By Robin Bloor

Software pricing has always presented a conundrum, both for vendors and for the customer. In the pre-Internet days software pricing on computer servers was roughly proportional to the cost of the hardware. In the days of mainframes and minicomputers this seemed rational, but as the servers morphed into anything from a lonely Intel box to a high-end cluster, it began to get complicated and it was quite possible that, with expensive software such as the big name database products, the structure of software pricing could limit or determine hardware choice.

This evolved to the point where – for example – Oracle’s database technology was specifically designed to run on inexpensive commodity servers (via Oracle’s RAC technology), with the idea that if the hardware costs are low, the overall ticket price is lower. Such developments would be fine if all vendors stayed completely in step in terms of pricing policy. But that doesn’t happen.

So the corporate technology buyers have a mess on their hands in trying to build rational and reasonably priced corporate networks. Licensing is a potential nightmare that completely distorts costs. The mess is made greater by the onset of virtualization, which further muddies waters that were already supersaturated with mud.

Once any vendor gets into a monopoly position, or even a position of significant leverage, it tends to maintain the price of its product and seek to commoditize everything around it. The battle plays out on your network. With software vendors, if their sales are climbing then their unit costs are definitely trending down, but the customer rarely sees any benefit from this.

This is one of the reasons that Open Source is important and why corporations really should have a policy of using it to some degree – and I’m not just talking Linux here, I mean the LAMP stack plus the JBOSS stack plus a little bit of Open Office plus anything else that can deliver benefit. It will help to keep the vendors of proprietary software honest – and incidentally, a good deal of Open Source it is quality software.

Cloud’s On The Horizon

Open source has long been a viable option within the corporation, but it is now becoming a force for change. For better or worse, it is now part of the fabric of the IT industry. The area of the IT industry that was never been backward in adopting Open Source, and were instrumental in establishing it, are the xSPs – now referred to generally service providers. They have always been enthusiastic users of free software and, web hosting companies in particular seem to use almost nothing else. (That in turn means that hosted bloggers like me use almost nothing else, because I use the software they provide.)

Open Source imposes a constraining business model on anyone who wants to make a business out of selling the Open Source software. The GPL pretty much torpedoes any business model based on the direct software sales of the Open Source product. But the GPL doesn’t and cannot prevent people renting the software out, no matter whether the company doing the renting simply claims to be charging for support or claims to be offering Software As A Service (SaaS). When you buy SaaS you do not contract to use specific products, you simply contract to use an application or a set of applications – and, at the end of the day, applications are what IT is about.

So, if you use Salesforce.com, you may well use software written by Salesforce.com itself, but it is possible that you’ll also be using some software provided by Salesforce.com partners and also some Open Source products. You just won’t know and you won’t care either. You’ll only care if the software fails to deliver the contracted service in any way. There are no simple and generally agreed models for pricing SaaS, primarily because its major competition is not other SaaS. It’s major competition is in-house software and it only has to cost less than that, and be reasonably easy to implement, in order to establish a market.

The costs of cloud services will follow a similar model to licensed software, because as the cloud business grows, its costs will fall through simple economies of scale. And, of course, the end user will probably not see much of those cost reductions. Open Source is particularly appealing to SaaS vendors, because its costs flat-line as the business scales. (You might think there are no costs to Open Source, but there are, see Ten Reasons Why Software Cannot Be Free).

As software moves towards a rental model, the “disruptive” market impact of the Open Source GPL will diminish on one side of the equation, because it will become easier to exploit commercially. However, it will also force competing proprietary products into a difficult position – because their costs don’t flat-line. The natural impact of this will be to encourage proprietary software products to establish a SaaS market as quickly as they can – before it gets taken by an Open Source option. If an open source option gets established it will be difficult to compete with.

At the moment there is a rush to providing SaaS for many reasons, from the recession to the lower costs of sale and the speed of adoption. However, imho, one of the most compelling reasons to do so is to get to market faster than your competitor, whether the competitor is Open Source or proprietary.

Robin Bloor, Technology Analyst, Founder Bloor Research, Partner Hurwitz & Associates, blog at http://www.havemacwillblog.com/

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