This  report is part of a larger series of Directions on Microsoft Licensing Outlines and should be used in connection with the Directions on Microsoft Enterprise Software Roadmap.

The shift from perpetual licenses that require a one-time payment to subscription licenses that require an annual payment is a major goal for Microsoft because of the ongoing (and often larger) revenue that they generate. Like most services, Microsoft Online Services are purchased as annual subscriptions that license services, users of those services, and sometimes devices that use services. Microsoft offers discounts for customers who use both online services and more traditional on-premise server software and devices, but in most cases users are likely to use one or the other, not both.

Online Services for Business Users

Microsoft offers online services for consumers (such as Hotmail), developers (such as the Windows Azure platform), server management and security (such as Forefront), and business users (such as Exchange Online). This article focuses on the last category of services, sold as Microsoft Online Services, which today includes hosted versions of the following servers:

• Communications Online Standard (US$2.50 a month) provides instant messaging and user presence in concert with the Outlook Communicator desktop client (licensed separately)
• Exchange Online Standard (US$10 a month) provides e-mail, contacts, tasks, and antivirus and antispam services, accessed with the Outlook e-mail client (licensed separately), with mailboxes up to 5GB
• Exchange Online for Deskless Workers (US$2 a month) offers mailboxes up to 500K and is accessed by a browser
• Live Meeting Standard (US$4.50 a month) is for online interactive multiparty conferences with up to 250 participants (all of whom must be licensed for Live Meeting)
• SharePoint Online (US$7.25 a month) provides document storage, indexing, and collaboration services, allowing 250MB of storage per user
• SharePoint Online for Deskless Workers (US$2 a month) provides access to Windows SharePoint Services, a subset of SharePoint capabilities, focusing primarily on document libraries.

Most of these services will be familiar to customers who use traditional on-premise servers and licensing. (Although its name is different, Live Meeting's conferencing service resembles one built into the on-premise version of Communications Server, the platform for Communications Online.)

All of these services are available individually or in one of two suites:

• The Business Productivity Suite (BPOS) covers all of the Microsoft Online servers (including the less costly "Standard" version of Live Meeting) for US$15 a month, a 38% discount off the price of the products purchased separately
• The Deskless Worker Suite offers browser-based access to Exchange e-mail and to Windows SharePoint Services (WSS), a subset of the full SharePoint Server product, for only US$3 a month; separate (unbundled) Deskless Worker subscriptions for Exchange and WSS are available for US$2 a month.

Two Levels of Services

Two levels of Microsoft Online Services are available, Standard and Dedicated. As the Dedicated label suggests, that service is hosted on server hardware that is dedicated to a particular customer. The Standard service, in contrast, is hosted on shared (multitenant) servers that each may serve many different companies. However, the feature differences are deeper than just the server hosting architecture.

Standard Online

The Standard services offer basic features that will serve a large part of the user population, but they do not offer the same range of features offered by comparable on-premise servers. For example, Communications Online provides instant messaging and presence features, in concert with Communicator software running on the user's desktop, but not private branch exchange telephone system integration or multipoint Voice over Internet Protocol, which are available with the on-premise server.

The Standard services also use HTTP for communicating with users, and while this protocol is flexible and ubiquitous it does not by default support more advanced synchronization and communication between clients and servers.

For customers who want to have some users online and others on-premise, Microsoft provides some basic synchronization tools. A directory synchronization tool provides one-way synchronization of Active Directory users and Exchange addresses from an on-premise server to online services. Another tool can migrate e-mail from an on-premise server to an online server.

A "single sign-on" client application will let users sign on once to both their on-premise network and the online services.

Standard services are licensed with User Subscription Licenses (USLs), assigned to each user of the service. Each user requires his own USL, although USLs can be reassigned from one user to another.

Add-on licenses are available to increase storage volume. While customers get 5GB of storage for each Exchange user, individual mailboxes can be given up to 25GB of storage while others are restricted to less than 5GB, to stay within the customer's total allowance. If more is needed, customers can purchase Exchange Online Standard Extra Storage in 1GB increments for US$2.50 a month. Similarly, while users get 250MB of storage for SharePoint documents, customers can purchase SharePoint Online Standard Extra Storage in 1GB increments for US$2.50 a month.

