Licensing software for the Cloud

There are many doubts regarding software licensing for cloud computing. Subhankar Kundu tries to clarify the picture

Cloud computing may be today's buzzword but when it comes to software licensing in cloud environments there's plenty of confusion. On the one hand, enterprise users are looking to cloud computing as a means of addressing rising IT costs. On the other, they aren’t sure about who's going to pay for the software licenses particularly when it comes to a private cloud (in a public cloud the cloud service provider would include the cost of software licenses in the per user/per month fee).

Muddying the waters is the fact that virtualization is the foundation for any kind of cloud computing and software licensing for virtual environments is quite different from what it is in physical environments.

There have been concerns that traditional licensing practices are not compatible with virtual environments leading IT heads to complain about ambiguities and irrational license fees.

Traditional licensing falls into three major categories namely CPU, enterprise and seat. The CPU license generally covers operating system software, middleware and some application software. An enterprise license allows you to use software without worrying about boundary complexities or the number of users who can access it. The seat license designates the number of 'seats' that can use the software.

One alternative to this complexity of licensing is to take the Software-as-a-Service (SaaS) route. Here the cost of software licensing is covered by the per user/ per month fee that you pay to the SaaS provider.

However, it's not that simple in the other cloud models namely Platform-as-as-Service (PaaS) and Infrastructure-as-a-Service (IaaS).

Santanu Ghose, Country Head, Infrastructure Software and Blades, HP India, said, “Infrastructure-as-a-Service will be priced on the basis of the quantum of resource used and the duration of time for which it is used. It can be based on the number of VMs as well. As of now, this will be a mix of fixed contract and extra resources and it will be on a pay-per-use basis. Software—both applications and utility tools—has an established usage-based licensing model. Hence, rolling out pay-per-use for software will not be an issue.”

Nitin Mishra, Head - Product Management, Netmagic, said, “For Infrastructure-as-a-Service, it's more on the physical side, which is a bundle of CPU, RAM and hard disk. There is the flexibility of per core, per GB of RAM etc. Most providers like us are providing data center licensing in terms of Windows. There are players who are licensing software on a per core basis. For us, it goes by default as part of the infrastructure licensing. In SaaS, most of the licensing is to the end customers on a per user basis.”

Vikas Arora, Group Director - Cloud Services, Microsoft India, said, “Depending upon the need of an application, the VM instance size and the CPU consumed for an hour could be one unit of charge as a metric of application use. The other unit of charge could be how much of storage and database are being used by an application.”

Another aspect which Microsoft claims as a differentiator is the Service Bus which allows users to go for on-premises and cloud applications with licensing modeling being user-focused.

Arora added, “The technology that we use is Service Bus which is an integration layer for the application running behind the firewall and those running on the cloud. We are using the same measurement that was employed on a traditional application like how many messages got exchanged between two applications etc. We are basically applying the same principles even on charging and this is the kind of pricing mechanism that we have in SaaS, PaaS or IaaS.”

The service bus is a concept of a service oriented architecture (SOA).

For Netmagic, vis-a-vis SaaS and its licensing model on a per-user basis, Mishra said, “Either we do it at the physical processor level or some software vendors are doing it at the virtual machine level.”

Netmagic prefers to go with licensing at the processor level. The reason being that this gives it some flexibility in licensing.

Benefits of newer approaches

Virtualized as well as cloud computing environments present challenges to both suppliers and users. The challenge involved in tying the use of a specific instance of a software tool or application to customer value is humongous.

Gaurav Agrawal, Product Head - VAS, Sify Technologies, said, “In general, software or application licenses on a cloud or virtualized platform are confusing and requires detailed OEM analysis with regard to its applicability and usage criteria. This becomes even more complex if the customer already owns the licenses and would like to apply the same on the cloud infrastructure. It is mandatory that the cloud services platform has automated tools to not only maintain an inventory of infrastructure resources, but also of the software license resources to ensure their authenticity.”

The mature players in this space have started releasing criteria regarding usage of their software licenses on the cloud or a virtual infrastructure.

