Used software market threatens program giants

European Union court ruling looms as a big challenge to US$250 billion industry

PUBLISHED : Tuesday, 18 September, 2012, 12:00am
UPDATED : Tuesday, 18 September, 2012, 9:14am

As chief of computer systems for Berliner Volksbank, Joerg Bauske has long been dismayed at the amount he spends on software. Now he says he has found an easy way to cut costs dramatically, by buying used programs.

Bauske plans to upgrade the regional savings bank's copies of Microsoft's Windows Server with second-hand copies purchased from a broker named preo Software.

The move was eased by a July ruling from the European Union's highest court paving the way for sales of previously owned software. Bauske had some experience in the matter, having bought second-hand copies of Microsoft Office and Adobe Photoshop in 2006 and 2007, when the legality of such deals was less clear.

"We have had to be certain that the savings outweigh the legal risks," Bauske said. "Now there is less reason to be concerned."

On July 3 the European Court of Justice ruled in a case brought by Oracle seeking to prevent Munich-based UsedSoft from reselling software licences. The court said developers could not forbid resale of programs and updates downloaded from the internet, expanding earlier case law permitting the sale of second-hand software delivered on disc.

"Software vendors have every reason to worry," said Ray Wang, chief executive of Constellation Research, a technology adviser whose client roster includes Microsoft and Adobe Systems.

Companies spend US$250 billion to US$275 billion on business software annually, and the total potential value of programs that might find buyers could exceed US$1 trillion, Wang estimates. The market today is much smaller, however. In Germany, one of the biggest markets, less than €100 million (HK$1.01 billion) of corporate software was resold last year, according to traders.

UsedSoft, which had sales of about €5 million last year, has seen demand treble since the July decision, chief executive Peter Schneider said. The verdict "will make the market explode", he said.

Also fuelling the resale business is an injunction from a Hamburg court last month forbidding Microsoft from warning potential buyers of used programs that such deals were illegal unless the software maker approved them.

Chemical and pharmaceuticals company Bayer, car-parts maker Magna International, and German retailer Edeka Zentrale are among companies that have tapped the used software market, according to the customer reference lists on the resellers' websites.

Bayer Business Services, Bayer's IT branch, says it is re-evaluating the use of second-hand software following the court verdict. Magna declined to comment. Edeka did not respond to requests for comment.

Trading used business software is not quite as seamless as selling secondhand video games on eBay.

Sellers contact companies such as UsedSoft with the programs and number of licences they want to sell. Buyers request specific programs. If brokers have the licences, they quote a price, typically 30 per cent to 70 per cent of the original cost. The buyer can then use the licence information to download the program from the software maker's website.

The intermediaries usually took a cut of about 30 per cent of the deal, said Boris Voege, co-founder and sales chief at preo. A notary's certification testifying the programs have been deleted from the seller's computers is often required to complete a deal.

Since not all companies want the latest programs, the process helps sellers cash in an asset that would otherwise be discarded.

"When Microsoft introduced Office 2007, demand for Office 2003 was skyrocketing because companies were used to it," said Dirk Lynen, chief executive of 2ndsoft, a used software broker in the city of Aachen, Germany.

In the United States, most software contracts blocked resale, and there had not been any decisive challenges to such clauses in court, said Eben Moglen, a Columbia Law School professor and founder of the Software Freedom Law Centre.

Still, American companies can tap the market via European subsidiaries. The European decision confirmed the rule across the region that a vendor's right to control what happens to software expires with the first sale, much as is the case with physical goods.

Officials at Microsoft and Oracle declined to comment on used software.