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Prescription for subscriptions is good

Software will increasingly be purchased on a subscription basis, according to a new report.

Renewed interest in the hosted model for software delivery and the demand for subscription-based licenses appear here to stay, according to a recent International Data Corp. report.

Revenue from subscription-based licenses in 2003 was approximately $19.9 billion and is expected to grow to $42.9 billion by 2008, a 16.8% compound annual growth rate, according to the Framingham, Mass., company's report.

"We expect that will come at the expense of traditional models," said Amy Konary, program manager with IDC, focusing on software pricing, licensing and delivery research. "Vendors will add those [subscription] models to their portfolios."

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In contrast to the subscription licenses, perpetual licenses will only grow 0.3% annually, according to the report.

IDC defines subscription-based pricing as licenses paid for with a recurring (often annual) fee. If the fee is not paid, the user no longer has the right to run the software. Perpetual licenses are paid for on a one-time basis, allowing users to run the program as long as they choose.

The trend encompasses nearly every software market and its growth will come from existing vendors adding subscription pricing to their historical pricing options, as well as start-ups basing their model entirely on subscriptions, Konary said.

While some companies, like San Francisco's with its software-as-a-service model and SAS Institute Inc., in Cary, N.C., which bundles its maintenance and licensing together, have been using subscription pricing for years, the trend isn't yet widespread, Konary said.

In fact, she doesn't expect the subscription model to overtake perpetual licenses. By 2008, 34% of worldwide software license revenue will be derived from subscription licensing methods, according to the report.

Cost-sensitive customers have driven subscription-based pricing, Konary said. Also, as software vendors turn their eye to the small and medium-sized business market, they are finding that buyers are more interested in the subscription model and hosted providers, which remove the necessity for large IT infrastructures, she added.

The model also offers benefits to the vendor, Konary said, by helping them balance the up and down fluctuations of the perpetual licensing model.

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