How does a software license work?

*This post originally appeared on the Cherwell blog, prior to the acquisition by Ivanti. 

Understanding software license types is important for two key reasons:

1. Maintaining compliance with software licensing agreements.
2. Reducing wasted IT spend on software licenses that are surplus to requirements and go unused.

Compliance with software license agreements is a significant issue for IT organizations. When an organization chooses to purchase software licenses, they are legally bound by the terms of the software license, sometimes known as the end-user license agreement (EULA).

If a software vendor suspects that you are non-compliant with the terms of your software license agreement, they may request to perform a software audit.

In fact, survey results published by Gartner Research indicate that 68 percent of enterprise organizations had received at least one software audit request from a vendor in the past year. If you’re over-using proprietary software without paying the proper licensing fees, a failed vendor audit could result in costly true-up fees, audit costs, and hefty fines and penalties.

For IT organizations, understanding software license types is a necessary step towards accurately interpreting software license terms and conditions, and ensuring ongoing compliance.

Familiarity with software license types is also important for reducing wasted IT spending.

A report on the cost of unused software collected data from 3.6 million users at 129 companies in the United States and the U.K. over a four-year period. Researchers found that 37 percent of all installed software was not being used, amounting to $259 per desktop and over $37 billion in total wasted IT spend.

And with the global market for software licensing expected to grow at 8.6 percent compound annual growth rate through 2023, there’s even more potential for waste as IT organizations increase their spending on software licenses.

With a better understanding of software license types, and improved software asset management, IT organizations can rein in spending and reduce waste, even while investing more in software than ever before.

What Is Software Licensing?

When a software company releases a new software application, that software is protected by copyright under United States intellectual property laws.

As owners of that copyright, software companies have the exclusive right to control the usage and distribution of the applications they create.

A software license is a legally binding agreement between a software vendor and a business or IT organization that wishes to use their software products. It establishes rules, requirements, and guidelines for both parties, especially pertaining to how the licensee may use the software, how usage costs will be determined, and the extent to which the licensee may copy, modify, or distribute the software. 

What Are the Different Software License Types?

Getting familiar with software license types can help you make smarter decisions when negotiating software licensing agreements and keep your organization in compliance with software contracts.

To help you get started, we’ve put together this list of the most common software license types that IT asset managers need to know. We’ve divided our list into two categories: open source software license types, which are free, and proprietary software license types, which are paid licenses.

Open Source Software Licenses

The key distinction between open source and proprietary software is how they treat access to the source code. The term “source code” refers to the actual text documents containing the code for the application, written in the programmer’s chosen language.

With access to the source code, a business or IT organization can easily inspect the application’s functions and make changes based on their business needs.

Open source licenses are ones that allow software programs to be used, distributed, and modified by the end-user. A true open source application should comply with the Open Source Definition, a set of 10 general requirements open source software.

There are many different open source software license types.

Public Domain License

A programmer or company that creates copyrighted software can choose to forego that copyright by donating the software to the public domain.

Software in the public domain can be freely shared, modified, distributed, commercialized, and relicensed by the end user with essentially zero restrictions.

Literary works like the plays of William Shakespeare and famous novels like A Christmas Carol (Charles Dickins) or The Time Machine (H.G. Wells) are also part of the public domain. That means anyone is free to reprint, reproduce, recreate, or reinterpret these works, sell them, and make a profit.

The intellectual property associated with these works, as with open source software, belongs to the public.

Permissive License

A permissive license is like a public domain license, but it may contain limited restrictions on how the end user may modify or distribute the software.

The benefit of permissive licensing for software creators is that it allows them to retain their intellectual property and maintain some control over how their software is used while continuing to support open-source development and even licensing their product for free.

There are several sub-types of permissive software licenses, each with their own specific terms and conditions for how the licensed software may be modified or redistributed.

The Apache License 2.0 was developed by the Apache Software Foundation in 2004. The document grants individuals and organizations permission to use, reproduce, or modify Apache Software products. It also establishes additional requirements for the redistribution of the software and prohibits users from suing each other for patent infringement.

The MIT License, created at the Massachusetts Institute of Technology, is another example of a permissive license that places minimal restrictions on the end user.

Restrictive Licenses

Restrictive licenses may be referred to by several other names, including reciprocal licenses and copyleft licenses (a play on the term copyright). The most common restrictive software license type in use today is the GNU General Public License (GPL) v3.0, created by the Free Software Foundation.

With a GPL v3.0 license, the end user is granted permission to copy, distribute, or modify the licensed software program, but with one caveat: any adaptations of the source code can only be distributed under the same GPL v3.0 software license.

The result here is that even purchasers of a derivative software product licensed under GPL v.3.0 will have the right to receive the source code, make changes, and copy or distribute the program as desired.

LGPL

The GNU Lesser General Public License (LGPL) was also created by the Free Software Foundation.

This type of software license permits the end user to modify the program and incorporate the derivative version into a proprietary software product that can be licensed on their own terms and at their own discretion.

This stands in contrast to the terms of the GPL software license types, which typically require creators of derivative works to give away the source code for free.

Proprietary Software License Types

Most IT organizations will primarily deal with proprietary software licenses from major vendors like Microsoft, Oracle, Adobe, and IBM.

Navigating these software license agreements is a complex process, frequently requiring collaboration between IT professionals and legal advisors specializing in technology and contract law.

