Problematic Pricing

How changes in software licensing policies have a big impact on the channel

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Michael Baum has a lot on his mind. The president of Relavis, a New York-based developer of CRM tools, Baum has to help his company respond to shrinking software margins, increased competition from companies small and large,including a particularly formidable one in Redmond, Wash.,and customers' spiraling demands. But Baum and resellers like him have another, major issue to deal with: software vendors who have made some significant structural pricing moves. Taken as a whole, they essentially mean there's no turning back from services, leasing and maintenance contracts; they are the wave of the future. "We've been using value-added services to help customers manage their organizational changes for awhile, but now we're starting to promote, market and advertise them more," Baum says.

When Microsoft unveiled its Software Assurance program last summer, it was merely the first strike in a wave of vendor assaults on old pricing models. Microsoft unveiled the program with considerable fanfare, and industry observers greeted it with a familiar dose of consternation. That was partly because every announcement emanating from Redmond is viewed with at least a little suspicion. But it also was because people are instinctively leery of change, especially when it hits their pocketbooks.

Unfortunately for them, the whole world of software licensing is changing, affecting literally millions of people who buy and sell software for a living. For them, Microsoft's recent change is only the tip,albeit a big tip,of the iceberg. Changes going on elsewhere portend that software licensing and the pricing landscape will look drastically different very soon. For example, Computer Associates, an Islandia, N.Y.-based software giant, has been hyping its FlexSelect model for months. The plan offers customers month-to-month and metric-based licensing, features that will appeal to any organization with tighter purse strings. Oracle, too, is also making modifications. In January, the Redwood Shores, Calif., database giant unveiled its All-in-One pricing plan, which gives midmarket customers an up-front quote for the cost of buying, installing and maintaining its 11i E-Business Suite. IBM, meanwhile, recently launched a new pricing model for its WebSphere Express server that was specifically aligned to how the midmarket buys its software, providing a fixed cost per user and a simplified pricing model. Others contemplating changes include Sun Microsystems, which is getting ready to roll out a plan that lets licensees take larger packs of licenses and split them among customers who don't need the full complement.

As partners know, sometimes painfully well, these changes often are made without significant partners' input. And VARs don't enjoy any sort of veto power over the adjustments.

"The changes we made weren't predicated on our partners," says Oracle's vice president of pricing-and-licensing strategy Jacqueline Woods. "Their response has been phenomenal, but they're required to pass on our terms to the end users."

The Impact on the Channel

All this activity means a new set of challenges and opportunities for VARs of all sizes. Dave MacDonald, president of Softchoice, a Toronto-based hardware, software and licensing VAR that works with vendors and customers from the SMB sector up through the enterprise, says programs like Open Value and others offer VARs a great chance to expand their businesses.

"The key role of VARs is to make sure software gets deployed," he says. "A lot of customers have bought software licenses, and the VARs and vendors want to make sure they renew them, so it's an opportunity for VARs to provide services these customers need to get the software running. The risk right now is in making sure they renew, but the trend toward an annuity-type program with frequent upgrades is good for the whole industry," he adds.

The increasing use of maintenance contracts will be a critical component of new pricing trends. VARs will do what they can to introduce value-added services, but securing maintenance agreements will be the quickest way to ensure consistent revenue streams. The problem is that many customers look at these agreements with the same suspicions some consumers do with extended warranties for electronic devices,as needless assurances that merely line sellers' pockets. This skepticism may be warranted for a camcorder or DVD player, but good maintenance contracts are essential for business solutions. The challenge lies in convincing customers of that. "Problems arise when customers spend big money on a product and then try to support it themselves," Baum says. "We must establish close relationships on maintenance, because when the customer slides off it, they move away from an effective use of what we sold them."

License Technologies Group (LTG), a Buffalo Grove, Ill.-based services provider that helps companies manage their licensing programs, will find the pricing changes helpful. LTG president Geoff Surkamer says the latest licensing trend is merely a natural progression of the way technology has been licensed to large organizations for some time. "It's been like this in Fortune 500 companies for the past eight years or so, and now traditional licensing practices are being driven down to the SMB level and even to the consumer level," he says. He even foresees a time when multiple-PC households will upgrade their software via licenses. For now, "TCO [total cost of ownership] will drive the trend. If you're a four-to-five-PC business, software licensing will become easier and more affordable," he says. "[VARs] will still be big players, but the mix of customers will be less focused on one or two segments."

