward, with the service component kind of model, it means you're not going to write a check for a $14 million CRM suite. Vendors will see some changes in the average deal size as well as the complexity of the deal."
According to IDC's Rogers, "one of largest areas impacted will be the package providers, but it will be a while before we get to that stage."
Once SOAs are widely deployed, "no doubt the overall licensing of application software will undergo a dramatic shift," Greenbaum said. "You're no longer really going to be buying an application. You're going to be buying services and collections of services you string together in a process using modeling software. It's clear per-user and per-CPU licensing will have to shift."The new model license
Ori Inbar, senior vice president of solution marketing for SAP NetWeaver, says the company is not ready to reveal the pricing model for its major release scheduled for later this year, but said SAP will continue to license its software with traditional user licenses as well as pricing based on what he calls "engines" that are tied to business metrics. However, he said he expects the balance to shift between these models. "The licensing will shift more toward the usage of software through those Web services," he said.
In addition, Inbar said, "with the emergence of software as a service I see subscription becoming a more integral part of the license structure." SAP's CRM on-demand solution, announced in February, "is our first major attempt to go in that direction."
Other vendors have begun testing the waters as well with new ways to buy software. Flashine Inc., for instance, an SOA governance vendor with a registry/repository product, offers a pricing option based on the number of unique daily users.
"We were desperately trying to come up with an effective way to equate value to price," said Charles Stack, founder and CEO of the Cleveland-based company. "It's been an ongoing struggle in the software business. The phrase 'shelfware' adequately describes the pain customers feel."
The greatest value for a product like Flashline's is when a large number of users across an organization are using it, Stack said, "but getting customers to buy that many seats out of gate is challenge." The unique daily user pricing option "gives customers the ability to start small from a dollar standpoint, and not incur [a larger] licensing cost until they've realized the value of the software."
Another young company, StrikeIron Inc., offers a subscription-based Web services marketplace for buyers and sellers. It offers both monthly and annual subscriptions, as well as the option to make a one-time purchase. The subscriptions "are kind of like a cellphone package," said Bob Brauer, CEO, president and cofounder. "It enables you to do so many transactions for the month, say, and if you run over it kicks into a per-transaction charge. What makes our model attractive is you don't have these big upfront license costs. A lot of customers will do a one-time purchase just to try it. If it's what they need they'll subscribe to it on an ongoing basis. It reduces the amount of risk an organization must undertake in terms of cost when doing something new."Start small, end big
But will these different pricing models reduce software costs in the long-run? Will open source SOA solutions save money or will organizations end up spending just as much on subscription fees to vendors that support them?
And in the end, for vendors, is there money to be made in the SOA world? According to IDC, worldwide SOA-driven software spending represents just 0.6% of total software spending in 2005 and is expected to grow to approximately 3.4% of total software spending by end of 2009.
While this is a small market today, StrikeIron's Brauer said he "expects it to be very large. I wouldn't be working weekends if I didn't think so."
Greenbaum said all the vendors are counting on the idea that there will be more software to deliver to a larger number of users, as more functionality can be directed to a greater number of individuals. "So the volume per user will go up probably significantly, which may make up for the lower overall deal size."
However, he said he's advising clients to focus on increased productivity and usability rather than cost savings. "The trend in software is you end up spending similar amounts, but getting better value. There's no peace dividend for SOA. You will have to pay to play, but hopefully the investment will be justified."