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10/01/2012

The high potential of second-hand software market

Why can we talk about a used software market? How are we able to measure the potential of the second-hand software market? What are the legal context in Europe and US?

Why a used software market?

In the past few years there has been an interesting discussion within the software industry regarding the possibility to sell second-hand software. For hardware, it is now considered common practice, but for software, practitioners and IT operational have always excluded this possibility, especially because of strict conditions imposed by the vendors. However, since we can buy and sell second-hand laptops, why could not we do the same with computer programs?

According to experts in the software industry, there is quite an important  presence of unused software in the companies, and essentially for two main reasons: firstly, software may be out of use in case of staff reductions, mergers, changes in the information system or in the business; secondly, some software have never been used since their first purchase because needs have been overestimated or because of continuous changes in the IS strategy.

In the first scenario we call the product “unused software”, since the software was actually installed and for some reason it ran out of use; in the second case, the product is commonly called “shelfware”, that is a software that was directly put “on the shelf” and never deployed.

Software that are not used in a company could actually still be valuable for other organizations. According to a study from EHI Retail Institute, a German-based scientific institute of the retail industry, companies would have a strong interest in the commerce of second-hand software in order to save costs. Second-hand software licenses can be bought at a discount compared to new ones and the resale of used licenses may represent a capital gain in the balance of the IT department. Other reasons that would push companies to look at second-hand software are to ensure software stability and to be less dependent on continuous upgrade from software vendors.

The potential of the second-hand software market

The real use of license is a quite discussed topic within IT departments and it is still a challenge today. In 2003, Gartner highlighted that 42% of CRM licenses remained unused1. Business intelligence software often remain on the shelves as well, and this fact is confirmed by a wide range of surveys in the industry.

However, there is not consistent estimate of the second-hand software market size at the moment and no reliable research on the number of current market players. Recent studies have tried to assess the “potential value” of this market, by estimating the expected revenue of software that are not used (both unused software and shelfware) if they were sold.

A recent research carried out by 1E, a UK incorporated company focused on efficient IT solutions,  gives an estimate of the value of unused software in the US and in the UK. According to the study, the total value of unused software would be worth approx USD 12bn and GBP 1.7bn in the US and in the UK respectively every year. The result is based on the hypothesis that there would be more than USD 100 worth of installed but unused software per PC each year. However, considering the historical amount of unused software already installed, the value could go up to USD 414 for every PC. If you multiply this number by 108m of regular business PC users in the US would result in a total value of approx USD 45bn of unused software in 2011.

Potential European Market in Europe (EUR 8.8bn, 2009)

Source: Munich Strategy Group

According to another research by Munich Strategy Group, a German-based consulting company, the value of unused software in Europe would be approx EUR 8.8bn in 2009. Germany is considered the largest European market, with approx. EUR 2.1bn of unused software value (24% of European market).

Looking at the real sales of second-hand software in Germany, the revenues are expected around EUR 100m in 2012, according to software traders.

Comparing the volume of unused software currently available with the actual sales of second-hand software, there is still a huge upscale potential.

As already mentioned, the purchase of second-hand licenses offers companies significant saving perspectives compared to the purchase of new software: market players claim discounts and savings in the range of 30%-50%. Main software traded in the second-hand market are Microsoft, SAP, Oracle and Adobe products. In general resellers require quite recent versions, meaning that the current market is mainly for software released after 2007.

Germany-based players seem to be leaders in this market, mainly due to the active involvement in recent law cases with top software vendors.

The defense position of Software Vendors

Not surprisingly, software vendors have been trying to prevent the resale of software products, claiming the illegality of such initiative and bringing the case to court. However, software vendors found the court a tough playground. In fact, the resale of second-hand software has been considered legal in many courts around Europe. Despite this fact, vendors have continued their campaign against software resale, at their own risk and expenses.

Precedent cases show in fact that software vendors are banned to claim illegality regarding sale of second-hand software. One of the most popular cases is the decision of the Hamburg court in 2008, which “prohibited Microsoft  from publishing misleading allegations regarding the lawfulness of the trade with used software”. Susensoftware vs. SAP in 2009 also represents a similar case. The origin of the dispute was an email sent by a SAP employee to a German company, preventing the purchase of second-hand software, and stating that it could be done only with SAP consent. Based on the previous Microsoft case, Susensoftware succeeded against SAP.

