Redmond Negotiator

Used Software: The New Reality?

If you're looking to save money on licenses (or make money on the ones you no longer need), license reselling may be the answer.

• By Scott Braden
• 11/29/2005

This common situation has a name: Shelfware. Software that was purchased but is no longer used or needed. In many cases, it's a recent version, maybe even still covered by maintenance.

But shelfware is not limited to Microsoft, or even to desktop software: There are plenty of enterprise software modules and packages on every conceivable hardware and OS platform that were bought at considerable expense but are now un-used (although they may still be depreciating in an accounting line item somewhere).

Every IT shop that's been around for long has the filing cabinet, the closet, the shelf in the data center where they keep the old software that's no longer being used.

Until recently, that was about all you could do: Let the licenses gather dust on a shelf while the depreciation runs out.

But that situation seems to be changing. At a recent conference I met with Jeff Cook, a principal in the Business Software License Exchange (BLSE). The BSLE works with companies to help them sell their un-used software licenses by handling the legal and contractual details, and helping find a buyer (who gets a discounted price on "used "software).

It's a great win for all parties: The software owner gets to unload a depreciating asset that's not contributing any value to the business, and gets a small amount of cash for the sale. The buyer gets a great price on software licenses. And the BSLE gets a fee for making the transaction legal and painless.

According to Cook, about half of the software vendors they've dealt with over the past five years have transferability built into their license agreements and are "relatively easy" to deal with. Microsoft, for example, has standard contract language and even a standard form for handling license transfers.

The other half? Of course, every vendor has slightly different standard contract terms, and many vendors have no terms at all regarding resale or transfer of licenses. Some vendors have strict terms prohibiting transfer, but have been known to negotiate. Cook says the keys to getting a non-standard transfer approved by the vendor are in understanding the licensing contracts, the applicable laws and perhaps most important, showing the vendor how the transaction will be good for business.

What would convince a software vendor to allow a customer to resell software? One reason is that the new buyer may not be an existing customer of the software vendor, so the vendor gets to have a new customer (and the long-term revenue stream that comes with it) that they might not otherwise get.

Another reason is to prevent an existing customer from moving to another vendor's products. For example, many customers have built their businesses around a particular version and implementation of an enterprise app. But the vendor's new version is not backward compatible and requires a costly and time-consuming upgrade process, so the customers are considering other options. By allowing customers to buy older-version licenses, the vendor gives their customer an alternative that keeps costs down, keeps the customer enrolled in maintenance, and avoids a dangerous competitive situation for the vendor.

The benefits to the customers (used software sellers and buyers) are obvious:

• The seller gets anywhere from a little to a lot of money – and how often do CIO's get to hand a check to their CFO instead of the other way around?
• The seller gets a potentially very expensive asset “off the books,” which is good for the financial statements.
• The seller's IT shop gets a very compelling and measurable reason to implement effective enterprise-wide software asset management and usage monitoring. We all know IT asset management has great ROI, and here's more concrete proof.
• The buyer gets a great price on software licenses. And if the vendor understands their self-interest, gets to enroll in maintenance and support the same as a “new” buyer.

The benefits to software publishers and resellers are obvious as well:

• The publisher has low or zero cost for new customer acquisition, and those customers replace the maintenance stream of the former rights holder.
• The copyright and intellectual property rights of the manufacturer are protected through legitimate, sanctioned trades as opposed to the current unregulated secondary market that includes counterfeiters and grey market dealers.
• Customers are simply more likely to purchase and pay a premium for a product that has residual value.
• Resellers can benefit by participating in the secondary market as a service to their customers.

So what are the catches?

There are a few: The first is simple supply and demand. “Right now,” says Cook, “we have way more buyers than sellers.” Obviously, everybody wants to buy legitimate software licenses for less than normal pricing. But sellers have a harder time bringing their excess software to market.

Even though Cook and his team have been handling these transactions for five years, it's still a new concept to most corporate legal departments. So internal approvals and signatures can be slow in coming before you can even offer your shelfware for sale. “Many corporate attorneys' first reaction is to call the vendor and ask permission -- which is the wrong way to go about it,” Cook says. Instead, he recommends the IT department engage a company early to assess your shelfware, get an estimate of potential value, understand the legal process to handle the sale, and then go to your attorney with your documentation and a plan already prepared.

Vendors also can be challenging (surprise!). When the contract terms are unclear or require special approval, you can expect the vendor to have internal conflicts between sales reps worried about commissions, legal departments worried about “setting precedent” and senior executives who hopefully understand the long term benefits.

Given all the hurdles and hassles, is it worth it for you to take another look at your shelfware collection? Here's how to quickly assess:

First, look at your Microsoft license inventory. Today, Microsoft is the only major software vendor that has a standard process where you need only to notify that you're transferring the licenses -- no permission required.

If you have excess Microsoft licenses, it's very simple to sell them. Kudos to Microsoft for a very good policy here!

Next, there are a few vendors that have standard transfer terms that are relatively painless, but they do require you to get permission in advance. Symantec/Veritas and Adobe fall into this category, among others.

Then there are vendors that require more effort and persuasion. You can probably guess which ones are difficult to deal with – the same ones that you love to gripe about today (and no, I won't be naming names). You should consider the potential value of the licenses for sale to see if it's worthwhile to chase down the approvals.

For more information on the services the BLSE offers, go to http://www.buswarexchange.com.

What's next? Look for the growth of a mature secondary marketplace, where licenses are consistently valued and able to be exchanged easily. Cook predicts that over time many vendors will either understand the benefits, or yield to customer pressure and standardize their license terms. Until then, it's a seller's market.