Tiptoeing Through Virtualization Licensing Minefield

Even though the virtualization market has started to mature, IT managers are finding that licensing is still a complex issue that requires extensive attention and proactive due diligence to make sure that the virtualized technologies remain affordable, serviceable and, most importantly, in compliance with end user license agreements (EULAs) and other usage agreements.

Stewart Buchanan, research VP of IT procurement and cost management at Gartner, stated in a report that virtualization uptake gained traction during the early 2000s, which posed challenges to traditional software licensing models. Many vendors had to modify existing terms or sell additional licenses specifically for virtualization software.

Buchanan noted that this resulted in licensing rights becoming more abstract and complicated, which meant clients would typically have to pay extra for more comprehensive licensing rights to deploy the software to adhere to compliance.

Frank Marshall, director of global retail support for The Estée Lauder Companies, has seen firsthand that deploying virtualization solutions is not without its challenges. "Virtualization can present as many challenges as it solves," he says. "Management of licenses has become one of the biggest pain points we face in our data centers, and it only seems to be getting more complex."

Of course, Marshall’s experiences are not unique, and virtualization vendors are struggling to meet the licensing needs of businesses without sacrificing profits. VMware reworked its licensing agreements last year and shifted to a more complex strategy of licensing virtual machines instead of physical processors--a potentially more expensive way of doing business for many IT shops.

Nevertheless, the company is reporting impressive results. On VMware’s first-quarter 2012 earnings call April 18, CFO Mark S. Peek said, "Total first-quarter revenues increased 25%, and license revenues increased 15%, compared to the same period last year." He added, "License revenues were $482 million, up 15% from last year, driven by strong demand in our international markets and strength across product offerings during the quarter. License growth on a constant currency basis was 14%. Enterprise license agreements were 22% of total first-quarter bookings and included two transactions of $10 million or more. For comparison, we had five transactions of $10 million or more in the first quarter of 2011."

Does that mean licensing will remain expensive and complex? Arguably, yes. VMware hasn’t blinked yet when it comes to licensing fees. However, that does not mean everything is set in stone. With the launch of Microsoft’s next server OS (Windows Server 8), virtualization in the form of Hyper-V will play a very large role.This should be of concern to VMware, simply because Hyper-V is poised to be free, for all intents and purposes, bundled with the Windows Server 8 OS. The real upside to that is enterprises may be able to gain the upper hand in licensing negotiations with VMware and others.

Raj Mehta, CEO of Infosys International, an IT services firm based in Plainview, N.Y., says, "We have proactively and aggressively pursued the vendors, and negotiated [customers] much better deals.”

However, success in negotiations will invariably be affected by the power dynamics between vendor and enterprise customer, which will ultimately play a role in how costly and comprehensive virtualization licensing will be. In turn, vendors may not be as willing to compromise if they see negotiating price as a threat to the bigger picture--namely, their revenue stream.

Conversely, customers would want "the right to run anything, anywhere, but they don't want to pay more to buy [these rights]" and may look to renegotiate for virtualization software based on existing license agreements with the vendor, says Buchanan.

According to a new report from Gartner,Top Five Server Virtualization Trends, 2012, VMware's customers are not abandoning ship, but they are very interested--perhaps for new deployments, a business that isn’t virtualized yet or a branch office--in looking at a secondary vendor. "For net new [customers], it’s the 80/20 rule: They’re looking at having a secondary vendor for new technology and getting a new footprint in that technology and learning something new, and perhaps to gain leverage to negotiate with VMware," says Tom Bittman, a VP and analyst with Gartner Research.

He says another trend reshaping server virtualization in 2012 is that VMware’s competition has improved significantly in the past few years, and price is becoming a big differentiator. In addition, virtualization pricing models continue to be in flux, and a move toward private and hybrid clouds "will ensure that virtualization pricing will continue to morph and challenge existing enterprise IT funding models."

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