Worldwide Software Pricing and Licensing 2014 Top 10 Predictions

Top 10 Predictions Worldwide Software Pricing and Licensing 2014 Top 10 Predictions Amy Konary PREDICTIONS FIGURE 1 IDC's Software Pricing and Licensing Top 10 Predictions Note: The size of the bubble indicates complexity/cost to address. Source: IDC, 2014 March 2014, IDC #247103

Figure 1 presents IDC's software pricing and licensing top 10 predictions in terms of their likely impact across the enterprise and the time it will take for the predictions to reach mainstream. By mainstream, IDC means the broad middle of the bell curve of adoption (i.e., the 40 60% of enterprises that are neither the first movers and early adopters nor the last to act). Each bubble's size provides a rough indicator of the complexity and/or cost an enterprise will incur in acting on the prediction. IDC's worldwide software pricing and licensing 2014 top 10 predictions are: 1. Software Subscription Revenue Will Continue Its Rapid Growth Trajectory, Increasing by $12 Billion in 2014, a 20% Increase Over 2013. 2. Software License Complexity Will Indirectly Cost Organizations an Average of 25% of Their Software License Budgets by 2015. 3. Seeking to Increase Revenue, Software Vendors Will Initiate Twice as Many Audit Requests in 2014 as in 2013. 4. Owing to Negative Customer Feedback and Bad Press, at Least One Major Software Provider Will Reverse a Major Licensing Policy in 2014. 5. Organizations Will Increase Their Investments in Software Asset Management by 35% Over the Next 18 Months. 6. Because of the Rise of 3rd Platform Investments and the Spending Shift from IT to Line-of- Business Budgets, 60% of Operational Spending on Software Will Come from the LOB by 2017. 7. Mobile Enterprise Software Apps Will Be Used by 80% of Licensed Users by 2015, But These Apps Will Drive Less Than 5% of Total Enterprise Software Spending. 8. Usage-Based Software Pricing Models Will Be an Option for 80% of Applications by 2017. 9. Discount Levels on Perpetually Licensed Software Will Continue to Trend High in 2014, at 50 80% Off of List License Price. 10. Software Licensing Policy Will Cause More Than Half of Organizations to Substantially Modify Their Plans for Private Clouds by Mid-2015. IN THIS STUDY Throughout conversations with software vendors, enterprises, and other technology firms, IDC has developed refined trends and validated our thinking about the effect that key trends will have on software licensing spending, policy, and management over the next two to three years, with particular focus on developments in 2014. This study presents IDC's top 10 predictions for software licensing and pricing and a description of the ways that these predictions will impact IT buyers. Also included are IDC's recommendations for IT buyers in light of these predictions. 2014 IDC #247103 2

SITUATION OVERVIEW The software industry is going through a phase of dramatic change with the advent and adoption of 3rd Platform technologies. This driver, as well as other key drivers, is leading to the obsolescence of traditional pricing models, the development of new pricing models, and making pricing models more important than ever that IT buyers understand licensing and manage software licenses effectively. This top 10 predictions document will help IT buyers understand what types of shifts to expect, how these shifts will impact IT buyers, and how to capitalize on these key industry dynamics. Key Drivers for the Software Pricing and Licensing Top 10 Predictions There are many external factors that have a direct or an indirect impact on software pricing and licensing. IDC has identified economic, social, and technology forces that are shaping our software pricing and licensing top 10 predictions for 2014, as discussed in the sections that follow. Rapid Adoption of 3rd Platform Solutions (Mobile, Social, Cloud, and Big Data) A combination of factors are actively driving the adoption of the 3rd Platform technologies, some of which are an evolution of previous drivers (including lower cost and ease of use) and other factors are brand new. The adoption of 3rd Platform solutions is helping drive the adoption of subscription pricing models. IT buyers should also expect to see models that enable flexible access to applications and consumption-based pricing models. IDC is observing that IT buyers are building investment plans not just around cloud, social, mobile, or Big Data but around business solutions that include two or three solutions or all 3rd Platform solutions together. However, the transition to 3rd Platform business models will happen incrementally. During the transition and beyond, IT buyers will have to contend with a complex hybrid mix of onpremise/cloud, perpetual/subscription, and PC/mobile software. Explosion of Applications and Licensing Models Software is everywhere! From vending machines to cars to wristwatches, software is bringing the "Internet of things" to life and forever changing consumer and business experiences. Along with the proliferation of software, there is an explosion of ways to monetize these software. At the same time, many of the tried and true ways of pricing software (such as one-time perpetual license fees) will remain. Software vendors and device manufacturers are offering IT buyers new and more flexible ways of licensing software. While choice can be a good thing, many of these models are inherently complex. It's not clear that anyone will figure out how to balance simplicity and flexibility in software licensing anytime soon. In the meantime, it is clear that IT buyers will be licensing (and managing) more software via a wider variety of software pricing models. Customer Expectation for Increasing Levels of Service The levels of complexity in software licensing are unacceptable to many IT buyers and the software providers themselves. This complexity creates challenges throughout the software purchase and management process, directly resulting in investments in time and money with little or no value-add. In 2014 IDC #247103 3