For example, Microsoft, VMware and Red Hat have clearly defined policies of license usage on such setups. Further, they have special programs for cloud service providers where, instead of offering licenses based on CPU or processors, they offer it in terms of instances (irrespective of CPUs). Going forward, more software OEMs are expected to release such guidelines and pricing models which are applicable for a cloud setup and are simple and payable on a per instance or per user basis.

Agrawal added, “Sify is the first service provider in the country to offer both VMware and Microsoft Hyper-V based cloud offerings and have a service provider model from both the partners. Such arrangements offer benefits to the service provider and, in turn, they benefit end customers as well.”

The benefits that Sify claims to offer are a simple licensing model, monthly payout based on usage, flexibility to reuse licenses, flexibility to scale up or down as well as bundled support and assurance.

The simple licensing model is based on a per instance or per infrastructure component basis, rather than the typical enterprise way of counting the number of CPUs or CPU cores. In the monthly payout based on usage model, payment to the OEM partner happens based upon actual usage month on month rather than the customer buying the software on a perpetual basis.

Unlike enterprise licensing models where licenses are granted for named users and are hardwired, in the service provider model, licenses are granted to be used by the service provider. The service provider offers these to its end customer for usage and can reuse these licenses with many other customers, in case a customer stops using the licenses assigned to it. Since the payout happens on a monthly basis, it allows the service provider to scale usage up or down as per need. This also ensures the flexibility to scale rapidly rather than waiting for license grants. Most models offer bundled support and software assurance as part of the cost, allowing service providers to seamlessly offer upgrades to their end customers.

Agrawal continued, “In return, the customer pays per instance of the OS, database or application used rather than worrying about CPUs or CPU cores, upfront payout, etc. This gives them the flexibility to start or stop a service based upon their requirement. However, there are many ISVs who still license their software on a per-node, per-CPU or per-core basis and are still wrestling with the issue of software licensing in a virtual environment.”

Microsoft has found that the challenge is largely with regard to the adoption of the model.

Arora said, “Every customer is at a different stage of evaluation. We see it as an opportunity and not as a challenge. It lets us provide flexibility to service providers and users in terms of licensing for the cloud at a time when the concept is in its early stages. One thing that we resonate to our customers is that we tell them that we have all forms of licensing. So, we give them the options of an OPEX-based model, CAPEX-based model or a combination thereof.”

Arora claimed that most CIOs were relieved to get rid of licensing woes as they left the licensing to Microsoft and focusing on their requirements.

Ghose pointed out, “A pure pay-per-use model is difficult to implement, since some amount of usage has to assured by the users in order to enable service providers to invest and estimate the level of investment to begin with. Application and software tool pricing faces the challenge of one time usage based pricing versus the annuity-based model. Usually applications are used on a day-to-day basis and their usage can be calculated on an annual basis. Whereas software tools used once in while or for some specific instance will work out better on a usage-based model.”

Mishra pointed out, “The biggest challenge is when the software vendor goes by licensing on a per VM basis which becomes expensive not only for us but for users as well. Software vendors also do server-based licensing but licensing on a VM or per user basis is definitely not a model for us. The second challenge is that the cloud is a pay-per-use model but software doesn't come on a pay-per-use basis. The cloud goes beyond monthly licensing as there are customers who are charged on an hourly basis but are still licensed on a monthly basis.”

He also pointed out that some vendors including Microsoft did licensing on a monthly basis.

Who pays for it?

In both virtualized and cloud computing environments, software instances run in an abstracted environment that can grow or shrink as needed. Now, the question is, who pays for the software? Is it the cloud service provider or the user? If it is the user who pays, how affordable is it or is the user over paying?

Purchasing software licenses, deploying, managing, monitoring, updating, upgrading etc. is the cloud service provider’s responsibility. For cloud customers they can avail of a subscription-based service (pay-per-use) model with the flexibility to start or stop the service based on their requirement on a monthly basis.

Agrawal said, “The cost of usage of software on a cloud infrastructure is certainly quite economical when compared to that of owned software. Depending upon the volumes and license requirements, in some cases a cloud OS instance will be six times more affordable than a similar enterprise license.”

Arora pointed out, “It is important to understand the difference between actual cloud offerings and hosted offerings. In a real cloud offering, it is the service that is being delivered to a customer which includes the software, hardware, electricity, cost of managing and administering the infrastructure etc. Everything that goes into the offering and its pricing is transparent because customers know that they are paying for a single service.”

