Service Provider Licensing – Are meaningful changes coming?

Last month, Microsoft’s President Brad Smith announced several changes to Microsoft licensing policy and practices with a goal to make a more even playing field for non-Azure cloud Providers. (Partners that host services from their own infrastructure using Service Provider Licensing (SPLA)).

Microsoft has come under scrutiny in Europe over licensing practices, the changes announced are perhaps aimed to pre-empt legislation, but it is good that Microsoft are listening and have proactively taken action.

There’s a lot in the post – it’s over 4000 words, and covers Feedback from European Cloud Providers, Microsoft investment in Europe, Microsoft European Cloud Principles and how Microsoft is supportive of Europe’s values.  It emphasizes how much money they are investing into Europe and the many benefits they offer Europeans, while humbly admitting that their actions to compete with AWS and Google have really taken a large toll on Service Providers.   I’ve seen Brad talk a few times, I think it’s a pretty big deal to Microsoft that they have gone to this amount of effort for Service Providers.

So…For Microsoft Service Provider Licensing Partners, what could this mean, and will it be a substantial change or a small “tweak” to try and keep the European Union at arms length?

Right now, it’s hard to know exactly – but we can read between the lines and try and see what this might mean.

Before I start… Microsoft Licensing is complex.  I am no expert and may get things wrong – if so, I apologize in advance and don’t hesitate to correct me!

From what I can see, there are two core areas from this change which might be impactful to Microsoft CSPs:

1. For those that deliver desktop-as-a-service or applications via RDS/Citrix desktop.
2. For general infrastructure hosting where there could be more flexibility and portability around windows server licensing.

Will I be able to host my own Microsoft 365 services?

I have read other posts which have suggested Microsoft will enable third parties to start offering Microsoft 365 cloud services – Before you get excited, I am confident this is not what is being offered.   I am pretty sure these are not packaged products ready to be deployed on non Azure infrastructure.  In short, I think we can rule this one out.

The closest you can get to running your own Microsoft 365 services is to use Exchange Server 2019, SharePoint Server 2019 and Skype for Business Server 2019 and our Atria Platform.   Note that this is not quite the same, but it’s perhaps the best available.

The many Microsoft licensing challenges of delivering hosted desktops.

There have always been what I can only describe as convoluted rules relating to delivering hosted desktops using Windows desktop (RDS CAL) licenses, virtualization and the use of server based desktops.  These may have been designed to protect other licensing streams.  Regardless of where they came from, it’s a complexity which doesn’t help MSPs and is not easily explainable to any end customer.   There will be business logic from a Microsoft perspective.  When you try and do this logically, most people would come to the conclusion that Microsoft hasn’t made this easy for their partners.

Some examples of the licensing rules associated with delivering desktop as a service:

• You can host a virtual desktop on shared infrastructure provided you use a server-based operating system. It’s challenging to use Windows 10/11.  You can use Server 2016, 2019, 2022
• Microsoft 365 Apps version of Office is not supported on Server 2022, but it is on Server 2019 or 2016!
• Server 2022 can however run Office 2021 LTSC – i.e. the On Premises version of Office.
• If you need to offer Windows 10/11 then
  • The Service Provider has to ensure physical infrastructure is dedicated to each customer – i.e., you cannot get the benefits of virtualization, costs are higher, operations are more complex.
  • A special VDA license is needed for each terminal connecting to the Virtual desktop environment.
  • And I believe the service provider also needs to be a member of QMTH program (see 5 below)
• If you wanted to combine the virtual desktop with Office 365 services transacted via CSP – then you have to Join the Qualified Multi-tenant Hosting (QMTH) program – in order to do this, you also have to
  • Be a Tier 1 Microsoft CSP provider – direct billing relationship with Microsoft, in order to do this, you must (amongst other things)
    • Transact at least $300,000 through CSP with Microsoft each year
    • Purchase a Paid support plan
    • Offer 24×7 support options to your customers
  • Also – pay an administrative fee to Microsoft via SPLA each month
• Windows 10 Multi-session is only available in Azure – even though the core capability of this version is in the base Windows 10 product. It’s not available to use in non-Azure environments (Excluding Azure Stack HCI)
• Pricing for some licenses such as Remote Desktop Services has had ongoing increases over multiple years making it comparatively expensive (when compared to Azure Virtual Desktop)
• Microsoft SPLA licensing costs are high when compared to the finished products offered by Microsoft. Compare M365 Business Premium with the associated licenses you’d need to deliver something similar through SPLA.

