Monday, February 20, 2012

What is the difference between SAAS and regular software licensing?

Companies providing SAAS, or software as a service, are different than traditional software providers. The main distinction is that a typical software provider will charge for software that the buyer installs (after download or through a CD or other medium) the software code until their local computer. The purchaser is also granted a license to use the software, usually for a certain period of time. The buyer is buying a product in the software, but they are really getting a license to use that software. For accounting purposes, those software sales are classified generally as purchases of a product, even though there is often no physical product given to the buyer. SAAS is when the provider company generally hosts the software on their own server and provides the software to the purchaser online. The main difference is the delivery method. SaaS is often referred to as software on demand. Each type has its own set of legal and tax characteristics/implications. Software licenses generally book the revenue from the front end costs to purchase the software as a product upon the time of sale. SaaS generally spreads the revenue recognition over a period of time during the subscription period. Tax liabilities therefore accrue at different times in the revenue cycle. There are also different types of agreements that are used as a software license agreement or end user agreement. SaaS agreements are usually setup as a subscription for a certain period of time to use the software and traditional software agreements are a license to use the software code, often also for a period of time but the purchase happens at initial purchase. Some traditional licensors try to limit the use period and require users to pay to renew their license after expiration or limit the number of users or number of computers it can be installed on. The difficulty is obviously that once the person has the software installed locally, it is difficult to enforce any kind of restriction if they fail to renew their license. Some could enforce this through things like only providing support or software updates if the user is current on their license fees (subscription). SaaS gives the company much more control over their code since there is typically no local installation and they retain complete control of their code. Of course SaaS requires online connections to run the service, but the availability of the internet has made that almost a non-issue. Some Saas will provide customers the service for free and earn their revenue from ads on the sites. It is pretty easy to see that the control and flexibility of SaaS make it the preferred method for most software.

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