Examining Software Licensing Models

Software licensing is a legal agreement between an organization and a software vendor that grants permission for the installation and use of software on a workstation or network. The terms of usage are specified in the details of the license agreement and are unique to each vendor. Over time, vendors have established a number of different types of licensing arrangements that vary in terms of how the licenses are counted, the way the licenses are distributed, and, most importantly, cost. This note reviews the most common software licensing models. The usage scenarios and the advantages and disadvantages of each arrangement are informed by Dinesh Bettadapur’s IEEE article, “Software Licensing Models in the EDA Industry.”

User or Device Licensing

User or device-based licensing ties a software license to a particular workstation (hardware-locked) and/or a specific user (user-locked). With hardware-locked licensing, the software is installed on a single machine with a specific hardware configuration and can be used by multiple users. User-locked licensing ties the software licensing to a specific named user, granting the user permission to use the application. In some scenarios, user licenses may enable the use of multiple devices that the named user can utilize.

Most commercial desktop software is licensed using this model (e.g. Microsoft, Adobe). However, cloud-based software deployments are changing the licensing landscape. Device-based licensing is typically the most inexpensive license for organizations purchasing small quantities of software and remains the most dominant software licensing model in the market.

When to opt for device- or user-based licensing:

In the early phase of tool deployment (i.e. when piloting an application).
If the base of users is calculable.
If users require dedicated access to the application (1:1 license/user ratio is needed).
If device-based licenses are of particular use when shared devices are being employed.

Table 1. Pros and Cons of Device- or User-Based Licensing

Source: Dinesh R. Bettadapur in “Software Licensing Models in the EDA Industry”

Pros	Cons
Can limit licensing to necessary devices or shared devices. Ensures dedicated access to required users. Pay-as-you-go or maintenance model – keeps the supplier motivated over the long term.	Higher upfront costs and potential for high maintenance costs over lifecycle. Only accessible to a small base of users in a cost-effective manner. On-premises licensing minimizes negotiation position with supplier resulting in potentially lower discounts than are otherwise possible.

Server-Based Licensing (or “Floating” Licensing)

Server-based (or “floating”) licenses are indexed (or assigned) to a particular server. They allow a complete network of workstations to access the application by “floating” between workstations based on use/need. This assumes a finite number of CPUs per server. The main limitation is the operational impact of having too many workstations accessing the system.

The advent of multi-core processor servers has led to interesting shifts in the server-based licensing model. Some organizations calculate cost based on each additional processor (counting by core), while others charge per connection (counting by socket). Counting by processor assumes that each core has the same computing potential, which isn’t always the case. In response, some of the larger vendors have opted to treat multi-core technology as a single processor or to calculate each core as a percentage of a processor.

When to opt for server-based licensing:

There are a large number of users at a single site.
You only need a small set of licenses to be shared by a large set of users (e.g. 1 license per 5+ users).
You have both dedicated-user and batch-user scenarios.

Table 2. Pros and Cons of Server-Based Licensing

Source: Adapted from Dinesh R. Bettadapur in “Software Licensing Models in the EDA Industry”

Pros	Cons
Limits the upfront investment and minimizes re-hosting costs. Enables access to several users with the additional benefit of running multiple jobs on a single machine. Better utilization of licenses compared to perpetual licenses. Pay-as-you-go model – keeps the supplier motivated over the long term to ensure organization is making use of the license.	Spending increases linearly with usage with no upper limit on maintenance. Limited by the performance of the network for delivery. Administrative overhead in ensuring smooth running of licenses.

Subscription-Based Licensing

With subscription-based licensing, enterprises purchase licenses (subscriptions) for a fixed term, usually a year or longer. During this period, the organization generally receives automatic updates (e.g. patches), upgrades, and feature enhancements. Prices normally include maintenance and support – based on the number of licenses and terms of the contract. Increasingly support is basic and additional subscription support is required at a cost equal to a set percentage of the ACV or subscription cost.

When to opt for subscription-based licensing:

The organization is cash strapped, requiring license capacity for low upfront cost.
You need software for shorter-term projects, where software is not needed after project completion.
When OPEX is preferred to CAPEX.

Table 3. Pros and Cons of Subscription-Based Licensing

Source: Dinesh R. Bettadapur in “Software Licensing Models in the EDA Industry”

Pros

Cons

Peak capacity available upfront.
Less upfront cost when payments are distributed monthly, quarterly, or annually.
No long-term commitment required – subscription may be terminated at the end of period, depending on contract details.

Peak capacity upfront can result in under-utilization of licenses.
Minimizes negotiation position with supplier resulting in potentially lower discounts (i.e. can’t take advantage of volume discounts).
Can result in higher costs compared to purchasing a set of permanent licenses.
You don’t own the software after the terms of the subscription expire (unlike perpetual licenses).
No end-of-life support.

