In recent years, awareness of capacity on demand (CoD) and utility computing has increased significantly. Many hardware manufacturers provide systems with variable hardware capacity, which allows customers to purchase base capacity and request additional capacity when needed to satisfy their “on-demand” needs. By their variable-capacity nature, these systems have strained standard software licensing models, especially those that are capacity-based. This article examines these strains and proposes a solution that will allow software vendors to license software in a simple, equitable way, while addressing customer needs.
THE COMMON HARDWARE PRICING MODEL
Hardware manufacturers of CoD systems often charge for the variable capacity inherent in such systems. Typically, hardware is priced in relation to its capacity. The simplest hardware-pricing model reflects a basic price accounting for basic hardware capacity, plus an additional price accounting for variable capacity. For modern CoD systems where the variable capacity can be turned on or off (i.e., IBM’s zSeries 990, Hewlett-Packard’s iCOD, etc.), the variable capacity is often “rented.” With typical rental models, the price usually takes into account the highest enabled capacity for each day, multiplied by the number of days that capacity was active or utilized.
This model requires the hardware vendor billing system to be cognizant of the enabled capacity of each customer on each day. This is easily satisfied by hardware vendors that require customers to register the enablement of certain capacities. For example, IBM z990 customers are required to “order” extra hardware capacities and are charged accordingly. To disable some capacity, the customer must register a change with IBM, in effect informing the IBM billing systems of the lowered capacity. Additionally, IBM’s “Call Home” facility sends hardware information back to IBM, providing it with another channel of information on the enabled hardware capacity.
THE SOFTWARE PRICING DILEMMA
Clearly, the hardware-licensing model described previously creates a high-transaction volume and requires a significant investment in back-office operations—something large vendors such as IBM can afford. Once this investment is made, the infrastructure that supports hardware billing can also support (with a relatively small, incremental investment) variable software pricing for software priced proportionally to the hardware capacity. However, such investment is beyond the ability of many software vendors and an alternative method is needed.
Most IBM mainframe software vendors use a capacity-based pricing model. For fixed-capacity computers, this model is simple to implement: The software vendor licenses the software for specific hardware models that are known to have specific capacities. Billing reflects the licensing arrangement, and when the customer needs to grow and an upgrade is planned, the software vendor issues a new license key that allows for a new hardware model (at higher license fees, of course).
CoD computers, such as the z990, create a dilemma for software vendors. How should the software vendor charge for such a system? Which capacity should be used to calculate the software price? Charging for the fixed capacity and ignoring the variable capacity seems unfair to the software vendor (though many users are certain to cheer such a model). Charging for both the fixed and variable capacity is not fair either if, for example, the variable capacity is used only one day a year. Clearly, the fairest capacity-based model would be based on only the enabled capacity; similar to the way the hardware capacity is accounted for by the hardware vendor.
Alas, this kind of model would require that the user convey variations in capacity to each software vendor. In turn, each software vendor would be required to create an adjustable billing system and enhance back-office operations to receive customer input for all their licensed products. The investment required for this is certain to make every software vendor cringe. If software vendors were ready to make such an investment, they could consider other licensing models that more closely reflect the use of their software, such as usage-based pricing, or IBM’s Workload License Charges (WLC). As we all know, that has not happened, partially because of the cost of retooling and maintaining the vendor back-office systems.
Software vendors face additional problems with the capacity-based model and “On-Off” CoD computers. From an accounting point of view, software vendors need a guaranteed revenue stream to recognize their license revenue. While licensing fees related to the fixed portion of the revenue are guaranteed, fees associated with the variable capacity are not, as future use is not assured. In other words, a portion of the revenue stream is not immediately recognizable by the software vendor.