Dedicated Online

The Dedicated services use dedicated servers and provide more advanced features. They employ virtual private networks to connect the customer's internal network with Microsoft's online services, to deliver better connectivity; Active Directory federation and synchronization; and support for a broader set of clients. For example, while the Exchange Standard service required Outlook 2007 until July 2009, the dedicated version has supported Office 2003 since its inception. No client application is required for users to sign on to Dedicated services.

Dedicated services employ two tiers of license. A Service Subscription License (SSL) covers the first 5,000 user accounts, and the customer pays the Standard service USL price for additional users. The cost of the first 5,000 Dedicated accounts is more than twice the cost of Standard USLs for 5,000 users; the extra cost pays for dedicated hardware and more advanced services and customization. But as large customers put more users on the service, their cost per user begins to approach that of the Standard level of service.

Exact pricing for Dedicated services is not public. Customers have more options to customize the services to suit their requirements and will typically have a customized contract with Microsoft whose price will reflect the specific services that they want.

USL and CAL Relationships

USLs are the online counterpart to Client Access Licenses (CALs), which are required for users or devices that connect to many on-premise Microsoft server products, such as Exchange and SharePoint. (Some Microsoft servers are licensed per processor and do not require CALs.) Customers with Enterprise Agreements (EAs), for example, may license the Core CAL Suite—which contains CALs for Windows, Exchange, and SharePoint servers, as well as a management license for Configuration Manager—for every PC or user in their company.

USLs offer a superset of CAL rights—they can be used to license access to both online and on-premise servers, while CALs license access only to on-premise servers. Consequently, Microsoft offers some concessions to customers who already have CALs but who want to purchase USLs. But customers who see online services as a way to reduce their costs need to plan carefully to avoid actually paying more.

USL Discounts

USLs are significantly more expensive than CALs. For example, a customer who buys CALs for an on-premise Exchange Server pays about US$40 a year per user, at most, while an Exchange Online USL costs at least US$90 (and up to US$120) a year, depending on volume discounts.

Customers can get a discount on USLs if they have purchased Software Assurance (SA, which confers upgrade rights and other benefits) for their CALs. Purchasers must always buy SA for suites of CALs, such as the Core CAL Suite or the Enterprise CAL Suite, but when purchasing CALs outside of a suite in the Open or Select volume licensing programs, SA is optional.

SA costs 25% of the CAL price per year. A customer that has purchased SA on CALs and decides to use online services, which use USLs, can purchase discounted Step-Up USLs. The price of these USLs is discounted by the amount that the customers pays for SA on their CALs. However, they get no credit for the actual CAL licenses.

For example, an Exchange Standard CAL costs US$68 under some licensing programs. SA on that CAL would cost a customer an additional US$17 a year. If that customer wants to use Exchange Online, it can buy an Exchange Online Step-Up USL at a discount of US$17 less per year off the regular price.

Step-Up licenses are associated with users, and users for whom Step-Up licenses are purchased must also be assigned CALs (which can create difficulties, since CALs in many EAs are assigned to devices rather than users). USLs can be reassigned to other users (if one employee leaves and another takes her place, for example), but the new user of a Step-Up USL must also have been assigned the appropriate CAL (with SA) as well. If they do not also have a CAL with SA, they are not eligible for the Step-Up USL price.

Doubling Up

In general, getting the Step-Up price should not be a problem for customers who have EAs through which they have purchased a CAL suite, since CAL suites must always be purchased with SA, and an EA provides companywide licensing for common products (Windows, Office, and a CAL suite).

However, this can lead to double payment—purchasing both USLs and CALs for some of their users even though users with USLs do not also need CALs.

Currently, there is no mechanism in place to allow customers to mix USLs and CALs in an EA. For example, a customer with 1,000 employees cannot purchase 500 Core CAL Suites and 500 BPOS subscriptions through an EA. This is not a major problem for customers with existing or renewal EAs, who have been using the on-premise servers companywide, for which they required CALs for everyone. They will get full credit for their SA payments on existing CALs when they purchase USLs.

