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February 2, 2023

Service Providers and October 2022 Microsoft Licensing Changes

SAMexpert Podcast

In October 2022, Microsoft released significant updates to Microsoft Product Terms. Nothing changed for providers in the Service Provider Use Rights document. However, because SPLA does not exist in a vacuum, the end-user licensing changes may have also affected your business. Things like License Mobility Partnership and QMTH lost their sense in October 2022. But the changes opened new possibilities.

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Episode Transcript

In October 2022, Microsoft released significant updates to Microsoft Product Terms. Nothing changed for providers in the Service Provider Use Rights document. However, because SPLA does not exist in a vacuum, the end-user licensing changes may have also affected your business. And although, as I just said, nothing changed for providers in the Service Provider Use Rights documents, things like License Mobility Partnership and QMTH lost their sense from October 2022.

So let's recap what's changed, how it may affect you, and how it probably has affected you already.

What exactly has changed for end clients?

Number one, Microsoft introduced a new right called Flexible Virtualization, which gave the rights to any subscription license to be taken to any provider. No authorisation is required. Every product is included. The only rule is the license must be either on a subscription or have another type of subscription – Software Assurance. So you must pay a recurring fee to Microsoft as an end client, not a provider, to take that license to a service provider. With a caveat, though, that the services provider accepts Bring Your Own License.

Flexible Virtualisation has overridden License Mobility through Software Assurance. It's wider, covers more products, and does not require the provider to be a License Mobility Partner. It also includes all the CSP licenses that did not previously benefit from License Mobility through Software Assurance.

As a consequence of introducing the Flexible Virtualization Benefit, Windows Server also received Bring Your Own License rights even on shared hosting. Well, the Flexible Virtualization Benefit includes all products.

End clients, together with that, got the ability to license Windows Server per virtual machine. Combined with the previous point that they also have the Bring Your Own License right, in theory, if you allow them to, they may take that license, per VM license, and assign it to a virtual machine in your data centre and license Windows Server virtual machine with their licenses.

That affects service provider economics and the design of your platform a lot. But the possibility is there.

The other thing that affects mostly end clients is that Windows 11 through CSP may now be virtualised on-premises. And if you sell CSP licenses, that benefits you as a reseller because now Windows 11 licenses may be virtualised on-premises, which improves the attractiveness of such licenses and their value.

Volume and CSP licenses of Windows Server may be taken to multi-tenant hardware. BYOL has expanded.

When discussing Windows Server licensing per virtual machine, please remember that it doesn't exist in SPLA. It is only applicable to end-client licenses; if they decide to bring it to your data centre and you allow them to, that is the formula. But still, that formula applies to the licenses they bring to your data centres, and it's simple.

The number of core licenses required per virtual machine equals the number of cores of that virtual machine with a minimum of eight cores per virtual machine.

If you know about SQL Server licensing per VM, this works similarly; the only difference is that SQL Server requires at least four cores per virtual machine, and Windows Server requires at least eight cores per virtual machine.

SQL Server is an excellent example of a non-operating system that also benefits from the recent changes. Previously, CSP subscription licenses could only be taken to Azure. From October 2022, those same CSP licenses could be brought to your data centres, which improves the attractiveness of SQL Server licenses through CSP. Although they are called SQL Service subscriptions for Azure, they can be taken to any service provider now. And again, License Mobility authorisation is not required.

How have these changes affected the tiers of service provider authorisations?

Before October 2022, there were effectively four tiers of service providers or outsourcing companies that provided hosting services. And yes, you could be an outsourcing or hosting company without an SPLA agreement if you only hosted your end clients on dedicated hardware. You didn't have to have SPLA. In that case, you would be like a colocation company, an outsourcing company. You didn't host it for them. They hosted their hardware with you effectively. But obviously, if you wanted to provide services from a public cloud infrastructure, a multi-tenanted infrastructure, in that case, SPLA was a requirement.

Still, pure SPLA did not allow Bring Your Own License to the shared hardware. For that, you had to become a License Mobility Partner. You may still become a License Mobility Partner, but I'll explain to you why it's not required anymore.

And then the last authorisation level, the hardest to get, was QMTH. It still exists. For how long? We don't know. But it also lost its sense because QMTH allows your end clients to bring their Windows 11 and Office applications to your data centres on shared hardware. Now because of Flexible Virtualization Benefits, it's not needed. And let me remind you, every product now has the Bring Your Own License rights to both dedicated and shared hardware. How is it different now? Effectively, we now have providers without any hosting agreement and providers with SPLA. And there's more to that. Providers without authorisations may now host clients on multi-tenant hardware using end client's licenses on subscriptions or with Software Assurance through the Flexible Virtualization Benefit.

So, in theory, and we already know a few companies trying to, you may become a services provider without an SPLA agreement. It is perfectly compliant.

