Microsoft set to close licensing loopholes, leave cloud rivals high and dry

Beginning in October, Microsoft plans to tighten its licensing rules to stop customers from using their own licenses for Windows, Windows Server, SQL Server and other software on rival cloud providers.

Microsoft Cloud App Security

Microsoft this fall will begin closing loopholes in its licensing rules that have let customers bring their own licenses for Windows, Windows Server, SQL Server and other software to rival cloud providers like Google and Amazon.

The Redmond, Wash. company laid down the new law in an Aug. 1 announcement, the same day it previewed Azure Dedicated Host, a new service that runs Windows virtual machines (VMs) on dedicated, single-tenant physical servers.

"Currently, our outsourcing terms give on-premises customers the option to deploy Microsoft software on hardware leased from and managed by traditional outsourcers," Microsoft said in a statement. "The emergence of dedicated hosted cloud services has blurred the line between traditional outsourcing and cloud services and has led to the use of on-premises licenses on cloud services."

That, Microsoft continued, triggered its licensing changes. "We're updating the outsourcing terms for Microsoft on-premises licenses to clarify the distinction between on-premises/traditional outsourcing and cloud services and create more consistent licensing terms across multi-tenant and dedicated hosted cloud services."

In plainer English, Microsoft drew a line in the sand. On-premises licenses should stay on the premises, not wander onto the cloud.

No longer will customers be able to take existing licenses — one for Windows 10, say, that was bought to use on a physical PC in the workplace — and walk it to a dedicated host cloud provider, one that assigned the license to a copy of Windows 10 on a server accessed by, and only by, the customer.

But it gets more interesting. Microsoft made a list of cloud providers where this new rule will be enforced. It was a short list.

"Beginning October 1, 2019, on-premises licenses purchased without Software Assurance and mobility rights cannot be deployed with dedicated hosted cloud services offered by the following public cloud providers: Microsoft, Alibaba, Amazon (including VMware Cloud on AWS), and Google," (emphasis added) the company said in its August declaration.

"This was the only loophole that [let customers] run Windows clients in anybody's cloud," pointed out Wes Miller, analyst with Directions on Microsoft, in an interview.

And now that loophole's gone, or soon will be, for Microsoft's cloud computing competition.

Microsoft, money and licenses

It's easy to see why customers took their on-premises licenses for products like Windows Server and Windows client to the cloud, and why cloud providers such as Amazon and Google wanted to accommodate those customers.

Based on the bring-your-own-license model — Microsoft has long called the practice "outsourcing rights" instead, perhaps shy of the word "your" — providers like Amazon and Google created offers that ran Microsoft workloads on dedicated hosts, said Tony Mackelworth, head of Microsoft Advisory at SoftwareOne, a Swiss firm that, among other things, helps clients navigate software licensing.

"Customers are able to leverage a 'Bring Your Own Licensing' model and save money when bringing their Microsoft workloads to competitive cloud offerings in AWS [Amazon Web Services] and GCP [Google Cloud Platform]," said Mackelworth, because they had already paid for the Microsoft licenses.

Take that away and affected cloud providers would have only "license included" deals, ones in which they pay Microsoft through a Service Provider Licensing Agreement (SPLA) for the rights to run the software in order to, in turn, sell a service, such as hosted servers. That's an additional expense for the provider, typically passed on to the customer.

"Customers can often pay more in licensing costs than when [they] use their own discounted Volume Licensing via their Enterprise Agreement (EA) [for a bring-your-own offer]," Mackelworth said.

The end result? By barring Amazon's and Google's customers from utilizing a bring-you-own concept, Microsoft made the competition, well, less competitive.

Hey, wait a minute

Those on the no-more-bring-your-licenses list certainly thought that's what was happening.

"Shelf-ware. Complex pricing. And now vendor lock-in. Microsoft is taking its greatest hits from the '90s to the cloud," Robert Enslin, Google's head of cloud sales, asserted in an Aug. 7 tweet.

Amazon minced even fewer words. "Yet another bait+switch by $MSFT, eliminating license benefits to force MS use," Werner Vogels, Amazon's CTO, said in an incendiary tweet. "1st, MS took away BYOL SQL Server on RDS, now no Windows upgrades w/BYOL on #AWS. Hard to trust a co. who raises prices, eliminates benefits, + restricts freedom of choice."

Sandy Carter, vice president at AWS, went beyond the boundaries of Twitter, adding a post to her LinkedIn account. "Microsoft wants you to believe that this is just 'removal of outsourcing rights,' but Microsoft is looking to restrict what computer you can use. And what cloud," Carter said.

Is that really what Microsoft's after?

"This will provide a competitive advantage to Azure Dedicated Host over competitor offerings from AWS, GCP and Alibaba," Mackelworth said, talking about Microsoft's new service. For example, on-premises Windows Server and SQL Server licenses that are covered by Software Assurance get a price discount when used to bring the workloads from, say, the banned AWS to Microsoft's own Azure Dedicated Host.

