Archive for July, 1995

A New Age In Software Licensing

Tuesday, July 11th, 1995

(This column first appeared in the July 11, 1995 issue of PC Graphics Report)

Most, if not all, of you are in the hardware business. And, hopefully you realize that without software, your hardware is close to useless. Software is the fuel that makes hardware go. The bigger and unwieldier the software, the bigger and more expensive the hardware needed to make it run properly.

It’s a cycle, of course. Hardware improves in capabilities, which results in existing software being revised with more features and bulk to suck up the extra bandwidth the new hardware provides. That in turn helps drive the creation of even faster and more capable hardware, which creates even bulkier and feature laden software. And so on, and so on…

However intertwined hardware and software are, certain undeniable sales differences exist. A given user only needs one clump of hardware to run a multitude of different software packages, but as the SPA is quick to point out, a fair number of users don’t pay for those software packages. But, they have to pay for the hardware regardless, because it can’t be easily pirated.

Of course, both hardware and software companies make a significant part of their revenue by selling users newer versions of what the users already have. The percentages between new sales and upgrade sales differ between hardware and software, but not significantly on the whole.

The Cycle Wobbles
The perpetual upgrade cycle to have the latest and greatest hardware and software is starting to wobble a bit. Many users, especially in the corporate world, are increasingly resisting the purchase of upgrades to hardware and software solely for the sake of the upgrade. The bulk of today’s hardware and software sales appear to be coming from the consumer market, which has newly rediscovered the value of having a home PC.

Upgrade resistance is borne of a number of factors. On the software side, software companies have over the years made their offerings so feature rich and powerful that new upgrades appeal to an ever smaller, more specialized segment of the market, leaving the larger part of the market unenthused. Several examples include:

  • Word processing – most people using word processing software didn’t come close to using all the features their old word processing software had (some of us dinosaurs even still use, gasp!, the DOS versions of popular WP software);
  • Desktop publishing – the greatest volume of DTP usage is still black and white, since full color reproduction is still rather costly in comparison, but leading DTP software companies have run out of truly useful black and white features to add to their software, and are instead adding more and more full color manipulation and output support to new versions of their software.
  • CAD – All the big names are adding, almost exclusively, 3D capabilities galore to their upgraded CAD packages, even though the majority of CAD users are still 2D oriented.

Most users don’t care to spend the additional $500, $100, or even $50 an upgrade costs, because they can’t justify the expense based on features they won’t be using.

PC hardware is suffering similarly in markets where such hardware has existed for long periods of time (i.e. the corporate world), which is why sales of Pentium systems in such markets are a shadow of those into the new, booming consumer market. Users (and even some noted columnists) have been quoted in various national publications as finding the performance of their 486DX2/66 systems as adequate for their needs. It logically follows that since the overall system performance impact of the newest graphics technologies is minor when compared to the previous generation, that graphics hardware sales may suffer as well from the “upgrade apathy”. The only saving grace for hardware sales is that hardware will fail sooner or later and need to be replaced. Software can pretty much run forever under normal use, and therefore doesn’t benefit from failure.

In both cases, one obvious way to reverse the downward upgrade trend would be to significantly increase the benefit to the user of the upgrade, but this is the course that software companies have been trying to follow until now, without significant success. There is more hope for the display hardware industry however, with the increasing demand for real-time, high resolution digital video playback and the anticipated market for 3D – new features that aren’t truly satisfied by existing hardware capabilities.

Another way to increase upgrades is to obsolete the current implementation, usually in theform of OS-specific support. This minimizes the options a user has in adding necessary components to his system as his or her computer use expands. With no support for such expansion, the user is forced to have to upgrade his software, and frequently the operating environment. Alas, not too many companies can accomplish this entirely by themselves.

There’s only one company that has enough clout to do this by itself, and that’s Microsoft.

And the latest effort at getting those valuable software upgrade revenues is called Windows 95. Already we’re starting to see 32-bit applications being announced which will not run on previous PC operating systems, as well as hints that current PC OSes will be phased out of the channel eventually. Where other companies have helped is by hopping on  the bandwagon and developing Win32 applications which have no hope of running on Windows 3.1x.

The most ideal model for software companies would be to have “disposable” or “consumable” software, which would require users to repurchase software on a regular basis, as the previous software purchase gets used up. A variant of this is software that has a naturally limited life, like a tax package targeted at a specific year, a virus checker, or an annual compendium of current events. However, without something which expires tied to software, this model is impossible to achieve. Or is it…?

What’s Old is New
Back in the days of mainframes, software companies used to license software over a period of time. Software packages would be licensed annually, with a hefty advance payment. This practice was justified by virtue of the hundreds of users that might all be using the same software, as well as the on-going development that was frequently required to adapt a huge general purpose package to a company’s specific needs. There was also significantly less competition at the time.

With single user systems and an exploding software market, the mainframe licensing model went out of style rather rapidly, but now, some companies are bringing variants back.

First, one of the more innovative licensing models I’ve seen announced comes from Graphisoft, with their ArchiCAD product. ArchiCAD is one of many products in the higher end PC CAD market, selling for just under $5000. Since ArchiCAD has such a high price of entry, the company was apparently finding it difficult to attract as many new users as they would have liked. So, how do you sell a costly software package affordably without cheapening the product like CADKEY, another competitor did when it dropped its pricefrom over $3000 to less than $500? Graphisoft’s answer was to rent out the software in a program they call “Pay per use”. For a setup fee of $795, which covers administrative and materials costs and training, Graphisoft will send a customer a full ArchiCAD package, along with a special hardware lock. This hardware lock meters the use of the software, and is good for 50 hours of active use. The cost of using ArchiCAD works out to be $3.83/hour. When the hardware lock is used up, another needs to be purchased.

