Licensing & Costs

How Commercial Software Became About Charging Multiple Times for the Same IP

Executive Summary

  • Commercial software vendors trump up their IP, but they attempt to charge multiple times for the same IP.
  • In this article, we cover how they both take IP from the public domain and double and triple charge customers.

Introduction

The original proposal around commercial licenses is the same as for patents. As presented by Bill Gates in his Open Letter to Hobbyists. Gates was dismayed by unpaid copying of Microsoft’s BASIC program. However, as the decades have passed, and Gates and Microsoft have behaved as long-term pernicious monopolists, Gates letter looks less and less genuine. Microsoft’s original MS-DOS program was not even their own. Still, licenses for a pittance ($50,000) from another company and on the fact IBM did not know who made operating systems and thought Bill Gates would be an honest broker. Through this bit of deception, Microsoft was able to become a giant corporation, interfere in the open-source movement to the detriment of their customers, and later years, screw up many of the companies they are acquired.[1]

Microsoft was perfectly fine, nearly stealing the IP for its original OS (that it limited licenses for use on IBM computers, but non-exclusively). Microsoft has displayed technical incompetence in failing in many of its technological endeavors, literally wasting many of the resources that it obtained through its monopolistic practices, as the following quotation explains.

“Microsoft currently wastes billions of dollars a year expanding its business in unproductive ways that don’t yield new profits. It spend millions writing a free web browser to compete with Netscape’s and then they just gave it away (of course to injure Netscape, removing profits from the browser) They probably gave up millions of dollars and untold bargaining chips when they twisted the arms of competitors into shunning Netscape. The company’s successful products pay for these excursions.”[2]

Therefore their views on IP should be taken with a grain of salt, mainly since Microsoft itself has produced shocking little IP considering their size.

This hypocrisy around IP is expressed in the following quotation quite nicely.

“The software industry likes to portray itself as a bunch of libertarians who worship the free market and all of its competition. In reality, the leading firms are riding a wave of power-grabbing that has lasted several decades. The firms and their lawyers have consistently interpreted their rules to allow them to shackle their customers with stronger and stronger bonds designed to keep them loyal and ever spending.”[3]

Monopolist Power Means Multiple Charges

However, what eventually happens is monopolistic software vendors want to be paid not once but multiple times for the same thing. The multiple payment ratio is determined by the monopoly power of the vendor, which is well approximated by the size of the vendor. Many people had had to pay Microsoft for the same thing on several occasions when their Windows valid license key did not work when they had to reinstall Windows. Microsoft had no way you could contact them (voicemail that went nowhere), so they had no other option other than to repurchase the software. Microsoft continually charges for items like Windows and Office that are either little changed from previous versions, or worse than previous versions. How can anyone look at the Windows versions after Windows 7 and call this progress or “IP”?

Secondly, Microsoft’s long-term security problems with Windows has caused security headaches for decades, which is in part due to Microsoft’s need to control their source code.[4] These are security headaches that Linux does not have. The reason for this is explicitly explained in the following quotation.

“You need source code to test software, and careful testing is the only way to eliminate security problems in cryptosystems,” he said. “We need everyone to review the design and code to look for weaknesses. Today security products that come with open source code are the most trusted in the industry. Private companies like RSA Data Security or Entrust can brag about the quality of their in house scientists or the number of outside contractors who’ve audited the code, but nothing compares to letting everyone look over the code.”[5]

Therefore, while Microsoft held and continues to hold a majority of the market share for operating systems on computers worldwide, its commercial license reduced both the security and the stability of the operating system that was the standard for millions. Microsoft’s compensation trumped the interests of all the billions that relied upon their OS. An OS that, due to lock-in with both hardware and software vendors, had little practical alternatives (more so in the past than now). However, in a more hidden area, Microsoft lost to open source, as explained in the following quotation.

“Microsoft lost the server market to Apache and Linux on the basis of price and performance. Web server managers are educated computer users who can make their own decisions without having to worry about the need to train others. Hidden computers like this are easy target, and the free software world will gobble many of them up.”[6]

Imagine for a minute if Microsoft had won the server market, how insecure the Internet today would be.

