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Optomizing Microsoft site liscening basics

September 10, 2008

Microsoft’s licensing programs are complex and come with a variety of options, restrictions, and conditions. This note will help familiarize managers with licensing terminology, reduce complexity, outline the different options available, and highlight key differences crucial to making the right licensing decisions. Enterprises that take the time to learn licensing basics will be in a better position to optimize license purchases and reduce software spend.

Software licenses are one of the largest expense items in a typical IT budget, and, if improperly managed, can create significant legal and cost exposure. With this in mind, it is essential that IT decision-makers optimize software licenses to minimize cost, simplify management, and achieve licensing compliance. The first step in this process is to understand the basics of how Microsoft licensing works.
For most IT decision-makers, Microsoft licensing is opaque, poorly understood, and sub-optimized. In fact, the majority of companies are not realizing maximum value from Microsoft licensing programs. This research note aims to:
» Reduce complexity and help managers become familiar with the different Microsoft licensing programs and terminology.
» Introduce managers to Software Assurance (SA), Microsoft software maintenance and upgrade programs.
» Provide a high-level comparison of agreement types and some sample pricing information.
While the majority of information is universally applicable, this report has been compiled primarily for corporate entities in North America.

Technology Point

The average enterprise spends over $300 per desktop per year in Microsoft licensing, as well as thousands of dollars in server spending. Even for mid-sized enterprises this means hundreds of thousands of dollars worth of investment over the term of a single licensing contract. This is no trivial sum. Understanding Microsoft licensing and developing a licensing strategy can help IT decision makers save money and improve migration planning.

What It Is & How It Works

To start with, let’s look at the three ways in which enterprises can license Microsoft products:
» Option 1: Shrink-wrapped. Purchase a Full Packaged Product (FPP) that is boxed, shrink-wrapped, and sold through a variety of retail channels.
» Option 2: OEM Channel. Obtain an end-user license agreement for pre-installed software during a hardware purchase through an Original Equipment Manufacturer (OEM). According to Microsoft’s 2006 annual report, the OEM channel accounts for 80% of total revenue for the Windows client operating system (OS).
» Option 3: Volume Licensing. Sign a Volume Licensing Agreement with Microsoft and receive discounts for various levels of commitment.
While Options 1 and 2 can provide a certain amount of flexibility in terms of procurement, they tend to be more suitable for individual consumers and are not cost-effective methods of licensing.
Certainly, no enterprise of any size should be considering Option 1, shrink-wrapped software as a procurement strategy. However, the reality is, shrink-wrapped software does occasionally make its way into the enterprise as non-IT managers approve one-off purchases to meet immediate needs. This is dangerous, not only in terms of driving up costs, but also in terms of license management and rogue software installs.
Option 2, OEM licensing is occasionally a viable strategy for acquiring client OS licenses. Increasingly, ServiceXen is seeing this as a preferred method for Windows Vista due to the significant hardware requirements of the new OS. While purchasing Vista pre-installed on new PCs can be cost-effective, it does come with certain limitations. Specifically, the license for the OS will be tied to the hardware and cannot be transferred to another PC. Two ways around this are: 1) to pay extra to have OEM-licensed copies of Vista covered by Microsoft’s software maintenance program (discussed below), or 2) to sign a Volume Licensing Agreement.

Option 3, Volume Licensing, is by far the preferred method for organizations to license their Microsoft software. Volume Licensing prices for various Microsoft products decline to 60% of the Manufacturer’s Suggested Retail

Price (MSRP) for mid and large-sized enterprises. Most companies, even small shops with as few as five PCs will qualify for at least some portion of these incremental savings.

Volume Licensing at Microsoft

Microsoft has several different Volume Licensing programs to choose from, each with its own costs and benefits. Some benefits are standard and available regardless of the type of volume license. These include:

» Perpetual use rights. Once the software license has been fully paid for, companies may continue to use the software in perpetuity. The only exceptions to this rule are those licenses that are explicitly labeled as subscription-based (which operate under a lease-like model).

» Volume discount and pricing. Licenses purchased under a Volume Licensing program provide significant savings when compared to the MSRP. This saving is usually 10% to 30% for smaller volume contracts, but can be as high as 50% or more for very large enterprise-level agreements. For a more detailed comparison of how volume license pricing compares to MSRP prices, use the Microsoft Product License Advisor, an excellent online resource that provides decision makers with pricing information under different scenarios (most countries). Discounts are also available via separate agreements for education, charity, and government organizations. Ask the enterprise’s Microsoft sales representative for details.

» Reassignment rights. Customers may reassign a license and the SA benefits from one computer to another, as long as it is not on a “short term basis.” One notable exception is Windows Vista, for which licenses may not be reassigned to another device. A hardware partition or blade is considered to be a separate device.