While Graphisoft’s solution is a very good one, it could be significantly improved if it did away with the added cost of the hardware locks, and instead offered monthly electronic billing, with the computer automatically dialing in to a central accounting office on a regular basis, much in the way that the pay-per-view feature works on the new breed of digital satellite systems (DSS) for TV. (I spoke with Graphisoft, and they indicated that they are working in this direction, as well as on a functional metering approach, which may charge different at different hourly rates for various program functions – rendering might incur a lower cost because it’s more machine dependent, while a vertical market specific function might cost more.)

Microsoft has entered the market with a new license model as well, namely the software subscription. Microsoft started this with its developers, via the Microsoft Developer’s Network, where, for an annual fee, you get 4 quarterly releases of CDs containing lots of valuable software resources, if you’re a developer. The license applies to a single named individual, and is not supposed to be shared among developers, but Microsoft currently has no way to verify or ensure that this requirement is being observed at all companies which have one or more subscribers to MSDN. However, the subscription does successfully create a significant annual revenue stream for Microsoft, something which under a traditional upgrade model would be less likely (and more of an administrative headache).

Microsoft has taken the subscription model to an application recently as well, namely its Visual C++ compiler. The subscription guarantees several updates to the compiler per year, which is important to developers, as Visual C++ is a moving target of sorts. The benefits to Microsoft are the steady revenue stream, as well as the ability to make changes and bug fixes as needed and update its active customer base, with that customer base paying for such fixes and enhancement.

Finally, Microsoft has promised to use a similar mechanism for Windows 95, although the general scuttlebutt is that this is to allow Microsoft to provide regular bug fixes under the auspice of “Update Packs”, all with customers paying for the privilege of getting a product that some say is not ready for retail sale. Whether the latter is true or not, I suspect we’ll start seeing more and more companies ship product earlier than it should be and use the “Update Pack” subscription strategy to correct any problems in the software at a later date.

By the way, for those of you that didn’t see the Cringely column in InfoWorld a couple of weeks ago, there’s an unconfirmed rumor floating around that Microsoft will put a hardware lock on each copy of Windows 95. I think it’s unlikely, but stranger things have happened.

The Future of Software Licensing
Both Graphisoft and Microsoft are pointing to the future of software licensing. The missing component to make it all work better, though, is global (or at least nation-wide) networking. I envision that within a couple of year’s time, you’ll be able to automatically download the latest version of your word processor in the background off the Net, under a combined subscription and metered license plan. For applications you use infrequently, more of a metering approach would make the most sense – only pay for when you use it, while for indispensable applications, you’d use a subscription service (or at least hope that your several-year old application works in some sort of compatibility mode).

A few more years down the road, and you’ll start using applications remotely in real time and be metered that way, and we’ll be back to the mainframe days, albeit with distributed processing in place.

You’ll definitely have some interest problems arise along the way though. First, once a large number of people are connected to the Net on a regular basis, software piracy will become more carefully monitored and hunted down, because the operating system (or at least the network connection) will in all probability allow the client software to peruse your system and see what you have installed, and report it back to some monitoring agency (or the actual software company whose software you’ve got installed). This will lead to the commercialization of local firewalls that prevent such utilities from detecting everything on your system, and we’ll be back to the whole vicious hack-crack-protect cycle again.

You may think that this is all just a tinge of paranoia, which, of course, brings us back to the present, and a thing called Microsoft Network. A recent issue of a major industry weekly described how the Microsoft Network connection software that is part of the Windows 95 Beta, and supposed to be part of the release version of Win95 if the Justice Department permits it, examines your system’s hard drive to locate all Microsoft applications installed on your system. This list of applications is quietly reported back to Microsoft electronically as part of the on-line registration process. Microsoft officials were quoted as saying that the MSN software is only doing what Microsoft would ask users to provide on a registration card anyway. This invasive procedure is only the start of what might come down the pike in terms of system software monitoring, stuff that wouldn’t be possible without a network connection (or modem). It will help software companies curb piracy though, which probably is a good thing (there’s a theory that some piracy actually increases legitimate software sales).

In any event, in exchange for the immense resources the proverbial Net provides, you will give up some system privacy.

What This Means To You
In the home, and in many offices, these software licensing changes and increased networking capabilities mean that the PC will become more like the phone or cable TV box or DSS dish in terms of billing. Users will just get a monthly bill for software services provided to them. This also more than likely means that they will spend much more on  software annually than they have in the past (but for more variety), which may mean less of a budget for hardware, unless the software company which receives the largest  monthly software revenues decides to loan/lease/rent PCs to consumers so that they can suck up more software (just like in the Cable world with set-top boxes). It’s all back to the Gillette approach – give away the razors to sell more razor blades.

Either way, it calls for more standardization of base hardware platforms so that a common set of features can be depended on for a minimum configuration. The next year or two will cause that base configuration to freeze, so get your dibs in now with the best 3D and video playback technology you can, and don’t forget to start looking at high speed communications technologies to integrate with your devices.