Combining Disdain for Customers with the Desire for Duplicate Compensation

This disdain for customers and the desire to be paid many times for modest intellectual property contributions is easily found among the mega-vendors. Oracle wants to be paid multiple times with booby-trapped configurations and byzantine audit rules; SAP wants indirect access rights. Can anyone reasonably argue that SAP and Oracle have not already fully monetized their only real contributions to the IP space (SAP’s ERP system and Oracle’s database)? When SAP introduced the S/4HANA ERP system, which is simply the next version of their flagship ECC ERP system, they declared that it was the “logical successor, but not the legal successor” to ECC. The reason? So they could charge customers who had paid their 22% level of support every year while using ECC a new license for S/4HANA! This undermined the support agreement between SAP and its customers (which we covered in the article Why S/4HANA Should be Free). This rather obvious conclusion was not published by any media entity or any SAP consulting firm when we researched this topic. In the SAP space, SAP consulting companies would not dare call out SAP on double-charging customers. The SAP consulting companies compete with each other for who can flatter SAP more, so that they may receive projects and references from SAP.

If I look at the vendors that Brightwork Research & Analysis has interacted with, they seem to agree that they should be able to charge for software, but when they contact us for information, they seem to think that our research should be free. When it comes to being paid for IP, we never recall any software vendor proposing we should be paid. We have to tell them. So how strong is the adherence to compensation for IP really among software vendors? If one is only serious about the topic when it is “your IP,” then as with Microsoft, you are not holding to any principle other than the principle of self-interest. And of course, most software vendors also consider it appropriate to be paid for innovations they never created, or those that are exaggerated. Therefore, they want to be paid not for the software they created, but for the software they would like to have created, or that they would like others to think they created. Vendors that fake IA capabilities, want to be paid for those capabilities. SAP wants to be paid for creating a database that is “100,000x faster than any competing technology,” which, of course, they never created.

If a vendor fakes innovation, should they be paid for that as well? Our analysis of quarterly calls with analysts indicates that vendors usually do think they should be paid for both real and fake innovation.

The Position of Teradata on IP

Recently Teradata sued SAP. We read the Teradata complaint against SAP with great interest. In the complaint, which we covered in the article How True is SAP’s Motion to Dismiss the Teradata Suit?, Teradata accused SAP of both IP theft and of engaging in monopoly practices.[7] Teradata frequently promoted its IP in the complaint, but they also seem to imply that they created all their database technologies from a clean sheet of paper.

Somehow it seems likely that much of what Teradata created was pulled from the public domain, and they added some things.

It is quite likely that a number of Teradata founders and IP contributors not only were educated at public expense but read books about databases that allowed them to consume information placed in the public domain by authors that came before them.

However, this is not at all apparent from Teradata’s complaint. According to Teradata, all of their IP was internally generated. At this point, it is not necessary to conjecture if software vendors exaggerate their IP. They all do.

The largest software vendors today are thrilled with their lock-in. SAP is the most challenging software to integrate other systems, and SAP uses a fictitious extension on a previously legitimate framework called indirect access to punish customers that show the independence to purchase too much non-SAP software, which is explained in the following quotation.

“The reasoning is simple: If a program is accessing the data files of another program, meaning that they interact with one another, manufacturers claim that they are technically getting used by the foreign software. Consequently, licenses for this “Indirect Access“ have to be paid for. But Indirect Access is an illusion! SAP’s wish to make more money is responsible for creating Indirect Access. From a technological perspective, the interaction between user programs is called interoperability which is strictly regulated by the EU software directive. Therefore, it is the very nature of every software to communicate with other programs. With promises and threats, SAP created a fairy-tale castle that looks desirable as well as menacing from a distance. Upon closer inspection, the castle collapses in on itself, revealing the illusion it was all along. What is left is a disaster, because Indirect Access has no logical explanation.”[8]

SAP customers must increasingly be prepared to be charged multiple times. (Illustration from E-3 Magazine, which is a German publication)[9]

In addition to charging numerous times for their software, SAP now has a scheme to markup cloud services of AWS/GCP/Azure by charging far more for the same services that SAP customers could buy from these cloud vendors directly. SAP has no interest in building much in the way of cloud infrastructure, but a great deal of interest in marking up the services of other providers. The major SAP consulting firms are so “dedicated” to their clients that they will likely not bring up the up charging cloud to their “clients.” We categorized this as an entirely new classification of cloud service, the “upcharge as a service” or UaaS.[10]

How to Best Understand ITAM on Cloud and SAM

this article, we will cover some selected quotations from the article What Does the Cloud Mean for ITAM, from the site ITAM.

