Avoiding the Traps of Software Transfer Fees

You’re a sophisticated ATE buyer. You’ve done the technical analysis, even tested your product on the ATE you plan to purchase. Your financial people have approved the cost justification and the site engineers have done their work. You believe you have captured all of the costs–but like most of the other ATE buyers, you have missed something important.

You believe you are buying hardware, software, ownership rights and resale rights. However, you are really buying ownership and resale rights of the hardware only. You are getting a license to use the software with no ownership or resale rights.

Is this important? Yes. When you are ready to sell or trade in the ATE system, the prospective buyer gets no rights to use the software; therefore, you recover much less of your original investment than you expected or deserve. This affects your purchase of replacement ATE and means your depreciation schedule was off–way off.

If you wonder whether this is important to you, consider that software license transfer fees range from $4,000 to $175,000. The original ATE manufacturer can charge just about anything he wants and, since there is no other place to buy that software license, he can get away with a lot. If surprise equals expectations minus reality, you are in for a big surprise. Of course the surprise will be later, not now. But it will make your original purchase look less wise and your next purchase less feasible.

Why do most ATE manufacturers charge such onerous amounts to transfer a software license? To restrict the sale of used equipment. The original ATE manufacturer would like to have your surplus equipment disappear. They don’t want to compete with their own equipment. By charging an expensive transfer fee, they make it much less likely that you will sell your system.

Not all ATE manufacturers have these nontransferability clauses. Some enlightened companies, such as Hewlett-Packard, realize that transferability makes good marketing sense. They realize that restrictive policies alienate valued customers, and that helping their customers to maximize the investment recovery on their surplus system will be a strong argument for buying Hewlett-Packard as replacement equipment.

The environment is another reason for ATE manufacturers to allow inexpensive transferability. Germany was the first country to pass legislation requiring electronic equipment manufacturers to be responsible for the recycling of their products. Other countries are adopting policies which will force manufacturers to develop programs that encourage reselling rather than scrapping surplus equipment.

Is it legal for ATE manufacturers to charge a second time for the software license? The courts have upheld the right of computer manufacturers to charge a transfer fee if they also charge that fee when used equipment is sold by the original manufacturer.

Is it ethical? No reasonable person would deny ATE manufacturers their right to make a profit and justify their original software development costs. But would this reasonable person feel it was fair for the first ATE buyer to effectively pay for the license again when the system is resold? I don’t think so.

It might be helpful to look at a more obvious example: You are about to sell your late-model automobile when you are informed by the manufacturer that you must remove all the software on all the PROMs because the next buyer has no right to them. You can easily picture the effect on your resale value.

Whey should you fight the nontransferability of ATE software licenses? Because when you buy or sell a used system, your company becomes a victim. It raises the real cost of ownership, and the increase in cost is based on terms you didn’t know about until after you received your system and unwrapped the software.

Fortunately there is a solution, and it’s not difficult. All you have to do is negotiate the software license transfer before you buy, just as you do the price, warranty and delivery. Let the ATE sales representative fight this battle with his or her management. They want your order, and now is the time to use your leverage.

During negotiations to purchase anything, the buyer’s leverage with the manufacturer behaves in a repeatable pattern (Figure 1). If either party abuses a period of maximum leverage, the relationship is damaged.

As you intuitively know, your leverage is at a peak when negotiating the purchase of new ATE. If you will consider only quotations from vendors who allow inexpensive transferability, you will likely receive cooperation from most of them. However, if you wait until after the order is placed to discuss this matter, your leverage has moved to the manufacturer’s side.

While the order is being filled, you have little leverage. After delivery, leverage has now shifted back to you as the manufacturer must meet performance goals if it wishes to be paid. This may occur when you discover previously hidden software license provisions when you open the software package.

The fine print says that, when you open the package, you are bound by the enclosed provisions. This is called an adhesion contract.

If you don’t like what you see in the fine print, don’t open the package. Call your vendor. You haven’t accepted the system yet. You still have leverage to change the transferability provision since you were not informed during the original purchase negotiations.

This, however, is your last chance. You won’t have leverage again with this vendor until you’re ready to purchase your next system.

Software license transferability is an issue of real test economics and fairness. It also is an issue that you have the power to affect.

About the Author

Paul D. Leif is President of GlobeTech International. He obtained a B.A. degree in astronomy from Northwestern University. In 1992, Mr. Leif was a finalist in Inc. Magazine‘s “Entrepreneur of The Year.” GlobeTech International Inc., 1684 S. Research Loop, Tucson, AZ 85710, (602) 298-6900.

February 1995