Software Licensing in the Cloud - Association of Corporate

Software Licensing in the CloudShaalu Mehra, Gibson Dunn & Crutcher, LLPRobert Lewis, Zhong Lun Law Firm

ACC IP Licensing CommitteePalo Alto, CAJune 11, 2013

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Overview

• Cloud-based software delivery models are evolving rapidly

• Changes are driven by:– Evolving commercial considerations and models– Flux, uncertainty, and inconsistency in legal frameworks

• We will review implications of these developments for cloud-focused licensing practices and delivery models

2


A Brief History of Cloud Computing

• Application-Based Service Providers (ASPs)– Enterprise applications hosted remotely, accessed via

Internet

• Software as a Service (SaaS)– Turnkey web-based applications– Drivers• Startups• Large enterprises• Incremental vs. “lift and shift”

3


A Brief History of Cloud Computing (2)

• Virtualization– Creation of virtual machines, or “instances”, of hardware

resources– Rapid deployment and provisioning of instances across

data centers– Vendors’ economies of scale

• Our working definition:

“Cloud” ≈ Dynamic pools of virtual servers accessed via a wide-area network

4


Background: The Cloud Stack

5


Evolving Cloud Delivery Models

• Public Cloud– Multi-tenancy– Accessed via Internet

• Private Cloud– Dedicated servers– Dedicated private networks / MPLS

6


Evolving Cloud Delivery Models (2)

• Community Clouds– By vertical

• Federated / Hybrid Clouds– Mix of public and private clouds– Net new vs. legacy

7


What’s Driving Change in Delivery Models?

• Evolution of pricing considerations in the enterprise

– Capex vs. opex

– Pay by the drink• Protections against overprovisioning• Predictability• Scale• Price protections

8


Software Licensing Considerations

• All in one pricing vs. bring your own license– “One throat to choke”– No direct enforcement against software provider• Lack of customary protections

• Conversion of legacy hardware-based metrics– E.g., cores / sockets• Interpretation in virtual environments

– Vendor guidance

9


Software Licensing Considerations (2)

• License impediments in legacy licenses– Lack of platform support– Hardware keys– Explicit hosting restrictions

• Software vendor’s SaaS / IaaS offerings

• Perpetual licenses vs. subscriptions– Costs vs. lock-in

10


Software Licensing Considerations (3)

• Legacy assets– Leverage sunk costs– Legacy systems integration / customization– Maintenance vs. subscription• Potential restoration of maintenance, with credit for

subscription fees paid

11


Change in Delivery Models

• Standard Terms of Use– Drives operational economies of scale– Uniformity of cloud services

• However,– Terms may be incompatible with customer regulatory /

operational requirements– Control of documents

• Negotiation of one-off agreements predicated on size / scope of engagement

12


Change in Delivery Models (2)

• Factors– Service level agreements– Control of documents– Disaster recovery / service restoration– Data location– Liability caps

13


Emergence of Community Clouds

• Regulatory requirements– HIPAA– BAAs– ITAR / BIS• Access restrictions• Deemed exports

• Operational requirements by vertical– Meaningful SLAs

• Legal and operational– Disaster recovery

14


Interoperability• Multi-sourcing in steady state– Hybrid model

• Post termination transfer– Lock-in

• Challenge: lack of uniform standards– Proprietary system calls / libraries / standards• PaaS

– Proprietary data formats • SaaS

15


Interoperability (2)

• Considerations– Persistent APIs (PaaS)

• Recognition by vendors• OpenStack

– Document schemas (SaaS)

16


Interoperability (3)

• Reverse transfers– Conversion into prior schema or alternative in reverse

transfer– Price protections

• Post termination licenses– APIs / schemas• Case law

– Code (with insolvency protections)– Staggered escrow

17


Delivery Models for Cross-Border Cloud Services

• Multi-national customers require access in multiple jurisdictions

• Delivery models are structured for:– Compliance with local laws– Tax optimization– Currency controls

• Examples: Delivery of cloud services in China and EU

18


Cloud-based services in China

• The main commercial structuring considerations for SaaS/Iaas/PaaS in China are the same as outside China

• The regulatory regime in China presents some important new twists

19


Who needs to know China cloud rules?

• MNCs with China subsidiaries using globally-sourced cloud-based services offerings

• Cloud-based services providers with China userso Early stage start-up with footprint in China (to be more

attractive acquisition target)o Major global cloud services operator looking to access China

market

20


Key structuring issues for the China cloud

• Where are the servers located?• Place and currency of payment?• Who owns the customer relationship?

o Major accounts (MNCs in China, major SOEs, etc.)o SMEs

21


Key regulatory issues for the China cloud

• What licenses are required?

• What privacy rules apply?

22


Key elements of China cloud structures• Servers

o offshore – not regulated in Chinao onshore – need licensed IDC/ICP operator partners

• Customer relationshipo reseller vs. agent vs. no face-to-customer

• Technologyo supply of h/w, licensing of s/w and provision of tech

support services are not regulated

23


If you need a license, can you get one?

