Most software publishers that embed royalty-bearing 3rd party software within their software products have an opportunity to significantly reduce royalty expense, improve gross and net margins and greatly improve the accuracy of 3rd party installed base data using electronic software licensing. Our customers have been able to reduce royalty expense by as much as 50% by using electronic software licensing to track and report on the actual use of royalty-bearing 3rd party software. Royalty expense is reduced and margins are increased by using electronic licensing to activate 3rd party software only when customers have purchased rights to use that software vs. having to pay royalties for all deliveries of your software with the applicable 3rd party software. Controlling and tracking entitled software activations allows you to accurately capture and report on the 3rd party installed base, paying only applicable royalties.
There are, however, a few challenges associated with how this is commonly addressed – using internally developed software license management systems. With internally developed license management systems, in order to address the range of functional requirements, the time and cost required to develop, maintain and continuously enhance the license management system is usually either very high, or you’re only delivering a small fraction of the capabilities required to minimize royalties and satisfy your customers’ need for a simple license activation experience. Either way, internally-developed software license management systems are rarely feasible from an economic perspective. If the internally developed license management system isn’t easy enough to use, customer satisfaction decreases and customer support costs will increase – negating your royalty expense reduction goal.
When you try to reduce royalty expense using an internally developed license management software solution, you incur an ongoing expense that will probably grow substantially over time and is likely to be a significant support burden. In order to address the variety of license models that customers demand, your home grown license management systems will have to support perpetual, subscription, term, token-based, and a wide variety of usage-based models including trust-but-verify. And, in order to support the compute environments that customers require, your homegrown software license management system will have to support desktop, server, virtual machine, cloud & mobile device computing.
Customers will want your licensing to work seamlessly in internet-connected environments as well as occasionally connected and completely disconnected computing environments. And, they’ll want all of that provided to them on a 24/7/365 self-service, highly scalable basis – without having to call you to perform routine license management transactions. You will have to customize your IT system to generate the right license keys, deliver them to the right customers, authorize, record & report on activations, integrate with your renewals process, etc.
You will also have to develop license management software that gets embedded into your products – allowing your customers to enter the license keys that are used to allow access to an entitled quantity of software functions, including keeping track of rights to different versions, operating in different computing environments. You will also need to integrate the different systems with a set of cohesive business processes that are used to perform a variety of transactions. Also, because your customers will require that you continuously innovate or at least keep up with the license models available from your competitors, you will have to continuously enhance your internally developed license management system.
Finally, when you do periodically enhance your internally developed software license management system, you’ll have to do it in such a way that you don’t disrupt software licensing in your legacy products and minimize inhibiting sales and product use with new releases. From the customer perspective, you’ll have to make sure that your license management system is seamless and easy to use – otherwise, if you’re like most, 50%+ of your customer support calls will be attributed to problems with licensing – significantly undermining customer satisfaction.
When OEMing or redistributing software components, a software producer often needs to pay royalties based upon usage of the component. If the software producer does not have a way to determine how much software is used they fall back on how much product is delivered which leads to overpayment of royalties because not all software that is shipped gets used.
Lack of perceived fairness due to limited visibility into what the payments should be can leads to ill-will and discontinuity in the business relationship.
An effective entitlement management solution with product activation will allow you to reduce royalty payments by providing accurate reports of what has been fulfilled instead of how much gets shipped. Such a solution provides visibility into what is in use by requiring a product activation that results in fulfillment records that can be reported upon by the entitlement management system. Alternative approaches are to rely on estimates or use shipment records. Shipment records may not be in alignment, for example a customer might buy 15 node-locked user licenses but only ever deploy 10.
