Authors

Somak RoySomak Roy

Oracle vs. UsedSoft verdict is not a big deal for enterprise software

OVUM VIEW

Summary

In July 2012, the European Court of Justice (ECJ) reached a verdict in the Oracle versus UsedSoft case, which related to the resale of enterprise software licenses. The court ruled in favor of UsedSoft, adding another element of legality to the resale of pre-owned software licenses at owner-determined discounts. It implies that the manufacturer of the software ceases to have control over subsequent sales of the software once it has been sold. However, concerns remain around support, which continue to hinder any significant traction in the market. Ovum is not entirely convinced that the long-term ROI of used software is positive. While short-term benefits are apparent in application areas that require little customization and support, Ovum is skeptical of the value for buyers in the wider enterprise software market.

The case and the verdict

The verdict was about the equivalence of Internet downloads and the transfer of software via physical media. The court ruled in favor of UsedSoft, finding that downloading software constitutes a sale as much as transferring it via physical media does. However, the minutiae and implications of the case go beyond what this description would suggest. The verdict represents a near-final episode in the long struggle for legal recognition of pre-owned software licenses.

There is one clear implication from the verdict – that a license-owning enterprise can transfer licenses and the rights to updates to another party, and that this applies equally to software delivered through a material medium or downloaded from the Internet. However, a few restrictions still apply. The license cannot be unbundled, and the seller must forfeit access to the software (the verdict allows resale, not replication). Importantly, the verdict only applies to perpetual licenses, not term licenses. In addition, the resale makes the new license holder eligible for patches and updates, but not for support.

The impact on the enterprise software business is likely to be minimal

It remains to be seen whether major enterprise software companies will look to defend their existing businesses by modifying their contracts. However, used software is not new and vendors have been selling used licenses for a number of years with a limited impact on the overall market.

Discount Software has sold Microsoft licenses since 2005, while SusenSoft and UsedSoft have been providing used SAP licenses for many years, with little impact on the overall market. Part of the reason for this is the indivisibility principle that governs used software transactions in the EU. An IT organization cannot sell off a few extra licenses via the UsedSoft route – it is typically an all or nothing proposition. The bundle of different types of licenses cannot be divided and sold to different organizations, which naturally reduces the level of liquidity in the used software market.

The immediate impact on software procurement – great opportunity to save on ready-to-use software

The impact of the software aftermarket is entirely on software licensing costs. Therefore, where licensing costs account for a high percentage of total project costs – such as in email servers, word processing, and operating systems – the impact of the secondary market will be more significant. As a result, the ECJ verdict is more likely to affect the Microsoft Office market than the supply chain management software market.

The biggest impediment to the full utilization of the secondary market for enterprise software is the lack of support. A secondary sale does not entitle the new license holder to support services. Potentially, the emerging third-party maintenance (TPM) market could step in to provide support services. However, the TPM market is still small, with only two vendors – Rimini Street and Spinnaker – achieving significant momentum.

There is also the important question of services. Not many systems integrators will risk their OEM relationships until the used software market is properly established. The lack of services is another reason why the impact of used software will be limited in enterprise software markets that require little or no implementation.

The verdict opens up a number of opportunities for both buyers and sellers

For sellers, migration to a new vendor is an obvious opportunity, as are major business events that render processes redundant (including insolvency) and with it the software installations that support those processes. For companies with licenses to sell, the verdict adds to the negotiating leverage in upgrade situations. The secondary market also offers the opportunity to reduce losses in the event of failed implementations or abandoned projects.

For buyers, the software resell model reduces the cost of software acquisition, with UsedSoft claiming that it can reduce costs by at least 30%. There are many dated software lines that are perfectly usable for many companies.

The verdict favors the move to subscription-based pricing

The verdict is tied to the “exhaustion of rights with the first sale” – the notion that the licensor has the exclusive right to determine how the software is distributed but that this right is exhausted after the first sale is made. The verdict does not apply to term licensing, but a form of licensing that can be reasonably considered as a sale – perpetual licensing. As few vendors will want a thriving secondary market for their licenses, Ovum expects that there will be a move away from perpetual licensing to term licensing. However, the transition is unlikely to be straightforward. The long enterprise software sales cycle implies that vendors want to book revenues upfront, and term licenses are seldom the first choice.

Recommendations for enterprises

Ovum recommends that enterprises test the waters with software that does not involve a lengthy implementation project, such as word processing. Software procurement teams and IT managers must be made aware of the possibilities that used software affords. From the selling perspective, future platform migration plans should be informed by the used software option. Any event leading to license redundancy should also trigger a search for an opportunity to sell. Lastly, the verdict applies to the EU only, meaning that transnational companies with a presence in both the US and the EU need to be careful about managing legal implications.

APPENDIX

Author

Somak Roy, Senior Analyst, Enterprise Solutions

somak.roy@ovum.com

Surya Mukherjee, Senior Analyst, Information Management

surya.mukherjee@ovum.com

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