Below are some of the proprietary software license types that IT professionals should be aware of.

Subscription vs Perpetual Licensing

A perpetual software license is one that grants users permission to use a software indefinitely, usually for a single one-time cost. Perpetual licenses seem like they may reduce lifetime ownership cost—but beware, as your IT organization may end up paying more for extras like software upgrades, vendor support, and ongoing maintenance.

In contrast, subscription-based software licenses are purchased on a monthly or annual basis and grant the user rights to operate the software only during the specified subscription period.

Most software companies are shifting towards subscription-based business models to provide better service for their customers. Software subscription packages typically include things like customer service, software maintenance, and annual upgrades. For software-as-a-service (SaaS) licenses, the vendor may even provide the IT infrastructure needed to support the application.

User Licensing: Named Users vs Concurrent Users

User licensing allows software vendors to set their licensing fees based on the number of people who will use the software at your IT organization. The most common user licensing types are named user licensing and concurrent user licensing.

For named user licensing, each software license is assigned to one person, along with a login and password they can use to securely access the software from any device. Named user licenses cannot be shared between staff members, but it may be possible to transfer them between employees on a permanent, one-to-one basis.

Concurrent user licensing allows users at a business or IT organization to share user licenses, provided that the total number of individuals using the software at a given time does not exceed the total number of licenses available.

Device Licensing

Some software vendors choose to license their application on a per-device basis.

This software license type grants the user permissions to install and operate the software on a specific laptop, computer, or data center device—whichever is most appropriate for the application.

Device licensing is frequently a more cost-effective option in scenarios where several employees use the same computer to perform their job roles.

An IT call center with 100 desktop computers might support 300 employees working in three separate shifts. In a case like this, it would usually be cheaper to purchase 100 device licenses (one for each machine) than to purchase 300 user licenses (one for each worker).

Network Licensing

Network licenses are a popular software license type in enterprise organizations with 1000+ employees.

Network licensing grants software access to all users and devices connected to a specific network. A network license may support an unlimited number of users, or it may be used to support a concurrent licensing model that restricts the total number of sessions on the network for that specific application.

Metered/Consumption-based Licensing

A metered or consumption-based software license is one where the software vendor charges licensing fees based on how frequently users access specific application features, data, or other resources.

Software vendors can measure factors such as total use time, number of database queries, number of CPU cycles consumed, or quantity of stored data—then charge their customers accordingly based on how they used the software.

Some metered software licenses require customers to pre-pay for usage, then draw down the prepaid amount by using the software. In other cases, the customer uses the software according to their needs and receives a monthly or quarterly invoice based on their total use of metered software features.

Some IT organizations dislike metered licensing because the cost of the software increases as the business becomes more reliant on it. Others may like metered licensing because it offers flexibility for users and devices while tethering the total cost of ownership to actual usage and reducing waste.

Benefits of Software Asset Management

Software asset management (SAM) is a system for maintaining oversight and centralizing control of software licenses within your organization. There are three key benefits that are associated with software asset management.

1. Enhance Oversight and Minimize Waste

A software asset management program empowers the IT organization with complete oversight of IT assets within an organization. IT and purchasing managers can identify where licenses are going unused and reduce waste by choosing not to renew excess licenses.

2. Optimize IT Spending and Find Savings

IT organizations can optimize their software spending and find opportunities to save money with software license management.

Enhanced oversight of licenses means that IT managers can purchase the right types of software license types in the appropriate quantities to support business needs. They can also identify opportunities to secure volume discounts by renewing licenses in bulk.

3. Reduce Financial & Litigation Risks with License Compliance

Software license compliance is the driving force behind the adoption of IT asset management software tools. Organizations who violate their license agreements with software vendors can find themselves facing lengthy audits, costly true-up payments, financial penalties, and even litigation.

What Are the Risks of Poor Software License Management?

Poor software license management leads to all kinds of negative consequences, including inefficient IT spending and wasted budgets on excess software licenses—but the biggest by far are the financial and legal risks of non-compliance with software licensing agreements.

IT organizations should be aware that software audits are big business. Various reports have suggested that major vendors like Adobe and Oracle earn as much as 20 percent of their revenue through software audits. There’s even an organization called the Business Software Alliance that offers large monetary rewards to employees who report non-compliant software usage within their own companies.

Here’s what you should know about software audits:

• A typical software audit takes 3-6 months to complete.
• There is no guarantee that the software audit process will not disrupt your business.
• At the end of the audit, the software vendor and its hired accountancy firm will determine whether your firm is compliant with your software license agreement.
• If you are using more software than you have licensed, you may receive a 30-day demand for “true-up” payments. Software vendors will demand that you purchase new licenses at the list price for any non-compliant installations or usage of their software products.
• You may be asked to pay backdated costs for software support and maintenance related to your unlicensed use.
• You may be assessed fines or penalties for copyright infringement.
• If you disagree with the findings of the software audit, you could be facing a lengthy and costly litigation process with your vendor.

Software licensing claims made by vendors can amount to hundreds of thousands or even millions of dollars. In the United States, software copyright holders can claim federal statutory damages of up to $150,000 per instance, depending on the nature of the infringement.

In a recent case, Oracle accused a healthcare consultancy firm of over-using its software, claiming over $3 million in licensing fees, support fees, and lost profits.

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