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Services Provider Licensing Updated

Posted: 
September 21, 2009

Hosting companies that offer Microsoft products as a hosted or managed service have been given more flexibility, lower prices, and a broader range of product offerings. Changes to the Services Provider License Agreement (SPLA), which lets Microsoft partners provide online hosting and management services with Microsoft products, will help Microsoft maintain a significant role in providing popular applications over the Internet and should keep third-party hosters in business even as Microsoft itself offers overlapping solutions.

Why Hosting?

Most Microsoft customers use the company's software on computers that they own and run on their own premises, but some use hosted services, such as hosted Exchange servers, or managed services, such as on-premise PCs or servers and their software, for which they pay a service provider a rental or leasing fee. The most significant benefit of these arrangements is that customers do not need to employ their own IT staff to manage the computers and applications, but can depend on a service provider employing expert staff who manage thousands of computers with high reliability.

When Microsoft first began permitting such services in the late 1990s, it did so reluctantly: prices for hosted Microsoft products were quite high—monthly fees over the course of a single year could exceed the cost of a permanent software license for on-premise use—and many products were not available for hosting.

In spite of that, the greater availability and reliability of commercial broadband networks spawned a substantial community of hosting companies. Microsoft says that about 10,000 companies have signed the SPLA and now offer some level of hosted service to external customers.

(For a description of the SPLA's licensing model, see the sidebar "The SPLA Model".)

Meeting the Threats

In recent years, hosted services offered by competitors have begun to pose a threat not only to these Microsoft service providers but also to Microsoft's core software business itself: Google, for example, boasts that about 1.75 million businesses use its Google Apps, which offer free or low cost e-mail, instant messaging, and conferencing, as well as Web-based word processing, spreadsheet, presentation, and database software that compete with Microsoft Office applications.

These threats have prompted Microsoft to take a two-pronged approach toward hosted applications: the company has begun offering its own products online, and it has begun to liberalize its rules for third parties to host Microsoft applications.

In particular, the SPLA and its accompanying use rights have seen substantial changes, starting in late 2008. Major changes include lower prices, product changes that level the playing field between Microsoft and its partners, licensing changes that clarify some confusing rules, and a new offering called SPLA Essentials that could encourage more companies to start hosting Microsoft products.

Lower Prices

SPLA hosters have long complained of high prices: they argue that the prices they must pay—and pass on to their customers—are roughly equivalent to licenses purchased through Microsoft's Open License, an entry-level volume licensing plan whose discount level ranges from about 5% to 20%. Although businesses with 250 computers or more can get discounts of 40% or greater for on-premise software purchases, SPLA hosters are stuck at a lesser discount level, even if they are hosting many thousands of users.

Starting June 1, 2009, Microsoft began offering Extended Term licenses for some products; if hosters commit to a particular number of licenses over the term of a three-year SPLA agreement, they get an additional 12% discount off the monthly SPLA price.

While welcome, the list of products eligible for the Extended Term licenses does not include some of the most popular hosted products, such as hosted Exchange and SharePoint Servers.

Parity Between Microsoft, Partners

When Microsoft began offering hosted Exchange, SharePoint, and Communications Servers directly to customers in 2008 through its Microsoft Online initiative, it also created the Business Productivity Online Suite (BPOS), comprising all of those server products as well as the Live Meeting conferencing service. The suite offers customers a 38% discount over the price of the products purchased separately.

To ensure that SPLA partners, who can host Exchange, SharePoint, and Communication Server through the SPLA program, are not disadvantaged, Microsoft has created a discounted Business Productivity Suite (which is similar to the BPOS) and added it to the SPLA's offerings.

Another change to the SPLA that mirrors the Microsoft Online offering is creation of specially priced Subscriber Access Licenses (SALs), which are the online equivalent to the Client Access Licenses, or CALs, required for many on-premise server applications. These specially priced SALs recognize that some customers have purchased Software Assurance (SA) maintenance and upgrade rights for their CALs, but are moving to hosted services—to ensure that they do not pay extra, the special SALs give them credit for SA that they are paying for on-premise licenses.

Microsoft has also improved licensing of Exchange through the SPLA. In the SPLA, the company offers five different types of Exchange Subscriber licenses—Basic, Standard, Standard Plus, Enterprise, and Enterprise Plus. Until recently, customers who wanted to use hosted servers with Microsoft's Messaging Application Program Interface (MAPI), used to access tasks, calendar items, and public folders, had to use Standard Plus or Enterprise Plus licenses.

However, Microsoft Online offers MAPI access for its Exchange Online Standard service. To ensure that SPLA users have price and feature parity with Microsoft Online customers, Microsoft now offers MAPI functionality in both the Standard and Enterprise licenses for SPLA-based Exchange customers.