Even though the opportunity exists for VARs to find new revenue streams, the transition won't be easy. One observer who is a little more guarded about VARs' ability to adapt is IDC senior channel analyst Steve McHale. He co-authored a report last fall that showed software margins to be in decline, and he listed nascent licensing programs among the worst culprits. He says the key to staying ahead will be to provide value-added services rather than selling in high volume. But even in this area, VARs might struggle as the vendors they represent may begin to add services of their own. There already are indications of this in the customer relationship management (CRM) market, as Microsoft has begun a big push into that space. "Corporate [VARs] are under a lot of pressure as they see Microsoft and others take their revenue away with increased services and smaller margins. I'll be interested to see what the [VARs] do over the next six months," McHale says.

He suggests that VARs keep an eye on which vendors are ramping up their telesales operations,an indication that they plan to do more direct selling to customers,and attaching more services to their maintenance contracts. He also says an increase in electronic licensing and managing tools being developed by vendors will let end users manage their own assets, obviating yet another service VARs might provide. "VARs are not at the same point of sales as they used to be, because vendors are taking more sales direct and trying to find services to add to their maintenance deals," he says. "If I'm in reselling, I don't see renewals as my business for much longer, and I really want to find someone who can explain licensing to me, because not a lot of VARs have expertise in that area."

As vendors shift their focuses to the midmarket, they're doing it with an eye toward the pricing issues smaller companies face. But while the companies are smaller, the opportunity is not: There are approximately 400,000 worldwide midtier companies, ones with 100 to 1,000 employees, a potential market of about $15 billion. As IBM moves down to the SMB sector from the enterprise,the opposite direction from Microsoft's client-up approach,it's doing so with a keen awareness of pricing issues. For the past several months, WebSphere director of marketing Scott Hebner has been making the case that IBM's TCO is significantly lower than what companies pay for Microsoft software. "Microsoft's pricing model is very complex, and it gets very expensive as you add more users," Hebner says.

Even though Microsoft defends its company's prices by arguing that it provides a greater breadth of products and features (see "Up Close With Microsoft's Licensing Guru" on page 44), Hebner maintains the opposite. "We actually have more features and functionality in WebSphere Express than there are in Microsoft Portal," he says. Moreover, he contends that Microsoft is in danger of alienating some of its partners by competing with them on technologies such as CRM. "As midmarket companies leverage the Internet platform, they're looking for partners to help them do that, and they're not happy with the way Microsoft has begun to compete with them," he says.

But as Jeffrey Tarter, editor of industry newsletter Softletter in Dedham, Mass., says, "People spend their entire lives figuring out Microsoft's pricing, but it's complicated for a very good reason: They don't want you to figure it out. Microsoft makes it very difficult to do one-to-one comparisons with other vendors because they change their pricing models about as often as Imelda Marcos changes shoes."

But Tarter adds that even though direct-vendor comparisons might be difficult, VARs must take into account other costs that might arise later. "Microsoft's tech people tend to be lower-skilled because it's easier to configure Microsoft solutions, so in that area, they might have a lower cost than Linux," he says. "However, that lower cost might mean that they're weaker on security, so how do you compare those costs? The impact on VARs is that they might end up spending a lot of time and money on the service end."

Meanwhile, other vendors' pricing programs show there's no one magic solution for the entire industry. Stephen Richards, CA's executive vice president of sales and field operations, says the company's FlexSelect plan has received very positive results so far, but acknowledges that it best serves CA's preferred partners. Oracle has tinkered with its licensing and provided helpful tools like the software investment guide, which shows customers how to set up their implementations the way a stereo manual shows you how to set up a home-theater system. And at Sun, the company has begun helping its VAR partners realize new revenue streams.

"The reseller community tells us the value-add is in the up-selling and cross-selling of service for things like consulting and migration," says Sun StarOffice product-line manager Iyer Venkatesan. "We help them by marketing these services and pointing out other opportunities for value-adds."

Ultimately, it's crucial that VARs are more attuned than ever to clients' needs. Relavis, which resells IBM software, is committed to demonstrating a technology's usefulness before requiring its customers to buy it. Baum says the move to a complete service-provider model may still be a ways off, but there's no doubting customers' feelings about software prices. "We're seeing a strong downward pressure on pricing because companies are tired of expensive projects with long implementations," he says. "They're telling us, 'We've bought a lot of stuff over the past few years, so what you're selling better work with what we have and with minimal impact on our infrastructure." By listening to such input and adapting accordingly, Relavis and other VARs are giving themselves the chance to compete in this ever-changing marketplace.

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