the past, IT buyers had little choice but to bear the burden of managing this complexity. However, new market entrants with "good enough" technologies and much simpler and transparent business practices are offering real alternatives to traditional software. This development, as well as an overall industry focus on improving the software customer experience, is helping drive improvements in software pricing and licensing. Consumerization of IT The consumerization of IT is a well-known phenomenon. Next-generation applications are being designed for the consumer and enhanced for the enterprise (as opposed to being designed for the enterprise first). Consumer-like expectations for ease of acquisition and access as well as simplicity and transparency of pricing models are dictating pricing models and payment terms. In addition, expectations for ease of use and interoperability are being gleaned from consumer experiences. This includes the introduction of "freemium" or advertising-supported software into the business environment, as well as simpler and more transparent software business models. Ubiquitous Mobile and Socially Connected Lifestyle CIOs are finding that, with the rise of BYOD and the increasing power of cloud applications, virtually anything that they put out has to have a mobile component. In the case of cloud, mobile devices provide just another mode of access increasingly it is "the" mode of access. Even the most basic monthly subscription plan includes mobile access. In addition, cloud models provide a mode of central provisioning, central administration, and rapid speed of deployment for mobile applications. IT buyers are already realizing that determining what they need to extend on-premise applications with mobile applications and how much it will cost is not as straightforward as in the cloud. Part of the reason is that additional layers of technology are needed underneath the mobile applications, and customers with on-premise applications must deploy and manage these applications themselves. Then there are the mobile applications themselves. These applications must be native and easy to deploy and use and must provide a rich user experience that includes app awareness and contextual data. In addition, while IT buyers have high expectations for user experience, they have low-cost expectations. Many of these mobile applications are driving key social business initiatives. Furthermore, the socially connected software consumer is helping drive discourse on software licensing away from the backroom and into the conference room. In this way, through blogs, user forums, and Twitter, IT buyers are holding software vendors accountable for complexity and opacity in software licensing. Logarithmic Jump in the Number of Connected "Smart" Devices, Interfaces, and Processes IDC expects that with billions of users on an average with three devices apiece, there will be a shift from device-based pricing models to user-based models. Furthermore, the billions of users that access 3rd Platform solutions via mobile devices provide a Big Data trail that can be harvested, curated, and sold back to interested parties (e.g., retailers) or otherwise used to improve user experience. For example, location awareness built into mobile devices can help generate a better user experience and can also be used to enhance the overall image of users' online activities and personal behaviors. This 2014 IDC #247103 4