Differentiated value from Service Provider hosted solutions

Microsoft Azure and Microsoft 365 are comprehensive and capable services, however many Service Providers still offer real value to their customers and have done for many years.  They do this by delivering tuned solutions from their own platforms, importantly adding personality, care and flexibility.  Importantly – they back their services with real people who answer the phone and care in the way a small business can.

As one of our European Service Providers emphasized, Azure isn’t always right for every business – and many customers have unsophisticated requirements.  For this particular Service Provider, their self-hosted platform delivers a finished solution for their target audience.  They deliver a high standard of service and have been successful in keeping and growing their customer base.  (Note that this Provider is not anti Azure, they also offer Azure services – if it’s right for the customer)

There are many MSP businesses like this that are being “disrupted”, the question is whether they are being disrupted by the technology shift, or by Microsoft policy and practices.  There is a bit of both, but for sure, the future of these businesses is decided by Microsoft policy – read on…

Service Provider Licensing and Microsoft’s move to the cloud

Before Microsoft went “all in” on the cloud with Azure and Microsoft 365, Service Provider Licensing was the fastest growing revenue line for Microsoft.

Over the past 5-10 years increasing pressure has been placed on SPLA partners to transition their hosting services to Azure/M365 rather than host on their infrastructure.  This is not a surprise, Microsoft have poured Billions into their strategy and they want the world to follow their lead.

Pressure comes in various forms, I have seen:

• Increase in SPLA Audits and unfavorable (and arguably unfair) audit outcomes that pressure increased spending through CSP over SPLA.
• Removal of incentives related to SPLA licensing.
• Removal of any Partner status for organizations that are not hosting on Azure/CSP
• Ongoing increases in relative cost of software licensing when compared to equivalent Microsoft 365 services.
• Removal of Microsoft Hosting/SPLA teams – there is only a push for CSP.
• Approaching larger customers directly to push them away from the Service Provider solutions

These things are not necessarily wrong and I’m sure many of these anecdotes are local or individual strategies designed to meet corporate targets.  Microsoft is finding the best commercial strategy for itself, the dominant position they hold in business and the great dependence on Windows and Office, removes choice.  I have wondered for some time when a challenge might appear, it’s positive that Microsoft have taken a first step without being forced.

What Benefits are Microsoft Announcing for Cloud Providers

The changes were summarized in this post in the Partner Center Announcements section of the Microsoft documentation site: Microsoft announces new benefits for cloud providers

Let’s step through the key points and what that might mean to Microsoft SPLA/CSP Partners:

Hosters (excluding Listed Providers) can run more types of Microsoft products—including Windows and Office—on their own servers for customers, including on-premises products that previously had been licensed only for customer computers and servers. This will help Hosters create end-to-end solutions for customers who want a cloud provider to host this software for them.

This could mean that Hosters are able to reuse licenses already owned by customers for those customers, rather than forcing them to buy more licenses via SPLA.  Note that Listed Providers means Microsoft’s competing Cloud Providers (Amazon, Google, Alibaba).  These statements don’t apply to them.

Software Assurance and subscription benefits will be expanded to allow customers to bring their licenses to non-Listed Provider Hosters’ multitenant and dedicated servers.

