- The ability to run disconnected from Azure cloud is nearing general availability, with support for air-gapped deployments to follow.
- A new release supports Exchange Server, SharePoint Server, and Skype for Business Server, but only for partner-managed deployments.
- Microsoft is using a carrot-and-stick approach: adding features but also making Azure Local the only option for on-premises Azure Kubernetes Service.
- Azure Local is still focused on new ways to run old software instead of bringing net new Azure capabilities to on-premises environments.
Azure Local (formerly known as Azure Stack HCI) is Microsoft’s primary server host OS for on-premises virtualization and software-defined storage, offered only with subscription-based pricing for deployment on Microsoft-certified hardware. Since rebranding Azure Local, Microsoft has indicated it has broader ambitions to make Azure Local the preferred way of deploying and managing all on-premises infrastructure and hinting that it may eventually replace Windows Server. For Microsoft, replacing Windows Sever with Azure Local would help fulfill a long-term goal of moving customers from perpetually licensed software to subscription-based software.
Upcoming releases address some long-standing adoption blockers, most notably that of requiring a constant connection to an Azure cloud region. However, Azure Local is still more complex to deploy than Windows Server, and the latest announcements are limited to new ways of running old software instead of enabling new use cases or new capabilities. But they do at least hint at Microsoft finally finding a unique value proposition for Azure Local.
Fixing Adoption Blockers
One of the biggest Azure Local adoption blockers has been that even though it is intended for managing on-premises infrastructure, Azure Local has required an ongoing connection to an Azure cloud region—for billing purposes if no other reason. In late 2024, Microsoft announced “disconnected operations”—the ability for Azure Local to perform certain operations, such as starting or stopping a VM while being temporarily disconnected from Azure cloud. (At a minimum, Azure Local must still connect once every 30 days.) The capability has been in preview throughout 2025, and Microsoft has recently announced that it will become generally available in early 2026. In addition, Microsoft announced its intention to expand support to include air-gapped environments, enabling Azure Local to manage on-premises infrastructure that is permanently disconnected from the cloud. The latest release also includes more hardware support, including support for external storage area networks (SANs) and the latest NVIDIA GPUs.
However, significant restrictions remain compared to traditional Windows Server deployments:
Disconnected operations significantly increase the resource requirements for Azure Local because the customer is now responsible for hosting the entire control plane instead of relying on Microsoft’s cloud infrastructure.
Customers must provide what Microsoft calls a “validated business need” before being allowed to use disconnected operations. Microsoft does not specify what exactly constitutes a validated business need, nor whether this is a temporary restriction due to product complexity or a business decision intended to discourage customers from running without a connection to the cloud. A cloud connection makes it easier for Microsoft to ensure customers are billed for all the infrastructure they operate.
Customers must update frequently to maintain support, and Azure Local is particularly complex to deploy and upgrade. Although Azure Local previously followed an annual release cadence for OS and feature updates, it now follows what Microsoft calls a “monthly release train.” When combined with a requirement that customers can be no more than six months behind the current release, adopting Azure Local means signing up for regular ongoing maintenance tasks, much more so than if customers were running Windows Server.
Microsoft 365 Local: New Way of Running Old Apps
Until recently, Azure Local use cases were limited to hosting VMs, SQL Server, Azure Virtual Desktop (AVD), and Azure Kubernetes Service (AKS). But that is expanding significantly with the addition of support for Exchange Server SE, SharePoint Server SE, and Skype for Business Server SE, a capability Microsoft calls Microsoft 365 Local.
It is important to note that although the Microsoft 365 naming implies a relationship to Microsoft’s cloud services, these are in fact the existing on-premises versions and not the online hosted versions. In other words, customers are getting the features of Exchange Server and not Exchange Online, with the same applying to SharePoint Server and Skype for Business.
In addition, Microsoft 365 Local requires specifically certified hardware and must be deployed by a certified partner. This is even more restrictive than Azure Local, which also requires Microsoft-certified hardware but allows customers to deploy their own systems. The reason for requiring a partner is unclear. But each of the three products in Microsoft 365 Local can be tricky to install and configure even without the additional complexity of Azure Local, so Microsoft may be attempting to manage its support burden by placing a partner on the front line of dealing with customer issues.
