Licensing Economics

Let's say you're a lucky developer who has been asked to explore new technologies for your next systemlucky because you want to learn Java and J2EE as you think it will be a good career move. You download the trial version of SuperSoft's J2Server, a fully compliant J2EE 1.1 container, and use it to build a slick prototype. In fact, the prototype is so useful that your boss is convinced that using Java, a J2EE-based architecture, and especially SuperSoft's J2Server is the obvious choice for your project. Fortunately, your boss wants to make certain that her next release is fully buzzword compliant, so when you suggest this approach she readily agrees.

Believe it or not, you might have just designed yourself into a real jam. Many evaluation and/or trial licenses explicitly prohibit the development of software for commercial uses. Even if you bend the rules and ship the prototype to a customer for evaluation, you certainly cannot release your software unless you've secured the necessary rights.

As discussed throughout this chapter, licensing issues must be aligned with your tarchitecture . Saying that you're going base your application on J2Server isn't going to buy you anything if you don't know how SuperSoft is going to charge you for its products. In fact, integrating J2Server could break the economics of your application, something that a good marketect will be able to tell with a basic economic analysis. The following exercise illustrates why.

Let's assume that you're company requires a gross profit margin of 30 percent and that your marketect estimates the average selling price of an annual license at $100K. The current estimated direct and indirect costs associated with this project are $65K, without SuperSoft's licensing fees. So far, so goodyour average estimated gross profit is $35K, or 35 percent. Now, let's assume that SuperSoft wants to charge 15% of the gross annual revenue. This means that on a $100K license you will be paying SuperSoft $15K. You can model this as an increase in costs (from $65K to $80K) for each sale, with the net result that your average estimated gross profit just dropped to $20K, or 20 percent. Something needs to change.

The example is intentionally simple, but it illustrates how vitally important it is that the total projected and/or actual costs of technology in-licenses be incorporated into the product and business plan. Without them, you're not likely to create a winning solution.