Summary
We often talk about Microsoft SPLA in the context of compliance audits. However, audits may or may not occur, but life goes on. When you are a service provider, your true priority is probably growing your business and generating a profit.
Today, I’d like to talk about that: about how to combine traditional Microsoft SPLA licensing with relatively modern offerings like CSP-Hosting and SQL Server with Azure Arc. Because, despite Microsoft’s efforts to present these as easy to understand and implement, they are not.
Mixing SPLA and CSP-Hosting, BYOL, and now SQL with Azure Arc must be done carefully, with planning and preparation. Only then can you be certain that you are truly profitable and avoid nasty surprises during an audit.
In my career, I have worked with over a hundred service providers of various kinds and sizes all over the World, defending them in audits and helping them improve their compliance and commercial operations, thereby avoiding the waste of hundreds of millions of dollars in license fees and audit penalties.
The Usual Elephant in the Room
I’d like to start with the usual elephant in the room.
What is happening with Microsoft SPLA? Is it being discontinued? Can we still rely on it?
There are two sides to it.
About a year ago, Microsoft made a written promise to CISPE to keep SPLA for at least five more years.
On the other hand, they also promised to release a new product based on Azure Local, specifically for providers, and that has not yet happened. Two deadlines have already been missed without any real consequences for Microsoft in sight.
In our opinion, however, SPLA is safe for the time being. It’s not as if Microsoft currently has a choice to abruptly end SPLA without offering an almost one-to-one alternative and wrecking an entire provider ecosystem.
SPLA remains a viable option—for now. Microsoft has no immediate alternative capable of replacing it.
However, they are making moves to undermine SPLA and offer alternative licensing solutions that ultimately benefit Microsoft. However, stating that these alternatives are always bad for providers and end clients would be incorrect.
It depends on your business model and the services you offer. For some of you, CSP-Hosting may be precisely what you have been missing in SPLA. For others, it may be an entirely wrong programme. For some of you, SQL Server with Azure Arc may bring additional revenue. For others, SPLA would still be a much better choice.
That is what we’ll discuss today: CSP-Hosting and SQL Server with Azure Arc, along with connected subjects such as BYOL and Flexible Virtualisation Benefit.
SQL Server with Azure Arc
I'll begin with SQL with Azure Arc, as it is recent, and at the moment, a truly "flagship", "scorecard" offering from Microsoft. Their salespeople are handsomely rewarded for selling it, including to service providers.
What is it? Microsoft Azure Arc enables the connection of SQL Server to Microsoft Azure, regardless of whether it's located on-premises, within a service provider's environment, or even on a hyperscaler like AWS. All you need to do is run a script that installs an Azure Arc agent, which connects the SQL Servers to Azure.
End clients benefit from centralised management and monitoring capabilities. They can view data from all their connected SQL Servers in their Azure dashboards.
SQL Server with Azure Arc enables hourly billing and centralised management via the end-client’s Azure subscription.
From a licensing perspective, it enables hourly billing for SQL. The licensed end-user organisation only pays for the time SQL is running. If it's shut down, there is no fee. They pay for it via their Azure subscription.
Note that I mentioned "end clients" multiple times, not "providers"? I did it on purpose: it's a critical detail.
The current licensing documentation describes SQL with Azure Arc as an end-user benefit only. End users can bring it to their provider's estate, shared or dedicated. But it's still billable via the end-client's Azure subscription. We can call it "Bring Your Own License" or invent a new term. I like "Bring Your Own Azure", but I'm open to suggestions.
I have recently spoken to a few prominent Microsoft licensing experts, and none of them can recall any information about allowing providers to pay for SQL Server with Azure Arc via their own subscription. There is only one officially permitted exception when you can use SQL with Azure Arc as a service provider, and that is when SQL supports your own SaaS applications.
However, there are rumours, which I cannot and will not confirm, that Microsoft has approached some providers with an offer to replace SQL Server licensed in SPLA with SQL Server licensed with Azure Arc and paid for via the provider's Azure subscription.
If this unconfirmed rumour triggers your interest, I suggest you reach out to your Microsoft or CSP channel contacts and ask them whether that offer is officially on the table. Inform them that you are seriously considering the move from SPLA to Azure Arc, but you want the billing to be processed through your Azure account.
If you do so, and I cannot emphasise it enough, GET THE CONFIRMATION IN WRITING. Until it's clearly and unambiguously in the official documentation, it is not a compliant scheme. Every exception must have supporting evidence in writing.
Always get written confirmation from Microsoft if you’re offered provider-based SQL Arc billing.
If your contacts cannot keep a poker face and begin expressing excitement, take it as a sign to negotiate a good deal. We can help you with that. We have a dedicated team in SAMexpert to handle commercial negotiations with Microsoft.
However, let’s get back to the officially permitted use. What if the only option is for your end clients to pay for SQL with Azure Arc hosted in your data centres via their own Azure subscriptions? How is that good for you?
The vast majority of service providers I know are Microsoft CSPs; some are even Tier 1, direct CSPs. If you are one of those, the benefits are apparent. If you resell Azure to your end clients, you get your regular Azure kickbacks and margins.
