Monday, March 13, 2006

Caveat Emptor - The Perpetual License

Let's all pretend for a moment that we are a software buyer. Perhaps we wish to purchase an accounting application for our business, and we have begun the process by creating a "punch list" of requirements for the application - mostly functional requirements, some technical requirements. Next, we engage our favorite technology sales person whom we trust because she has dealt with us squarely in the past, and each time she has delivered value commensurate with the value promised (no joke here, seriously, these people do exist and I have had the pleasure of working with some of them).

Upon review of our punch list, she proclaims that the application she is selling does indeed perform all of the "punch list" functions as specified. Furthermore, she provides us with references in the industry who also proclaim that "the punch list is punched" by this application. She also has her fabulous sales engineer install a trial version for us so that we can "take if for a few laps around the track to see that it works as advertised - punch list punched."

Not wanting to negotiate price before we examine the fine print, we ask to see the license terms, which can be summarized as follows:

- Perpetual right to use the object code in the form delivered.

- Media warranty - the media will be replaced with new media if it is found to be defective

- As Is - no fitness for any particular use

- No source code nor any right to decompile, reverse engineer, blah, blah, blah

Everything seems to be in order. Typical language for most software. We ask a few final, simple questions of our trusted sales person:

Q: "So, what is the financial health of the company that develops this code anyway? Are the developers happy? Are they working on the next great thing for my business?"

A: "Well, the company that originally developed this application is defunct and the developers are not reachable in any way, shape, or form. Now let's get down to the business of pricing this perpetual license, shall we?"

How does this story end if you are the buyer? Everything is in order. You have a punchlist that is punched, great references, a trusted sales person, and a typical perpetual license. The perpetual license is the most valuable thing in the software industry, right? It is the item which defines the software sale, right? So, how much do you pay for this very valuable thing which can never be changed by you or anyone else for the life of the "perpetual license?"

Not one thin dime, because the current functionality of the "punch list" is table stakes, and the real game is played based upon a sustainable future - a future where the "punch list" is certain to change. Since its birth with the IBM consent decree, the software industry has largely existed as a failed market because the item for which the buyer pays the most money, "the perpetual right to use the current object code functionality AS-IS with no warranty or fitness for any particular use," is the item the buyer values the least.

What is most valuable to the buyer is the ability to adapt the technology to future needs, whatever they may be. So, in most cases buyers pay for the expensive perpetual license based upon the "promise" of some future maintenance stream. This "promise" is implicitly bundled with the perpetual license in the form of a maintenance contract (which also likely proclaims "no fitness for any particular use"). A market is a failed market when the value a buyer ascribes to a product is grossly different than the value actually delivered by the product as part of the contract, yet the buyer completes the transaction anyway.

The great news is that the market is transforming from a failed market with software vendors wielding too much power to an efficient market where software goods are purchased based upon the real value they deliver to the buyer over the contract term. It's called a subscription. Carpe diem.


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