What Impact Does This Have on ITAM?

“Cloud’ based software, licenses, and storage pose new challenges for ITAM professionals. There have been a number of publications that state that the cloud will mark the end of ITAM, but it is the complete opposite. Cloud-based services just change the way we will need to manage software, and further emphasizes the importance of ITAM to an organization.”

Hypothetically, when a company moves from on-premises to the cloud, it is supposed to allow the vendor to be able to review the customer’s software usage continually. So it is interesting to see ITAM push back on this.

“With the new cloud based licenses there are a number of new elements added to an ITAM professionals role, including user management, deployment management, and contract management. This means that whilst compliance is no longer such an issue, there are other elements of the software and licenses that need to be correctly managed. As the majority of licenses now state that a user has the rights to install the software on up to five devices, including a home machine, the ITAM team need to ensure that there is a management process in place to ensure that should the user leave they are no longer able to use a license that belongs to the organization.

Cloud poses even more challenges for ITAM professionals, and ITAM professionals need to ensure that they keep their knowledge level of cloud and cloud based licenses to expert level to ensure they fully understand their organisation’s rights with cloud services and software. When negotiating new cloud service contracts it may be important to ensure that someone from the organisation’s legal department is present to ensure that the organization is fully aware of their legal rights.”

This brings up the question of how the customer can verify the usage. Vendors like SAP try to keep the information to themselves. Unless the cloud vendor offers what amounts to SAM software built into its application, the customer is then in the position of having to install SAM software onto the cloud application.

A New Dawn for ITAM

“With the new cloud-based services and software licensing, organizations need to ensure that they modify existing ITAM processes and policies to fit in around the cloud. The cloud is a new element and challenge when it comes to software license management and software asset management, so organizations’ processes and policies need to be updated to reflect that. This will help ensure that organizations are still getting the most out of their cloud based software assets and services.

It is also important that organizations keep up-to-date with what ITAM tools are offering the way of cloud management. If there is already an existing ITAM solution implemented, then the organization needs to understand what new features and capabilities they will be bringing to the product to ensure it can successfully manage cloud based licenses and cloud based software. Cloud based software and licenses still need to be managed by ITAM as there needs to be clear management of how many installs each ‘user’ has so the organization can ensure that compliance is maintained.”

These are all good points. There is a natural inclination to think that SAM becomes unnecessary with the cloud, but that falls into the pattern of trusting the vendor. Some vendors are quite reasonable. However, some specific vendors are a license liability, and as those vendors migrate to the cloud, they are not likely to change their approach to license audits.

How Difficult to Move Away from the Oracle Database?

Oracle revels in how difficult it makes its database to migrate away from. Larry Ellison specifically brags about how difficult it is to migrate from Oracle (exaggerating quite a bit actually). Time and again, in the computer industry and in other industries when private companies have their way, they create maximally incompatible systems and lock-in, which are profit-maximizing for them, and profit minimizing for their customers. In the perfect world of commercial software vendors, there is zero collaboration between developers that do not report up through the same hierarchy, and every problem is solved multiple times in different organizational hierarchies. This is apparently what conservative economists at fake think tanks like The Hoover Institute and The Heritage Foundation refer to as “efficient markets.” When problems are solved, each commercial software company declares that they came up with the single best way to solve that problem. SAP, for instance, states that every single best practice that exists within a domain is contained in its software. We evaluated the legitimacy of SAP’s best practice claims in the article How Accurate Was SAP on Containing Best Practices?[11] And in the article How SAP Uses Best Practices to Control the Implementation.[12] If we look at Oracle with Exadata, their desire is to combined proprietary hardware with proprietary software (the database) and then to sell both proprietary items and to top it off with a proprietary operating system (Solaris). Oracle has a straightforward way of presenting their ideas. They have the best products in the world and anyone who does not believe this is an idiot. It’s quite cut and dried. Currently, Oracle is losing business badly to AWS. However, Oracle seems to think if Larry Ellison performs enough analyst calls and speaks at enough Oracle conferences, AWS will go away.