Additionally, you make your Microsoft representatives and the company itself happy. There are multiple ways to extract additional partner benefits from Microsoft when you keep them satisfied.
Plus, you get a competitive offering. SQL with Azure Arc is billed per hour as opposed to SPLA, which is billed per month. Additionally, as per the current pricing, SQL with Azure Arc may be more cost-effective than SPLA. Therefore, you can offer your clients a more affordable and flexible SQL Server option.
SQL with Azure Arc can be more cost-effective than SPLA—especially if you already resell Azure to clients.
And last but not least, if you manage SQL instances for your end clients, you get the management features of Azure Arc as a bonus. I speak with system administrators on a regular basis, and they appreciate the "control centre" capabilities that Azure Arc provides.
If it all sounds like an advertisement for Microsoft, please let me remind you that we are not Microsoft Partners in SAMexpert, and we deliberately don't sell any Microsoft products. I don't endorse them in any way. My goal with this article is to try to clarify the new licensing options available to you. And Azure Arc is one of them.
Do your homework. Assess all aspects of introducing SQL with Azure Arc. If it's not for you, it's not for you.
Please also don't confuse SQL Server with Azure Arc and a similar licensing option for Windows Server with Azure Arc. The latter is not yet permitted to be used in any form in service provider data centres.
So, SQL with Azure Arc provides end clients with more flexibility, making your services more competitive. But please don't think of Azure Arc as a replacement for SPLA. The SPLA option is still available; there's no need to transition entirely to SQL with Azure Arc. It's simply another option to consider, another offering to add to your portfolio. From that perspective, it's a positive evolution.
What makes it an easily adoptable option is that switching to SQL Server with Azure Arc can be done in-place, without changes to the infrastructure. You don't need to move the servers anywhere or create dedicated clusters. Install an agent, connect it to Azure, stop paying via SPLA, and start paying via Azure. That's it, which is not the case with the other relatively new licensing option - CSP-Hosting.
CSP-Hosting
CSP-Hosting has been around for nearly three years. Yet it remains largely misunderstood.
So, let me tell you a story to clarify what it is.
In October 2022, Microsoft introduced the Flexible Virtualisation Benefit, its most flexible and exhaustive Bring-Your-Own-License model. The Flexible Virtualisation Benefit was, and is, a massive improvement for end clients.
However, providers can benefit from it, as it gives your end clients more flexibility. If you understand how to combine it with SPLA, you can improve your offerings. And if you actively sell Microsoft CSP, it gives you additional business opportunities.
Here is the way Flexible Virtualisation Benefit works. An end client may bring any license on a subscription model or any license with active Software Assurance to a service provider and deploy that license in a dedicated (private) or shared (public) cloud environment. There are no product limitations. There are no specific authorisations you must obtain from Microsoft as a provider. Any product. Any provider. Any environment.
The only exception is that it does not work on Google, Amazon, Alibaba, or Azure. If you use these hyperscalers' servers to provide your services, your end clients will not be eligible for the Flexible Virtualisation Benefit.
Flexible Virtualisation Benefit allows any license with Software Assurance to run on any provider—except hyperscalers like AWS, Google, or Azure.
Now, here's something critically important that may contradict what you've been told: CSP-Hosting is simply an extension of the Flexible Virtualisation Benefit, which provides participating providers with a few additional benefits, some of which may be insignificant. Most providers we work with don't need to become CSP-Hosters.
What are those benefits?
Most importantly, it allows CSP-Hosters to pre-activate virtual machines. If you have a virtual machine marketplace or image library, you are allowed to activate them with your own keys.
Secondly, there are a couple of licensing benefits only available to end clients of CSP-Hosters. They both relate to Windows Server.
Another thing you need to grasp is the most critical difference between SPLA and CSP-Hosting.
In SPLA, the provider is the licensee. The license is granted to the provider. It is not sold to the end client. The end client just pays for a service and receives no licenses.
CSP-Hosting is fundamentally different. When a client brings their own license, it is straightforward and does not require explanation. However, when a license is "included" with the CSP-Hoster's service, the licensing scheme is utterly different from SPLA.
It is, in fact, a regular sales transaction in CSP:
The client signs an MCA.
A license is sold to the client
and added to their CSP tenant.
The software is hosted for the client.
What the CSP-Hoster programme calls "license-included services" should be called "license-bundled services" instead.The "license-included" name is misleading. In the end of the day, it is just another BYOL scenario.
CSP-Hosting “license-included” services are actually BYOL transactions tied to the client’s CSP tenant.
From the end client's perspective, there are a few key differences between SPLA and "license-included" CSP-hosting services.
First, there is no license transaction in SPLA versus a regular license purchase from a CSP-Hoster.
Secondly, and importantly for many, the minimal term in SPLA is a calendar month versus at least one year in CSP.
Again, I’m not saying that CSP-Hosting offerings are worse than SPLA. But these differences must be understood.
If an end client is okay with having to manage their licenses, if they are okay with a minimal subscription term of a year, and if your typical end client stays with you for at least a year, CSP-Hosting can even provide cost benefits to the end client.
