Digital goods like software applications are licensed not sold, which means that even after paying for software, ownership does not automatically transfer to the buyer. Unless the software application is open source, ultimately the rights regarding the software are always reserved by the software developer. Software licensing is a legal instrument that grants an individual, company, or organisation permission to use a software program.
Every piece of software, has some kind of software licence attached, even free software, and using it without a valid licence agreement in place constitutes a breach of copyright law. Usually, the terms and conditions of the licence agreement will explain to the end-user how they can legally use the software. This includes the number of installations allowed or the terms of distribution and how long they can use the software for.
Not having a valid product licence in place can leave companies liable to a potential lawsuit, which can be very costly. From the point of view of the software vendor it is your software applications that you worked so hard to plan, design, implement, test, debug, deploy, iterate and deploy again that are the lifeblood of your company and its employees. Software protection is an essential capability for any software vendor as it helps ensure that customers can only unlock the programmes and data that they're meant to be using.
Although there are a broad number of licence types and definitions, most software licences will fall broadly under one or more of these four categories:
Perpetual licence: A licence without an expiration date, which permits the use of the software indefinitely. A recurring fee is usually required in order to download all updates to the software and receive technical support, but there is no recurring fee for the continued use of the software. Providing software on a perpetual licence has long been the dominant software monetisation model, however, IDC Futurescapes predicts that 100% of organisations already have a migration plan in place to shift from perpetual licences to more consumption-based licensing models.
Term-limited or subscription licence: Involves "Leasing" the software to an organisation or end-user for a specified period of time. The software will stop functioning after the time period has elapsed and users are usually required to remove the software from their computer when they cease paying the licence fee. Subscription licences are often (but not always) "named user" licences, meaning that their use is restricted to a specific person.
Aggregated use time: The licensee purchases a total amount of time that can be spent using a product - for example, 1000 hours. This time allocation can be consumed by a single user or a pool of users and when it runs out, access to the licensed application ends.
Concurrent use licence: Permits installation on multiple machines as long as the number of computers using the software at the same time does not exceed the number of licences which have been purchased. Concurrent use licences are usually managed by separate licence management software.
A common misconception is that the software license key is the software licence. In fact, the product key it just a representation of the legal right to use the software and there are a number of different ways that these usage rights can be distributed.
Paper licences This type of software licensing is usually only deployed to large companies or businesses and occasionally standalone devices that will never connect to the internet. For example, in the past, if a large retail store wanted to install software at 50 locations within its organization, instead of managing 50 installations of the software individually, the company can buy one copy of the software. A signed paper document then authorises them to use it on 50 computers.
Software protection dongle - The dongle (or hardware key) is encoded with a specific, per-user license code and attaches to a computer or appliance externally. When the software protection dongle is attached it unlocks the software. Without the dongle, the software may run in a restricted mode, or may not run at all.
Licence file - Product keys can also be issued as a license (or LIC) file, which is either attached to an email, included with a product download or controlled by the license manager function of a license server solution. The LIC file or licence directory needs to be saved by the end-user or stored on the local network. If the licence directory is moved to an alternative location (or deleted) this may invalidate the software licence and the software will fail to run. Enforcing software licensing using licence server solutions requires a licence server to be installed at each end customers location.
Cloud-based software licensing - Access to software applications is based on the authenticated identity of an individual end-user or other attributes such as time and location. Typically end-users will have an individual user account, which they sign in to each time they want to access an application. The client application will only grant access to the end-user if they have been both authenticated and authorised.
The software licensing landscape is evolving. Perpetual licensing is currently the dominant software licence type, but use-time, concurrent and consumption-based licensing models are rapidly gaining popularity. Ultimately the software licensing model that you provide should reflect the needs of your customers. The market is shifting towards increased flexibility and business customers are beginning to assume that they will be able to only pay for the features they want and turn off the features that they don't need. Many software developers are stuck in the mindset of 'one-time' revenue, fixed price and fixed consumption, but you need to offer your business clients more flexibility if that's what they want.
Yes. Expect to see an initial reduction in revenue for the first year as larger up-front perpetual licence fees are replaced by smaller recurring revenues. The break-even point will depend on the difference between the cost of the perpetual licence compared with the subscription or consumption-based pricing model but is generally considered to be around 3 years.
Short-term revenue reduction is offset by the fact that it’s easier to upsell to customers that have had to spend less upfront than they would with perpetual licensing. Consumption-based software licensing also widens the funnel by making your products accessible to lower end prospects. Costs can also be offset through operational efficiency throughout the software licensing lifecycle, for example implementing identity-based licensing will produce savings of up to 70% on licence reconciliation costs. Recurring revenues are also more appealing to shareholders as a large proportion of yearly targets are met with recurring revenues.
You also need to carefully consider the potential cost of not updating your licensing and pricing models. Market Research Future noted that vendors who do not offer cloud-based solutions will face increased competition in the coming years, as businesses are preferring cloud over on-premises solutions. Data from IDC supports this in their 2016 Software Licensing and Pricing Predictions.
The software licensing mechanism you choose will ultimately determine whether or not you can reliably revoke access to your digital assets. Software licensing solutions that rely on software licence keys or USB dongles may fail to provide an adequate mapping between software licences paid for and the actual software in use. More often than not, unless you use an identity-based licensing solution, you will have to either carry out a formal audit or simply trust that your products are not being used illegally.
The software licensing landscape is evolving towards more consumption based models so, in this blog post we answer some common software licensing questions.