capability, along with users that allow data capture associated with their activities, generates components for a Big Data store. IT buyers are already being offered services from software providers that capture this usage information and leverage it to provide a benchmark of the customers' work processes against their peer groups. Moribund Economic Recovery The global economy has been uneven and volatile, with some regions struggling to maintain momentum. The U.S. economy remains fragile, however, with the sequester cuts still driving down government spending in the near term. U.S. GDP is increased by just 1.9% in 2013, lower than 2012's 2.8% growth. As capital flows out of emerging markets (partly on the assumption that the United States will begin to taper down its bond-buying program), short-term growth has weakened significantly in countries including India and Indonesia. This slowdown in emerging markets is now the main downside scenario to monitor in the next 12 months. Currently, there exists a pent-up demand for IT products and services, especially around 3rd Platform technologies, but a persistent air of caution exists in the IT buyer community. IDC is observing hesitancy on the part of IT buyers in entering into long-term software deals and in making large capital investments in software. FUTURE OUTLOOK Prediction #1: Software Subscription Revenue Will Continue Its Rapid Growth Trajectory, Increasing by $12 Billion in 2014, a 20% Increase Over 2013 In a decade's time, purchasing software via subscription has grown from being an interesting alternative attempted by only a few daring companies to a mainstream approach that represented nearly $65 billion in worldwide software spending in 2013. The momentum toward subscription approaches will continue as more IT buyers recognize the benefits of a well-executed subscription software procurement approach. The benefits of subscription for IT buyers include: The ability to stay up to date on current software by receiving all updates/upgrades as part of the subscription The simplification of license/software management for easier compliance Increased purchasing efficiency The ability to reduce capital spending/shift spending to an operating budget Lower up-front cost More predictable long-term cost The benefits of cloud deployment, when subscription is coupled with cloud delivery (or software as a service [SaaS]) 2014 IDC #247103 5

The main concern that IT buyers have with subscription licensing is that it may cost more over the long term to purchase software via subscription compared with perpetual license plus maintenance models. At the same time, some customers have a preference for paying for software purchases from capital budgets, and others are concerned that when they stop paying for a subscription license, they can no longer use the software. IDC expects that, despite these challenges, subscription will continue to be on the rise for the foreseeable future. Explosion of applications and licensing models Moribund economic recovery Subscription will increasingly be an option, and in some cases, it may be the only way to buy software. Organizations will need to develop best practices for subscription contracts. In the next three to five years, subscription budgets will increase for each given product/service by an average of 35%. Educate yourself on subscription models, and understand the levers that impact your benefits. Focus on preparation and understanding before you go into a subscription negotiation. Proactively look for opportunities to shift spending from license/maintenance to subscription. Prediction #2: Software License Complexity Will Indirectly Cost Organizations an Average of 25% of Their Software License Budgets by 2015 Variety in software licensing is not hard to find. Software companies are motivated by the ability to offer customers both flexibility and choice in pricing. For customers, choice and flexibility in software licensing can result in efficient software purchasing, advantageous financial arrangements, and pricing that aligns more closely with actual usage. Unfortunately, increased flexibility means increased complexity in licensing terms and conditions and in the management of software licenses. For example, a pay-per-use pricing model (more flexible) is more complex than a one-time per-user fee (less flexible). In addition, there will still be applications on-premise, licensed in the traditional sense. Many of these models are made more complex by external technology factors, such as when software licenses are deployed in a virtualized environment. 2014 IDC #247103 6

Explosion of applications and licensing models Perpetual licenses will continue to be inherently complex. Complexity leads to cost when organizations "license up" to mitigate compliance issues. Costs are also incurred due to noncompliance, and complexity in licensing makes this harder to avoid. Buy only what you need. Buy only what you can manage. Consider perpetual licenses only where software is mature and frequent updates are unnecessary. Prediction #3: Seeking to Increase Revenue, Software Vendors Will Initiate Twice as Many Audit Requests in 2014 as in 2013 The software audit letter is about as welcome as canker sore. Unfortunately, IT buyers can expect more canker sores in 2014. The software licensing landscape within most enterprises is complex. This is made more complicated by the sheer number of contracts to manage (hundreds, if not thousands) as well as the different types of licenses that must be administered. Contributing further to this is the fact that sources of important licensing information are often paper based (i.e., not electronic), making it harder for vendors to keep track of. In addition, no two software vendors license their software exactly alike. As a result, when software audits occur, they are time consuming, and often expensive, for enterprises. Explosion of applications and licensing models Moribund economic recovery Vendors will develop automated systems for identifying audit targets and will audit more frequently. More of vendors' suppliers will initiate audits. Demands on time and resources for software audits will increase. 2014 IDC #247103 7