For HP, rather than focusing on licensing benefits, the company thinks that cloud services are supposed to be affordable, especially when we take into account the fact that the user does not have to invest in idle resources to take care of seasonal peaks and DR. The cloud ensures that you can scale up the resources as and when required.

Mishra said, “Cloud computing remains cheaper for the end user because there are no investments needed in hardware and hosting components. It makes sense even if the user has to pay for the software component as he is relieved of dedicated server expenses.”

The trend is that software licenses for core infrastructure (OSs, some databases and other applications) are offered based on agreements that a service provider makes with the ISV or Software OEM.

Agrawal pointed out, “This allows them to deploy licenses on a large infrastructure and offer it as a simple OS, database or application instance irrespective of cores, RAM or processors. The customer will define its requirements with regard to compute parameters (1-8 Core, or 2-64 GB RAM etc.), and its choice of OS or version, etc. and the same would be deployed on a cloud setup instantly.”

The customers are not required to count each virtual core as equivalent to a physical core for licensing of platform instances provided by the service provider. However, in most cases, if the customer owns the licenses; and would like to apply the same to the cloud setup, then the service provider assists in making such choices based on the guidance given by ISVs or OEMs.

Agrawal continued, “With those ISVs who have not been able to mature their model for cloud setups, for example Oracle, customers are required to count each virtual core as equivalent to a physical core for the purposes of licensing Oracle programs in the cloud environment.”

For Sify, this policy applies to all programs available on a processor metric with the exception of a few software programs that are struggling to adapt to the cloud model.

Agrawal said, “Because of such issues, we have seen many customers migrating to those platform options that offer a flexible or cloud-ready licensing model.”

Increasingly applications and utility software will be provided and consumed on a usage-based model, wherein the payment would come on a monthly or quarterly basis.

Ghose said, “While a usage-based model puts pressure on investment recovery, truly speaking there is no significant investment in having software in the usage-based model. A usage-based model gives a better and more predictable cash flow over the lifecycle of the software being used. In the one-time payment-based licensing model, the fee is one time and this creates a lot of pressure to discount since the payment is made at one go and is large whereas the usage-based model has a smaller payout on a monthly/quarterly basis hence there is less negotiation on price, resulting in better margins for the supplier or software IP owner. For the customer, conversion from a CAPEX model to an OPEX model helps improve the cash flow.”

Agrawal said, “Increasingly we are seeing a trend where customers are turning to usage-based models rather than purchasing software upfront.”

The trend that Mishra observed was that Microsoft was going ahead with processor-based licensing and that others would follow suit.

Transaction-based licensing

If there's one trend that the constituents are looking at it is that of a better licensing structure that fairly balances the interests of licensors and licensees. This would be transaction-based licensing. This could be considered as having some of the elements of an enterprise license. However, this model would address the licensing issues prevailing in cloud computing.

Most software vendors and service providers are of the opinion that bringing in a transaction-based license would allow the licensee to use the software sans the boundary complexities, geographic limitations, restrictions on the number of users or machines accessing the software.

The license fees here would be based on the licensee's transactions. Purchasing additional licenses would no longer be required as long as the actual transaction volume was within a preset range, Moreover, the transaction limits could also be designed, decided and agreed upon unanimously by both licensees and licensors.

Microsoft thought that transaction-based licensing was a big form of licensing on the cloud but its positive take on transaction-based licensing was confined to the SMB segment. Going back to a historical sort of a view, Microsoft said that when compared to the complex licensing prevailing in the industry, a transaction-based model made things simpler.

Nevertheless, when it came to large enterprises, Arora had a different view of the transaction-based model. He said, “Large enterprises have been adopting IT in a big way over the past two decades. Looking at the kind of investment that they have made in traditional licensing, they wouldn't like to totally switch over to transaction-based licensing. Many large enterprises have gone in for perpetual licenses. Therefore, there are several factors including the huge investments that enterprises have made on existing licenses, regulatory restrictions and concerns over cloud security that will lead large enterprises to employ newer models in co-existence with existing ones for the foreseeable future.”

subhankar.kundu@expressindia.com