Software License Types Explained: What You Need to Know
Understanding software license types is important for two key reasons:
- Maintaining compliance with software licensing agreements.
- Reducing wasted IT spend on software licenses that are surplus to requirements and go unused.
Compliance with software license agreements is a significant issue for IT organizations. When an organization chooses to purchase software licenses, they are legally bound by the terms of the software license, sometimes known as the end user license agreement (EULA).
If a software vendor suspects that you are non-compliant with the terms of your software license agreement, they may request to perform a software audit.
A Unisphere Research survey found that 77% of companies with over 1,000 employees were subject to software audits sometime in the last three years, versus 85% of mid-sized firms, though less than half of small companies were audited. If you over-use proprietary software without paying the proper licensing fees, a failed vendor audit could result in costly true-up fees, audit costs and hefty fines and penalties.
For IT organizations, understanding software license types is a necessary step towards accurately interpreting software license terms and conditions, and ensuring ongoing compliance.
Reduce wasted spending
Familiarity with software license types is also important for reducing wasted IT spending.
A report on the cost of unused software collected data from 3.6 million users at 129 companies in the United States and the UK over a four-year period:
Researchers found that 37% of all installed software was not being used, amounting to $259 per desktop and over $37 billion in total wasted IT spend.
According to a report from Nextthink, almost half of all installed software and licensed SaaS applications go unused by employees, costing organizations over $500 million per year.
The global market for software licensing is expected to expand at an 8.7% compound annual growth rate through 2027. So, there’s even more potential for waste as IT organizations increase their spending on software licenses.
With a better understanding of software license types, and improved software asset management, IT organizations can rein in spending and reduce waste, even while investing more in software than ever before.
What is software licensing?
When a software company releases a new software application, that software is protected by copyright under United States intellectual property laws.
As owners of that copyright, software companies have the exclusive right to control the usage and distribution of the applications they create.
A software license is a legally binding agreement between a software vendor and a business or IT organization that wishes to use their software products. It establishes rules, requirements and guidelines for both parties, especially as to how the licensee may use the software, how usage costs will be determined and the extent to which the licensee may copy, modify or distribute the software.
What are the different software license types?
Getting familiar with software licensing models can help you make smarter decisions when negotiating software licensing agreements and keep your organization in compliance with software contracts.
To help you get started, we’ve put together this list of the most common software license types that IT asset managers need to know. We’ve divided our list into two categories: open-source software license types, which are free; and proprietary software license types, which are paid licenses.
Open-source software licenses
The key distinction between open-source and proprietary software is how they treat access to the source code. The term “source code” refers to the actual text documents containing the code for the application, written in the programmer’s chosen language.
With access to the source code, a business or IT organization can easily inspect the application’s functions and make changes based on their business needs.
Open-source licenses are ones that allow software programs to be used, distributed and modified by the end user. A true open-source application should comply with the Open Source Definition, a set of 10 general requirements for open-source software.
There are many different open-source software licensing models.
Public domain license
A programmer or company that creates copyrighted software can choose to forego that copyright by donating the software to the public domain.
Software in the public domain can be freely shared, modified, distributed, commercialized and relicensed by the end user with essentially zero restrictions. That makes it among the most attractive software licensing models, at least from an initial costs perspective.
Literary works like the plays of William Shakespeare and famous novels like A Christmas Carol (Charles Dickins) or The Time Machine (H.G. Wells) are also part of the public domain. That means anyone can reprint, reproduce, recreate or reinterpret these works, sell them and make a profit.
The intellectual property associated with these works, as with open-source software, belongs to the public.
A permissive license is like a public domain license, but it may contain limited restrictions on how the end user may modify or distribute the software.
The benefit of permissive licensing for software creators is that it allows them to retain their intellectual property and maintain some control over how their software is used while continuing to support open-source development and even licensing their product for free.
There are several sub-types of permissive software licensing models, each with its own specific terms and conditions for how licensed software may be modified or redistributed.
Among those software licensing models, the Apache License 2.0 is one of the most well-known, and was developed by the Apache Software Foundation in 2004. The document grants individuals and organizations permission to use, reproduce or modify Apache Software products. It also establishes additional requirements for the redistribution of the software and prohibits users from suing each other for patent infringement.
The MIT License, created at the Massachusetts Institute of Technology, is another example of a permissive license that places minimal restrictions on the end user.