It has also lowered prices of some of these licenses to allow hosters to offer more competitive pricing versus Exchange Online.

Windows Server Licensing Reworked

Microsoft has changed how Windows Server is licensed in the SPLA, altering the model to make it less expensive to host third-party applications on the Microsoft platform and improving pricing for virtualization on Windows Server Datacenter.

New Model Rewards Application Developers

The SPLA licensing model for Windows Server now distinguishes between a "hosted" service and an "outsourcing" service (rather than the previous distinction between "anonymous" and "authenticated" use, which was sometimes difficult to judge and did not accurately reflect the business models of hosters). In a hosted service, the hoster offers one or more non-Microsoft applications that run on Windows Server, and that contain significant intellectual property developed by the hoster or another party. In this scenario, customers are paying primarily for the application, not for the underlying Windows Server functionality.

In an outsourcing situation, a service provider hosts a Microsoft application for use by an organization's employees, contractors, agents, or vendors. For example, a customer who replaces an in-house Exchange Server with an outsourced service is paying primarily for the right to access Exchange Server managed by a service provider.

Prices vary, depending on the mode used. Service providers pay Microsoft monthly fees that are up to four times higher for Windows Servers used for outsourcing, although pricing to the customer, which is set by the hoster rather than Microsoft, may not reflect such a significant price differential.

The effect is to reward Windows application developers who host their products for customers by offering them the lower "hosted" price, even if their applications authenticate users.

Standardizing Windows Server and Virtual Machines

Until July 2009, use rights for Windows Server editions varied by edition. Notably, Enterprise edition was licensed only in the more costly authenticated mode, and Datacenter edition only for anonymous use, which limited its use in many scenarios. All Windows Server editions in the SPLA can now be licensed in either hosted or outsourcing modes.

The most notable impact of that change is the opportunity to use Datacenter edition, which permits unlimited virtual machine (VM) use with payment of a per-processor fee, in a wider range of scenarios. An SPLA hoster that could run many VMs per processor could get its monthly cost per server OS instance below US$15 when using Datacenter edition.

Older Versions Allowed

The SPLA has given hosters relatively little flexibility in determining which version of a product they can use. In general, they had to use the latest version of a product, although they could continue to use an older version if they had licensed it within the SPLA prior to its being replaced by a later version. This restriction made it hard for hosters to solve customer problems—they couldn't act as outsourcers for legacy applications that did not run on the latest version of Windows Server, for example.

As of July 1, 2009, prior version rights were added to the SPLA program. SPLA hosters can use earlier versions of Microsoft products in place of the latest versions. The use rights that apply to those products and the prices that hosters pay are those of the later version.

SPLA Essentials

In an effort to broaden its reach in the hosting community, Microsoft has introduced a "light" version of the SPLA, called SPLA Essentials.

Compared with the standard SPLA, Essentials has a simpler legal structure and does not require a Microsoft Business and Services Agreement. Essentials candidates must be registered members in the Microsoft Partner Network (formerly Microsoft Partner Program) and enrolled in that program's Hosting Community. They can then sign an electronic agreement to begin hosting Microsoft products through SPLA Essentials. They also report their license use to Microsoft through a Web-based interface that is simpler than the reporting required of regular SPLA hosters, if they choose to work directly with Microsoft; hosters can also work through a reseller.

SPLA Essentials could help companies use hosted services to drive additional revenue and to create stronger customer relationships. For example, a systems integrator might want to offer hosted versions of a custom application on a trial basis to customers, who could later move it to their internal network or continue to access the application as a hosted service. Since the integrator is the hoster, it is in a better position to provide technical support or customization for the application and can upgrade it or apply patches more easily than if the product is running on customer hardware.

SPLA Essentials does not permit some of the more advanced hosting options that are part of the regular SPLA, including the following:

  • Customer facility installs, in which a service provider rents computers and Microsoft software to customers who use the hardware and software at their own sites
  • Data center outsourcing, in which an SPLA hoster owns the billing relationship and collects fees from the customer, but does not own its own data center and outsources data center operations to another company
  • The ability to consolidate SPLA license use reporting from affiliates in a single monthly report to Microsoft for billing purposes.

Resources

The SPLA home page, with links to documents describing the program in detail, is www.microsoft.com/licensing/licensing-options/spla-program.aspx#tab=1.

The Microsoft strategy for online services is described in "Software Plus Services Strategy Update" on page 23 of the May 2008 Update.

The development of Microsoft Online Services is covered in "Partners Get Commissions on Microsoft-Hosted Services" on page 7 of the Aug. 2008 Update and "Online Business Services Aim at Broad Market" on page 13 of the Apr. 2008 Update.