Software licensing for small and medium business

You’ve just shelled out for the software that going to revolutionize the way you do business. You’d be tempted to think you own it. You’d be wrong.

What you have purchased is the right to use the software under certain circumstances. Software is licensed, rather than sold outright, because

it is the intellectual property of the vendor. Much like music or literature, while we may possess the medium, the content doesn’t belong to the buyer.

A software licence, according to analyst Amy Konary of IDC, is permission to use the software for a specific period. At the most elemental level, therefore, there are two types of licences: term and perpetual.

Term versus perpetual

As the name suggests, a perpetual licence allows you to use the software forever. The obvious advantage is the single payment. One drawback: That probably doesn’t cover support and upgrades without paying for maintenance contracts.

Term licences must be renewed (and paid for) regularly, but each renewal should bring the latest and greatest version of the application.

OEM versus retail package

Original Equipment Manufacturer licences (OEMs) package software with a hardware purchase. The most familiar example would be your computer’s operating system. Office suites and other desktop application are also sometimes OEMed with particular brands of computers.

OEM licences are priced in bulk for the manufacturer, so they’re cheaper than a retail package, according to Microsoft’s Sunny Charlebois, product manager with Microsoft’s licensing and pricing group. But OEM licences usually aren’t transferable — the licence dies with the computer. When you replace a computer, a new licence is needed.

(BTW … Received an e-mailed offer of huge discounts on OEM software packages lately? Don’t bite. Your copies won’t be legal unless they’re purchased with a machine, says Charlebois.)

Full retail package pricing is usually steeper than OEM, but for some software packages, it’s the only way to buy. And there’s an advantage to paying more if you expect to replace hardware, but don’t want to upgrade the application or operating system — full packages are transferable. As long as they’ve been removed from the first machine, they generally can be reinstalled on a second.

Open Source

Open source licensing warrants an article unto itself, but the gist is the source code of the software is free to be used in any fashion the user sees fit. It often isn’t “free” — vendors package and sell open source software like Linux and Apache, for example — but it’s not necessary to pay for every copy that’s installed.

Note, though, that support, service and maintenance costs do increase with the number of copies installed. When users look at the cost over time, “it might not be as free as they hoped,” Konary notes.

There’s a learning curve for the average desktop user, too — not to mention a dearth of desktop applications compared to the ubiquitous Windows — but for server applications, where there’s tech-savvy staff, open source software is a popular option.


For most business software, there will be a volume licensing option, whether it’s a five-licence retail package or an agreement that allows a single copy to be rolled out to hundreds of machines. Desktop applications are normally priced by the number of machines they’re installed on. Higher-end, server-based business applications — large databases, ERP systems, and the like — are priced according to a number of metrics.

Users might pay for these licences on the basis of how many processors are in the server. Often, cost is on a per seat basis. Per seat licences are usually on a named-user basis, which is appropriate for applications that are in constant use, for example, call centre contact management. But it can be unnecessarily expensive to license on a named-user basis when the application is accessed infrequently by a large number of users.

Other Options

Some applications offer concurrent access licensing, which allows a certain number of users on the application at once. It’s a popular option with users, as Business Objects discovered when it discontinued CAL for its Crystal Enterprise product. There was a backlash from customers including Peterborough Technology Services. Marie Howran, manager of applications services, told IT Business last fall the switch from CAL would cost the utility $130,000 to $150,000. Business Objects replied with a version of Crystal Reports offering packages of five CALs, up to a maximum of 20 per system.

Concurrent access licensing “is definitely a battlefield for customers and vendors,” says Konary. Customers like CALs because they feel they’re paying for what they use. “Vendors don’t like it because they feel they’re leaving money on the table,” she says. Regardless, not many vendors offer CALs, and it often doesn’t make sense for specific packages. It’s popular with development software, especially for companies who have developers on shift or in different time zones -– when one developer signs off, another can sign in.

Another consideration for desktop applications: if employees work from home, look for licensing provisions that allow the same licence to be used for the employee’s home machine and work computer. You won’t have to pay for two licences as long a both machines aren’t being used simultaneously.

SMB Extra Home

Contact the editor

Would you recommend this article?


Thanks for taking the time to let us know what you think of this article!
We'd love to hear your opinion about this or any other story you read in our publication.

Jim Love, Chief Content Officer, IT World Canada

Featured Download

Dave Webb
Dave Webb
Dave Webb is a technology journalist with more than 15 years' experience. He has edited numerous technology publications including Network World Canada, ComputerWorld Canada, Computing Canada and eBusiness Journal. He now runs content development shop Dweeb Media.

Related Tech News

Get ITBusiness Delivered

Our experienced team of journalists brings you engaging content targeted to IT professionals and line-of-business executives delivered directly to your inbox.