Quick Guide to Second-Hand Software (Part 1 of 3)

"Some statements from software vendors in this space may seek to cloud your judgement and paint a shady tone of grey"

This article has been contributed by Noel Unwin of Discount-Licensing.com

• Part One – Industry Dynamics
• Part Two -Demystifying the Mist
• Part Three – The Legalities

Part 1 of 3: Industry Dynamics

Over the past decade, you may have come across articles relating to ‘second hand software’, otherwise referred to as ‘pre-owned’ or ‘remarketed’ software — also sometimes known across the pond as the ‘IT aftermarket’.

These articles have originated from sources such as journalists within the IT arena, bloggers and legal eagles — whilst the objectives of these opinion makers will be to try to paint a clear black and white picture of the development of the second hand software industry, some associated statements from the software vendors in this space may seek to cloud your judgement and paint a shady tone of grey.

For instance, your business may have been the lucky recipient of an invitation to audit and therefore received guidelines from a software vendor, which may have included statements relating to the use of pre-owned software licensing.

The mixed messages surrounding the industry do indeed add confusion to the mix, especially when businesses are faced with making proactive or reactive licence compliance decisions. So let’s have a stab at aligning some of the truths and dispelling the myths surrounding the second hand software market.

Searching For Clarity

• The first part of this analysis will define the so-called “sub-market boundaries” of the second hand software industry and elaborate on their independency. We will then look at the interdependency of the tiers working within each market.

• The second part will go on to examine some of the myths that have evolved in terms of licence compliance and the business models / processes that are adopted by players within the secondary software industry

• Finally, part three will then consider the legalities of the industry, in terms of the software vendor’s Licence Agreement (LA) terms (transfer provisions) as well as local and regional governing laws.

NOTE: For the reader’s transparency, my own secondary software experience began in 2003 and continues to this day with Discount-Licensing.com, a business responsible for setting up the second hand market in Microsoft ‘Volume’ software licensing. However, to generalise the second hand software licence industry solely on Microsoft, volume licensing or my own company’s business model would only contribute to the cloudiness already out there. Therefore, for completeness, reference will be made to the secondary sub-markets, which includes Original Equipment Manufacturing (OEM) and Retail Boxed / Fully Packaged Product (FPP) whereby suppliers from these different secondary markets have been researched and/or conferred with.

Industry & Sub-Market Boundaries

Software Licence Programmes — The second hand software industry can be broken down into three main sub-markets, defined by the software vendor’s different licensing programmes: ‘Volume’, ‘Original Equipment Manufacturer’ (OEM) and ‘Retail Boxed / Fully Packaged Product’ (FPP). The distinct differences between these markets are the intangible characteristics of the volume licence programme as opposed to the tangible aspects of OEM / FPP. Tangibility and deployment do incur different issues in terms of legalities… and this will be covered in part three.

Partly due to the nature of the deployment, pre-owned volume licensing is aimed at small, medium and large organisations, whilst the latter two markets are primarily aimed at small to medium sized businesses as well as consumers.

Note that the second hand volume software market is restricted to trading in ‘perpetual’ software licence assets that have been paid for in full. As with any pre-owned market (cars, software, films etc), this excludes subscription (rented) software licences as clearly, a company cannot legitimately sell something that it does not own in the first place. Again, this will be elaborated upon in part three.

Software Vendors & Products — Due to the distinct differences in product functionality, the software vendor’s products themselves further define the boundaries of the sub-markets. Within the volume market, there are now established pre-owned suppliers of Microsoft and SAP products. The OEM and FPP markets offer a wider range of products including Microsoft, Adobe plus a host of anti-virus, security, audio and visual orientated software. The secondary suppliers within the volume market tend to work independently of the OEM and FPP markets although we do see an overlap between OEM / FPP.

It is notable that the pre-owned software licence baton has not been picked up again with Oracle products but as covered in part three, this is a software vendor that is known to be particularly unfriendly to the idea of secondary competition in a similar way that Cisco has been towards the secondary hardware / equipment market. Interestingly, Cisco’s attitude has appeared to soften over the past year (CRN News: “Cisco comes around to used kit”) although do not suddenly expect the software vendors to start advocating the second hand software markets.