Restrictive licenses may be referred to by several other names, including reciprocal licenses and copyleft licenses (a play on the term copyright). The most common restrictive software license type in use today is the GNU General Public License (GPL) v3.0, created by the Free Software Foundation.
With a GPL v3.0 license, the end user is granted permission to copy, distribute or modify the licensed software program, but with one caveat: any adaptations of the source code can only be distributed under the same GPL v3.0 software license.
The result here is that even purchasers of a derivative software product licensed under GPL v.3.0 will have the right to receive the source code, make changes and copy or distribute the program as desired.
The GNU Lesser General Public License (LGPL) was also created by the Free Software Foundation.
Unlike other open-source software licensing models, the LGPL permits the end user to modify the program and incorporate the derivative version into a proprietary software product that can be licensed on their own terms and at their own discretion.
This stands in contrast to the terms of the GPL software license types, which typically require creators of derivative works to give away the source code for free.
Proprietary software license types
Most IT organizations will primarily deal with proprietary software license types from major vendors like Microsoft, Oracle, Adobe and IBM.
Navigating these software license agreements is a complex process, frequently requiring collaboration between IT professionals and legal advisors specializing in technology and contract law.
Below are some of the proprietary software license types that IT professionals should know.
Subscription versus perpetual licensing
A perpetual software license is one that grants users permission to use software indefinitely, usually for a single one-time cost. Perpetual licenses seem like they may reduce lifetime ownership costs — but beware, as your IT organization may end up paying more for extras like software upgrades, vendor support and ongoing maintenance.
In contrast, subscription-based software licenses are purchased on a monthly or annual basis and grant the user rights to operate the software only during the specified subscription period.
Most software companies are shifting towards subscription-based business models to provide better service for their customers. Software subscription packages typically include things like customer service, software maintenance and annual upgrades. For software-as-a-service (SaaS) licenses, the vendor may even provide the IT infrastructure needed to support the application.
User licensing: named users versus concurrent users
User licensing allows software vendors to set their licensing fees based on the number of people who will use the software at your IT organization. The most common of these user licensing types are named licensing and concurrent user licensing.
Under named licensing, each software license is assigned to one person, along with a login and password they can use to securely access the software from any device. Named user licenses cannot be shared between staff members, but it may be possible to transfer them between employees on a permanent, one-to-one basis.
Concurrent user licensing allows users at a business or IT organization to share user licenses, if the total number of individuals using the software at a given time does not exceed the total number of licenses available.
Some software vendors choose to license their applications on a per-device basis.
These software license types grant the user permission to install and operate the software on a specific laptop, computer or data center device — whichever is most appropriate for the application.
Device licensing is frequently a more cost-effective option when several employees use the same computer to perform their job roles.
An IT call center with 100 desktop computers might support 300 employees working in three separate shifts. In a case like this, it would usually be cheaper to purchase 100 device licenses (one for each machine) than to purchase 300 user licenses (one for each worker).
CPU or processor licensing
CPU-based licensing is a software licensing model that charges customers based on the number of central processing units (CPUs) or processor cores they use to run the software. This licensing approach is commonly used for enterprise software applications and allows organizations to scale their usage and costs based on their computing needs. With CPU-based licensing, customers typically pay a fee for each CPU or core that the software is installed and running on.
This model offers flexibility as it allows organizations to add or remove CPUs as needed without incurring additional licensing costs. CPU-based licensing can be advantageous for businesses with fluctuating computing requirements, as they can optimize their software usage and costs based on their current infrastructure.
Enterprise licensing is a software licensing model designed specifically for large organizations or enterprises. It offers a comprehensive and flexible approach to software procurement and usage, allowing businesses to deploy software across multiple users, departments or locations within the organization.
With enterprise licensing, organizations typically purchase a volume license that grants them the right to install and use the software on a specified number of devices or for a specific number of users.
This model often includes additional benefits such as centralized license management, technical support and the ability to upgrade to newer versions of the software. Enterprise licensing provides cost savings and simplifies software management by consolidating licenses and streamlining the procurement process, making it an ideal choice for organizations with complex software needs and a large user base.
Among software licensing models, network licenses are popular with enterprise organizations with 1000+ employees.
Network licensing grants software access to all users and devices connected to a specific network. A network license may support an unlimited number of users, or it may be used to support a concurrent licensing model that restricts the total number of sessions on the network for that specific application.
Some software licensing types have very flexible billing models. A metered or consumption-based software license is one where the software vendor charges licensing fees based on how frequently users access specific application features, data or other resources.