The primary benefit of running these services under Azure Local, instead of Windows Server, is that organizations can manage the underlying on-premises infrastructure using the same tools that are used to manage their Azure cloud infrastructure. The value of all of this will depend on how comfortable IT organizations are managing multiple environments and whether the savings in operational complexity offsets the costs of new certified hardware, migration, and ongoing maintenance.
Carrots and Sticks
In addition to the usual approach of enticing customers with new features, Microsoft is forcing customers to move to Azure Local by dropping or excluding Windows Server support from some of its existing products.
AKS on Azure Local. In Mar. 2026, AKS will no longer be supported on Windows Server 2019 and 2022, and it will never be available for Windows Server 2025 at all, making Azure Local the only option for on-premises deployments. Customers without existing Azure Local installations and using AKS on-premises have roughly three months to develop a plan for deploying Azure Local or investigate alternate Kubernetes-hosting services. Several vendors, including Red Hat, offer Kubernetes hosting services that support Windows.
AVD on Azure Local. Although the control plane for AVD is hosted in Azure, AVD on Azure Local allows customers to run their session host VMs on Azure Local. There is no indication that Microsoft will offer this capability for Windows Server, even if the server is enrolled in Azure Arc. Meanwhile, the Remote Desktop Services (RDS) roles in Windows Sever continue to stagnate, and RDS is not receiving capabilities like media optimization that come with AVD. All of this makes Windows Server less viable for hosting virtual desktop and pushes AVD customers to either Azure or Azure Local.
What remains unsaid, however, is how far Microsoft will take its carrot-and-stick approach. Exchange Server and SharePoint now support both Windows Server and Azure Local. If Microsoft is serious about pushing customers away from Windows Server and toward Azure Local, either of those could eventually follow AKS and AVD in making the jump to Azure Local as the only supported option.
Still Searching for a Unique Value Prop
The latest releases highlight the fundamental conundrum of Azure Local. Although the product is getting more capable, these new capabilities are almost entirely focused on giving customers new ways of running old software instead of delivering net new capabilities or new solutions. The only benefit from running existing services under Azure Local instead of Windows Server is the potential operational efficiencies that come from a unified management console. End users will see no difference.
What most customers want, and what the name Azure Local implies, is the ability to bring to on-premises environments new capabilities or capabilities previously available only in the public cloud, neither of which appear to be imminent. In Microsoft’s defense, that is much easier said than done. Taking software designed to run at the scale of an Azure datacenter (or AWS or Google, for that matter) and shrinking it down to run on a typical corporate environment, while preserving the unique capabilities that make the cloud special, is a tall order.
With the introduction of air-gapped deployments, Microsoft is leaning into digital sovereignty and making Azure Local the lynchpin for its Sovereign Private Cloud offering, with bidirectional migrations of workloads touted as a key benefit. The idea is that a workload could start out on the public cloud, but if a customer becomes concerned about geopolitical or legal jurisdictional risks, they could migrate the workload to an air-gapped on-premises environment.
How well this will work in practice is an open question. Disconnected operations will only become generally available in early 2026 with air-gap support to follow, and seamless migrations between the cloud and on-premises have been a siren song for generations of IT vendors, with the lived reality often lagging the marketing material.
But at least Azure Local may now have a reason to exist, other than moving on-premises customers from perpetual licenses to subscriptions.
Directions Recommends
For customers concerned about digital sovereignty, watch Azure Local. Although it is not yet a complete offering, the direction of travel makes it clear that it is Microsoft’s preferred solution.
For existing Azure Local customers, consider Microsoft 365 Local if the idea of a unified management console is appealing enough to outweigh the need for new certified hardware along with partners to manage the process.
For AKS users, get comfortable with Azure Local or find another Kubernetes runtime because Azure Local is now the only supported option.
Resources
Disconnected operations are described in the Directions report “Azure Local: New Name, Same Limitations.”
Detailed information on the retirement of AKS on Windows Server is at “Announcing the retirement of AKS enabled by Azure Arc on Windows Server” (Microsoft).
To get more information on Microsoft 365 Local, customers should either contact their Microsoft account team or use the provided sign-up form (Microsoft).
Detailed information on AVD, including alternatives, is available in the Directions Roadmap for Azure Virtual Desktop.