Gartner

Virtualization: licensing cost implications

Stewart Buchanan analyzes whether new virtualization and streaming use cases bend or break software licensing rules

Application virtualization can create higher than anticipated licensing costs. Customers need to understand that some software vendors earn more by not changing their licences to accommodate new virtualization use cases, making it a matter for negotiation.  As customers look for greater flexibility in the way they deliver applications to employees and external partners, some cost increases seem inevitable. However, for customers that do not understand the licensing implications, these costs could be extreme.

Before investing, user organisations must plan the full life cycle total cost of ownership (TCO) impact on all existing software. It may be unrealistic to expect all new and more flexible ways of using software to cost less. They should also check vendor licensing rules and get independent advice. Get licensing examples in writing with illustrations and include them in your contract. Where vendor rules continue to be inflexible, they can look at external service offerings that include software costs.

Application virtualization is generating interest as a way of providing access to desktop software in more efficient and flexible ways. However, customers are frequently disappointed by licensing cost implications, because the ways in which they want to use software are not always envisioned in all application licence agreements. Instead, they want software licences to follow the software. Many would prefer their software rights to be assigned to them as a user rather than to the device they are using. Some customers risk being bought off with higher discounts to offset higher licensing costs when they really need better terms.  

Vendor account managers are not generally empowered to change their company’s licensing model. In the current economic climate, vendor salespeople may only be able to use short-term discounts to clear your objections. The more outrageous the cost of their licences, the more they can afford to discount. Discounts are being used to encourage customers to overlook compliance issues. (See table for an example of preferred software discount levels.)

First reactions can be deceptive. Whatever level of discount is charged, even when licences fees are waived altogether, it costs the same amount over four years at $123,000. The lowest discount also has the lowest maintenance fee at 20.5% of list price, so it will work out to be the least expensive after the four-year break-even point. Vendors can then add another column of processor and core multiplier costs, against which they can discount more deeply. Overcoming these licensing problems will use up customer leverage that might otherwise be used to obtain a better deal.

Ultimately, vendors will only change their licensing models in response to market competition. Software as a service has traditionally been focused on applications where collaboration with external third parties is more common, such as CRM, sales, procurement, logistics, project management, HR and even ERP. More traditional desktop and client/server applications such as email are now starting to follow, but application streaming and application virtualization remain underexploited as enabling technologies.

Vendor licensing inflexibility could drive more customers to outsource in the cloud, which could even be some software vendor’s strategy. One thing is certain, external services are a powerful catalyst of change in desktop software licensing, and vendors will be measured by how well they respond to that change.

Stewart Buchanan is Research Director, Gartner. www.gartner.com