Take steps to self-audit in advance of an audit. Understand the key triggers and be especially vigilant with license management when any of the following apply: virtualization/cloud initiatives, M&A activity, and cloud migration. When an audit does occur, address the underlying situation that caused or enabled the issue. Prediction #4: Owing to Negative Customer Feedback and Bad Press, at Least One Major Software Provider Will Reverse a Major Licensing Policy in 2014 Software providers are trying to retain and grow their customer base in an environment that is undergoing sweeping changes while also engaged in competitive battles that hinge on having flexible business models. As a result, IDC expects to see reversals in licensing policy in situations where long-standing policies are no longer acceptable for IT buyers in today's environment as well as new policies that have not met IT buyer needs from the get-go. Customer expectations for increasing levels of service Organizations will need to be flexible in response to changing license models. Some license changes will have significant budget impact, hence carefully assess the financial impact of new proposals. There will be no impact if the change and reversal happen during an agreement term. If the proposed license model doesn't work for you, consider and suggest acceptable alternatives. Encourage open dialogue with vendors on software licensing. Request sessions on licensing at customer conferences. Attend and ask questions. If a proposed licensing model doesn't work, consider alternative vendors. Prediction #5: Organizations Will Increase Their Investments in Software Asset Management by 35% Over the Next 18 Months Managing the software licensing landscape within most companies is a complex task, which is made more complicated by the sheer number of contracts to manage (hundreds, if not thousands) as well as the different types of licenses that must be administered. Industry trends such as virtualization, cloud, and the consumerization of IT have added to this challenge. Market dynamics are ensuring that the complexities associated with understanding and managing software license contracts will likely increase. In addition, customers are calling for increased flexibility in software licensing, such as concurrent licensing, pay-per-use models, and licensing approaches that 2014 IDC #247103 8

allow customers to take advantage of the benefits of virtualization. Managing software licenses successfully is important, as organizations want to maximize their returns on every software license they hold, as well as manage the updates, support, and maintenance that help ensure that software is working as it should and add costs. Most IT buyers are aware of the tangible impacts of the complexities discussed previously. At best, hours are wasted and thousands of dollars are spent manually counting licenses. At worst, millions of dollars are spent rectifying software license compliance issues. IDC believes that in the next 18 months, IT will reach a tipping point where software asset management (SAM) gets the attention of senior management and receives the investment that it deserves. Explosion of applications and licensing models Moribund economic recovery Consumerization of IT Budgets will need to accommodate spending on resources and technology. Up to 50% of the increased cost will be offset by the improved ability to manage software licenses. Software asset management will be involved in the entire software procurement life cycle. Institute process changes that complement technology investments. Identify technologies that can track license entitlements and true software usage within the next six months. By 2015, build a repository of common terms and conditions and outline accepted practices. Prediction #6: Because of the Rise of 3rd Platform Investments and the Spending Shift from IT to Line-of-Business Budgets, 60% of Operational Spending on Software Will Come from the LOB by 2017 A key tenet of 3rd Platform technologies such as cloud is a subscription pricing model, which shifts software spending from being a capital expenditure to an operational cost. This makes it possible for line-of-business (LOB) executives to select, purchase, and pay for software-based services. Depending on organizational culture, this dynamic could present a threat to the IT buyer, or an opportunity. Explosion of applications and licensing models 2014 IDC #247103 9

