Perpetual Licensing vs. Subscription of Software: A Theoretical Evaluation

Software vendors have been using the subscription (leasing) model to replace or supplement the traditional perpetual licensing (selling) model. Durable goods theories generally support such a model. This paper looks at a software vendor who can sell (at a posted price) or lease his product and guarantee that subscribers will always have the latest version of the software. We discuss the optimal way of licensing software: perpetual licensing, subscription, or a hybrid approach that involves both. By addressing such specific issues in the packaged software market as network effects, upgrade compatibility, and the vendor's ability to commit to future prices in a dynamic environment, we demonstrate how a software vendor can manage the trade-offs of perpetual licensing and subscription to achieve a higher profit, as well as the corresponding welfare effect on consumers.