Licensing in a modern world

 By Peter Worlock

Software licensing is a confusing but important subject. Peter Worlock is your guide through the software jungle.

HardCopy Issue: 53 | Found In: Licensing | Published: 14/09/2011 | Last Revision: 14/09/2011

While there are many aspects of IT management liable to provoke a headache, none is more likely to bring on a full-blown migraine than the subject of software licensing. But while managing your installed software is a painful process, it is as nothing compared to the financial cost of not doing so. Software publishers have become much more aggressive in policing the use of their products through software audits. One survey suggests that around half of UK businesses were inspected last year – more than twice as many as in 2009. Using pirated software, installing single-user software on multiple machines, or exceeding the numbers of licensed users within an organisation not only leaves you open to financial penalties from the software vendor but is also a criminal act under copyright law and can incur hefty fines and imprisonment for directors. Yet despite the potential penalties, many IT departments are failing to deal with the problem. There is evidence to suggest that managers are often afraid to tackle the issue for fear of discovering the need to buy additional software to cover a shortfall, but another survey (conducted among 500 organisations in the US and the UK by researcher Opinion Matters for vendor 1E) suggests that most organisations are actually wasting money in purchasing software and paying for maintenance of applications that are never installed or deployed. Within the UK alone, the company puts those costs at £230 per year for unused software and a further £107 per year in ‘shelfware’ for each PC – a total of more than £1.7 billion wasted annually. A full discussion of software licensing in all its forms could fill a book (and has), so is obviously far beyond the scope of this article. Here we limit the discussion to licensing for small-to-medium-size businesses, whilst noting that most vendors offer preferential licensing to government, education and not-for-profit organisations. In addition to the general framework of licensing, we will look at Microsoft and Oracle as particular examples.

An IT-driven problem

The difficulties in managing software licensing reflect the developing role of the PC and the increasing complexity of the IT environment. In the beginning, PC software licensing was very simple: you bought your shrink-wrapped software from the vendor, installed it on your PC, and never looked back. There may have been certain copyright restrictions to do with copying or lending but, much like any other product such as a book or a vinyl record, you owned it. The serpent in this Eden was the ease with which software could be copied. Unlike a book or a record, duplicating software with no loss of quality was the simplest of tasks. Copies could then be given to friends, sold in street markets or installed on all the PCs in an office. As a consequence, software vendors began a dual-pronged approach to securing their copyright. The first weapon was the rise of copy protection systems involving the use of hardware dongles, tying an installation disk to a single PC, and a wide variety of other technical limitations. The second was the introduction of highly-restricted licensing.

Simply put, the concept of licensing means that you do not buy the product, and you don’t own it. Instead you purchase a licence to use the software according to the strict limitations set out in the licence itself. Those limitations will usually prevent you from making a copy, providing copies to other people, and reverse engineering the software, but they can also include other restrictions and impositions. Some companies have tried to prevent users selling second-hand software, even when the original buyer no longer uses it. More recent licences may provide that the vendor can acquire data from the PC, or restrict you from running and publishing benchmark tests. Many users found some of these restrictions unacceptable, such as the inability to install the software on a desktop and laptop system even if only one instance of the software would be in use at any one time, or the general hassle caused by hardware security systems. So software licensing has developed as a trade-off between protecting the rights of the software developer, and the rights of the user. If the story had ended there, licensing would still have remained a relatively straightforward process. But complication ensued when large organisations began deploying software on hundreds of PCs, and then employing servers that may cater for thousands of users. The situation becomes even more fraught when you introduce virtualisation, and now the concept of the Cloud is presenting vendors and customers with yet more problems.