Software vendors can measure factors such as total use time, number of database queries, number of CPU cycles consumed or quantity of stored data — then charge their customers accordingly based on how they used the software.
Some metered software licenses require customers to pre-pay for usage, then draw down the prepaid amount by using the software. In other cases, the customer uses the software according to their needs and receives a monthly or quarterly invoice based on their total use of metered software features.
Some IT organizations dislike metered licensing because the cost of the software increases as the business becomes more reliant on it. Others may like metered licensing because it offers flexibility for users and devices while tethering the total cost of ownership to actual usage and reducing waste.
Metered licensing is often used for IaaS (Infrastructure as a Service) platforms such as Amazon AWS, Microsoft Azure.
One of the more innovative software licensing models is outcome-based licensing. In this case, rather than using traditional metrics such as user count or usage, the cost of the software is tied to business results.
By pegging the price of the product to the value the software delivers to the customer, the vendor has an incentive to ensure their offering provides tangible results. The metrics used to measure those results are mutually agreed upon by the vendor and their customer. Some examples might be cost savings from accelerated operations, increased productivity or reducing downtime from cyberattacks.
Software licensing models: subscription versus perpetual
Lastly, we should address the fact that software licensing models are mainly subscription-based licenses, rather than the perpetual licenses that were once predominant.
While many organizations liked the idea of “we own it forever” with perpetual licenses, the advantages of subscription-based software have been so numerous — scalability, flexibility, reduced or eliminated need for infrastructure/maintenance, et cetera — that the preference for subscription-based software licensing models is continuing to grow across practically every industry.
Benefits of software asset management
Software asset management (SAM) is a system for maintaining oversight and centralizing control of software licenses within your organization. There are three key benefits that are associated with software asset management:
1. Enhance oversight and minimize waste
A software asset management program empowers the IT organization with complete oversight of IT assets within an organization, including all the software licensing models it utilizes. IT and purchasing managers can identify where licenses are going unused and reduce waste by choosing not to renew excess licenses.
2. Optimize IT spending and find savings
IT organizations can optimize their software spending and find opportunities to save money with software license management.
Enhanced oversight of licenses means that IT managers can purchase the right types of software license types in the appropriate quantities to support business needs. They can also identify opportunities to secure volume discounts by renewing licenses in bulk.
3. Reduce financial & litigation risks with license compliance
Software license compliance is the driving force behind the adoption of IT asset management software tools. Organizations that violate their license agreements with software vendors can find themselves facing lengthy audits, costly true-up payments, financial penalties and even litigation. With the diversity of software licensing models that even a mid-sized business may use, compliance can become a complicated task.
What are the risks of poor software license management?
Poor software license management leads to all kinds of negative consequences, including inefficient IT spending and wasted budgets on excess software licenses — but the biggest by far are the financial and legal risks of non-compliance with software licensing agreements.
IT organizations should be aware that software audits are big business. Various reports have suggested that major vendors like Adobe and Oracle earn as much as 20% of their revenue through software audits.
There’s even a watchdog group called the Business Software Alliance that offers large monetary rewards to employees who report non-compliant software usage within their own companies.
According to the BSA, 25% of businesses operating in the US are non-compliant in some way, costing software vendors an estimated $6 billion in losses. So it’s understandable why software providers are keeping a sharp eye out for non-compliance with their software licensing models.
Here’s what you should know about software audits:
- A typical software audit takes 3–6 months to complete.
- There is no guarantee that the software audit process won't disrupt your business.
- At the end of the audit, the software vendor and its hired accountancy firm will determine whether your firm is complying with your software license agreement.
- If you use more software than you've licensed, you may receive a 30-day demand for “true-up” payments. Software vendors will demand that you purchase new licenses at the list price for any non-compliant installations or usage of their software products.
- You may be asked to pay backdated costs for software support and maintenance related to your unlicensed use.
- You may be assessed fines or penalties for copyright infringement.
- If you disagree with the findings of the software audit, you could be facing a lengthy and costly litigation process with your vendor.
Software licensing claims made by vendors can amount to hundreds of thousands or even millions of dollars. In the United States, software copyright holders can claim federal statutory damages of up to $150,000 per instance, depending on the infringement.
In a 2020 case, Oracle accused a healthcare consultancy firm of over-using its software, claiming over $3 million in licensing fees, support fees and lost profits.
So, it’s important to closely manage software licensing models and be on guard against the “gotchas” that seem to be written into some agreements.