However, in two cases customers will pay extra. The two following examples assume a 1,000-employee company that wants to purchase the Core CAL Suite for 500 employees who will access on-premise servers, and 500 BPOS USLs for employees who will access Microsoft Online Services. This hypothetical customer also plans to assign all new employees to use BPOS.

Purchasing a new EA with the Core CAL Suite. When a customer orders the Core CAL Suite in a new EA, the customer must purchase Core CAL licenses for all 1,000 employees, since the Core CAL is available only for companywide purchase in an EA. The customer will also purchase 500 BPOS USLs. The Core CAL Suite licenses cost about US$190 each, or US$190,000 for all 1,000 employees. In addition, the company must pay another 25% of that cost, or US$47,500, each year for SA on those licenses. It will recover the SA payment on 500 of those licenses in the form of the Step-Up discount on the BPOS USLs assigned to 500 users, but it will not recover the cost of the 500 CAL Suite licenses themselves (worth US$95,000) that are assigned to employees who have BPOS USLs and do not need CALs.

True-ups. When the customer adds PCs or users, it will be billed on the next anniversary of its EA for the licenses and SA for the additional employees, a process known as "true-up." Even if the customer assigns new employees to use online services only, it will still be required to purchase and assign Core CAL Suite licenses to those employees, thus spending US$190 on each employee for licenses that those employees do not need.

Microsoft says a software platform (called Laminar) that it is building for its licensing operations will eventually make it possible to permit customers to purchase BPOS and CAL Suite licenses separately in an EA.

In the meantime, customers who anticipate using BPOS for a significant portion of their users may want to be careful when purchasing a new EA, to avoid paying for CAL suite licenses that their online users do not need.

By not including a CAL suite in their EA, they can purchase USLs, but not CALs, for users who need only the former license, and can purchase CAL suites (or individual CALs) for users who require access only to on-premise servers. They would make the CAL purchases through a volume licensing agreement such as Select or Open, and the BPOS licenses through a separate online services agreement.

Because USLs are an annual subscription license and CALs are perpetual licenses (although customers often add an annual SA subscription to CALs), a customer that purchases only USLs could lose the right to access an equivalent on-premise server if it cancels its Microsoft Online subscription. For example, a customer that purchases Exchange Online USLs does not also need to purchase Exchange CALs in order to use an on-premise Exchange server. But if it discontinues a subscription to Exchange Online, it must then purchase Exchange CALs to access the on-premise server.

Few customers are likely to use both on-premise and online services for the same users. Aside from technical issues, such as the fact that online and on-premise Exchange mailboxes may not be synchronized and customization of online SharePoint systems is limited, customers may want to reduce or eliminate their investment in on-premise systems in order to realize the most significant savings offered by online services—the reduction in server hardware and management costs.

(For a list of scenarios that minimize license duplication and overlap, see the sidebar "Online Services Business Scenarios".)

Client and Server Licensing

Like CALs, USLs do not include any client software that customers will need to use Online services, such as Excel, PowerPoint, and Word to create documents for SharePoint Online; Outlook to access Exchange-based e-mail; and Communicator to use Communications Online.

They differ, however, when it comes to licensing the server products, such as Exchange Server or SharePoint Server. Customers who use these products on their own premises must acquire a server license for each server instance in addition to CALs for each user or client device. In contrast, the cost of the servers that Microsoft hosts for online users is built into the price of USLs.

Online Agreements

Customers may purchase the Standard tier of Microsoft Online Services (with a minimum of five licenses) either through a Microsoft Online Services Program (MOSP) or through an EA.

While all Microsoft Online Services can be subscribed to through the MOSP, Step-Up BPOS and Deskless Worker USLs are only available as part of an EA. Customers must have purchased the Core CAL Suite or Enterprise CAL Suite for all of their users or devices, and they can then purchase BPOS Step-Up licenses for each user or device. Although EAs typically require customers to purchase platform products (such as the Core CAL Suite) for every user or device in their organization, BPOS is sold as an additional product, which means customers are not required to purchase BPOS USLs for every user or device.

