A new secondary market for used software has emerged
Some time back in December 2006, we wondered why enterprises could not resell unused and used software and transfer related services to a willing buyer under a perpetual license. Enterprises could resell hardware, telecom equipment, and other services contracts. So why couldn’t a licensee retain the right to sell their software in the secondary market? In addition to licenses, this could include maintenance agreements, support contracts, training, and consulting services to either an unrelated third party, joint venture, partnership, or subsidiary. In fact, we even put this in as the 36th right in the landmark Enterprise Software Licensee’s Bill of Rights. Well, since that time, several German vendors such as Preo Software, SusenSoftware and UsedSoft in EMEA have pioneered such a capability in the German market.
Recent lawsuit with SAP highlights some tactics vendors have tried to mislead customers
German copyright law (UrhG) upholds the principle of the “Exhaustion Rule”, which means that the developer’s copyright expires at the time of sale. This legal foundation was upheld in the German Federal Court of Justice (BGH) on July 6th, 2000. In summary, a developer can only make money on the initial sale and any attempt to restrict trade of used software through specific trade terms conflicts with the exhaustion rule. Experts cite that this rule applies throughout the EU and Switzerland based on recent case law.
In the most recent case against SAP, apparently an SAP employee told a customer that they must seek permission from the software vendor to purchase used software. Based on a previous ruling between UsedSoft and Microsoft in the Hamburg courts on June 29, 2006, vendors can not mislead customers on the legality of used software. In specific, “It is forbidden (416 O 103/08) to the software producer to spread misleading statements for the legal standard of the using software trade”. The provisional order won by SusenSoft over SAP also reinforces the previous legal challenges.
Ruling also applies to the U.S.
To date, the “Exhaustion Rule” also known as the “First-Sale” doctrine has been upheld most recently in the June 2nd 2008 case of Timothy S. Vernor v. Autodesk Inc. In fact the specific ruling cites, “This doctrine is stated in the following statutory provisions: “Notwithstanding the provisions of section 106(3) [17 USCS § 106(3)], the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” 17 U.S.C. § 109(a). Because a first sale exhausts the copyright holder’s distribution right, future distributions of the copy do not implicate the Copyright Act. Opinion, p.7, citing United States v. Wise, 550 F.2d 1180, 1187 (9th Cir. 1977). A first sale does not, however, exhaust other rights, such as the copyright holder’s right to prohibit copying of the copy he sells. Id. For example, the first sale doctrine permits a consumer who buys a lawfully made DVD copy of “Gone With the Wind” to resell the copy, but not to duplicate the copy. Id.
The bottom line - consider the secondary market as part of your long term apps strategy
Enterprises seeking to optimize enterprise software costs may want to consider the used software or secondary market as an option. It appears that the legal precedents have been set in EMEA (we’re hearing mixed things in the US (revised 6/22/2009 8:05 am PT). Now may be the time to pick up additional SAP R/3 4.7, Oracle 11i EBS, or Infor Baan 4CIV licenses! Resellers, VARs, and distributors should take the opportunity to create this new market. Pressure from vendors will most likely be limited as the sentiment in the courts now side with the customer.
Your POV
Wondering when you can unload your used software licenses? Are you looking to unload an acquired entities assets to use? Would you want to benefit from the secondary enterprise software market? Please post or send on to rwang0 at gmail dot com and we’ll keep your anonymity.
Related research and links
June 12, 2009, Channel Partner, “Used software – SAP suffers defeat”
June 9, 2009 Channel Partner, “UsedSoft obtains a provisional order against Microsoft”
December 22, 2008, Forrester Research – Peter O’Neill “The Spread Of Remarketed Software Could Be A European Response To The Economic Crisis”
June 2, 2008, Law Updates – “Federal Judge Approves eBay Auction of Copyrighted Autodesk AutoCAD Design Software”
December 18, 2006, Forrester Research – R “Ray” Wang “An Enterprise Software Licensee’s Bill of Rights”
Copyright © 2009 R Wang. All rights reserved.
* This post provides an alternative that must be vetted by proper legal professionals. Please consult your own legal counsel for specific advice on legalities.
14 Comments »
Ray -
Are you sure you can buy “seats”? I don’t believe this is true.
I’m sure you can “buy” (or acquire the license), but I don’t believe the license can be “split” (e.g. selling a seat or a module bought under a single agreement).
I would also imagine the software vendor would have anticipated this in the license agreement, and would have other protections (e.g. non-transferrability of upgrade rights, support rights, etc.). “Selling” organizations had better have lawyers look at the agreements, because they could be forfeiting rights (support, warranties, rights to receive upgrades/updates, discounts on support and services contingent on non-resale of licenses, etc.).
