Are SaaS & recession killing perpetual software licenses?

by Eric Lai

December 5, 2008 —

Danube Technologies Inc. is a small maker of software tools for Scrum and agile programmers. While Danube's technology and audience is cutting-edge, its licensing model is old school.

Several weeks ago, the Redmond, Wash., vendor switched from selling subscriptions to its software back to selling perpetual licenses.

"We're not doing this on a whim," said Danube co-founder and CTO Victor Szalvay. "But based on the feedback we got, our customers aren't keen on the subscription approach."

That may seem surprising. Subscribing to software requires much less upfront investment than buying license for it, just like renting costs less upfront than buying.

The subscription model has also been boosted by the increasing popularity of software-as-a-service and open-source software, both of which typically use subscription licenses rather than perpetual licenses. For enterprise software, a perpetual license typically involves an upfront fee plus an annual maintenance fee of 20% to 25% for patches and upgrades.

Even Microsoft Corp., the most visible champion of perpetual licensing, is starting to embrace subscription models as it adds more Web-based services.

But experts say there are plenty of reasons why perpetual licenses, while unfashionable, are nowhere close to being on the way out in the enterprise.

One reason is that perpetual licenses are safe. They grant users the right to use the software indefinitely.

"Owning the license outright is important," said Al Hilwa, an analyst with IDC Corp. A company could go out of business, sell its intellectual property, or simply kill that product line in favor of a newer one. But by owning the perpetual license, the companies can continue to use the software.

Enterprises also view buying a perpetual license as an investment in that vendor. They don't mind paying a little more upfront if it will help keep that vendor in business, providing bug fixes and new features, Hilwa said.

"Enterprises put a heavy premium on longevity, quality of service, and their vendors being around for the long run," he said.

Owning a perpetual license also makes customers immune to potential price increases that subscriptions are subject to, just like rent increases by a landlord. They are also not as complex to keep track of, Hilwa said.

"People don't want a million subscriptions to things," he said.

Roger Bottum, senior vice president of marketing for license management software vendor, Acresso Software Inc. (formerly Macrovision), agreed, though he cited basic accounting practices as the reason.

Purchased software licenses are considered assets, or capital expenditures. Even though the full license cost must be paid upfront, the cost is amortized over the life of the software. That means companies "don't take a hit on a [profit and loss] level," he said.

Subscription fees, meanwhile, are treated as operational expenditures, and must be wholly subtracted from earnings the year they are paid. That means even if a company pays more for a perpetual license than in subscription fees, it would appear less to a bookkeeper or investor.

That's what Szalvay saw among Danube's customers. These firms' "entire budgeting infrastructure is based on purchasing software on per-seat licenses," Szalvay said. Subscriptions "throw a wrench into the system, because the buyers have to go back and justify budget for the same item again and again."

Ironically, many of Danube's customers include software vendors that themselves offer subscription models, such as Amazon.com, LexisNexis, Adobe Systems Inc., Sun Microsystems Inc. and Microsoft.

But Bottum noted that most software vendors have strong cash reserves, meaning that subscriptions offer no financial upside to them and plenty of accounting downside compared to a slightly-more-expensive perpetual license.

Computerworld