Importantly, the requirement for dedicated physical infrastructure will be removed when customers have BYO licenses. The rules around this are complex, but in general it is easy to reuse licensing if you host in Azure (which by the way is also shared hosting), but it’s either not possible or not easy to do if you want to move to a hosting partners shared infrastructure)

This I believe means that Windows 10/11 VDIs will be able to be delivered to customers from shared infrastructure, I don’t think this was possible previously.

Microsoft will make it easier than ever to license Windows Server for virtual environments by enabling customers to buy licenses for only the virtualized compute capacity they need, without being tied to a physical number of cores.

I’m not 100% sure what this means (I do like the easier than ever statement) Often, Service Providers will license Host Server physical CPU cores – each host can then run many virtual machines which are covered by the hosts license.  From this statement, I think it implies that virtual machines will be able to be licensed without the current minimum core count that applies to customer bought licenses.

Microsoft will create a European Cloud Partner Support Team, invest more time and money in developing business opportunities with European partners, and partner with local European providers to deliver cloud offerings including those that meet European government sovereign needs.

This could mean that there will be advocates for Cloud Partners within Microsoft. Could this be a reforming of the Microsoft hosting community which was very inclusive of Microsoft Partners a while back.

Could we even see Microsoft re-incentivizing Service Providers to offer desktop solutions on their own infrastructure?

Other questions we have?

Could Windows 10 multi-session become available outside of Azure/Azure Stack HCI?

This would really help Partners to offer an improved end-user experience to their customers.  We are hopeful that Microsoft will do this as it should be simple to implement as it is purely a licensing change.  If Office 365 apps are to be allowed to run on Service Provider infrastructure, then this would be an important step in levelling the playing field.

Will License changes be made solely for Europe?

It appears (from later threads on Microsoft websites) that the changes will not be isolated to Europe, they will be available globally.  Although we haven’t yet seen the actual changes to licensing – This is surely great news for Microsoft partners suffering from the same challenges outside of Europe.

Will QMTH be dropped?

This seems like an obvious piece of licensing complexity that could be removed to help Microsoft partners.  It’s removal would also pave the way for smaller hosting companies to legally combine Microsoft 365 apps with hosted desktops.  QMTH was tacked onto Service Provider Licensing in the early days of CSP in order to encourage the volume of Service Provider Office and Exchange licenses to transition to Office 365 CSP licensing.  This was a quick win for Microsoft to gain CSP growth and success.

What is the timeline for the Euro Microsoft Licensing changes?

The impression given by Microsoft is that we will see changes implemented quickly – given that the announcement was made in May, it could be expected that the details will be announced as soon as this month (July 2022) – my bet is that we could have an announcement at Microsoft’s annual partner event (Inspire) towards the end of July.  Look for changes and announcements related to Service Provider Licensing and CSP.

Where can more information be found about the Euro Microsoft Licensing changes?

• This was a good article from ZDNet Microsoft goes public with planned changes to undo restrictive cloud licensing policies in Europe | ZDNet – the last comment is where I figured out that Microsoft will make this change globally.
• This article on Bloomberg highlights some of the background which has forced Microsoft to reconsider some of their Licensing practices Microsoft (MSFT) Customers Decry Cloud Contracts That Sideline Rivals – Bloomberg
• This earlier ZDNet article also covered the background Customers aren’t happy about Microsoft’s restrictive cloud licensing policies | ZDNet
• The Register published this article on European Commission probe into Microsoft licensing practices Euro Commission looks into Microsoft cloud practices • The Register

What will happen to SPLA

As far as we know, this is unlikely to change the future of SPLA – it’s more about the licensing that can be brought and used on a service providers infrastructure via license mobility.  The Shared Computer Activation (SCA) and QMTH programs are however tightly related to SPLA and the wording around these may change.

Longer term, It’s possible that SPLA licensing could be consolidated into CSP, however I have no idea if this is the plan

We will follow up on this story – if you want an update, sign up to our monthly newsletter and we’ll keep you in the loop with this and other news affecting the Microsoft SPLA and CSP communities.