Supply & Demand: Software Pricing

ATA Holdings Corp. navigated the new rules of engagement with software vendors for the first time nearly two-and-a-half years ago. The Indianapolis-based parent company of discount ATA Airlines Inc. was in the midst of the post-Sept. 11 air-travel crisis, when air travel dropped off a cliff. That’s when management decided that a reborn Internet site was essential to lead the carrier out of the wilderness. Before then, ATA had a negligible e-commerce presence: an outsourced Web site that was neither attractive nor reliable. Their plan was to bring control of the site in-house and remake it into a profit center—all in a matter of months.

It was a tall order, recalls Bob Lewandowski, ATA’s director of e-business. The biggest problem was gauging capacity and guaranteeing virtually no site slowdowns or downtime. “The Web site was going to be such an important part of our distribution channel that we couldn’t afford to not be open and ready for all customers at all times,” Lewandowski says, “or we lose the sale.”

ATA was using Oracle software to develop and run the site, but when Lewandowski’s team began test runs, the software would spike to 100 percent usage and lock up. In the old relationship between software buyers and sellers, to troubleshoot the Oracle program, ATA would have had to pony up tens of thousands of dollars to obtain several perpetual licenses for a new software-management program. Then the company would have had to spend months installing the program on its internal systems and working out the kinks. By the time the Web site was up and running, months would have been wasted and a lot of commercial opportunity would have passed irretrievably.

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But Lewandowski had better options: He cut a three-month subscription deal with Mercury Interactive Corp., a maker of business-technology-optimization software, to deliver a program via the Web that could simulate 10,000 users and determine how to tweak the Oracle software to handle the load. Moreover, the Mercury software would continually monitor ATA’s Internet site and benchmark its performance every few minutes.

With no internal setup required, Lewandowski was able to see and quickly identify some of the data-indexing and pooling fixes he could apply to increase the capacity of the Oracle software. And, although purchasing software by subscription costs more over the long term than buying a perpetual license, the upfront fees for ATA’s initial Mercury contract were just a fraction of what he would have had to pay if a perpetual license had been the only alternative. (Since then Lewandowski has signed up for two more one-year subscriptions.

ATA’s site went live in May 2002. It has become the airline’s most profitable channel, with 100 percent revenue growth each of the past two years, and it often racks up $100,000 in sales in an hour. Along with a lucrative Pentagon contract to ferry soldiers and supplies to and from Iraq, ATA credits its Web site for the company’s recent turnaround: The carrier posted total operating earnings of $86.9 million for the first three quarters of 2003, compared with losses of $108.9 million during the same period the year before.

“We were successful because I had a number of software-delivery and purchasing choices to pick from and a software company that was bending over backwards to work with me,” Lewandowski says. “That’s a far cry from the way it used to be with software vendors. This time I had leverage.”

Such a statement was unimaginable just five years ago, when software companies were king. With demand at its peak, thanks to a seemingly unquenchable thirst for ERP and CRM applications—not to mention the need for programs to address Y2K fears and drive dot-com dreams—software vendors were able to dictate the terms of purchase. But as the economy slowed, so did software sales. Worldwide, annual software-industry revenue fell 2.5 percent between 2000 and 2002, after years of double-digit growth, according to the Software & Information Industry Association. As IT budgets shrank, many CIOs began focusing more on integrating recent software acquisitions (too often still not living up to expectations) rather than on making big new purchases. To entice customers in this strapped business environment, vendors of every stripe—from the more conservative standbys such as IBM Corp., Siebel Systems Inc. and Oracle Corp., to more freewheeling players such as Inc. and Computer Associates International Inc.—are offering ever more creative and customized pricing and delivery choices.

In today’s market, the perpetual license, still the dominant approach for purchasing software, is inexorably giving way to yearly or even monthly subscriptions and more radical fee plans, in which, for instance, companies pay for software based on how much they use, just as they would purchase electricity from a utility. Meanwhile, traditional arrangements based on one name, or one box, per license have already been overtaken by concurrent licensing in which companies buy, say, 50 licenses and divvy them up among users as needed from one moment to the next. And more and more companies are acquiring their programs from vendors who manage and maintain the software on their own computers and deliver it via the Web.

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