The licensing landscape

Most software vendors offer you multiple ways to acquire software licences, and each brings its own benefits and drawbacks. There are also issues of cost. Briefly, these are the main alternatives: OEM licence When you buy a new PC from a computer vendor you receive an OEM licence for the software that the vendor has pre-installed on the system. Usually that includes the operating system but may also include additional software such as Microsoft Office, a Web browser, anti-virus and other security applications, and utilities for back-up and more. Typically, the OEM licence is much cheaper than acquiring the software through other channels, but while it will probably match retail software in features, it may be restricted in other ways. For example, you will usually find that the licence expires when the equipment is disposed of. Perhaps the greatest drawback is the fact that you end up with various versions of operating systems and applications scattered throughout the organisation as you acquire new computer systems. Retail licence When you buy individual shrink-wrapped software from a reseller it comes with a retail licence, commonly called the End-User Licence Agreement (EULA). While the EULA is often included as a lengthy printed document in the box, increasingly it is presented in electronic form as part of the installation process, and the terms of the EULA must be agreed to before installation can be completed. For smaller businesses (or larger organisations that allow staff to install software on their PCs) this can be a simple way of acquiring licensed software, with the advantage that the licence is permanently granted and the software can be removed from one PC and installed on another. However there are many disadvantages. It is usually the most expensive way of acquiring software, and it is easy to breach the terms of the licence, for example when a user upgrades to a new PC, sells or passes on the old hardware but does not remove the software. There are also administrative issues, such as the fact that installation usually requires a keycode for activation and codes are easily lost. Also the installation is sometimes tied to the original hardware and making changes to the system (such as adding a new hard drive) may require the software to be reactivated. An important point to note is that with both OEM and retail licensing technical support may be available for only a limited time, often just one to three months although a year is also common. Beyond that period support must be paid for by subscription or on an incident-by-incident basis. Volume licence As the use of PCs spread throughout the organisation, often numbering hundreds or thousands, software vendors introduced the concept of volume licensing. Volume licensing usually allows you to buy a media kit for the software (often in the form of a single installer disk and manual) which can then be installed on the licensed number of PCs. Increasingly, the software is in the form of an electronic download. Both as a reward for the fact that you’re buying tens or hundreds of copies, and because the vendor enjoys considerable savings in media, packaging and shipping, volume licensing usually offers discounts over retail licences. Other advantages include improved software management and IT administration, since it becomes easier to ensure that all PCs within an organisation are running the same version of operating system and application software. However, there are a number of points to be aware of. Volume licensing doesn’t always equate to the lowest cost of purchase. Compared to retail products you may pay more, although you will get additional features, benefits and services in return. Depending on vendor, you may not qualify for the best prices and benefits if you cannot meet minimum volume requirements: most vendors include breakpoints of 5, 25, 50 or more users, PCs or licences. Some volume agreements also require you to predict the number of licences you need over a fixed period (often two or three years), leading either to additional costs if you exceed the initial number, or paying for unused licences if you reduce your requirements. Subscription licence Historically, most software vendors allowed their existing users to acquire interim or full-version upgrades at a discount. Although the situation varies across the industry, some no longer provide for discounted upgrades even for volume licensees. Instead, vendors have introduced the concept of licensing subscriptions, either as part of a volume licence or as an additional benefit at additional cost. Typically, the subscription gives you the right to any or all interim and full version upgrades, enhanced service and technical support for the duration. But while a subscription gives price protection in the form of free or discounted upgrades, it is also usually severely limited in term (often as little as one year), which can greatly complicate your ability to calculate pricing. For example, for a large enterprise the subscription will often be cheaper and allow free upgrades to the latest software; smaller businesses with the ability to skip an interim upgrade will often pay less by avoiding, say, a three-year subscription and simply buying the next major upgrade when it becomes available. Open source licence There is a widespread assumption that the problems associated with software licensing can be avoided entirely by opting for open source software. Not only is open source software assumed to be free in financial terms, but it is also assumed to be free of restrictions and limitations commonplace in commercial licences. That is often the case, but not always. Wikipedia notes that there are currently more than 180,000 open source projects available, subject to no less than 1,400 unique licences. The terms of those licences can make the software freely available, free to be reverse-engineered, adapted, rewritten or otherwise used in any way the user wishes. However, it isn’t universally true and companies who go down the open source route need to pay attention to the terms of the licence – particularly as the US federal appeals court ruled in 2008 that free software licences set legally-binding conditions and are enforceable under copyright law. Among the most common limitations in open source licensing are the ability to use the software for personal use but not for commercial or business purposes, and a restriction on reselling the software in whole or in part. Even where the software itself is free for commercial use, companies should allow for training and technical support which may need to be paid for, or may not exist.