The legal context in Europe

The legal context can be found in the Directive 2009/24/EC on the legal protection of computer programs, which states that the first sale of a copy of a computer program by the copyright holder or with his consent exhausts the right of distribution of that copy in the EU. In other words, after the product is sold for the first time, the original marketer cannot oppose the resale of the product.

However, some limitations have to be taken into account. The second-hand license cannot by divided by the acquirer in order to resell parts of it to a greater number of users.

In addition, the original acquirer must ensure that “the copy downloaded onto his own computer is unusable at the time of resale”. In other words, in case of resale the compliance regarding the copyright holder’s exclusive right of reproduction is always respected.

Even if the contract agreement explicitly prevents the transfer of licenses, the licensee has the right to contest any specific clause on this matter.

In the recent case UsedSoft vs. Oracle, Oracle opposed to the exhaustion principle of the distribution right for licenses downloaded from the internet. However, the Court of Justice made clear that the exhaustion of the distribution right is not limited to software sold on material medium (e.g. CD-ROM) but concerns also products downloadable from the internet.

In addition, Oracle claimed the impropriety of transferring licenses that are under maintenance agreement, since the current software has been improved by several upgrades and patches and it represents a different product compared to the original software bought. However, as pointed out by the court, the software product can still be used after the maintenance agreement expired and the alterations due to maintenance services are integrated in the product. Therefore, the maintenance condition does not represent an obstacle in the transfer and sale of computer programs.

The legal context in the US

The American common law is  similar to the European principles in this matter, but the cases regarding the reselling of software has been controversial in the past

The key point is the applicability of the First Sale Doctrine, firstly articulated  by the Supreme Court in 1908, which enables the distribution and the reselling of trademarked products after the trademark holder put the products on the market. This principle is actually valid for a sale agreement, but it does not apply when the arrangement between buyer and seller is a license.

According to the Ninth Circuit Court of Appeal of the United States, there are three criteria that would describe the software user as a licensee rather than an owner of the copy: (1) the copyright owner specifies that a user is granted a license, (2) the copyright owner significantly restricts the user’s ability to transfer the software, (3) the copyright owner imposes notable use restrictions.

This arguments were actually discussed during the recent case Timothy Vernor vs. Autodesk, Inc. in 2007. The case concerned an eBay merchant named Timothy Vernor, who started selling used Autodesk software through its eBay account. Autodesk reacted by filing infringement notices under the Digital Millenium Copyright Act. After the eBay account was suspended, Mr Vernon had no other alternative than to bring the case to the District Court of Justice.

Autodesk defended its point by stating that it only “licenses” copies of its software, rather than selling them, and that therefore any resale of the software would constitute a copyright infringement. However Mr Vernor's lawyers pointed out that Autodesk is actually selling the licenses, arguing that the characteristics of the transaction offered by Autodesk represent an authentic sale bargain. In the first stance, Autodesk’s argument was rejected by the District court, which confirmed that Mr Vernor is entitled to sell used copies of Autodesk's software regardless of any licensing agreement that might have bound the software's previous owners.

However, in 2010, the Ninth Circuit Court of Appeal reversed the result from the District Court, claiming that Autodesk customers are licensees of the software copies and not owners, mainly due to the significant transfer and use limitations imposed. Nevertheless, the Court of Appeal remanded the case to the District Court, stating that Vernor’s claim that Autodesk misused its copyright had not been reached yet and needs further considerations.

Conclusion

Current second-hand software resellers are on the lookout for opportunities to extend this market. At the same time they provide the companies some advice about the possibility to resell licenses among which: to avoid strict license transfer/resell conditions and to unbundle the contracts to allow the sale of a part of a contract.

According the CEO of UsedSoft Peter Schneider, the recent result of the case UsedSoft vs. Oracle “will make the market explode”. Experts in the industry see this result as a real breakthrough, which could potentially boost the second-hand software market in Europe. Also in the US where vendors have so far been less challenged than in Europe, the market of used software could significantly improve.

However, industry experts see the new trend of cloud computing as a new challenge for software marketers, as users do not actually own the software and therefore they will not able to re-sell it.

 

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1 Gartner Survey: 42 Percent of CRM software goes Unused (February 2003)
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