» Re-imaging rights. Volume licensing programs offer customers a single serial number via a volume license key for each product to be used across the organization. Retail copies, on the other hand, all have separate serial numbers that can only be used once, and need to be activated upon installation. Using the single serial number, re-imaging allows customers to copy software onto multiple devices from one standard image using Volume Licensing media. All Volume License customers may use re-imaging deployment tools. However, a license must exist for each copy being made (i.e. either through the volume license agreement, or via OEM or FPP licensing), and the re-imaged copy and the licensed copy must be identical.
For specific rules governing re-imaging rights, read the Microsoft brief “Re-imaging Licensed Microsoft Software Using Volume Licensing Media.” Of particular note is the fact that software re-imaged from Volume Licensing media, but licensed through an OEM version may not be eligible for Microsoft support or warranty coverage. FPP licenses are still eligible for support, even if customers re-image.

» Access to “Enterprise” products. Certain product editions are only available through Volume Licensing. For example, Microsoft Office 2007 Enterprise and Professional Plus as well as Windows Vista Enterprise Edition are only available via Volume Licensing. For more on what Office editions are available through which channels, visit the Microsoft page on “How to buy the 2007 Microsoft Office suites.”

» Downgrade rights. The right to use prior versions of Microsoft software. These rights are granted with all
Volume License agreements (application, system, and server software). For specific rules and regulations
pertaining to downgrade rights (including those for OEM and FPP products), read the related Microsoft
licensing brief.

» Asset management. Microsoft offers its Volume License customers access to certain free software/license management tools, including eOpen and Microsoft Volume Licensing Services (MVLS).
– eOpen: Since 2000, Microsoft has stopped selling physical licenses. Users can now view their licensing information online at Microsoft’s secure eOpen Web site.
– Microsoft Volume Licensing Services (MVLS): MVLS allows users to view personal licensing information, including details about the licensing agreement, license orders, Volume License Product Keys, and FAQs.
For a complete list of software available via Volume Licensing, read the Microsoft Product List. The list is published monthly and provides customers with eligibility qualifications for each available product, as well as a variety of other useful information. In addition to the Product List, Microsoft also publishes a quarterly update to its Product Use Rights document. For recent Product Lists and Product Use Rights, visit Microsoft’s Product Licensing Web.

Licensing Basics: Applications, Systems, and Servers

Microsoft software is categorized by product (e.g. Microsoft Office), pool (e.g. application software), and edition (e.g. Professional/Standard Edition). Pools of software are further categorized into three basic types, based on their functionality. Pools include:
» Applications (e.g. Word, Excel, Project, and Visio), » Systems (e.g. Windows Vista), and
» Servers (e.g. SQL Server and Exchange Server).
For some licensing models, the distinction between pools is extremely important because software purchases generate points towards a certain pool, which in turn contributes to quotas that must be met in order to maintain discount price levels.
Application and system licensing is on a per machine basis and is pretty straightforward. For remote users, most licenses also support Remote Desktop Licenses and Home Use provisions.

For servers, there are two licenses that need to be acquired for certain products: 1) the underlying license(s) for the server itself, and 2) the Client Access License (CALs) for devices or users accessing Microsoft server products. The combination of server software and CALs is licensed per server, per processor, or per seat (i.e. unique user/device).
In instances where CALs are required, they must be purchased for every employee or device that accesses the server in question. CALs are perpetual licenses and are valid throughout the lifetime of the server. However, CALs must match the most current version of server running in the enterprise (i.e. a Windows 2003 CAL can access Windows Server 2000 or 2003, but a Windows 2000 CAL can only access a Windows Server 2000).

Key Considerations

Volume Programs
Volume Licensing agreements fall into three licensing umbrellas: Open, Select, and Enterprise Agreement. Every agreement has its own requirements and benefits, and each is appropriate for a different customer profile. Before determining which license type is the best fit for the enterprise, take some time to understand all of the options available.
Open License
» Open Business – Eligibility requirement of as few as five PCs. Good for small and mid-sized organizations that don’t need a large number of licenses or that desire a one-time transaction.
» Open Value – Same target audience as Open Business, but with the added benefit of Software Assurance coverage.
» Open Value Company-Wide – Similar to Open Value, but added discounts for enterprises that have a desire to standardize on Microsoft products.
» Open Value Subscription – Similar to Open Value, but structured more like a software lease program. At the end of the subscription, the rights to use the software end and companies must either uninstall the software or renew the Enterprise Subscription enrollment.
» Open Volume – Similar to Open Business, but offers greater discounts for those willing to make a larger upfront order (calculated using a point system – see Select licensing below).

