In Depth: Software Vendors Try New Pricing Schemes For A Virtualized World

When you go to buy new servers to rev up the company's IT infrastructure, look carefully under the hood. The added horsepower just might change the price you pay for the software that runs on them.

Software vendors such as IBM, Microsoft, and Oracle have priced their server-based software--databases, application servers, and operating systems--according to the number of CPUs the software runs on. Software with a $10,000-per-CPU price tag costs $40,000 when installed on a four-way server. Pleasantly simple.

With the advent of dual-core and multicore processors and server virtualization, that simplicity's fading fast. Multicore processors and virtual servers let IT departments shift workloads more effectively, but they also make it difficult to track how many processors and servers the software runs on. As these technologies go mainstream, software vendors are scrambling to make sure they don't lose revenue or stifle the promising technologies with oppressive licensing.

IBM faced this reality last week when it unveiled a major change to licensing for middleware and other software products, using a complicated scale based on values IBM assigns to specific processors. IBM's goal is to move away from per-processor pricing and toward usage-based utility pricing.

Microsoft also is changing some of its pricing to jibe with virtualization. Starting in October, customers with Windows Server 2003 R2 Datacenter Edition can run an unlimited number of copies of Windows Server on virtual machines on a physical server. And users of the forthcoming Windows Vista that subscribe to Microsoft's Software Assurance program will be allowed to run up to four copies of the operating system on a PC.

The challenge of matching software prices to hardware innovations isn't new. Oracle stumbled over it back in 1999 when it experimented with "power unit" pricing, a scheme that based software prices on chip processing speeds. That approach raised prices and ticked off many customers, some of which defected to competitors. The plan was too complicated, admits Jacqueline Woods, Oracle's VP of global pricing and licensing strategy, and the company abandoned it two years later.

But multicore processing and virtualization are making server software pricing even more problematic. Intel and Advanced Micro Devices now make dual-core microprocessors and plan to introduce quad-core processors in the next year, and Sun Microsystems already sells servers with its eight-core UltraSparc T1 processor. Virtualization is being used much more widely in production systems, particularly for server consolidation. And broader adoption of grid computing, where workloads are broken up and distributed over hundreds or thousands of computers, is on the horizon.

John Matelski, deputy CIO and chief security officer for the city of Orlando, Fla., says the new technologies are making licensing options "more complex and more difficult to negotiate." Buyers like per-processor licensing better than per-user pricing because they don't have to track how many workers, partners, and customers might use a piece of software, Matelski says. Multicore chips, virtual servers, and grids may force vendors "to adopt utility-based pricing schemes that charge customers based on how much use they get out of their software," he says.

Not A Fair Exchange
Prices tied to hardware "are increasingly poor proxies for software value," IDC analyst Amy Konary says. A software vendor might charge double for software running on a dual-core processor, but that chip might provide only 1.7 times the processing power of a single-core chip--meaning customers would be paying for more than they're getting.

Oracle is continuing to experiment with ways to match middleware, database, and infrastructure software prices to processor performance. In July 2005, it modified its software pricing to accommodate RISC multicore chips by charging 0.75 of its per-CPU price for each core. Before that, Oracle had treated each core as a CPU when calculating prices. These formulas don't apply to Oracle's applications, which generally are priced per user.

In December, Oracle further modified the formula for Sun servers using eight-core UltraSparc T1 processors; each core is valued at one-quarter of a CPU. In January, Oracle decided to apply a 0.5 per-core multiplier for Intel and AMD dual-core chips. Without such modifications to Oracle's pricing policies, "moving to new technologies would be prohibitively expensive" for customers, Woods says.

But Oracle, which acquired PeopleSoft in early 2005, has continued pricing PeopleSoft applications according to a mix of metrics, such as the size of a customer company based on its revenue and other factors. That's common: Applications tend to get priced by a user measurement, while middleware and infrastructure such as databases and app servers are tied to processors.

IBM's New Math
Under IBM's "processor value units" plan, which replaces its per-processor licensing structure, buyers of IBM's middleware products will pay a license fee based on a value the vendor has assigned to the processor on which the software will run. IBM calculates the "units" for all processors, including single-, dual-, and multicore chips, based on their performance using a number of industry benchmarks--the more units, the higher the price. The plan applies to most software in IBM's DB2, Lotus, WebSphere, and Tivoli product lines. IBM will use 100 value units as the equivalent of the cost of a current software license, which it says prevents price increases in the immediate future. You still may want to keep a cheat sheet handy and do the math yourself.

And write it in pencil, because it's going to change. "This sets the stage for further pricing evolution down the road," says Rich Lechner, IBM's VP of virtualization. He sees flexible software pricing plus virtualization capabilities and usage metering ultimately leading to broader adoption of utility computing, in which businesses adjust the amount of computing resources devoted to specific applications as needed--and pay accordingly. IBM's acquisition in January of CIMS Lab, a developer of software that tracks the use of computing resources across virtualized IT environments, is a key piece of that puzzle.

Hewlett-Packard is pricing some of its software, such as HP-UX Unix, on a per-core basis, even if a customer creates virtualized environments that run multiple instances of the operating system. "Software licensing will continue to go through some very stressful issues for the next six to 24 months because of all the influx of virtualization," says Nick van der Zweep, HP's director of virtualization and Integrity server software. He acknowledges that the industry hasn't perfected the model: "Right now, it's very confusing."

The Holdouts
Microsoft and BEA Systems continue to price their server software on a per-processor basis, regardless of the number of cores. While Sun's Java Enterprise System software might seem just the type of middleware most likely to be priced according to processor, Sun prices the software based on the number of employees a company has.

Vendors must get the model right--and quickly. IT execs might slow their adoption of virtualization and other leading-edge technologies if software pricing doesn't keep up. Or they might drag out software purchases while trying to reconcile prices with the expected return--or even turn to vendors with more flexible terms, including providers of open source software.

IBM execs say their new software pricing plan is just a first step. It looks like a step in the right direction--toward customers paying for the value they get. That's the drumbeat to which the entire industry must march.

-- with Darrell Dunn and Paul McDougall

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