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Why is Cloud Licensing (SaaS) Replacing Perpetual Licenses?

Kumiko Saito
June 23, 2022
Clouds - Cloud Licensing Feature Image

Cloud licensing has transformed software distribution and upended the whole concept of software ownership. Gone are the days of paying once for permanent access to any title. Software is becoming something one subscribes to rather than owns.

Why has cloud licensing – or software as a service (SaaS) – become the new prevailing model for offering software? What benefits does it offer over perpetual licenses, and do these benefits outweigh the challenges that come with the cloud?

To answer these questions, there are a few factors to consider.

The Problems with Perpetual Licensing

To understand the rise of cloud licensing, it’s important to understand the flaws with the model it’s replacing. Perpetual licensing – selling copies of software for buyers to own indefinitely – was convenient for its simplicity. However, it had several drawbacks, for both licensors and licensees.

For Licensors

Perpetual licensing is not a financially ideal way for vendors to offer software.

Earnings are unstable and unpredictable. Influxes of revenue only come in every few years, when a new product version hits stores. Low adoption of a new release could throw profit projections way off. And perpetual versions of software tend to be so expensive, many users hang on to the version they have as long as possible rather than rush out to purchase each new version as it’s released.

For Licensees

That tendency for people to cling to one version of perpetually licensed software is harmful for end users as well as vendors. Inevitably, older versions of software stop being supported with security patches, leaving users vulnerable to cybersecurity threats.

Perpetual licensing also poses problems for organizations that license software in bulk, like academic institutions. Equipping 10,000 students with perpetually licensed software means managing 10,000 individual licenses for that software. Distributing copies is a hassle. Ensuring compliant use is an uphill battle. And knowing how many students actually use each offering is practically impossible, resulting in millions of dollars wasted on shelfware every year.

The Benefits of Cloud Licensing

Given the problems with perpetual licenses, it’s no wonder we’re seeing a transition to cloud licensing. The SaaS model addresses all of the issues described above, for software vendors, licensees, and end users.

For Licensors

Revenue is much more consistent and predictable under a cloud/SaaS model. It’s also higher. Though subscription fees are far lower than the cost of purchasing a piece of software outright, their recurrent nature adds up to significantly more money in the long run. This is how Adobe has quadrupled their revenue since launching Creative Cloud to replace Creative Suite.

“The company has a more predictable revenue stream,” Adobe’s CFO Mark Garrett said in a 2015 interview with McKinsey Digital. “We have a bigger business that can address a larger market opportunity, because we can bring tens of millions of users to this platform and develop additional services for them over time. The stock price and recurring revenue have surged over the past five years, and there is still a lot of upside left.”

For Licensees

End users always have the latest version of cloud-based software, including the most up-to-date security patches. They can access their files from anywhere. Students who just need a piece of software for a course can subscribe temporarily rather than spend hundreds on a product they’ll only use for one semester. These are just a few examples of how cloud licensing is good for software users.

For organizations that license software in bulk, cloud licensing eliminates the need for manual distribution. No more staff hours spent copying software to physical media, distributing it directly, or installing it on one lab computer at a time. Instead, end users can access software in a self-serve fashion online from their own devices. All they need is an account and the credentials to sign in.

But What About the Drawbacks of Cloud Licensing?

None of this is to say that cloud licensing is perfect. The SaaS model comes with its own challenges, which individuals and organizations are still working out how best to deal with.

Many people miss the simplicity of paying for a product once and keeping it forever. Transitioning their offerings to the cloud requires vendors to fundamentally change their development and go-to-market approaches. And for organizations that license software on behalf of large user bases, managing cloud-based software can be complex, time-consuming, and not without risk.

Despite these hurdles, the benefits of cloud licensing still make it the more appealing model. And due to how much financial sense this model makes for vendors, it seems inevitable that that it will continue to supplant perpetual licensing. The future is in the cloud. The only question is how we’ll adapt to it.

Want a Better Way to Manage Cloud Licenses at Your Institution?

Built specifically for education, Kivuto’s platform takes the complexity, effort, and risk out of managing and provisioning access to cloud-based software.

Kumiko Saito
June 23, 2022

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