» Open License Charity – Specifically designed to meet the needs of non-profit organizations. Select License

» Select – Good for medium and large-sized enterprises that require greater purchasing flexibility, and for smaller enterprises expecting significant growth. Requires a minimum of 250 PCs and a minimum of 500 points in a single product pool per year for three years. Select and Open Volume programs use a point system. Points are assigned to product pools and are used to qualify for different price levels. Point values for specific software can be found in Microsoft’s Product List.
Enterprise Agreement
» Standard Enterprise Agreement (EA) – Eligibility requirement of 250 PCs and mandatory SA. Appropriate for medium and large-sized corporate enterprises with centralized purchasing and a desire to stay current with the latest software across the enterprise. Available in two product tiers:
– Microsoft Enterprise Platform Products, including Microsoft Office Enterprise 2007, Windows Vista Enterprise operating system, and Microsoft Enterprise Client Access License Suite.
– Microsoft Professional Platform Products, including Microsoft Office Professional Plus 2007, Windows Vista Enterprise, and Microsoft Core Client Access License Suite.

» Enterprise Subscription Agreement – Similar to the Standard EA, but structured more like a software lease program. At the end of the subscription, the rights to use the software end and companies must either uninstall the software or renew the Enterprise Subscription enrollment.
Special consideration is also given to academic institutions and government agencies. Specifically, Microsoft offers Academic Volume Licensing (Campus Agreement, School Agreement, Academic Open, and Academic Select) as well as Volume Licensing Programs for Government Agencies.
The variety of options helps create choice and flexibility for Microsoft customers. When comparing these three broad agreement options, there are several factors to consider, including: company profile, eligibility requirements, license rights granted, upgrade strategy, and the payment options available. Specific selection advice will be covered in subsequent research notes. For a more detailed look at the differences between the various programs, download Microsoft’s “Volume Licensing Programs Comparison Chart.”

What Is a License Agreement?

Those interested in a Select agreement or EA also have greater contractual obligations and are required to sign both a Microsoft Business Agreement (MBA) and a Volume License Agreement.
» Volume License agreement: This term refers to any of the Volume Licensing options, including Open, Select, and EA. In addition to signing a Volume License agreement, companies must also sign a corresponding enrollment document. An agreement document covers contact information for both the customer and the reseller, as well as terms and conditions such as how to order licenses, licensing for affiliates, applicability of product use rights, making copies, license transfer and reassignment, and termination. The enrollment is a much shorter document that consists of additional contact information, a Software Assurance Election Form, and a media order form. To see a sample agreement or enrollment, contact a Microsoft reseller.
» Microsoft Business Agreement (MBA): Select and EA customers must sign an MBA before signing the enrollment for the program. The MBA contains the terms and conditions of the relationship with Microsoft and is required for all new customers that have not previously signed an MBA. Once an MBA has been signed, the agreement is perpetual, meaning that there is no end date to this contract.
For enterprises with global operations, Microsoft does allow customers to consolidate all of their licenses into a single Select Agreement or EA at the global headquarters and then sign local enrollments to acquire local language packages. In this case, all purchases would still contribute towards the global Select/EA commitments. Microsoft Open licensing programs allow customers to share price levels with their legal affiliates throughout certain geographic territories.
What Is Software Assurance?
One of the biggest decisions that companies need to make is whether or not to purchase Software Assurance (SA). SA is Microsoft’s software maintenance offering that entitles subscribers to version upgrades, as well as a variety of other benefits.
The annual premium for SA is typically around 20% to 30% of the cost of upgrading the software (or 60% to 90% of the total acquisition cost of the software over three years). On average, ServiceXen has found that about half of enterprises choose to purchase SA and half do not.
Since a large part of the value of SA is tied to the promise of new version upgrades, interest in SA subscriptions for desktop products has diminished slightly after the release of Windows Vista and Microsoft Office 2007. Microsoft has acknowledged that SA is a much more difficult sell at this point in the product cycle and so is improving the non-upgrade benefits of SA with new perks such as desktop optimization and PC virtualization. For a complete list of the benefits associated with Software Assurance, see Appendix A, below.

