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Azure infrastructure and platform hosted service license terms

Microsoft hints on its pricing and licensing plans for its business Copilot AI technology
Customers should look to what Microsoft is doing with packaging and licensing its GitHub Copilot technology when planning ahead for other Microsoft business Copilot features.
A mockup of what Microsoft 365 Copilot looks like across the Office apps

Microsoft has used the first several months of this year to blast its AI messaging on the business and consumer fronts. While its Bing chatbot and Microsoft Designer consumer Copilot AI assistants are in public preview — and even shipping commercially in the case of its developer-focused GitHub Copilot — its other business-focused Copilots are in private preview with a small set of customers. Microsoft officials have continued to decline to talk about plans for public previews, pricing, and licensing for Microsoft 365 Copilot and Dynamics 365 Copilot.

But during the company's Q3 FY'23 analyst call on April 25, Microsoft executives dropped a few hints about the company's thinking about pricing and licensing for its Microsoft 365, Dynamics 365, Viva and Security Copilot capabilities. And just because Directions on Microsofthas been asked this several times already: These Copilot capabilities definitely are not going to be free. They will be priced as add-ons on top of existing subscriptions like Microsoft 365 E3 and/E5.

"When we believe we’re adding a lot of value, and frankly, that’s what the Copilots are doing and some productivity improvement, you can expect that we will have a list price for those," said Microsoft Chief Financial Officer Amy Hood in response to a Wall Street analyst's question during yesterday's call.

CEO Satya Nadella added that the model Microsoft is using with GitHub Copilot is a good indicator of where the company will likely go with its other business-focused Copilot capabilities. (Nadella did not say if Microsoft would match the GitHub Copilot pricing exactly, however.)

Nadella told analysts:

"The Copilot that’s priced, and it is there, is GitHub Copilot. That’s a good example of incrementally how we monetize the price lists out there, and others are to be priced, because we are in preview mode. But you can expect us to do what we’ve done with GitHub Copilot pretty much across the board."

Microsoft sells GitHub Copilot, its developer-focused AI pair-programming technology, for US$10 per user per month (or US$100 per user per year) for individuals. GitHub Copilot plugs directly into developer's’ editors. And GitHub Copilot for Business is US$19 per user per month. For that price, developers get everything in Copilot for Individuals, plus license management, organization-wide policy management, privacy capabilities, and VPN support.

Nadella said yesterday that Microsoft has had more than 10,000 organizations "sign up" for GitHub Copilot for Business since it became broadly available close to three months ago. Microsoft has announced it will be adding more Copilot AI assistant capabilities to GitHub Copilot via its GitHub Copilot X initiative, which is now in technical preview.

Microsoft has demonstrated publicly via various demos how Copilot could improve customers' experiences with everything from security analysis to PowerPoint deck creation. Microsoft officials have insisted that Copilot is more than just OpenAI’s ChatGPT embedded into Microsoft 365. The official description of the Microsoft 365 Copilot "System": "It’s a sophisticated processing and orchestration engine working behind the scenes to combine the power of large language models (LLMs), including GPT-4, with the Microsoft 365 apps and your business data in the Microsoft Graph — now accessible to everyone through natural language."

Unsurprisingly, Microsoft focused heavily on its AI investments during its Q3 earnings announcement. Officials said the company has more than 2,500 customers for its Azure OpenAI service, which builds on top of its customer OpenAI's GPT-3/4 technology. In March 2023, Microsoft execs said they had more than 1,000 customers using Azure OpenAI. While Azure growth continues to slow, as Microsoft had warned it would, Azure and "other" cloud services grew 27 percent compared to the year-ago quarter. (One year ago, that Azure growth number was 46 percent.)

Microsoft officials didn't say on the call when the company will release its business-focused AI Copilots in public preview or commercially. Recently, officials said to expect the Viva Copilot capabilities to ship later this year. And a closer look at the Dynamics 365 release plan roadmap notes that several of the announced Dynamics Copilot capabilities have begun moving into public preview and are slated to ship this summer. The near-term delivery date for the Dynamics 365 Copilot features could be due to them being more of a rebranding of announced and in-preview features with the Copilot name, as Directions has noted.

Microsoft Azure is a teen now. Will an AI infusion lead to a further growth spurt?
Azure has come a long way since it launched as a Platform-as-a-Service (PaaS) service in 2010. And the way it evolves going forward could impact Microsoft customers in key ways.
A blue sky with clouds and skyscrapers

It was 13 years ago this week that Microsoft "turned on" its Azure public cloud service by making it generally available. Even though Microsoft was four years behind AWS in getting into the market, it did a lot to catch up fast. Now, all eyes are on how Microsoft plans to try to continue to grow Azure and differentiate itself from the competition—and how those moves could affect its customers.

