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Sunday, April 25, 2004

Software: The Subscription Pricing Model

Some industry analysts predict subscription-based licensing models are about to break into widespread acceptance as alternatives to perpetual licenses, the status quo in the software industry. Research firm IDC last month predicted "dramatic shifts" in software business models as a growing number of customers shop for more flexible licensing options. "Vendors that can't accommodate these models will eventually be at a competitive disadvantage," predicts IDC analyst Amy Mizoras KonaryIDC estimates a quarter of all software sales today are tied to subscription licenses, so the transition is already in gear.The trend is gaining so much momentum that Merrill Lynch software analysts have come up with a new method of assessing and valuing software companies, one that takes into account the growth in deferred revenue that results when vendors move in this direction. The brokerage firm has devised a formula, called the Merrill Lynch On-Demand Index, for measuring the performance of software companies using metrics that go beyond the standard stock-price-to-earnings or stock-price-to-sales gauges.The trend toward subscription contracts is being driven in part by customers' dissatisfaction with the old way of deal making. Perpetual licenses can entail large up-front costs and annual maintenance fees that can reach 20% of a contract's initial value. Fewer than 20% of users surveyed by IDC say they're taking full advantage of the software they licensed.

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