www.idc.com
October, 2004
The Recurring Revenue Revolution:How Much, How Fast, and Know-How
Amy M. KonaryProgram Director
Software Pricing, Licensing, and Delivery
AgendaAgenda
Key Trends Industry PerspectivesGrowth ProjectionsNext PracticesEssential Guidance
IDC BackgroundIDC Background
Global market intelligence and advisory firm on IT and telecommunications industries
700+ analysts worldwide
Founded in 1964
U.S. headquarters in Framingham, MA
50 offices in 42 countries
Subsidiary of IDG, an industry-leading media, research, and events company
In the Midst of Major ChangeIn the Midst of Major Change
Licenses Kill
TechWeb, 4/2004
“WW growth of software subscriptions will outstrip perpetual license…” Forbes,
7/2004
Software Licensing to Morph Information Week, 3/2004
Software-Licensing Market Taking New Shape
VARBusiness, 8/2002
Shift to Subscriptions Means More Choice for CIOs
CIO, 5/2004
Big Changes in Licensing?
CRN, 4/2004
Pay-as-you-go software at a VAR near you
Computer Dealer News, 6/2004
Software Licensing Grows Complex
Network World, 7/2004
“Software is dead”
Marc Benioff, Chairman, SalesForce.com
“Software is dead”
Shaun James Browne, SuperPowerNet.com
“Software is dead”
National Post Online
“Software is dead”
Bruce Fram, Silicon Valley Entrepreneur
“Software is dead”
Jack Mamais, Heavy Gear 2 Director
“Paying for software is dead, too”
InetBlog
Change is in the Air…Change is in the Air…
52%56%
65%
60%
67%
56%
0%
10%
20%
30%
40%
50%
60%
70%
Yes, wemadechanges inthe last year
Yes, we areconsideringchanges inthe nextyear
Q.- “Have you made changes or are you considering making changes to your licensing model?”
(% o
f re
sp
on
de
nts
)
35% of vendors that made changes in the last year are considering changes in the next year too
N = 107Source: IDC’s Future of Software Licensing Study, Q46 Vendor Survey 1, 2004
Change is in the Air…Change is in the Air…
14%
15%
42%
14%
15%
20%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Subscription/Maintenance
Simplified/UnifiedLicensing Approach
Pricing Meter (eg: per user,per CPU)
Last Year This Year
Vendor- “Please describe the changes”
N = 62 and 60Source: IDC’s Future of Software Licensing Study, Q54 Vendor Survey 1, 2004Note: Multiple Responses
Shift from One-Time to AnnuityShift from One-Time to Annuity
One-Time Annuity
REVENUE APPROACH
Indirect
Direct
SA
LE
S A
PP
RO
AC
HPREDICTABILITY
VOLATILITY
80%
15%
5%
Why the Revolution?Why the Revolution? It’s becoming increasingly difficult to make money as a software provider
Customers continue to be cautious with spending Discount levels are trending upward No “killer app” on the horizon
The lines between software and service are blurring New delivery models New competitors offering hybrid software/service models
Vendors are searching for sources of predictable, recurring, revenue Vendors want to get off of the “perpetual” merry-go-round The financial community is pushing for this… sort of
Before We Proceed- License DefinitionsBefore We Proceed- License Definitions
Subscription License- Subscription licenses are paid for with a recurring (often annual) fee to continue using the software. The customer does not own the software license.
Perpetual- Perpetual licenses are paid for on a one-time basis, giving the user the right to run the program as long as he/she chooses. It does not imply a right to upgrades, which are typically sold separately as part of a maintenance agreement or on a per-upgrade basis. Some vendors sell perpetual licenses on a term basis, which on the surface appears to be subscription based because the payments are spread out over time. However, from a deal perspective, it amounts to a financing approach in which either the vendor or a third party helps amortize payments over a specified period. The software does not stop running after that time period, and the customer is granted a perpetual license.
Maintenance DefinitionMaintenance Definition
Software Maintenance- An agreement between the licensee and software developer through which the developer continues to improve the packaged software product by repairing known faults and errors or enhancing, updating, or upgrading the product. It may also include technical support and is generally priced as a percentage of either the net or list license cost.
Vendors on Maintenance and SubscriptionVendors on Maintenance and Subscription
In the next year, will your maintenance revenues represent an additional 10% or greater of your total revenues relative to last year?
In the next year, how likely is it that your company will use maintenance as a primary vehicle to offer additional services, rather than just a version upgrade insurance
27% of vendors think this is highly probable
26% of vendors think this is highly probable
In the next year, how likely is it that the software industry will move toward subscription licensing?
