Low Prices And High Complexity

At the antitrust trial over Oracle's bid to buy PeopleSoft Inc. this summer, the evidence revealed competition so fierce that Oracle salespeople were asking for approval on software discounts as high as 85%. PeopleSoft was ready to offer as much as 65% off the list prices of its products. Even customers used to cutthroat pricing in the post-recession software market were surprised.

Traditional models of selling business software are being upended, but not just because of heavy discounting in what has become a saturated market. The fast-growing adoption of Linux and other free or low-priced open-source software and new licensing plans designed to appeal to cash-strapped companies by letting them pay for only the computing power they use or pay annual or monthly "subscriptions" instead of signing big, multiyear deals, have had an impact, too.

At Microsoft's annual meeting with financial analysts in Redmond, Wash., last month, CEO Steve Ballmer acknowledged that open-source software could undermine industry profits in the long run. "The question which a lot of you ask is, will software be a business that generates a lot of profit in the future, or will it not?" he said. "Is open source essentially a disruption that will cause the software business in general to be less profitable 10 years from now than it is today?"

The fallout is a growing tension between customers and software vendors, as customers' desire for flexibility, predictability, and affordability clashes with software companies' desire to keep prices from falling too low permanently. Some customers say that's causing power struggles. Microsoft, Oracle, SAP, and other vendors have been slow to adapt their pricing to appeal to small and midsize companies, says Atefeh Riazzi, CIO of ad agency Ogilvy & Mather. "We've hammered the hardware vendors the last few quarters, and they've given us a lot of pricing breaks," she says. "But the software vendors haven't been flexible. They're under pressure, but I don't think they have a plan."

According to market researcher IDC, 58% of software vendors have made changes to their licensing policies during the past year, and 57% plan changes in the next year. With more options for how to buy software, companies are asking vendors for more flexibility in licensing agreements, more predictability in their software costs, and better guarantees that they won't be gouged when new versions are released, IDC analyst Amy Konary says. "All CIOs think they're paying too much," she says.

Reinvigorated delivery methods such as hosted software have some companies reconsidering whether they should buy some types of software at all. For example, Salesforce.com Inc. has won some big contracts and put pressure on larger rival Siebel Systems Inc. by selling contracts to use online customer-relationship-management software that companies don't have to install and maintain. "Every small company wants to be a big company, and every big company wants to act like it's a small company," Salesforce CEO Marc Benioff says. "They've always been locked in."

In addition, demand by investors for more corporate accountability has IT departments using license-management software to more closely monitor usage and eliminate waste. Add to that a cyclical shift in the balance of purchasing power--right now, buyers seem in control--and software vendors have lots of reasons to make adjustments.

Hotel, travel, and real-estate company Cendant Corp. has been using license-management software to get a better handle on software usage in its rental-car business, which includes the Avis and Budget brands. That's partly to comply with financial controls put in place as a result of the Sarbanes-Oxley Act and other legislation. "We want to pay for what we use," says John Turato, VP of technology for Cendant Car Rental Group. "But we don't like to pay for capability that we're not using."

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