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Licensing and Architecture
A Conversation with Luke Hohmann, Part VI
by Bill Venners
April 19, 2004

<<  Page 3 of 3

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Providing Licensing Choices

Bill Venners: In your book, Beyond Software Architecture, you write, "Many companies practice Model T license and business model strategies. They create few business models, often only one, and expect each of their target markets to adopt it. Moreover they define relatively rigid licensing models, failing to realize that within a business model, market segments will pay to obtain certain kinds of rights, like the right to upgrade, or remove certain kinds of restrictions. Just as we want to choose the color of our cars, so customers want choice in how they license their software." What is a Model T licensing model, and what is the problem with it?

Luke Hohmann: The famous Henry Ford quote about the Model T is, "You can have any color you want, as long as it's black." Most software manufacturers say, "I'm happy to license you my software. It's a perpetual license, and this is how much it costs."

I'll give you an example. I recently had a project for which I needed to do some sound editing. Cool Edit, an audio editing product from Adobe, cost $99. I didn't really feel like spending $99, so I found a less full-featured piece of software I was willing to pay for that cost $29.

I can't speak to other people's purchase behavior, but whenever I think I need something, I have a price point in my mind, relative to the duration of use, that I feel comfortable paying. I wanted sound editing software for an urgent project that I needed to get done quickly. I had to take transcripts of tapes and edit them. I wasn't by any means planning to become a sound engineer. I was willing to spend about $30 or $40 to get a decent piece of software. I actually ended up spending $60, because I downloaded one piece of software for $29, and it didn't really meet my needs. I subsequently downloaded another piece of software for $29, and it was great. I loved it. Neither of these products were as good as Cool Edit, according to the independent comparisons I read on the websites, but Cool Edit was $99, and I just wasn't going to pay $99. So by only offering Cool Edit as a perpetual license, Adobe missed me as a market. If Adobe would have offered Cool Edit as a rental, I would have rented the software a week or two.

Bill Venners: For a software rental, how does a company decide how much to charge for what period of time?

Luke Hohmann: That requires a careful analysis. But it can be done. In the physical goods world, you can rent pretty much anything. Go to United Rentals. You can rent brakes, lawn mowers, backhoes, saws, hammers, screwdrivers. You can rent just about anything. Over the years, they have worked out the right way to rent something. This is hard work, but if we have figured out how to do this in the physical world, I'm confident we can figure out how to do this in software.

My point is that most companies go to market with very few options. They think they have a lot of options, but they really have very few. And because of that, they don't know what markets they are missing, because they aren't giving themselves a chance to go meet the needs of those markets.

Bill Venners: How do you balance the benefit that licensing options provide with the complexity they add to the buyer's decision making process?

Luke Hohmann: How do people make choices in the physical world, where there is a complex set of options right now? I can buy a lawnmower, rent a lawnmower, or hire a lawn service.

Markets tend to complexity of choice. Perhaps surprisingly, part of that is software driven. If you look at the average supermarket of the 50s, they only stocked between 5000 and 8000 items, because that was the most that human bookkeeping could handle. A large supermarket nowadays stocks between 100,000 to 130,000 items. Why are there 27 kinds of mustard? Well, because we have software to handle it. Are you happy that there are 27 kinds of mustard? I am, because I get the mustard that I like, and you get the mustard that you like. We could apply this analysis to numerous other domains. Production runs on car models are shorter because software enables shorter design and manufacturing runs. We can order the car we want, with the options we want, and get it in 6-8 weeks (or less) because software is powering the supply chain. As consumers, we're generally happier with choice.

Therefore, the concern that people can't handle the complexity of the choice of what software to get at what license point is only a temporary condition of the market itself. It's only the fact that people don't routinely have the choice of renting software that's causing rentals to be complex. If all software were offered as a rental overnight, there would be a high degree of uncertainty. Over time consumers would learn that they could get different kinds of software with rental, and they could make better choices.

For example, I would never rent Microsoft Office, because I use it every day. Usually in rental markets, you're going to pay more for the rental. I can buy a rake for $40, but I can rent it for $10 a day. If I'm going to use the rake for 2 days, it's a deal to rent. If I'm going to use it for more than two days, it's a deal to buy. There's no way Microsoft could rent Office lower than I would buy it for, but sound editing is a different story. Software for one-time tasks is a different story.

Of course, I'm grossly simplifying the complex infrastructure that would be required to manage rentals and make this seamless for the average user. There are a whole host of issues that need to be managed, including billing, managing data, and so forth. I'm betting that the entertainment industry will be leading the charge to really figure out how to do rentals, and the lessons learned there will slowly work their want into commercial software.

Bill Venners: You indicate in your book that more flexible business models can help maximize revenue, especially for mature markets. Does it follow then, that it's more important in the early stages of a market to balance keeping things simple with offering many licensing options? Prospective customers don't have a lot of time to spend with you. You may have two minutes to make your sales pitch, and if you have to spend an hour explaining all your options, you could be in trouble.

Luke Hohmann:Yes. Any market, if it's successful, will complexify over time. Too many choices is just not what you want at the beginning. As the markets mature, you want to have more choices to go after more niches.

Summary

Bill Venners: How would you summarize the main ideas you are trying to get across in your book?

Luke Hohmann: I've been asked this before, and, to be truthful, I find it hard to summarize the book. However, my good friend and colleague Elisabeth Hendrickson (who runs Quality Tree Software) summarized the book this way:

"There's no business decision that doesn't have a technical implication, and there's no technical decision that doesn't have a business implication."
This is a great summary. It's your job to understand and manage these decisions and their implications.

Next Week

Come back Monday, April 26 for an article about the SuiteRunner testing tool. If you'd like to receive a brief weekly email announcing new articles at Artima.com, please subscribe to the Artima Newsletter.

Talk Back!

Have an opinion about the design principles presented in this article? Discuss this article in the Articles Forum topic, Licensing and Architecture.

Resources

Luke Hohmann is author of Beyond Software Architecture: Creating and Sustaining Winning Solutions, which is available on Amazon.com at:
http://www.amazon.com/exec/obidos/ASIN/0201775948/

Luke Hohmann is the author of Journey of the Software Professional: The Sociology of Software Development, which is available on Amazon.com at:
http://www.amazon.com/exec/obidos/ASIN/0132366134/

Joel Spolsky's discussion of the macroeconomics and microeconomics of open source software in Joel on Software is called "Strategy Letter V":
http://www.joelonsoftware.com/articles/StrategyLetterV.html

SleepyCat Software, which Luke pointed to as a successful open source business model, are the makers of BerkeleyDB:
http://www.sleepycat.com/

The Pragmatic Programmer's home page:
http://www.pragmaticprogrammer.com/

The Pragmatic Programmer's home page:
http://www.pragmaticprogrammer.com/

A good place to start looking into Extreme Programming is:
http://www.xprogramming.com/

Frederick P. Brooks classic book, The Mythical Man-Month: Essays on Software Engineering, Anniversary Edition (2nd Edition), is is available on Amazon.com at:
http://www.amazon.com/exec/obidos/ASIN/0201835959/

The hyperbolic tree that Luke mentioned was from Inxight Software:
http://www.inxight.com

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