Since its start as codename "Red Dog," Azure encountered more than a few speed bumps. Microsoft launched Windows Azure, as it was known originally, as a PaaS play only. Later, Microsoft officials saw the money and customer demand was in the Infrastructure-as-a-Service (IaaS) space. Customers wanted a quick way to get into the cloud without having to rewrite their apps and IaaS looked like the best option.

Two years after Azure's launch, Microsoft shifted gears and enabled support for Linux on Azure. The course correction worked and by 2018, "about half" of Azure VMs were running Linux, not Windows Server, officials said. (Microsoft hasn't provided publicly an updated number beyond that, as far as I know.)

Microsoft originally was expecting Azure to host its own internal services, like Bing and Hotmail (much the same way that Amazon originally looked at AWS as a way to run its retail operations). Microsoft still hasn't managed to get Exchange, SharePoint or Bing completely rehosted on Azure, but it has launched its newer services, like Teams and Xbox Cloud Gaming, on Azure. And like AWS, Microsoft subsequently made available excess compute and storage to other software vendors, customers and partners while growing its set of commercially available Azure services.

"What’s amazing to me is that Microsoft has pretty much caught up technically with AWS to the extent that you can think of most cloud services as commodities, which is quite an achievement," says Directions on Microsoft analyst Barry Briggs. "Core and PaaS services are pretty much equivalent and mature."

So what's coming in the next 13-plus years for Azure, especially given its growth is slowing, as officials admitted during the company's most recent earnings call? Right now, Microsoft seems to be putting a lot of focus on AI as a potential differentiator. It recently made generally available the Azure OpenAI service, which adds enterprise capabilities like compliance, security and management on top of OpenAI's models (which are trained on Azure). And Azure OpenAI is set to get a ChatGPT natural-language chat bot addition, possibly before February is over.

But AI isn't the only place Microsoft is likely to try to gain mind and market share with Azure.

"I think MS now differentiates by leveraging Microsoft 365 integration, its integration with on-premises (where it's way, way ahead), and its move into verticals. AWS differentiates by virtue of scale and its investments in custom hardware (Annapurna acquisition which led to Graviton, Nitro, and Inferentia)," says Directions' Briggs.

Directions on Microsoft analyst Rob Helm agrees: "As for what will allow Azure to catch up with Amazon: It may come down to what worked for Office and many other Microsoft products: Licensing, especially bundling into enterprise-wide licensing contracts."

How Microsoft is thinking about Industry Clouds (and acquisitions)
Microsoft increasingly is going vertical when it comes to selling its cloud services. Here's a bit of the why.
A doctor looking at her computer screen

Microsoft execs make occasional appearances at various banking-industry tech conferences. And sometimes these appearances include some interesting insights into the company's thinking on a variety of topics.

Dave O'Hara, who is the Chief Financial Officer for Microsoft's Commercial business, all-up, was the Microsoft guest at the Deutsche Bank Technology Conference a few months ago. When asked about Industry Clouds (members)—Microsoft's growing family of (mostly) vertically focused cloud bundles for the financial, healthcare, retail, manufacturing, non-profit, and "sovereign"/government markets—O'Hara said Microsoft execs think of these as vehicles for "onboarding to Azure." He acknowledged while these clouds are industry-specific, they aren't "super deep," functionality-wise.

"It's really just industry, some industry functionality runs on Azure and gets people onboarded under our cloud," he said. Microsoft's goal is to leave plenty of headroom for partners to build on top of these clouds, he added.

O'Hara told conference attendees that he spent a lot of time on thinking about Microsoft's $19.7 billion Nuance Communications acquisition, both before and after it happened. He said Nuance is both an app and a platform, in that even though it can be embedded in other apps and services, it also provides an industry-specific base layer that partners and ISVs easily can build on top of.

"Would we do more stuff like Nuance? I think to the degree that we can have something platformy that works with the ISV community and provides differentiation that they want, yeah, absolutely," he added.

"I think before, historically we might have done a lot of product acquisitions, a lot of tuck-ins, and we still do some of those, but now I think we'll probably be just looking for stuff that's differentiated, strategic and impactful. We're buying fewer companies, maybe slightly larger, but they need to fit culturally and they need to fit strategically. And they probably are going to be adjacent to something we're already doing, because I just don't think we're going to run that far off field," O'Hara said.

Microsoft increasingly is focusing on verticals when it comes to marketing and selling Azure, Microsoft 365, Dynamics 365 and its Power Platform wares. Just recently, the company moved Corporate Vice President Alysa Taylor from her previous role, in which she oversaw marketing for the Business Applications (Dynamics) side of the Microsoft house to Azure + Industry.

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