Site Licensing

Site licensing involves the purchase of a large number of licenses for a single physical location or site. When purchasing licenses in bulk, the average cost per license is cheaper than perpetual (node-locked) and floating licenses.

When to opt for site licensing:

Large number of licenses are required with high use at a single site.
High usage rates are proven to lead to demonstrable value.
The organization has stable technology, minimizing concerns of re-hosting.

Table 4. Pros and Cons of Site Licensing

Source: Dinesh R. Bettadapur in “Software Licensing Models in the EDA Industry”

Pros	Cons
Lower per-license costs compared to pay-as-you-go model and lower administrative overhead. Lower long-term costs if high license usage and high value is realized. Access to full license capacity when needed, potentially resulting in higher user productivity. Potential for high quality of service from supplier in the short to medium term.	High upfront costs with potentially greater chance of a lower ROI – if usage is insufficient. Higher long-term total costs if low value is realized from the solution. Potential for excess unused capacity resulting in lower value. Upfront commitment model – less motivation for supplier in maintaining long-term performance.

Enterprise Licensing

Enterprise licensing historically differed from site licensing only in terms of scale, typically supporting multi-site and/or global operations. Historically, enterprise licenses would cover a full legal entity or other such employee population, but now vendors are creating their own iterations of what an enterprise license is, sometimes with geographic or mergers and acquisitions restrictions.

When to opt for site licensing:

Extremely large number of licenses is required with very high use across the organization (multiple sites).
The organization needs one license for every desktop and server.

Table 5. Pros and Cons of Enterprise/Corporate Licensing

Source: Dinesh R. Bettadapur in “Software Licensing Models in the EDA Industry”

Pros	Cons
Lowest per-license costs compared to other licensing models. Access to maximum license capacity when needed, resulting in (theoretically) highest user productivity. Lowest administrative costs/overhead in license management.	Highest upfront cumulative costs. Highest long-term cumulative costs if low value is realized from the solution. Upfront commitment model – less motivation for supplier in maintaining long-term performance.

Usage-Based Licensing

Also referred to as “taxi-meter licensing,” this model charges clients on the basis of actual time usage of the license(s). Organizations acquire a base number of pay-per-use licenses and the vendor will charge based on use. There is typically a minimum number of base licenses that need to be installed to justify the overhead for tracking usage. This model does involve some administrative overhead when setting up the system to accurately track the time usage of each license.

When to opt for utility-based licensing:

You need short-term controlled usage.
Usage capacity is not known and the license allows scale up/down.
The organization is a start-up, and cash flow is a heavy consideration. In other licensing models there can be substantial up-front costs.

Table 6. Pros and Cons of Utility-Based Licensing

Source: Dinesh R. Bettadapur in “Software Licensing Models in the EDA Industry”

Pros	Cons
Spending tracks actual license usage. Maximizes utilization of licenses – helps develop more accurate license usage models. Access to unlimited license capacity with potential for increased user productivity.	Possibility of higher costs due to potential for unconstrained usage. Significant administrative overhead in tracking actual license usage and managing payment mechanism. No controls on license usage can result in wasteful usage, and therefore wasteful spending.

Recommendations

The following considerations will be critical to selecting the optimal software licensing model:

Think about both short- and long-term costs. Many IT managers will focus only on the upfront costs of licensing (1–3 years). However, if the software is going to be used for several years, organizations need to know the total costs over the lifecycle of the tool.
Obtain reasonable estimates of the total number of users and software utilization rates. The total number of users alone should not dictate the selection of a licensing model. Enterprises also need to know how frequently the tool will be used by the proposed end-user group. For example, if there are a significant number of infrequent tool users, a licensing model that allows the enterprise to float licenses amongst a batch of users can reduce cost and improve ROI.
Know how long the product will be in use. Shorter-term deployments can take advantage of licensing arrangements, such as subscription-based licensing, that involve a smaller commitment from the enterprise.
Don’t sacrifice productivity for cost savings. A frequently overlooked component of ROI calculations is the productivity increase that software provides. Too few licenses can lead to diminished productivity. Forcing users to wait until a free license seat becomes available is one example of such a productivity killer. Maximizing ROI requires that users are provided access to tools when they need them. Having fewer licenses may be cheaper, but the value of a tool must also be calculated on the basis of the operational improvements you hope to achieve.
Consider hybrid licensing arrangements with mixed user groups. Larger organizations may have both dedicated and intermittent user groups. In cases like this, the most effective licensing arrangement might be a mixture of two (or more) license models – one that meets the needs of dedicated users (e.g. node locked) and another intended for batch users (e.g. server based).

Bottom Line

Failure to choose the right software license can lead to inflated costs and unused software. Select the right licensing agreement by understanding the nuances of available licensing arrangements.

Examining Software Licensing Models