CALs

A potential source of much confusion, CAL can either mean Client Access Licence or Concurrent Access Licence, depending on vendor. The Client Access Licence has been driven by the rise of the server, and the fact that while only one instance of the software might be running on the system it can be used by many users at the same time. In addition to requiring a valid licence for each installation of the software, vendors often require a Client Access Licence for each user and/or device that accesses the server. A variation is licensing by users and devices. With the latter it is the number of devices (such as client PCs) accessing the server that is licensed. User CALs will make more sense for organisations who have staff who access the server from multiple devices; Device CALs are appropriate for organisations who have staff who share client PCs or other devices on different shifts.

A top-level guide through the licensing jungle.

Some companies define the CAL as a Concurrent Access Licence, recognising that a company may have a large number of users who need occasional access to a server application or resource, but only a limited number who need to do so at any one time. Sometimes the server software itself will enforce concurrent access compliance so that if you have 100 CALs, the 101st employee who tries to access the server software will be refused access until one of the existing users logs off. More commonly, however, it is up to the organisation to ensure compliance by buying CALs to cover the number of expected users or devices, or both.

Software as a Service

SaaS is one of the fastest growing areas of IT. Researcher Gartner estimated the global SaaS market at $10bn last year and predicted it to rise by 20 per cent this year, and to double by 2015. Although SaaS is best thought of as a software delivery model, it applies to licensing in the way it impacts the cost of software. Traditional computing models are based on computers within an organisation’s premises and software installed on those computers. SaaS differs by hosting the software on a remote computer which is usually accessed via the Internet. Instead of buying software licences, SaaS users buy a subscription to the service, either monthly or annually. As a result, the setup cost for SaaS is usually lower than on-premises installation. Other advantages include much simpler administration costs since no upgrades and maintenance is needed on the part of the organisation, and the flexibility to constantly shift costs in line with the number of employees who need to use the software. Against those advantages, the key drawback is the limited kinds of software available in the SaaS model, largely designed to appeal to large enterprises, such as accounting, customer relationship management, enterprise resource planning, and so on. For smaller companies there is the additional risk that losing Internet access for any reason means you lose access to the software.

Virtualisation

As complex as the subject of licensing is, a recent development has thrown a massive spanner in the works: virtualisation. While virtualisation offers organisations huge advantages in IT development, deployment and administration, a report by Gartner last year identified licensing as a “major stumbling block to widespread adoption.” The problem is that many software licences are based on the idea of a single machine, a single CPU, or a single user; but virtualisation breaks these models by creating multiple virtual machines accessible by multiple users. Although licensing in a virtualised environment has been an issue for years, many software vendors are only now beginning to address it, often creating new problems in the process. VMware, Oracle and Microsoft have all attracted criticism in recent weeks after announcements in this area. Although some believe that software metering will prove to be the way forward, in a model similar to mobile phone tariffs, for IT managers there is currently no general approach – licensing must be dealt with on a case-by-case basis for every server, every OS and every application.

Cloud computing

The final cloud on the licensing horizon is the Cloud itself. All discussions of Cloud computing begin with a number of assumed advantages, including reliability, ease of use, ease of administration, and lower costs. But in the area of software licensing the cost advantages are not yet established. As with virtualisation, many vendors have not made clear their pricing structure for software that is running in the Cloud.

