Multi-Core Processors Challenging Traditional Software Pricing Models

by: William Trent, CFA

By now it is practically cliche that new technologies can be disruptive to traditional business models. However, there is one new technology that is proving disruptive to technology business models.

The new technology in question: multi-core processors. These semiconductors are divided into several “cores” that each act as mini-processors, speeding performance and lowering power use when running software designed to take advantage of the design. The problem, as noted by ComputerWorld:

Enterprise software vendors have traditionally priced software per processor. But now that some server processors have two cores (and soon will have four cores, followed by eight- and 16-core versions), one processor delivers the power and speed of several. That means customers will purchase servers with fewer processors to handle bigger workloads — and software vendors won’t make as much money if software continues to be priced traditionally. To compensate, IBM (NYSE:IBM) recently announced it will begin charging for software based on how fast it runs, not the number of processor cores on which it’s running. The company has developed a complicated chart to show how it will price software for different processors.

As the basis for this model, IBM created a new license-pricing unit called the “processor value unit.” IBM will set software prices using this scheme beginning with the release of Intel Corp.’s (NASDAQ:INTC) quad-core Xeon server processor, which is expected to be available later this year.

Oracle Corp. (NASDAQ:ORCL) unveiled its own multi-core pricing plan in July 2005. Oracle’s method defines each processor core on a multi-core chip as 25% to 75% of a processor, depending on the type.

However, Microsoft Corp. (NASDAQ:MSFT) hasn’t hopped on this train yet; it plans to continue to charge per processor for software, not per core or using a performance-based method. This gives the software giant a slight edge over competitors, analysts say, because customers gain cost consistency.

This is just the kind of thing to make CIO’s decide to spend less. Who needs to worry about a “complicated chart” or what percentage of a processor each core on a given chip represents. While high switching costs and inertia should prevent any wholesale switching away from IBM or Oracle, the companies have a limited amount of time to figure out how to serve their customers. The article continues:

Forrester Research Inc. analyst Julie Giera said she expects to see not only confusion but also frustration among customers in the next six to 12 months as software pricing continues to be “fluid” due to the growing prevalence of dual-core and multi-core servers.

Another strategy for CIOs, suggested Giera, would be to consider using open-source software as an alternative to commercial software during the transition period.

That would focus the minds of software executives.

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