Lexpert Magazine

LEXPERT MAGAZINE | JUNE 2017 67 BY GEORGE TAKACH TECHNOLOGY Taking software licences for granted, without spelling out terms of the agreement, can cost companies a lot of money The Perils of Software Licensing AN ORGANIZATION that uses soware recently lost a case to a soware company over a licensing dispute. e organization had pre- viously paid the soware company about $100,000,000 (yes, one hun- dred million dollars) in licence and maintenance fees; but the soware company claimed roughly another $90 million in licensing fees for what it alleged to be additional use of its soware, predominantly by the organization's customers. It's a fascinating — and sobering — case, and there are important lessons to be learned from it; but first, let's start with some basics. WHY SOFTWARE IS LICENSED It is worth remembering why, over the past 40 years, soware has generally been licensed to users in the marketplace, rather than copies of soware simply being sold (much as printed books still are sold). ere are several reasons why soware publishers prefer licensing to selling copies of their product. One is that most soware devel- opers want to control (or eliminate alto- gether) the resale market for their soware. is cannot be done if soware is sold (and in the same way is why we have sales of used books; when you buy a book you cannot copy it because you didn't buy the copy- right in it, but you can transfer the book to someone else). By licensing its soware the developer can better control the resale and other distribution activities of the soware. Another objective achieved by the li- censing model is that the developer main- tains control over how the customer uses the soware. at is, the developer can require in the soware licence agreement that the customer use the soware only for processing the data of the customer, and cannot use the soware on behalf of third parties such as clients of the customer. Again, if the developer merely sold cop- ies of the soware, it couldn't exercise this type of control. THE ART OF SOFTWARE PRICING Another advantage given to soware devel- opers by the licence model is that they can, in the licence agreement, implement some very sophisticated pricing models. And it is very interesting how pricing mechanisms have evolved over the past few decades. Back in the 1980s, when soware main- ly ran mainframe computers, soware li- cence pricing was based largely on the size of the computing power of the mainframe computer. A customer with a larger CPU paid more than a customer with a smaller CPU. When computers shied to the "dis- tributed" computing model, based on mul- tiple servers (rather than on mainframes), pricing became more complicated as the algorithm shied to a "per seat" pricing model: a price based on how many employ- ees of the customer used or had access to the soware. is per-seat pricing model, which still exists today, has itself become quite complex, given that the developers have multiple prices based on the nature and quality of use of the soware made by different types of employ- ees. So, for example, a "full user" of some soware, might attract a price of "x" dollars, and be permitted to use all the functions and features of the soware. On the other hand, a "light" user might only generate a fee of 50 per cent of "x" because they ac- cess the soware on a read-only basis, but can't input data into the system. You can see where this is going: namely, to the soware licensing world that we have today, in which it can be very challenging for a large organization to keep track of the various types of users and the related fees that should be paid to the soware company. Some customers, depending on the type of soware and the nature of their organization, try to buy a "companywide" licence that, for a fee, al- lows the organization to make unlimited use of the soware. But this model can come at a very high cost, so it is used rarely. THE SELF-SERVE REVOLUTION Your head might already be spinning; but wait, there's more! Another highly compli- cating factor is that much soware today allows your organization to permit your clients to connect with you. I'll give you an example, from the case I mentioned above. According to the facts of the case, tradi- tionally this company's customers (which were restaurant establishments) ordered product from the company by phoning a call centre of the company and placing their orders with the call centre agents. e call centre reps then accessed the organization's enterprise resource planning (or ERP) so- ware, which they used to generate the data and records for the product order. In this model of soware use, only an employee of PHOTO: SHUTTERSTOCK | COLUMNS |

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