Consumerization of IT Business executives will share IT leadership with the CIO in making 3rd Platform investments. IT role will shift from a decision maker to an advisor for applications software. IT will need to prepare a secure foundation (network, access) for the consumption of the 3rd Platform. Provide standard company guidelines to LOBs to enable them to evaluate SaaS offerings. Look for opportunities to replace legacy software/capital spending with cloud services. Help LOBs collect and share licensing best practices among different business units and geographies. Prediction #7: Mobile Enterprise Software Apps Will Be Used by 80% of Licensed Users by 2015, But These Apps Will Drive Less Than 5% of Total Enterprise Software Spending Mobility and enterprise applications can be a perfect match. By extending existing applications to mobile devices, or by using standalone mobile applications for business use, organizations are increasing employee productivity, enhancing the customer experience, and improving competitive advantage among other benefits. Organizations that seek out mobile enterprise applications are often looking to do more with their core systems, such as with a mobile customer relationship management (CRM) application that taps into information in the ERP system to provide customer information to a salesperson on the go. Although these applications address the needs that are prevalent in business environments, IT buyer expectations for how these applications are priced are strongly influenced by consumer experiences. Costs should be both transparent and relatively low. IT buyers also want these mobile applications to be simple to acquire, deploy, and use. At the same time, "mobile" will become the de facto access point for software in the way that "Internet enabled" has become a de facto requirement for all enterprise applications. Mobile clients are already assumed to be the primary access device for most cloud enterprise applications, and there is no separate "mobile enterprise application" for the customer to purchase in this case. Ubiquitous mobile and socially connected lifestyle Logarithmic jump in the number of connected "smart" devices, interfaces, and processes Moribund economic recovery 2014 IDC #247103 10

Initial spending on mobile apps will be on services for custom apps but will shift to products. Even though spending is only 5%, applications will be optimized for mobile device access. Budgets for mobile apps will increase, but spending will stay low as an overall percentage. Budget mobile apps spending for mobile extensions to core apps. Evaluate policies such as allowances that enable employees to purchase mobile applications for work (BYOA). Share spending with LOBs; source spending via enterprise app stores. Prediction #8: Usage-Based Software Pricing Models Will Be an Option for 80% of Applications by 2017 Usage-based software pricing provides IT buyers with a monthly cost for using a resource based on an agreed usage: Cost is determined by a periodic (i.e., monthly) measure of resource utilization. Cost scales up or down according to resource utilization. Other features of a utility pricing model can include an up-front flat-rate charge and the possibility of fees/rebates associated with overutilization or underutilization. Drivers for the proliferation of software utility pricing models include growing IT buyer interest, increased adoption and availability of technologies to meter software, and the expansion of alternative software purchase options. While usage-based options will be more prevalent, IT buyers will approach these options with caution as it is difficult to pinpoint the cost and budget impact of usage-based pricing. Explosion of applications and licensing models Ubiquitous mobile and socially connected lifestyle Logarithmic jump in the number of connected "smart" devices, interfaces, and processes Moribund economic recovery 2014 IDC #247103 11

New pricing models will require new budgeting and chargeback scenarios. Some software may be priced in models that include "bursting" capacity, creating the need to monitor and control usage. IT will need to implement new tools to analyze and optimize usage. Budget carefully for usage-based pricing, because in most scenarios, it is the highest per-unit cost of any pricing model. Seek out software that has predictable use that can be monitored and controlled. It buyers in corporate chargeback structures should incorporate usage models. Prediction #9: Discount Levels on Perpetually Licensed Software Will Continue to Trend High in 2014, at 50 80% Off of List License Price The current climate around software licensing discounting for perpetually licensed, on-premise software will continue. That is to say, probably greater than 50% and as high as 80% off of the list license price, whatever that is. Since list prices are not widely published, customers typically sign nondisclosure agreements that prevent them from discussing pricing, and software pricing is fraught with complexities, and it is hard to verify what those percentages really mean. What this does mean is that the discounting discussion will continue to be front and center in software licensing negotiations. IT buyers should realize, however, that subscription licenses are not heavily discounted in the same way that perpetual licenses are. Part of the reason is the bundled subscription nature of subscription pricing, which means that the right-to-use portion of what you pay (the license, although they don't sell you license) is not separated from the upgrades/updates portion of what you pay (the maintenance, although they don't sell you maintenance). In the subscription world, there are volume discounts, and there are discounts for different levels of term commitments. An annual contract is the baseline, with contracts for multiple years typically resulting in a discounted rate. Increasingly, there are discounts for enterprise agreements, but none of these will add up to the kind of level of discount that IT buyers are seeing with on-premise software. Customer expectations for increasing levels of service Moribund economic recovery As discounts on subscription aren't as aggressive, some vendors may shift to subscription to mitigate. Value in software is shifting from what it is to what it does. Software budgets will not decrease, despite this trend. 2014 IDC #247103 12

