IBM Is Working On New Software Licensing Schemes

April 22, 2013 Alex Woodie

The old tier-based licensing scheme worked great for many years, but is rapidly outgrowing its usefulness, thanks to widespread virtualization, cheap CPWs, and cloud workloads. Some software vendors who play by the P-group rules have taken it on the chin, while others have jury-rigged complex rules to make ends meet, and managed service providers (MSPs) just roll their eyes. IBM apparently has taken notice of the problem, and the Power Systems team is working on some kind of fix, IT Jungle has learned.

Ordinarily it wouldn’t be news that IBM is working on a new licensing scheme. After all, Big Blue has no shortage of different licensing metrics in use across its various divisions and business units, including authorized user, concurrent user, floating user, user value unit (UVU), processor value unit (PVU), and resource value unit (RVU), among (many, many) others.

But the licensing issues facing the IBM i-Power Systems community arguably are different than those faced by IBM’s Software Group and its customers running commodity X86 servers. IBM learned this first hand, when it backed off plans to jack up IBM i maintenance prices to closer to the industry norm of 20 to 25 percent. The tier-based, or P-group, licensing scheme is unique to the proprietary IBM i platform, and has been in place since the days of the AS/400 (if not before).

Tier-based pricing is deeply entrenched in the way that IBM i professionals think about their servers and the software they buy to run on them, and getting customers to adapt to another method will be difficult. But the need is there. IBM executives confirmed at the COMMON conference this month that they are working on at least one new licensing scheme, ostensibly to help MSPs sell cloud solutions, but perhaps for the wider IBM i world; executives would not divulge any details of the new scheme, except to say that they are working on something. An announcement could be made in a matter of weeks or months, sources say.

Tier Bloat

Tier-based software pricing is a considerable hurdle that MSPs must overcome to attract customers and close deals. The main problem is that tier-based pricing forces MSPs to standardize on smaller servers, which have less CPW and are in lower P groups. This lowers the price that customers must pay their software vendors when they move from running the software in-house to running it on their MSP’s machines.

For MSPs, having a lot of smaller Power 710s and Power 720s to manage increases the maintenance burden. This approach is necessary to maintain the P05 and P10 tiers that most small and midsize IBM i customers are in. But it flies in the face of the scalability advantage that cloud providers are supposed to be leveraging. In response, some MSPs have cobbled together their own on-off system management tools to help them manage their clouds (although they are writing these tools for other reasons, too).

IBM’s own pricing scheme for IBM i operating systems and related systems software has also forced MSPs to smaller boxes, when their business model would naturally lead them to invest in larger iron that can be carved into many logical partitions (LPARs). MSPs can get much more CPW bang for their buck buying smaller systems than by getting into larger machines. It doesn’t make any sense, but those are the rules of the game.

IBM did announce a special MSP software pricing scheme last fall with IBM i 7.1 Technology Release 6, where the MSPs pay $500 per core per month to rent the operating system; this deal was just recently extended to IBM i 6.1. This is a very precise deal and it looks like IBM is trying to do something else that appeals to more customers than a select group of service providers.

The independent software vendors (ISVs) who ply the IBM i software waters are probably hurt even more by the archaic tier-based licensing scheme. The number one offender in ISV-land is tier group bloat and very inexpensive CPWs on low-end IBM i servers.

Thanks to very powerful Power 710s and Power 720s, customers often move down a tier when upgrading their machine, even though the new machine has more CPW than the machine they are replacing. For example, the customer may move from an old P30-class server with 35,000 CPWs to a new P10-class server with 37,000 CPWs. Ordinarily, a more powerful machine would have a higher P-group rating. As they say, no good deed goes unpunished, and this is the penalty for successfully cranking the Power processor architecture. Over a million CPWs have to fit within six tiers (the P60 tier, alas, is gone), so those tiers have to get wider with each new generation.

That puts ISVs in a difficult position during licensing negotiations with the customer. After all, the ISVs are being asked to accept that they will make less money, since licensing fees traditionally go up with tier groups, despite the fact that the customer is running the software on a more powerful machine, which traditionally would require higher compensation.

New Approaches

ISVs have realized that the old tier-based licensing approach is broken, and have begun adopting new schemes. Some ISVs have taken to charging customers downgrade fees when they move from a higher software tier to a lower tier, as a way to compensate for lower licensing fees. Others have abandoned the traditional P-group licensing scheme altogether, and are licensing their software by other metrics: straight CPWs, by the number of LPARs, by the number of users, the number of cores, and other mechanisms (even days of the week, according to one ISV).

Subscription-based pricing is arguably the most popular of the new approaches, especially for MSPs and software as a service (SaaS) companies, but also for ISVs. The advantage of subscription-based pricing is that it eliminates the big, upfront capital expenditure of a perpetual license, and replaces it with a recurring cost. CFOs and accountants are said to highly favor the subscription method, as it shifts costs to the operational side of the equation (and hence away from needing to be depreciated like other items on the capital equipment budget). Since MSPs are already bundling CPWs into subscriptions, it makes sense that IBM would try to eliminate any impediments to the move to subscriptions.

No one licensing scheme can possibly fit all the different ways that software is used. While user-based pricing may be a good fit for ERP systems, business intelligence applications, and development tools, it doesn’t make any sense to charge systems management tools or high availability software that way. Meanwhile, companies that want to run everything close to the vest–and may even want the product’s source code to make modifications (gasp!)–may balk at the higher long-term costs of the subscription model.

The way an ISV prices its software has become more of a marketing and sales issue than it was previously, when practically everybody used the tier-based method. Some ISVs are touting what they claim are plain and simple policies, in the hopes that it challenges some of the bigger incumbents in the IBM i space, who, they claim, have more complex and less transparent pricing schemes that penalize customers with higher prices.

In a perfect world, everybody would pay their fair share, and pricing negotiations wouldn’t resemble a bartering session in some dusty bazaar. But that is the scenario starting to unfold at the moment, as ISVs accuse one another of unfair licensing policies, or charging some classes of customers (i.e. banks and hospitals) more than other companies working in “less-advantaged” industries.

While there should always be some room to maneuver and discount pricing, a healthy market also needs some sort of baseline to start from. That baseline is currently deteriorating as tier-based pricing becomes less pertinent to the realities on the ground. IBM is apparently working to change software licensing schemes for MSPs, but it should lead and help to set a new baseline for the rest of the IBM i world, too.