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Valuation of Discount Options in Software License Agreements

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Abstract

Many companies increasingly rely on licensed standard software for system software and applications. In addition to the regulation of usage conditions, software licensing agreements increasingly include services, such as software upgrades and user training, as a part of the contract or these are optional for a fee, which can be made use of by the licensee during the term of the contract at a reduced price or as a free service. This benefit entitlement is called a discount option and must be valued during the selection and designing of a contract. This paper describes the basic valuation issues as well as some weaknesses of previous approaches, and subsequently presents a model which, on the basis of the real option theory, enables an assessment of the discount options using mathematical methods. As the value of discount options can in many cases only be estimated by using analytical methods under certain conditions, a practical solution method is explained on the basis of numeric backwards induction. The procedure for applying the model and the achieved advances in knowledge are illustrated with an example.

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Authors and Affiliations

  1. Fujitsu Technology Solutions GmbH, Bürgermeister-Ulrich-Str. 100, 86199, Augsburg, Germany

    Daniel Gull

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  1. Daniel Gull
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Correspondence to Daniel Gull.

Additional information

Accepted after two revisions by Prof. Dr. Hasenkamp.

This article is also available in German in print and via http://www.wirtschaftsinformatik.de: Gull D (2011) Bewertung von Discountoptionen bei Softwarelizenzverträgen. WIRTSCHAFTSINFORMATIK. doi: 10.1007/s11576-011-0283-1.

At the time of writing employee of Department of Information Systems Engineering & Financial Management FIM Research Center Finance & Information Management University of Augsburg.

Appendix

Appendix

Algorithm of the numerical backward induction of the case study used in Sect. 4 (Irle and Prelle 2007, p. 44)

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Gull, D. Valuation of Discount Options in Software License Agreements. Bus Inf Syst Eng 3, 221–230 (2011). https://doi.org/10.1007/s12599-011-0170-8

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