Negotiate hard on perpetual licenses and expect initial prices to be double the final price or more. Use volume, timing, and term as key levers to optimize discounted prices. Pay close attention to maintenance costs and terms. Focus on license price should not impair the required levels of service, terms, or SAM. Prediction #10: Software Licensing Policy Will Cause More Than Half of Organizations to Substantially Modify Their Plans for Private Clouds by Mid-2015 A key technological feature of a private cloud is virtualization. Unfortunately, the software licensing policies of systems infrastructure and tools software are often not virtualization friendly. In particular, anything that is priced via a processor or processor core will likely have licensing-related restrictions on how software can be deployed in virtualized environments, which can easily result in costly license compliance issues. One sourcing officer at a global firm told IDC that while the firm saved $5 million in hardware with virtualization, it had a $42 million software compliance issue as a direct result. Because of the compliance risk and the difficulty of tracking license entitlements in a virtualized environment, IDC expects that IT buyers will need to leave key workloads out of private clouds. Explosion of applications and licensing models Licensing terms may make it impossible to run key workloads in private clouds, lessening the positive impact of cloud deployment. The complexity of managing licenses for software in private clouds will decrease the positive impact. Private cloud deployment will trigger a higher-level audit requests. Find out which vendors perform frequent audits, and consider the cost/benefit of including their software in your cloud. Place a high priority on license management in a cloud environment. Institute strong controls (technology and process) and implement license management technologies to mitigate noncompliance. 2014 IDC #247103 13

ESSENTIAL GUIDANCE IDC offers the following essential guidance to IT buyers: Prepare for the widespread adoption of subscription models. Strengthen internal capacity for license optimization and audit readiness. Cultivate optimal relationships with LOBs. Anticipate, manage, and mitigate complexity: it isn't going away. LEARN MORE Related Research Market Analysis Perspective: Worldwide Software Licensing and Provisioning, 2013 (IDC #244958, December 2013) A Moving Target: Manage Software Licensing Before It Manages You (IDC #244595, November 2013) Perspective: SAP Offers Customers a Path to the Cloud (IDC Manufacturing Insights #MI244368, November 2013) The Coming of the 3rd Platform and What This Means for Software Business Models (IDC #240918, May 2013) Synopsis This IDC study presents IDC's top 10 key predictions for software pricing and licensing and a description of the ways that these predictions will impact IT buyers. Also included are IDC's recommendations for IT buyers in light of these predictions. "The software industry is going through a phase of dramatic change with the advent and adoption of 3rd Platform technologies. This driver, as well as other key drivers, is leading to the obsolescence of traditional pricing models, the development of new pricing models, and making pricing models more important than ever that IT buyers understand licensing and manage software licenses effectively," said Amy Konary, research vice president, IDC's Software Licensing and Pricing at IDC. "This top 10 predictions document will help IT buyers understand what types of shifts to expect, how these shifts will impact IT buyers, and how to capitalize on these key industry dynamics." 2014 IDC #247103 14

About IDC International Data Corporation (IDC) is the premier global provider of market intelligence, advisory services, and events for the information technology, telecommunications and consumer technology markets. IDC helps IT professionals, business executives, and the investment community make factbased decisions on technology purchases and business strategy. More than 1000 IDC analysts provide global, regional, and local expertise on technology and industry opportunities and trends in over 110 countries worldwide. For more than 48 years, IDC has provided strategic insights to help our clients achieve their key business objectives. IDC is a subsidiary of IDG, the world's leading technology media, research, and events company. Global Headquarters 5 Speen Street Framingham, MA 01701 USA 508.872.8200 Twitter: @IDC idc-insights-community.com www.idc.com Copyright Notice This IDC research document was published as part of an IDC continuous intelligence service, providing written research, analyst interactions, telebriefings, and conferences. Visit www.idc.com to learn more about IDC subscription and consulting services. To view a list of IDC offices worldwide, visit www.idc.com/offices. Please contact the IDC Hotline at 800.343.4952, ext. 7988 (or +1.508.988.7988) or sales@idc.com for information on applying the price of this document toward the purchase of an IDC service or for information on additional copies or Web rights. Copyright 2014 IDC. Reproduction is forbidden unless authorized. All rights reserved.