Microsoft licensing

For years there has been friction between Microsoft and its customers over the complexity of its licensing policies. The Microsoft Volume Licensing Reference Guide, freely downloadable from the Microsoft Web site, runs to more than 70 pages, and in addition to OEM and retail licences describes multiple ways in which small or medium businesses can acquire Microsoft software, as well as further options for large enterprises, and separate licensing for both government and charitable organisations. Microsoft argues that this provides the flexibility – and opportunities for cost-saving – that customers want. Customers argue that it is confusing, with a degree of duplication that makes it difficult to work out which form of licensing provides the best fit for company needs at the best price. For small and medium-sized businesses, the breakpoints are at 5 and 250 PCs within the organisation. For companies with fewer than 5, Microsoft recommends buying individual retail licences. Between 5 and 250 PCs you have two options (with additional variations) under the Open Program banner. Open Licensing is the entry-level volume licensing scheme for businesses, organisations and academia, and generally offers better pricing compared to retail purchases. Having met the initial entry requirements, the scheme runs for two years during which period further licences can be added one or more at a time as you need them. Although the scheme expires, the licences purchased are perpetual and may be used indefinitely. All payment is up-front at the time of purchase. Most product media is downloadable and volume keys are also available through the VLSC site. Software Assurance, Microsoft’s subscription programme, is optional. This provides a range of benefits including enhanced support, additional training, exclusive products such as the Windows 7 Enterprise and Microsoft Desktop Optimisation Pack, and new products and upgrades. Open Value Licensing is a three-year volume scheme that includes Software Assurance as standard. Payment may be up-front in full at time of purchase, or may be split per year over the term of the scheme, with protected pricing. The scheme is sub-divided into three further options.

Open Value Non-Company-wide is the simplest of the variants since the other two require an enterprise-wide commitment to certain products. Open Value Company-wide provides additional cost savings, simplified licence management and better control of licensed product costs, but requires you to make commitments to certain key products (such as Windows or Microsoft Office) across your company, which has the added advantage of helping you to standardise. Open Value Subscription is similar to Open Value Company-wide but with the lower cost of ‘renting’ the software since the licences are not perpetual. However at the end of the licence period you lose the right to use the software unless you take the buy-out option. One point to consider in the three schemes is that, while all allow you to add extra products throughout the term of the agreement, under all but Open Value Subscription you cannot remove licences and unused product must still be paid for until the end of the agreement.

Oracle licensing

In broad terms, Oracle offers perpetual and limited term licences to its database products, sub-divided into Full Use, Application Specific Full Use and Embedded Software licences, the latter two for third-party applications that use Oracle’s technology, as well as additional licensing models for Cloud computing and virtualisation. However because Oracle software is server-based and multi-user, the devil is in the details. The first consideration in Oracle licensing is the hardware on which the software will be run. The company offers three licences depending on the number of processors on the server, whether two, four or unlimited. The development of multi-core processors has complicated matters but Oracle offers discounts to cater for this. Beyond the processor licence, each Oracle installation requires a Named User Plus licence that covers both human users and attached devices, with a minimum of 25 licences per processor. Whereas in the case of Microsoft licensing, the devices are generally assumed to be client PCs, mobiles and similar hardware, the nature of Oracle applications means devices can be literally anything that feeds into the database, such as thermostats and other data-logging hardware. While many software vendors count the number of simultaneous users, Oracle requires a licence for every user who will ever access the database. So if you have 200 staff of whom only 50 will use the software at any one time, Oracle still requires you to buy 200 licences. However, because Oracle also allows licensing by processor rather than by user, it can be more cost-effective to take the latter approach. In addition to on-premises licensing, Oracle also provides a SaaS offering through Oracle on Demand. This allows companies to have applications, database and IT infrastructure outsourced and managed, with the usual benefits of SaaS such as low start-up costs and on-demand subscription pricing.

Conflicting demands

Software licensing has evolved to match the developing role of the PC and IT, and continues to do so although, as in the case of virtualisation and the Cloud, it often lags behind. While licensing is undoubtedly complex, it is difficult to see how it could be otherwise, given the conflicting demands of software vendors who must earn a profit and protect their intellectual property rights, and customers who want simple agreements that allow them to minimise cost. Regardless of the complexity, licensing is a vital consideration for all IT managers. Having the right number of licences for the right number of users can save you money. Getting it wrong can incur severe financial penalties, and substantially damage your company’s reputation.

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