So, License Mobility Partners and QMTH still exist. Flexible Virtualisation provides more rights, so they just don't make sense anymore.

Let's touch on the divide between Listed Providers and Authorized Outsourcers that hasn't changed. There are Listed Providers. Four names: Microsoft, Amazon, Google, and Alibaba. Anyone who is not on that list is an Authorized Outsourcer. When you read Microsoft Product Terms, when you read Microsoft licensing guides, if it mentions an Authorized Outsourcer, it just means anyone, any outsourcing company, SPLA or not, that is not on that list.

So, it did become much more straightforward and more accessible for end clients to take their licenses and bring them to a shared or dedicated environment, with the only caveat that the provider must allow them to bring their licenses.

And Authorized Outsourcers, regular providers, have more benefits than Listed Providers.

If an end client wants to take their licenses to an Authorized Outsourcer, they need to check that the licenses are on an active subscription. It's all they need to check. That includes regular subscription licenses plus licenses with active Software Assurance because Software Assurance is, by design, a subscription. And they don't need to check whether a provider is a License Mobility Partner or they have QMTH status.

For the Listed Providers, nothing changed. They still have to stick with License Mobility, which in our opinion, provides more competitiveness for smaller providers versus Listed Providers.

So let's recap how it affected you. All those changes have only been introduced for the end clients, but they did affect you.

And in our opinion, the most important thing that happened is that you do not need License Mobility and QMTH authorisations anymore. You don't even need SPLA. You can become a service provider without SPLA, but if you have SPLA, by all means, keep it.

You may now host any CSP subscription license, not only Windows 11 and Office 365. And that includes SQL, which is a significant change, especially for those providers who, at the same time, sell CSP licenses to their clients, who are CSP resellers. It did feel strange that you could sell a SQL Server subscription to a client, but they couldn't bring it to your data centre. Now they can.

There is a new authorisation called CSP-Hoster. What you need to know, it does not affect compliance. It gives you no licensing benefits. It's a benefit that allows you as a provider to pre-build solutions, virtual machines and combined solutions using media and activation keys that you can download from VLSC. So, regardless of the name, you don't have to be a CSP-Hoster to host CSP licenses.

Unfortunately, there's a bit of bad news. If you transfer your SPLA licenses to any of the Listed Providers, you will have to stop doing that in October 2025. In three years, things may change. Microsoft may decide to retract it, but as it stands right now, you only have less than three years to rethink your licensing strategy if you have clients for whom you deploy virtual machines on Listed Providers. You can still provide a limited subset of SPLA licenses for them to use on Listed Providers, but only until the 30th of September 2025. In October, you will have to stop doing it. So are these changes good or bad for you? We think the changes are positive because there's no need for QMTH. It's never been a perfect program and only allowed a limited subset of CSP licenses to be brought to your data centres. That limitation is now gone. You don't need QMTH. You don't need that additional hassle related to being in QMTH.

You now have new opportunities with Bring Your Own License. You can offer more services. You can attract new clients with their existing licenses. And if you sell CSP licenses, you may now host any subscription license, and you don't have to become a CSP-Hoster.

On the other hand, those Tier 1 CSPs who invested a lot of effort and money have lost that competitive advantage of QMTH. Now, every provider may host the same licenses without being a QMTH and a Tier 1 CSP.

And if you use Listed Providers, you must start rethinking that relationship.

And some things are yet to be seen.

Windows Server Bring Your Own License creates a mess in service provider economics. You can now license a host with Windows Server Datacenter, and you recover the cost of that license by renting out Windows Server virtual machines. And effectively, the more Windows Server virtual machines you run on that host, the more money you earn on the margin.

What if your end clients start bringing their own licenses? How do you recover the cost of the license attached to the host? That is unclear. For now, most licensing consultants advise providers who want to explore Windows Server Bring Your Own License to deploy an additional separate infrastructure just for those cases.

I'm not sure that's feasible. With the existing provisioning and billing systems, what if an end client decides to switch a virtual machine to BYOL? Would that virtual machine have to migrate from one data centre to another? So that is yet to be seen.

Bring Your Own License compliance is on clients. But is it? CSP-Hosters are required to validate and verify end-user licenses, so CSP-Hosters continue carrying the burden of verifying licensing compliance that previously was on License Mobility Partners and QMTH providers. However, non-CSP-Hosters have no such requirements. They're not required to verify their end-client licenses.

So you may think if we don't become a CSP-Hoster, well, we don't need it, then we shouldn't care about the compliance of the end clients. I would not recommend thinking that way. We currently recommend all our clients have an internal process of verifying the compliance of the end users that bring their own licenses. What if there's an audit? How will an auditor know whether that is a compliant, legitimate license that belongs to an end user?

CSP-Hosters have a framework for how to report Bring Your Own License. But non-CSP-hosters, how are they going to report it? Right now, again, there are no requirements. But we think they will be introduced.