There are two common licence models: a perpetual licence and ‘software as a service’ (SaaS), with the related question where the application (and inserted data) are hosted.
Perpetual licences. A perpetual licence grants the user, subject to the licence restrictions, a right to use the software permanently without paying additional fees (with the exception of software upgrades). In addition to the perpetual licence, the licensee might optionally enter into a maintenance and support agreement for receiving bug fixes, incremental software improvements and minor new functionalities.
When software is purchased in a box or as a package to be installed on a computer, this is typically a perpetual licence: after payment of the licence fee, the user may use it without restrictions in time. Any ‘updates’ or ‘patches’ are delivered under a maintenance and support agreement, which may be fully paid in advance in order to prevent the high costs associated with the maintenance of countless versions being developed (see section (iv) below).
Software as a service (SaaS). The second and increasingly popular model is SaaS (‘software as a service’): the licensee pays a subscription fee and hosting of the software is provided by the licensor. The software functionalities are provided by way of ‘service’ through the internet rather than by way of a user licence. Likewise, the SaaS agreement takes the form of a service agreement instead of a licence (granting a right), and the terminology changes from licensor and licensee into service provider and customer.
Hosting. Increasingly, software applications become web-based. This means that the software operates somewhere on a server or website and the functionalities are used through an internet browser. A major advantage of web-based accessibility is that it considerably reduces error-sensitivity and installation issues. This means that web-based software is installed on the servers of the licensee’s organisation or on the servers of the licensor, and accessed through the intranet of the licensee or through the internet via a secure connection.
Hosting by the licensor (or service provider) triggers questions related to data security (possibility to access and protection of the software against third parties seeking access to the data managed through the software) and personal data protection (access and use of personal data, including the names of companies and individuals). The right to store and access depends from country to country, and the law governing such data is determined by the physical location where such data are collected and stored in a data centre. This is why it is crucial for many organisations to control where their data are stored (or where the data centre is located).
Subscription licences. If the licensee cannot finance a perpetual licence or wishes to remain free to step over to alternative solutions, a subscription licence could be attractive: the licensee pays a periodical fee and receives all bug fixes and support in exchange for the service fee. In many cases, the breakeven compared to a perpetual licence is at five years, the term for amortisation of software (and after which the perpetual licence would have been more beneficial). In a pure subscription scenario, the software would be ‘hosted’ on the servers of the licensee itself.