Dual core processors will increase software licensing costs by up to 50 percent by 2006, Gartner's research vice president Andrew Butler has warned.

According to Butler, multi-core chip architectures, virtualisation, capacity on demand, and rapid provisioning tools will drive the price hike. "All four happening at the same time is a recipe for software pricing mayhem," Butler said, before urging enterprises to protect themselves by initiating contract negotiations with vendors immediately.

Gartner also predicted software licensing "by core" could double price relative to performance. "If a new, dual-core design offers only a 50 percent improvement, a doubling in the licence fee becomes a tax on technology innovation with little return," Butler said.

Vendors contend they will remain flexible on per-processor pricing. Microsoft announced last month that it will consider dual or multi-core processors as a single chip. That policy will notapply however to Windows Server 2003 or Exchange Server.

Microsoft Australia's server business group director, Tony Ward, said users must ask if the performance of dual core processors is equivalent to two physical processors. "If you do get the same performance it doesn't matter. With Microsoft choosing to license its per-processor products - like SQL Server and BizTalk -[at the same cost as for dual core processors...you get double the performance for the same cost...it's a very good deal."

Ward said software pricing had decreased and would continue to fall. "Software has kept pace with hardware," he said.

SAP Australia and New Zealand managing director, Geraldine McBride, said her company was seeing aggressive pricing tactics from its competitors. "SAP's strength drives our competition to discounting in order to win deals. Given the competitive market, pricing may never return to old levels," McBride said.

Sun's Australia and New Zealand software business manager, Laurie Wong, said much software licensing remains legacy-based and could go up as Gartner warns if deals were not revisited. Wong said Sun has adopted different software pricing strategy including per-employee subscriptions. "For our own Web server software, we treat multi-core processors as a single CPU. When you have a lot of infrastructure software it's simpler to license per-employee. But when you are a vendor with a single product it is difficult to go per-employee," Wong said.

Solutions manager for Brisbane-based Linux and open source software consultancy Astute Systems, Paul Moore, said while proprietary licence fees could rise, open source software would see only a negligible increase in support costs by end users: "Support will be the same for a dual core processor. If there is any increase it will be trivial."