Software Licensing and its Impact on Cloud Strategy

Article written by Leo Reiter

With so much to think about regarding providers, platforms, and delivery models, it’s often easy to overlook the most critical part of any cloud computing strategy: the applications. After all, without applications, there’s simply no use for any computing, whether it’s cloud-based or not. Once we start to focus on applications, the complexities and intricacies of software licensing immediately become “front and center”.
 

In an ideal world, all cloud applications would be open source and providers would get paid on usage, which they would apply to system and software support. But in the real world, we often depend on vendors and thus have to pay careful attention to their proprietary software licenses. Not only is this understanding critical for compliance, but it can also steer cloud adoption strategy itself. Let’s consider the 3 primary ways vendors license software and how this plays in cloud computing…
 

Perpetual licensing is well understood and as old as the software industry itself. In a nutshell, a customer pays a software vendor for the rights to use an application indefinitely. This is sometimes also referred to as a “paid up” license. Note that most vendors don’t actually sell you software as an asset, but rather as an entitlement to use it (within the terms of an “End User License Agreement”). So even if you own a perpetual license, it doesn’t necessarily mean that you can run your software anywhere or in any way you like.
 

Perpetual licensing is ideal for consumers and businesses who own equipment and observe regular upgrade cycles (typically 3-5 years). If you amortize the cost of the license over the length of time you plan on using it, it generally gives a good return on investment (relative to the value you are getting, of course – this doesn’t mean it’s “cheap”).
 

In a cloud context, perpetual licensing has major problems. First, it’s unlikely that your Cloud Service Provider will own the software you want to use. Even if they did, they may not be entitled to “rent” it to you (for usage or subscription, which is more compatible with cloud computing). This almost always leads to a “bring your own license” situation. The problem with that, as stated above, is that in many cases the terms of the license entitlement don’t permit you to buy once, and run anywhere. You will likely end up having to buy additional copies just to run in the cloud, or enter an agreement with your software vendor that prevents you from using the application on your own equipment if you want it served from the cloud. If your strategy is wholesale, “cold turkey” cloud computing adoption, this may work, but generally moving to the cloud is a transition process that takes time and effort. Negotiating transfers with software vendors or buying duplicate licenses just to be able to get the same work done is generally a major obstacle.
 

When crafting your cloud strategy, pay special attention to your perpetual licenses and how you will deal with them both during the transition and after your adoption is complete.
 

Subscription licensing is basically a way to “rent” software for some agreed upon period of time. Typically this period is monthly, but in a “lease” context, can even be yearly (or longer). While much more compatible with cloud computing, there are some important points to consider.
 

First, a time-based subscription basically ignores actual usage – it’s either “on” or “off”. If you only use an application for a single day of the term (month, year, etc.), you still owe the vendor the full price for that term. This makes perfect sense for regular use, assuming the pricing works out. Some vendors who sell perpetual licensing will charge a premium (sometimes large) for a subscription or short term lease. Other vendors support “on demand” leasing – for example, if you suddenly need to run an application for a week, you can procure a one week lease from your software vendor. But beware of the lead time to acquire these licenses – for advanced software that is subject to regulation (e.g. export restrictions), the compliance process may take several days. This makes “on demand” impractical. Be sure you understand these terms if this is part of your strategy.
 

Second, subscription and leased licenses may still require you to “bring your own license”, unless the cloud service provider is a reseller of the software vendor’s products. In a pure Software-as-a-Service (SaaS) play, your cloud service provider likely will sell you the subscription directly. But if your cloud strategy is more about Infrastructure-as-a-Service, you’ll likely still need to purchase licensing from your software vendors rather than your cloud service provider.
 

Finally, subscription software licensing still demands software asset management, because you want to make sure you have enough entitlements to cover your end users (unless you are in fact the end user, in which case it’s a simpler problem). It’s important to consider compliance and asset management in your “total cost of ownership” (TCO), especially when crafting a business case for your cloud strategy.
 

Usage licensing, also referred to as “pay-per-use” and “pay in arrears”, is the most cloud computing compatible form of software licensing, especially if your cloud strategy is broad and incorporates infrastructure or platforms.
 

Software vendors selling usage licensing get paid in one of two ways: either by end users directly, or by Cloud Service Providers who collect aggregate fees from end users. The latter is the most advantageous because it generally presents “one throat to choke” should there be billing or support issues. However, due to compliance restrictions, not all Cloud Service Providers can resell all usage-based applications. So there’s still the good possibility that you’d need to work with multiple vendors. Generally however, that’s as far as the hassle goes.
 

With usage licensing, you only pay for what you use, typically on a monthly or quarterly basis (depending on your agreements with your vendors and providers). This is a lot like paying an electric bill. It’s also completely on demand – you do not need to work with your vendors ahead of time if suddenly you need to ramp up usage. You will simply be billed accordingly at the end of the cycle.
 

It’s important to consider the one major drawback to usage licensing, which is that it typically costs more than amortized subscription or perpetual licensing. In other words, if you have full time or predictable use, other licensing methods may actually save you money. You should compare hourly rates to monthly rates, for example, by multiplying by the number of hours you expect to use in a month. Just keep in mind that subscriptions are pre-paid, while usage licenses are paid in arrears. Some vendors even offer hybrid models, where you pay a subscription (a commitment for regular use) and then usage fees if you exceed your subscribed capacity. This is similar to a standard mobile phone plan, where you have a contract for a certain amount of data, but if you exceed the data limit on a given month, you pay for the additional usage on demand. Regardless, unless your usage is completely regular and predictable, this gives much more agility, flexibility, and likely even cost effectiveness than subscription or perpetual licensing.
 

While there are many factors to consider here, the good news is that things are only going to get easier. The market has spoken loud and clear: we want to pay for applications based on what we use (or plan to use), and we want the ability to scale that up or down at a moment’s notice. Software vendors are well aware of this market rhythm and know that if they don’t adapt, they are likely to be disrupted by cloud-friendly competitors in the coming months and years.   Of course, all new software “born in the cloud” is already licensed in a cloud-friendly way, so our options are only getting better as time goes on. There will come a day, perhaps in a few short years, when we will forget about licensing all together. End users will just worry about getting their work done, and software vendors will just collect money each time their applications are used. That day will signal the arrival of the “golden age” of cloud computing – and it’s closer than many might think.

 

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