Plus, Microsoft rewards CSP sales. If you are not just an infrastructure provider but also an active CSP partner, I don’t have to explain it to you. You already know that.
On the other hand, if your clients come and go often and require temporary or elastic workloads, SPLA is more flexible and usually more commercially reasonable to them.
The Windows Server Architecture Challenge
In order for you to achieve the full commercial potential of the Flexible Virtualisation Benefit, we need to discuss the most significant difference in licensing models. You need to understand it and possibly re-architect your infrastructure, not only to achieve a better bottom line but also to avoid potential losses.
It relates to Windows Server.
Licensing Windows Server in SPLA is the simplest of them all. Assign the necessary Windows Server Datacenter licenses to the hosts and share the costs between all Windows Server virtual machines running on the host. There is no limit to the number of virtual machines.
In CSP-Hosting and Flexible Virtualisation Benefit, you will most probably license end-client machines per VM. This option is unavailable in SPLA.
These are entirely different licensing and, more importantly, commercial models. That is why you should never mix them on the same hardware. If you mix SPLA and non-SPLA-licensed Windows Server instances, your relative SPLA costs per virtual machine will increase, thus reducing your margin and competitiveness.
Mixing SPLA and BYOL on the same hardware reduces your margins—keep them separate.
So, if you want to allow your end clients to bring their Windows Server licenses or you want to “include” them as a CSP-Hoster, build a dedicated infrastructure for that. Do not mix SPLA and BYOL Windows Server licenses on the same hardware.
🖐 Plan smart licensing strategies across SPLA, CSP and BYOL. Learn more: SPLA and CSP-Hoster Audit Defense.
There is also a very confusing situation with Client Access Licenses. There are differences between SPLA, BYOL, and the “license-included” CSP-Hosting option.
SPLA only requires client access licenses for Remote Desktop and Rights Management services.
However, if a client brings their own Windows Server license, they must also ensure they have the basic Windows Server CALs. It does not matter if a provider is a CSP-Hoster or not.
Simple so far. But then it gets complicated.
If a client buys a Windows Server license from a CSP-Hoster in a “license-included” (“license-bundled”) scenario, then the basic Windows Server CALs are not required, similar to SPLA.
It is clearly a CSP-Hoster benefit, but I wish I knew who came up with these “brilliant” ideas in Microsoft. As if Microsoft licensing for service providers wasn’t complicated enough already!
Just remember that in any BYOL scenario for Windows Server, when an end-client uses their own licenses, not “included” by a CSP-Hoster, they need to have Windows Server CALs. If you are their CSP partner, please ensure they have the necessary licenses.
In BYOL scenarios, Windows Server CALs are always required—unless licenses are purchased through a CSP-Hoster.
Most of the time, you don’t need to be a CSP-Hoster. You can still benefit from the Flexible Virtualisation Benefit’s additional flexibility and the opportunity to resell CSP licenses to your hosted clients.
The barrier to becoming a CSP-Hoster is still relatively high. You must be a Tier 1 CSP. If you are not a Tier 1 CSP and don’t want to become one, consider allowing your end clients to use the Flexible Virtualisation Benefit. It’s almost the same, with just a few differences:
You won’t be allowed to activate the virtual machines, but the only friction point is that the end client will have to activate them.
You may still sell them CSP subscription licenses together with the virtual machines. The only difference with CSP-Hosting is that Windows Server CALs will be required in all cases.
And there are no reporting requirements. However, we strongly suggest tracking BYOL internally anyway. Thank us for this advice when you get an audit letter from Microsoft.
The Economics
Let's discuss the economics of CSP-Hosting, SPLA, and the Flexible Virtualisation Benefit.
There are always two sides to it: the costs for the end-client and the profitability for the service provider. They are connected by the ability to offer compelling and competitive services.
For the end client with a legacy licensing portfolio, bringing their existing licenses with Software Assurance, such as those from an Enterprise Agreement, is almost always cheaper than SPLA or "license-included" options in CSP-Hosting. It may be your competitive advantage when there's a tender based on price.
For another end client that only needs a few VMs, it may be cheaper to purchase CSP licenses from you, along with the VMs, compared to the costs of SPLA.
The cost benefits heavily depend on your cloud architecture, including the number of hosts and cores, density of virtual machines, isolation of Windows Server VMs for SPLA, and other factors that affect the relative cost of a virtual machine.
Evaluate each option—SPLA, BYOL, or CSP—based on client needs, VM density, and licensing portfolios.
An accurate commercial feasibility study is not too difficult. We always recommend calculating and planning first, and then executing afterwards. And we can help you with that, just as we have helped many other service providers.
🖐 Optimise your SPLA architecture and margins. Learn more: Microsoft SPLA Managed Service.
The bottom line is that SPLA, SQL Server with Azure Arc, and CSP-Hosting, or simply BYOL if you don't want to become a CSP-Hoster, can coexist. With sound commercial and architectural planning, a mix of these can provide benefits to both you and your end clients.
If you want us to send you a comparison whitepaper between different licensing programs, please email us at ask@samexpert.com