Dennis,
You bring up a good point. Looking at the experiences from the Used Software founders, it appears that in Europe you can split seats. Here’s some of the legal basis in their argument. I’m not a lawyer so any IP lawyers out there, it’d be great to hear your point of view. Customers of both UsedSoft and SusenSoftware seem to have split seats.
Ray
It is not common to transfer seat licenses by themselves, but it is fairly common to transfer seat licenses along with the companies that originally bought them. So, if I buy Forrester Research, I take over all of their Oracle? seat licenses, and if I then fire half the analysts, I can get other employees of mine to use their seats.
In theory, therefore, I could always sell those seats by creating a new entity, assigning seat rights to that entity, then selling the entity. Just a thought. See more on my blog, blog.b2banalysts.com
It’s an interesting question. I wonder if a new client can insist upon this, what with there being so much M&A activity. I wonder if any ERP deals have come down to vendor X allowing it and vendor Y saying “no.”
David,
On quite the tangent, if you were to buy Forrester Research and fire half the analysts, you might actually raise our profit per employee from 250k to maybe 400k? You might want to reduce 30% to 40% of the workforce That would put us ahead of the industry average and more inline with the consulting firms that net a hire profit per employee. For that matter, I would say if you did that with any of the analyst firms, you’d unlock some huge value and save us some money in software licenses. You could then sell our used licenses to an upstart and we’d get a win-win (j/k) Cheers!
R
While the US “first-sale doctrine” is alive and well, it’s dependent upon a sale. Licensing of a copy of software is NOT a sale (and has been held by several courts not to be a sale). The result is that the first-sale doctrine doesn’t apply to licensed software.
Additionally, almost every software license I’ve seen in the last decade (probably close to 50,000 of them, all told) contains very specific provisions prohibiting the transfer of a license once licensed. So even if I HAD the ability to transfer the license … I’ve given up that opportunity by signing a contract that prohibits that activity.
It’s a cute thought, though, and you’re not the first to suggest it.
I would also suggest that if this WAS possible, it would only work for organizations that have an absolute count on their license usage. I’ve been with many large organizations in my life and I’ve never seen a single one that has a +/- 0 accounting on every licensed actually in use.
[...] Mirchandani at deal architect pointed out a Ray Wang article on the resale of unused licenses. My thoughts are in the comments on Ray’s article. But [...]
Coming from an ERP background, the master licence agreements of the big ERP vendors (and other software vendors) do ring fence the usage to global ultimate and wholly owned subsidiaries (the latter is defined by a % ownership that can be argued).
An interesting point to raise is that if you have a lot of shelfware (term for unused licences), you will also be paying maintenance at 22-25% per annum which is dead money. I would strongly suggest anyone with significant shelfware to bring this up with their ERP and software vendors in general as it is possible in many instances to suspend maintenance costs on unused licenses.
Ray, many of the comments point out the legal boundaries around this issue – as you rightly point out at the bottom, this will make a few attorneys a few more hours.
Broadly, though more clients are waking up to how rigid software spend is – as they look to variablize all kinds of IT spend. SW is rigid becuase a) shelfware does not ever go down (whereas with growth, M&A or changes in licensing unit never fails to go up) and b) Maintenance stays at same level even as products mature and customer needs change.
In that sense on-premise sw vendors are digging their own graves. Next gen models of SaaS and clouds are making unit of consumption tinier and terms commitment shorter so you manage costs far more in line with your demand and consumption patterns.
[...] R “Ray” Wang of Software Insider blog and a Forrester analyst wrote an interesting peice on how companies should consider and pursue resale of their unused, shelf ware they licensed or acquired as part of an acquisition. [...]
Ray
Interesting topic. Ironically at the same time SAP/Oracle are talking about raising support prices. I think the verbiage in the license agreement (in US at least) currently strictly prohibits re-sale or unauthorized use of licenses once sold. I also think if this possibility were to come to fruition, the process of transfer might create challenges. I did some loud thinking on this on my blog
http://www.prudentcloud.com/technology/re-sale-of-software-licenses-24062009/
Subraya Mallya
Pretty good post. I just came across your site and wanted to say that I’ve really enjoyed reading your posts. In any case I’ll be subscribing to your feed and I hope you will keep a good work!
[...] enterprises lack the understanding of how much shelfware may be in production. In addition, the used software market provides users with opportunities to unload or acquire older releases of [...]
[...] http://blog.softwareinsider.org/2009/06/21/news-analysis-used-software-rights-upheld-in-susensoftwar... [...]
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