Gartner Says Cost of Software Licenses Could Increase by at Least 50 Percent by 2006
Egham 22 November 2004 — Enterprises worldwide could see their software licensing costs increase by at least 50 percent by 2006 unless they act soon to renegotiate existing contracts, according to Gartner, Inc. This is because four emerging trends in hardware threaten the traditional pricing model used by Oracle, IBM, Sybase and many other software companies based on hardware capacity or central processing unit (CPU).
The trends include:
The move towards multi-core chip architectures
The move to virtualise hardware resources across physical servers
Growing availability of servers to support capacity on demand
Increased interest in rapid provisioning tools
"Any one of these trends would present a great challenge to software vendors to maintain a fair and acceptable pricing policy," said Alexa Bona, research director at Gartner. "The fact that all four are happening at the same time is a recipe for software pricing mayhem."
She added, "Software companies will generally charge for the total potential CPU capacity regardless of what is being used. They will have to change their policies, but that change will not come quickly. It is therefore crucial for enterprises to understand the risks and protect themselves by starting contract negotiations with their vendors now."
Multi-core chip architectures
Until recently, servers were made more powerful by increasing the execution frequency (speed) of the processor. However, when processors run faster, they also require more power and generate more heat.
Multi-core chip architectures have emerged to increase server performance without requiring more power or generating more heat. The processor chip conforms to the power profile and physical connection of a single processor chip, but includes multiple processor cores in one socket. System performance improves as a result, but Gartner warned that multi-core architectures will not double system performance. Despite this, the majority of software vendors surveyed by Gartner are intending to charge the current CPU fee for each core on the chip. For example, if a single core CPU now costs $40,000 per CPU, a dual core chip will cost $80,000
"If an upgrade to the new dual-core design offers only a 50 percent improvement, a doubling in the license fee becomes a tax on technology innovation with little return," said Ms Bona.
She added, "The current licensing model does not give software vendors an incentive to write more efficient code. It also leaves users unable to control costs when single core systems become unavailable, perhaps as early as year-end 2006. By that time, many enterprises will pay at least 50 percent more in software fees from a number of mainstream software vendors that currently license based on CPU."
Virtualised hardware resources
Virtual Machines (VMs) virtualise hardware resources so that multiple operating systems can share/partition resources and dynamically scale the amount of resources available. In the past three years, the market for VMs on Intel servers has exploded because of the large number of lightly utilised Intel servers with small applications. Although VMs do not reduce administrative costs, consolidating hardware into fewer servers can reduce costs significantly.
Gartner warned, however, that any savings that enterprises foresee from hardware or reduced personnel, will be more than offset by the increase in software fees. This is because most software vendors will not recognise logical partitioning or sub CPU partitioning in their licensing. This means enterprises will have to pay for the total potential server capacity, irrespective of what is used.
Rapid provisioning
Rapid provisioning and migration tools can be used to move or scale software between servers with more or less capacity, based on workload requirements. For example, moving from a small server to a large server for end-of-month processing, or to avoid hardware downtime during upgrades.
This kind of technology expands the realm of virtualisation from the server to a group of distributed servers. However, software vendors require their software to be licensed and priced based on every server that could be used, making these tools cost-prohibitive in many cases.
Capacity on demand hardware solutions
Major hardware vendors have become able to rapidly and permanently increase capacity on high-end servers. The ability to perform instant temporary capacity on demand (COD) — turn spare engines on and off when necessary, and only pay for the time they are active — has emerged more recently. This means enterprises no longer need to size servers for peak workloads.
Although these developments can reduce hardware costs, software license charges have not been addressed. Again, the software vendors generally charge for the total potential capacity, irrespective of what is used. There is no recognition of the utility-based pricing approach. Moreover, no mechanism is in place for software vendors to measure when and for how long these temporary COD processors were active. Consequently, potential savings in hardware can be eliminated by rising software fees that are based on the total potential system capacity.
Gartner recommendations
"Most users we speak to are aware of one or two of the four trends individually, but not of the combined impact," said Ms Bona. "Enterprises need to address this convergence rapidly. By year-end 2006, the manufacture of single-core chips will end. If contracts or pricing policies on this issue alone are not addressed, enterprises will have no option but to pay significantly more. Single core systems will not be available."
Many vendors are still undecided as to what their policy will be. For this reason, Gartner said customers should initiate discussions now with vendors to accelerate pricing policy changes.
Some vendors have already reacted positively to discussions of this nature. Microsoft, for example, recently announced that it intends to only charge for each CPU irrespective of the number of cores. BEA has also stated it intends to charge a 25 percent additional fee for dual core, rather than 100 percent.
Immediate Gartner recommendations include:
Try to negotiate a maximum of 25 percent uplift for dual core processors. Leverage the recent announcements from Microsoft and BEA.
Negotiate contracts that recognise partitioning of servers.
Demand to know the utility/virtualisation pricing strategies of software vendors.
Encourage software vendors to price by the socket (or module where two CPU chips can share a socket)
Investigate the suitability of alternative license metrics that are offered by the vendors
For those looking for databases for their enterprise resource planning systems and other business applications, investigate buying them through the application vendor.
However, Gartner warned that some of the recommendations are only short-term workarounds. Necessary standards that would permit a proper long-term restructuring of software pricing do not yet exist. Furthermore, the rules that one software vendor would need to meter and measure their usage would not necessarily be right for other software vendors. A real long-term solution will need to permit a variety of pricing rules and policies according to the ways that a software product will consume system resources.
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