Secondary Software Market Tiers — In a similar way that most markets operate, secondary software licence suppliers (Tier 1) undertake the job of both distributing product to a network of resellers (Tier 2) as well as direct to end customers (Tier 3). The legal ‘rights and title’ to reassign the software licences can travel through numerous Tier 2 intermediaries before product arrives at the Tier 3 end customer; however, with second hand volume (as opposed to OEM / FPP) licensing, the actual transfer of the software licences will normally be facilitated directly from the original customer to the end customer who is installing the software. This process should of course be dependent on the transfer provision within the software manufacturer’s License Agreement Terms & Conditions and the model adopted by the secondary supplier but as covered in part 2, this is not always the case.

In contrast to the conventional software reseller channels, the secondary suppliers within the same tier do trade cooperatively with each other. For instance, Tier 1 players sell not only direct to Tier 2 resellers and Tier 3 customers, but also to other Tier 1 competitors. Likewise, the Tier 3 customers may ultimately provide a source of supply later down the line to Tier 1. This creates a “fairly unique” interdependency within the secondary software licence markets.

Trade Bodies / Protection

You may have stumbled across counterfeit-related newsfeeds from the anti-piracy bodies such as the UK’s Federation Against Software Theft (FAST), the USA’s ‘Software and Information Industry Association’ (SIIA) and the internationally known Business Software Alliance (BSA). You may have then surmised that software vendors would be in adulation at the thought of a trade body policing the secondary software licensing markets — well, not quite – the second hand OEM, FPP and volume markets have yet to see a trade body emerge as we have seen with hardware markets such as America’s UNEDA (United Network Equipment Dealer Association).

Whilst it is not surprising that the software vendors are not exactly queuing up to work more closely their secondary software market competition, the attempts to curtail the growth of the secondary markets have created a self perpetuating problem whereby the onus upon due diligence falls heavily upon the shoulders of the secondary software licensing supplier.

As we will visit in parts two and three, it may be that not every secondary supplier’s business model operates neatly within the software vendor’s transfer provisions or the local / regional governing laws. Therefore, customers need to be well informed and able to see that the secondary supplier is procuring from legitimate sources.

Specifically relating to OEM / FPP, the customer should know that the supplier is adhering to stringent ethical standards that eliminate the potential resale of a stolen or counterfeit product. Due to the stigma sometimes attached to secondary markets, there will be a vested interest by the secondary software supplier to be even more diligent and have even more stringent checks in place to eliminate the threat of counterfeit or stolen goods. It stands to reason that one wrong move could ultimately damage the reputation of that supplier and tarnish that of other sub-markets within the industry.

Unlike OEM / FPP products, the unique electronic licence numbers associated with volume software licences are manufactured by the software vendor and cannot be re-engineered, reproduced or found to be counterfeit. However, as with both ‘new’ and ‘pre-owned’ licence purchases, it is always plausible that a disgruntled employee with access to volume licence details could install elsewhere.

Noel Unwin

There is no evidence that pre-owned volume licences have ever been misused in this way although even the most innocent of businesses could have accidentally overused a Volume Licence Key (VLK) at one time or another when installing the software. Microsoft’s Volume Licensing Service Centre (VLSC) web portal does now count the number of VLK installs and so there is a certain degree of policing by the software vendors.

While there is a distinct absence of trade bodies policing the second hand software industry, some secondary software licence suppliers and resellers carry what is known as ‘Professional Indemnity’ insurance. This is the currently the strongest known protection that a secondary supplier has to offer the channel against a mistake or invalid pre-owned licence transfer. It is therefore always worth checking whether the secondary (or conventional) software supplier / reseller has this protection is in place.

This article has been contributed by Noel Unwin of Discount-Licensing.com

• Part One – Industry Dynamics
• Part Two -Demystifying the Mist
• Part Three – The Legalities