Customers without an EA, and EA customers who want to purchase Standard USLs separately rather than through the BPOS bundle of USLs, must purchase them through the MOSP.

MOSP customers can get discounts for large purchases of USLs, and the discounts follow the EA volume licensing discount schedule, although they are based on the number of users rather than the number of computers (which is how most EAs are structured). Better discounts kick in at 250, 2,400, 6,000, and 15,000 users. For example, a USL for Exchange Online costs US$10 a month per user for up to 249 users, but only US$7.60 a month per user for a customer with 15,000 or more users. These discounts are not as aggressive as those offered for comparable products in an EA, where customers with 15,000 or more users can expect discounts of about 50%. However, the US$15 price of the BPOS, which discounts the prices of its component USLs by 38%, does offer a substantial further discount for those who buy the suite, even through the MOSP.

A MOSP agreement has a fixed 12-month term, and by default is automatically renewed at the end of that term. If customers want to cancel their subscription, they have 30 days to do so in the initial year of their subscription, after which they are liable for the full year's payment. After the first year, they can cancel their subscription with 30 days' notice.

Customers can add users during the term of a subscription, and these additional subscriptions will expire when the customer's subscription expires. Customers can also have multiple subscriptions running simultaneously, but with different expiry dates. By default, subscriptions are automatically renewed, although customers can specify manual renewals.

Sales Channels

Microsoft Online Services are sold either directly to customers or through partners; prices are the same in either case.

While most conventional Microsoft licenses are sold through special reseller partners, online services can be sold by a broad range of Microsoft partners and can supplement the revenue of a partner who hitherto has gained little or no revenue from selling Microsoft software. (Outside of resellers and the Dynamics line, partners generally get no rebates or commissions on Microsoft software; most of their Microsoft revenue comes from providing related services to their customers, such as planning, deployment, customization, or management of Microsoft software.)

Partners who resell Microsoft Online Services get 12% of the first year's subscription revenue, plus 6% of the monthly billings as long as the subscription continues. Partners are also often involved in providing additional services, such as migrating mailboxes and data from on-premise Exchange and SharePoint servers or administering a customer's account from an online services portal.

Better Integration Coming

The technical limits and licensing overlaps between on-premise and Microsoft-hosted services are likely to change over time, as Microsoft refines its online services and integrates them better with on-premise systems. Exchange 2010, for example, has several new features, such as better replication and Active Directory federation, that could aid integration of online and on-premise servers.

The licensing issues may prove more complicated, because the cost structure of Microsoft's online services reflects the company's desktop-centric business model. To protect its desktop revenue stream, particularly from Windows and Office, Microsoft Online focuses only on servers. Thus, to create and edit documents, business customers will generally require Office applications, like Word and Excel. In contrast, Microsoft's "software as a service" competitors, such as Google and Zimbra, also offer browser-based document creation, editing, and management, negating the need for powerful (and expensive) desktop client software. Customers with low-powered netbooks or even Linux can work with those systems as easily as Windows clients can.

Office 2010 will offer additional online capabilities, and the Deskless Worker products offer browser-based access to Exchange and SharePoint services, but as long as Microsoft derives most of its revenue from desktop software, it will likely focus on online services models that continue to require licensing of on-premise and client software as well.

Customers who want to explore hosted services may also want to review the offerings from third-party service providers who offer the same (and sometimes more capable) services as those available from Microsoft Online Services. Pricing of these products may be higher, but they do not draw a sharp line between low-level Standard services and higher-level Dedicated services and may offer more advanced services, such as advanced BlackBerry support, to small customers.

Resources

Microsoft Online Services are described at www.microsoft.com/online/products.mspx.

The Microsoft Online Services Team blog is an important source of information about service changes, limitations, and features, at blogs.technet.com/msonline/default.aspx.

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.

Exchange and SharePoint Online are described in detail in "Exchange, SharePoint Services Ready" on page 8 of the Jan. 2009 Update; Communications Server and new areas in which the services are available are described in "Online Services Add IM, Markets" on page 14 of the June 2009 Update.

The online capabilities and associated licensing implications for Office 2010 are described in "Office 2010 Technical Preview".