Cloud vendors rub their hands over European licensing ruling

New & Old sign

The EU ruling in favour of UsedSoft in its battle with Oracle over the sale of second hand licences is a shot across the bows of the entire on-premise software industry.

In short, the EU court ruled that Oracle cannot prevent UsedSoft from reselling software that is originally obtained digitally. This brings the law regarding digital distribution largely in line with earlier decisions in regard to hard copies i.e. CDs etc.

UsedSoft has been around the block a few times on this issue, earlier with Microsoft and now with Oracle. At the time of the earlier decision, colleagues were advising enterprise buyers to consider the second hand market in light of the decision.

In my initial analysis, I speculated that this could mark a watershed for buyers who may already be considering hybrid cloud/on-premise deployments. Any advisory has to be subject to the final decision being upheld in UsedSoft favour. In this case it is reasonable to assume that is a done deal given the fact the earlier decision was also held in a German law court. I predicted that US types would jump on their hind legs and one duly obliged declaring:

"The software industry is right when it says software is licensed not sold...Once you buy it and use it, you have received what you paid for. Sellers of software licenses should be able to forbid their resale."

The logic of this argument astonishes me but then it is a lawyer speaking so you never can be sure. And in any event, what that author singularly failed to grasp is that the EU decision is exactly that, not a US decision where it is widely believed that EULAs can say pretty much what they want on the topic of restrictions around use of software, including resale.

The question of software as somehow 'different' from other forms of asset has always amused me. It is not so much that US lawmakers have got it wrong, which I think they have by incorrectly assuming that software equates in some way to IP, but that the vendor community has successfully lulled those same lawmakers into making what I see as a fundamental error of judgment. I could go on all day about this but let's stick to the resale topic.

Having thought the ruling would receive a warmer reception in the UK, I was surprised to see UK based analysts blowing hard on this topic from an equally befuddled standpoint.

Angela Eager gets it right when she says:

"A second hand market could also revitalise the third party support market which took a battering from Oracle’s successful theft action against SAP/TomorrowNow. As software vendors like Oracle generate half or more of their software-related revenue from maintenance, fees the effect in their business could be serious."

But Andy Trish, MD of Microsoft software supplier NCI Technologies gets himself well and truly up the FUD alley with this ridiculous statement: “End users will have no idea if their software is legal and virus-free and vendors will still be responsible to ensure they are.” How many incorrect statements can you spot?

Simon Placks, director of fraud investigation and dispute services at Ernst & Young is then said to have rowed in with "The move could result in vendors losing track of software sales." Has he seen the methods Oracle, SAP and Microsoft (for starters) use to ensure they wring every penny out of licensed sales? If not then he might want to check in with Safra Catz, president Oracle's audit police. They do a sterling job.

Then we come on to one of the peaches of the piece. This time from Clive Longbottom: service director at Quocira “Vendors could move from a perpetual license to an annual one,” he suggested. “If the customer does not pay to renew the license, then the customer’s right to use the software is revoked.”

Close but no cigar. In the cloud world, you are renting the software and Longbottom's statement sounds like some sort of equivalency. However, he has forgotten the other pillar of on-premise licensing - the maintenance piece. If the incumbents tried to pull the annual license trick they'd almost certainly fall flat on their faces. I for one would never negotiate a deal on that basis.

Good news for cloud players

All of this of course is good news for the cloud industry. On the one hand cloud vendors can put to one side many of the on-premise v cloud arguments by simply suggesting that customers consider on-premise licenses obtained in a second market for functions they are not yet willing to put into a cloud.

I would go further by arguing that new on-premise licenses be deliberately underbought in the knowledge that additional seats can be obtained as needed at a lower price. If nothing else it puts the incumbent sales teams under pressure to offer better bundling deals than they will likely do today. This also places a sharper focus on the buyer's understanding of what they're getting into but should ensure a more economical outcome.

Colleagues will argue that most companies prefer to play safe and if that means over buying from the original vendor then so be it. I believe that to be a fool's argument. It is becoming increasingly obvious that incumbent on-premise business models are under direct threat from multiple entry points. I am for instance seeing plenty of cases where core financials that once would have been a "no fly zone" come under direct attack from many directions. Workday and spring to mind but even there, SAP and Oracle are starting to capitulate.

A great time for buyers

This decision could not have come at a better time for buyers. Oracle's year end has just passed and so they're off on new quotas. Q1 is always rough and Oracle sales people are already under intense quota pressure. Any deals are going to be good deals. SAP is meandering between on-premise and cloud deals as it works the SuccessFactors acquisition into the mix. It too has just closed out a quarter so again, now would be a good time to deal if that is in your immediate future.

Workday is preparing for an IPO. They need more deals and are running hard after everything they can steal from under SAP and Oracle's noses. Microsoft is in no man's land right now. I'd be deferring until some of the Dynamics dust settles. If that's not possible then a NetSuite or FinancialForce option might be something to consider.

As always, you should match cost, need, function and strategy but assuming the ruling holds up (and there is no real reason to think otherwise) then we are in for interesting negotiating time.

After spending more than 20 years at the IT coal face across a variety of industries, often in finance-related roles, Dennis Howlett is using that accumulated experience to hold vendors to account for what they deliver to customers. He believes the cloud computing model provides the potential to offer transformational business benefits that have yet to be fully understood or articulated. In early 2011, Howlett celebrated 40 years in and around IT. It was a very small party.