Under relevant Chinese law (and China’s WTO commitments):• Sino-foreign equity joint venture

VATS entities (foreign-invested telecommunications enterprises (or FITEs)) are permitted

• Foreign equity share is capped at 50%

• Requires approvals from Ministry of Commerce (MOC), Ministry of Industry and Information Technology (MIIT) and other departments (culture, publishing, advertising, etc. as applicable)

But in practice:• MIIT rarely issues VATS licenses to

Sino-foreign equity joint ventures (only a handful of FITEs in >10 years, compared with >2000 multi-province licenses for purely domestic companies)

• Even in rare case where MIIT approvals are obtained, other approvals cannot be obtained as a practical matter

• Most foreign investors prefer not to be subject to the 50% investment cap so use common work-around structures

THE LAW vs. THE PRACTICE

24


If you can’t get a license, what do you do?

WFOEForeign Party

Nominee shareholders

Board of directors

VATS operator

Internet data center

Wholly foreign-owned enterprise

Offshore China

100%Supply/ license/ services

Co-hosting

Nominee shareholder

controls

dividends revenuerevenue

Captive domestic VATS operator

End Users

Typical VIE/nominee shareholder structure:• Traditional work-

around structure• Validity increasingly

now called into question

• Not necessary for cloud business?

Weak-spot: so-called “vertical” nominee shareholder controls

25


China Roll-out of Global SaaS Offering

Data center

SaaS SP MNC global customer

Cloud ServiceWeb PortalOffshore

Onshore

SaaS SP China entity

Global Saas Contract

China End User (MNC

sub)

Provide non-regulated bundled services to End Users

Provide on-the-ground End User customer support

China BTOOnshore internet connectivity

Provide SaaS services to China End Users on cross-border basis

Key structure elements: Servers located offshore SaaS SP China entity provides unregulated bundled

services and customer support in China Question: who bills the customer in China?

26


Traditional Offshore Model #1

Key structure elements: Servers located offshore SaaS SP China entity provides unregulated

bundled services and customer support inChina

Question: who bills the customer?

End User (MNC sub)

Offshore

Onshore

Cloud ServiceWeb Portal

End User (POE)

End User (SOE)

China BTOOnshore internet connectivity

SaaS SP

Provide non-regulated bundled services to End Users

Provide on-the-ground End User customer support

Data center

SaaS SP China entity

Provide SaaS services to End Users on cross-border basis

27


Onshore Model #1

Key structure elements: SaaS SP China entity (1) is the SaaS

technology partner, (2) provides unregulatedservices directly to End Users, and (3) ownsthe overall customer relationship.

The China VATS Partner (1) holds the license,(2) provides the portal, and (3) runs the formalcontract/billing relationship.

China VATSPartner

End User (MNC sub)

Offshore

Onshore

Host and maintain web portal Sign SaaS service contract with End

Users Issues bills to End Users

SaaS technology license SaaS H/W and S/W supply SaaS technical services


End User (POE)

End User (SOE)

China BTO Internet connectivity

SaaS SP HQ

Co-location of servers (title held by SaaS SP or VATS partner)

Non-regulated bundled services contract w/ End Users

Overall End User relationship management

SaaS SP China

IDC operator

28


Prime Contractor Onshore Model #2

Key structure elements: SaaS SP China entity (1) signs the prime

contract for the SaaS offering directly with theEnd Users, acting as the reseller of the VATSportion, and (2) provides all of the SaaStechnology support to the China VATS partnerfor the service.

The China VATS Partner (1) holds the license,and (2) provides the portal, all on a subcontractbasis.

China VATSPartner

End User (MNC sub)

Offshore

Onshore

Host and maintain web portal



End User (POE)

End User (SOE)

China BTO Internet connectivity

SaaS SP HQ

Co-location of servers (title held by SaaS SP or VATS partner)

SaaS SP China

IDC operator

Cloud-base service prime contract with End Users

SaaS SP China acts as reseller of regulated services provided by China VATS Partner

29


Onshore BTO/VATS Partner Model

Key structure elements: SaaS SP China entity provides all of the SaaS

technology support to the China VATS partnerfor the service.

The China BTO/VATS Partner (1) holds theBTO/ VATS licenses, (2) provides the datacenter hosting, portal, and internet connectivity,all on a prime contract basis.

SaaS SP China

End User (MNC sub)

Offshore

Onshore

Host and maintain web portal



End User (POE)

End User (SOE)

China BTO

Internet connectivity

SaaS SP HQ

Co-location of servers (title held by SaaS SP)

Cloud-base service prime contract with End Users

IDC operator

China VATS

30


China data privacy issues

• Serverso offshore – not subject to China’s data privacy ruleso onshore – must comply

• Basic requirements

o Personal information broadly defined

o Disclosure requires user consent

o Illegal collection, sale, provision or use of personal information

may trigger criminal liability

o Online businesses are responsible to maintain security of

personal data

31


Conflicts in Laws

• EU Data Directive

• Patriot Act

• FISA

• Recent developments– Prism

32


Questions?

• Shaalu Mehra, Gibson Dunn+1 650 849 [email protected]

• Robert Lewis, Zhong Lun Law Firm +86 1380 116 4471 [email protected]

33


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Software Licensing in the Cloud - Association of Corporate

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