How Oracle and SAP Broke the Agreed Upon Rules of Commercial Software

It is common to propose that SAP and Oracle are merely following the commonly accepted rules of commercial software. It is difficult to see how this is true. The original idea of compensated software was that work in creating and maintaining software required compensation. That is certainly fair. However, SAP and Oracle have moved the goalposts.

Moreover, they use licensing rules to extract far above the value of their software. They spend far more on sales and marketing than they do on development and maintenance. The licensing agreements SAP and Oracle give customers are like credit card contracts. The complexity of the terms and conditions places Oracle and SAP in a dominant position versus the customer. Oracle and SAP have their customers so restricted by rules and restrictions that the goal of the software is often a secondary concern.

Furthermore, Oracle and SAP have been using this position to coerce their customers into things they don’t want to buy.

How SAP Took an Open Source Language and Made it Closed Source
The biggest problem of the SAP Cloud is the proprietary Java Development Toolkit. Although it sounds ridiculous and impossible, SAP took a free language, modified it, and forced customers to use it in the SAP Cloud. (that is Java was free until Oracle (who bought Sun) just recently began charging for Java).

“SAP Java” also free, but it requires license validation it if could be impossible to go to any other cloud vendor if SAP changes the pricing policy.

SAP has a habit of frequently changing their policies. If they did make this change, it would mean that SAP could effectively lock customers in with what was an open-source item that they had nothing to do with developing. SAP and Oracle’s approach to open source is to infiltrate it (in some cases, buy it) and then control it by closing it off. It was the EU regulatory body that required Oracle more or less not do this to MySQL to receive approval to purchase it. However, as soon as MySQL was acquired, it was forked to MariaDB. This was done for one self-evident reason. Oracle lacks credibility in the open-source community because of its previous behavior with open source projects.

Clues from Decades of SAP Development

SAP’s development advice leads to high expense and low development productivity. This is another reason to steer clear from SAP’s Cloud as they are trying to take their development approaches to the cloud.

Neither Fiori, oData, and other SAP cloud items have uptake very much. Moreover, this is with the ability to push their components to a willing installed base.

SAP’s Netweaver is (in part) an uncompetitive web server/application server, yet is still used by SAP in instead of better alternatives like NGINX or Apache. SAP burns resources and time trying to make its components internally when there are far better components it could use that are made by other companies or are open source projects.

SAP does not have a successful cloud product that was not acquired and, therefore, already cloud before it became part of the SAP product catalog. Consequently, their proposed web thought leadership that they claim is unsupported.

Promises Made to Wall Street

For customers with substantial investments in Oracle and SAP, because of the promises made to Wall Street by these companies, we see these abuses only getting worse in the future. Oracle and SAP have been ratcheting up coercive tactics to obtain revenues to hide the fact that these companies are not growing in the new areas where they tell Wall Street they are growing. Still, instead, they are merely extracting more income from their old areas. Is the fastest-growing part of SAP or Oracle is cloud business? Is it SAP’s “hot new IoT” solution called Leonardo? Is it Oracle’s Automated Database? No. Every year, support grows as a higher percentage of both of these company’s revenues.

If you listen to Oracle sales reps, they put themselves in the position of being there to help. They want to “help” their customers, but if one analyzes how they are helping, it is from Oracle’s coercive policies! If you create a coercive scenario, but then appear to “fix” that scenario, that is called racketeering. The standard approach came from protection rackets. Where a mobster would approach a store owner and declare..

“If you pay me protection money, your store will be protected from the mob.”

However, then, the same mob is the only entity that would damage or destroy the store! Wouldn’t it be a terrible thing if something happened to that store? Yes. So in a way, those that negotiate terms on protection rackets are also “helping” their “customers.”