33% of vendors think this is highly probable
The Macro Environment- CustomersThe Macro Environment- Customers
Suspicion abounds… conspiracy theorists flourish Dissatisfaction with vendor licensing practices Customer expectation that the vendor is trying to squeeze as much money out of
them that they can
In 2003, customers allocated an average of: 33% of their software budgets to new license 25% of their software budgets to upgrades 20% of their budgets to maintenance
From 2004-2005, customers will increase the % of their software budgets on maintenance at the expense of new license and upgrades
Software Maintenance IncreaseSoftware Maintenance Increase
5%
7%
11%
16%
33%
16%
9%
4%
0% 5% 10% 15% 20% 25% 30% 35%
(-20) - (-39)
(-1) - (-19)
0
1-9
10-19
20 - 29
30 - 39
50 - 59
Customer – “By what %, if any, do you expect the percent of your IT budget spent on software maintenance to increase or decrease from 2004 to 2005?”
(% of respondents)
(% in
crea
se o
r d
ecre
ase)
N = 57Source: IDC’s Future of Software Licensing Study, Q5 Customer Survey 2, 2004
Customers on Maintenance and SubscriptionCustomers on Maintenance and Subscription
Will vendors begin to use maintenance as a primary vehicle to offer additional services, rather than just a version upgrade insurance
Do you expect the cost of maintenance to increase?
48% of customers think this is highly probable
42% of customers think this is highly probable
In the next year, how likely is it that the software industry will move toward subscription licensing?
33% of customers think this is highly probable
Software Market ForecastSoftware Market Forecast
0
50,000
100,000
150,000
200,000
250,000
300,000
2003 2004 2005 2006 2007 2008
Maintenance
Product License
Worldwide Software Market Revenues, 2003-2008, ($M)
41%49%
Why Customers Purchase MaintenanceWhy Customers Purchase Maintenance
10%
18%
35%
35%
43%
0% 10% 20% 30% 40% 50%
Makes sense/saves moneyin the long run
To getupgrades/updates/support
Required in order to get adiscount
Company policy
Required as part of thesoftware purchase
(%) of respondents N = 40; Applications onlySource: IDC’s Future of Software Licensing Study, Q25 Customer Survey 1, 2004
Customer- “When you purchase maintenance/ subscription, is it because…”
Perspectives on SubscriptionPerspectives on Subscription
Vendor Predictable revenue Low up-front cost for
customer Upgrades
Customer Upgrades Relationship with or
support from vendor Low up-front cost for
customer
Subscription ProsVendor Revenue disadvantages Complexity or cost for
vendor Onus on value for vendor
Customer Long-term cost Unpredictable cost Automatic upgrades
Subscription Cons
Software License ForecastSoftware License Forecast
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2003 2004 2005 2006 2007 2008
Perpetual License
Subscription License
Worldwide Software License Revenues, 2003-2008, ($M)
81%66%
•Launched Software Assurance in 2003
Next Practices- MicrosoftNext Practices- Microsoft
•What they did right:Made the upgrade purchase process easier for customersIncluded additional services beyond upgrades that addressed customer pain points, such as eLearning, home use rights, and training
•Where they fell short:Did not ensure upgrades would be valuable to customersDid not communicate the benefits of the additional services effectively
•Company has offered a subscription model for decades
Next Practices- SAS InstituteNext Practices- SAS Institute
•What they do right:Philosophy- Move customers’ businesses forwardSimplicity (usage rights to the software during the paid period, including maintenance, Tech Support, bug fixes, updates and new releases)The model requires that SAS be accountable for innovative, reliable software year after year
•Why they have an advantage?They’ve been doing this all along
•CA moved to ratable revenue recognition
Next Practices- Computer AssociatesNext Practices- Computer Associates
•CA offers a licensing portfolioIncludes subscription for specific purposes
•Why they have an advantage?CA has factored their own receivables for years CA made the shift when the chips were already down
•Why they had a disadvantage?Reduces their market share in a revenue view Hard to anticipate market reaction
Essential GuidanceEssential Guidance
•Consider the benefits of maintenance or subscription:Revenue benefitsBenefits WRT your relationship with the customer and the customer’s allegiance to the softwareOpportunities to encourage customers to use valuable tools and services
•Consider how to build recurring $ without sinking the ship:Licensing portfolioIncrease maintenance renewalsEvery situation will be unique
Questions?Questions?