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Revenge of the Nerds: How Chip Vendors Are Changing Software Pricing

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Believe it or not, the balance of power in negotiating enterprise software pricing may be shifting to users. As the major processor vendors release multi-core processors, software vendors are falling behind the curve (of Moore's Law) with their pricing strategies. Louis Columbus explains what's happening and why you should take this opportunity to push for pricing more advantageous to your enterprise.
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The big four processor vendors—AMD, IBM, Intel, and Sun Microsystems—rely heavily on continual innovation and speed increases to fuel their businesses. At the heart of their strategies is Moore's Law. Simply stated, Moore's Law posits that transistor density on integrated circuits roughly doubles every two years. These chipmakers have ridden the Moore's Law curve for more than 40 years, constantly increasing the density of circuits and consolidating functions into more powerful microprocessor designs. This product development strategy has evolved to include multiple processing units (cores) within a single processor design.

AMD's dual-core processor, the Opteron, has been adopted by several systems manufacturers for low-end workstations; for example, IBM has adopted Opteron for their IntelliStation workstation product line. But IBM also chose the Power Everywhere Show in Tokyo in July 2005 to announce the IBM dual-core processor, the PowerPC 970MP. Sun Microsystems has multi-core technology in its line of UltraSPARC processors.

All this power in processors has many software companies wondering how to price their applications. On one hand, software vendors argue, this is really like having two processors in a single chip; on the other hand, the argument goes that there should be only a per-socket price per application. Intel and the chip vendors are coming down on the latter side of this argument, for obvious reasons. This debate has been going on since 2004, but the shipment of the first dual-core processors in July 2005 and the implications for enterprise software vendors are making this point noteworthy now.

CRM Best-of-Breed Curiously Silent

Scouring the Siebel site for any word of their stance on pricing as related to dual-core processors showed what the case is for many other best-of-breed customer relationship management (CRM) vendors: No one is taking a stand. This is surprising, given Siebel's latest 10-Q on file with the Securities and Exchange Commission, which shows a higher reliance than ever on maintenance revenue and a drop in the elephant-size deals on which this vendor relies. Deals over $1M fell from 29 in Q1 2004 to 22 in Q1 2005, a reduction of 24%. Total deals dropped from 306 to 244 with a corresponding drop in average deal size from $414,000 to $307,000 from Q1 2004 to Q1 2005. All these financial metrics point to maintenance revenue as the lifeblood of Siebel for years to come if this trend continues—and yet nothing on dual-core or multi-core pricing.

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