Miller pitched in, too. "Really bad news for Amazon. Kind of bad news for Google," he tweeted. "In the end, it also means really bad news for Amazon WorkSpaces in particular."

Changes start Oct. 1

Microsoft will modify its outsourcing licensing rules beginning Oct. 1. But as usual in the complicated-as-all-get-out world of licensing, there are caveats.

"The changes affect only net new licenses purchased on or after October 1, 2019," Microsoft wrote in an extensive FAQ. "Any rights you have today still apply in the future to your use of existing versions under licenses purchased before the October 1, 2019, effective date. [But] if you want to upgrade to a new product version released after October 1, 2019, or purchase a new license after that date, you have to follow the updated outsourcing terms."

While that seemed clear — as did follow-up answers about, for instance, software subscriptions and renewals — customers may be affected sooner than they think.

Miller pointed out that with the rapid release cadence Microsoft now employs, an "upgrade to a new product version" may be just around the corner.

Windows 10, for example, is slated to ship a new version, labeled 1909 in Microsoft's four-digit format, this fall. And if 1909 launches prior to Oct. 1, there's always the next in line, 2020's 2003, say, that's an upgrade.

SQL Server is another example. The 2019 version, slated to ship in the second half of this year, will likely release after the Oct. 1 deadline, Miller said, and thus come with the new rules.

And Microsoft offered a year-long carrot to organizations running Windows 10 Enterprise, figuring it might motivate some to re-up their subscriptions. Customers who renew Software Assurance coverage for Windows Enterprise or renew their current Windows 10 or Microsoft 365 E3 or E5 plans between Oct. 1 2019, and Oct. 1, 2020, will have until the latter date to move existing workloads off the banned providers.

What's behind the move

While Microsoft justified the changes by calling for licensing clarity and consistency, that's not the only truth or even the whole truth. As with many decisions announced by Microsoft — any company, actually — there's a lot it's not saying.

It was clear to both experts, for example, that Microsoft is motivating customers to do what it wants.

"Microsoft [is] seeking in incentivize adoption of Microsoft 365, and Windows Virtual Desktop and Windows Server workloads on Azure," said Mackelworth. He also saw a push by Microsoft to drive Software Assurance — or instead of that coverage, software subscriptions — in the new rules for products like SQL Server, Exchange and other Windows-based server workloads. "It will incentivize SA, or subscriptions for Windows Server and SQL Server, to leverage 'Azure Hybrid Benefit' on Azure Dedicated Host," Mackelworth added.

"In general, there are two things happening concurrently," said Miller, when asked Microsoft's reasoning. "First, Microsoft's move to everything subscription-based, less now Software Assurance but user-based subscriptions. That's very clearly a directive for a while."

Second, continued Miller, Microsoft is doing everything possible to give advantage to its own Azure cloud service. "Take a step back [and ask] what's in Microsoft's best interest? It's to make Azure the best cloud citizen."

Lke Mackelworth, Miller saw the alterations as prods to pay for Software Assurance (SA). The Directions team spent considerable time digging into the new licensing rules — the company regularly conducts licensing "boot camps," something Miller specializes in — in an attempt to parse Microsoft's decision.

"Colleague parsing the exact implementation of today's licensing changes (the negative side) and he sees it a bit differently," Miller tweeted on Aug. 1. "In the end, there will be no safe way to take your Microsoft licenses to a hosting provider without having SA ... and that may eventually change, too."

Microsoft's also using SA in conjunction with security updates, specifically those it sells post-retirement of a product to help enterprises that haven't yet migrated to a current version. SQL Server 2008, which exited support in July, and Windows Server 2008, which leaves it in January, must be covered by SA if an organization wants to purchase additional support to tide them over. "Arguably, as Microsoft require[s] active SA to purchase 'Extended Security Updates' for SQL Server and Windows Server, this has eroded the competitive landscape for AWS and GCP to target legacy versions without Software Assurance," Mackelworth said.

(Microsoft went even further when it offered customers three free years of Extended Security Updates to SQL Server 2008 and Windows Server 2008 when they moved those workloads to Azure.)

Licensing ... snake pit of confusion or just complicated?

"It is essential that customers understand the role of licensing in the economics of cloud and overall TCO (total cost of ownership) when evaluating competitive cloud offerings," said Mackelworth.

Of course. But saying or writing the word understanding is far easier than accomplishing that.

Microsoft has published more information about the Oct. 1 rules changes, particularly this FAQ (download PDF) that extends the Q&A from near the end of the Aug. 1 blog post.

Mackelworth plugged his company's expertise and more generally recommended that organizations seek out licensing advice from experts who have spent careers deciphering the complexities.

Directions' Miller was more concise. "If you're running Windows Server, Windows client and maybe SQL, on a dedicated host, it does impact you," he said.

Copyright © 2019 IDG Communications, Inc.

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