Conclusion

Open-source software is known, although underemphasized in its contribution to the development of the modern Internet and the rise of cloud services. However, less well-publicized is the impact of open-source hardware. This is usually explained with the term “commodity” yet. The truth is more nuanced than this. The design work is shifting from the vendor to the hardware buyers. Proprietary hardware manufacturers prefer to describe nonproprietary hardware as “commodity,” when, in fact, open-source is a more accurate term to use. The truth is that the fastest-growing infrastructure, which is the many billions of dollars currently being invested by AWS, Google Cloud, and Azure, is presently is primarily built on open source software and open-source hardware. The commercial hardware and software vendors don’t much like this story, so they do what they can to suppress it from being known.

These entities do allow proprietary software to be used (like the Oracle database and SAP database). Still, the majority of the software used on these hyperscale cloud service providers is open source. Secondly, the vast majority of the hardware being deployed is also open source. AWS and Google Cloud are not hardware or software vendors. They sell access. Azure is, of course, owned by Microsoft, one of the largest commercial software vendors in the world. However, Azure also uses large amounts of open-source software as well as hardware. Microsoft has tried to kill open source, but they just can’t, and they faced a decision, either stay with Microsoft’s software and become irrelevant or open their system up. If Azure is to remain competitive with AWS and Google, it knows that using only their commercial software is not an option. This is not Microsoft seeing the light. It is Microsoft dealing with how it is. Microsoft’s server products have failed. With all their resources, and with all their dirty tricks, they were beaten by Linux.[13]

References

[1] “One Hotmail founder told the PBS Online columnist Robert Cringely, “All we got was money. There was no recognition, no fun. Microsoft got more from the deal than we did. They knew nothing about the Internet. MSN was a failure. We had 10 million users, yet we got no respect at all from Redmond. Bill Gates specifically said, “don’t screw up Hotmail,” yet that is what they did.” – https://www.wayner.org/books/ffa/ffa-2002-12-13-mod.pdf

[2] https://www.wayner.org/books/ffa/ffa-2002-12-13-mod.pdf

[3] https://www.wayner.org/books/ffa/ffa-2002-12-13-mod.pdf

[4] “Open source versions of encryption technology are oozing through the cracks of a carefully developed mechanism for restricting the flow of the software. The US government has tried to keep a lid on the technology behind codes and ciphers since World War II. Some argue that the United States won World War II and many of the subsequent wars by judicious use of eavesdropping. Codebreakers in England and Poland cracked the German Enigma cipher, giving the Allies a valuable clue about German plans. The Allies also poked holes in the Japanese code system and used this to win countless battles. No one has written a comprehensive history of how code breaking shifted the course of the conflicts in Vietnam, Korea, or the Middle East, but the stories are bound to be compelling.” – https://www.wayner.org/books/ffa/ffa-2002-12-13-mod.pdf

[5] https://www.wayner.org/books/ffa/ffa-2002-12-13-mod.pdf

[6] https://www.wayner.org/books/ffa/ffa-2002-12-13-mod.pdf

*https://www.itassetmanagement.net/2015/08/25/cloud-itam/

[7] https://www.brightworkresearch.com/saphana/2018/09/04/how-true-is-saps-motion-to-dismiss-teradatas-complaint/

[8] https://e3zine.com/2018/12/02/indirect-access-illusion/

[9] https://e3zine.com/2018/12/24/sap-indirect-access-charge-twice/

[10] “What is more, HEC, HCP, and SCP are much more expensive than clouds from AWS, Microsoft, and Google, but do not have more or even any consulting services that would justify this difference. Some SAP partners have been noticing the first customers turning away from SAP clouds and to AWS, Azure, and Google with their help.” – https://e3zine.com/2018/12/07/sap-erp-cloud-computing/

[11] https://www.brightworkresearch.com/sapresearch/2018/01/03/accurate-sap-containing-best-practices/

[12] https://www.brightworkresearch.com/erp/2018/11/08/how-sap-uses-best-practices-to-control-the-implementation/

[13] Linux was beating Windows in performance benchmarks back in the late 1990s. https://lwn.net/1999/0429/

The Public Cloud Revolution Book
The Public Cloud Revolution: How Open Source is Displacing IT Mega Vendors
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