The decision to purchase SA must actually preempt the decision of which Microsoft Volume Licensing program is appropriate, because SA is included as part of the agreement for some of the programs, but is optional with others. Specifically, SA is mandatory for Open Value and EA customers, but is optional for Open Business, Open Volume, and Select customers. Additionally, while a three-year term is typically used to describe SA, under the Open Business and Open Volume programs SA is only available for a two-year term.
Learn More About Software Assurance
An important caveat to remember when evaluating purchasing or renewing SA is that if an enterprise decides not to renew SA at the end of an agreement term, they may not repurchase SA again at some later date, unless they repurchase the underlying license. So, signing off SA and then signing back on when new products are going to be released is not allowed. Although this behavior makes sense for customers looking for a cheaper upgrade path, Microsoft’s SA restrictions clearly state that if an enterprise terminates an SA contract, they may not repurchase SA for the same underlying license again.
Key Takeaways
1. SA is a big deal. SA is probably the most significant Microsoft licensing decision the enterprise will make. SA subscriptions were tracking strongly in 2006 due to the imminent release of Windows Vista, Office 2007, and Exchange 2007. However, now that enterprises have acquired the rights to these new versions and the next generation of products is far in the distance, many enterprises are reluctant to sign SA renewals.
ServiceXen’s analysis shows that a positive ROI for SA is dependent on Microsoft releasing new versions of its products every 4.5 years or sooner (3.5 years for Office products). This assumes ongoing SA and not a single three-year contract. Since enterprises are not permitted to sign on and off SA, it must be a long-term decision.

For enterprises that make good use of all the benefits listed in Appendix A (below), it may be reasonable to expect a positive ROI from SA, even with five or more years between product upgrades.

2. Size does matter: centralize and consolidate. Enterprises that centralize procurement functions and consolidate license agreements will be able to make larger volume purchases and thus qualify for higher discount levels. In addition, these companies will have better license management, make better use of SA benefits, and have more leverage in license negotiations. Larger enterprise buyers have been known to secure special pricing from Microsoft resellers, as well as favorable licensing terms and conditions. Since Microsoft licensing and pricing is not administered centrally, resellers will often make exceptions to rules to secure business from lucrative clients.
3. Size doesn’t matter: program fit is determined by company profile. Enterprise size alone does not determine the appropriate licensing strategy, as most companies will qualify for at least two of the programs listed above based solely on the number of PCs. Consider the following three scenarios:
» Small enterprise (50 or fewer PCs). Has the option of using any of the three agreement types under Open, depending on how aggressive its upgrade strategy is (although companies on the smaller end of this range might find it difficult to qualify for Open Volume).
» Mid-sized enterprise (approximately 250 PCs). Would qualify for all Microsoft Volume Licensing programs and, depending on the enterprise situation, expected growth, and software migration strategy, may be optimally suited for any one of the program types.
» Large enterprise (500 or more PCs). Would have to choose between Select and EA agreements, depending on how aggressive its upgrade strategy is and how pervasive Microsoft products are in the organization.
A more detailed discussion of how to select the appropriate licensing option will be covered in subsequent Premium research notes. For now, it is sufficient to say that enterprises should be wary of software resellers that try to push one program or another based solely on enterprise size.
4. Licensing is separate from activation. So far there has been no discussion of product activation. This is because activation and licensing are two distinct functions. To learn more about Microsoft product activation, refer to the ServiceXen Advisor research note, “Vista’s License Activation Requirements: New Options Create Confusion.”

Bottom Line
Microsoft’s licensing programs are complex and come with a variety of options, restrictions, and conditions. Info- Tech can reduce this complexity for companies, help familiarize managers with licensing terminology, outline the different options available, and highlight key differences important to making the right decision. Enterprises that take the time to learn licensing basics will be in a better position to optimize license purchases and reduce software spend.

Appendix A: The Benefits of Microsoft SA

Not all benefits listed below are available for all Volume Licensing programs. To see how the benefits received under SA differ for the various licensing programs offered, download Microsoft’s “Software Assurance Benefits Comparison Chart.”
» New version rights. The key benefit of SA is the right to new versions of software that are released during the contract period. A critical component of this is the fact that once the right to upgrade to a particular version is obtained, the right is perpetual. Thus, the enterprise is free to deploy the software at its own pace, even after SA subscriptions have been terminated. All other SA benefits terminate with the expiration of SA coverage.
» Spread payments. SA allows companies to spread license and SA payments annually for up to three years (while still maintaining perpetual use rights for the software). This effectively reduces the initial procurement cost, allows managers to take advantage of the time value of money, and improves budget forecasting for software purchases.
» Microsoft Desktop Optimization Pack (DOP). This software bundle is available only to SA subscribers. At an annual cost of approximately $10 per desktop, DOP comes packed with value-added functionality, including desktop virtualization, software inventory management, group policy management, and system recovery tools. To find out more about the MS Desktop Optimization Pack, refer to the ServiceXen Advisor research note, “MS Desktop Optimization Pack Improves SA’s Value Proposition.”
» Desktop Deployment Planning Services. These services are designed to help improve managers’ understanding of the business value of upgrading and decrease the deployment TCO. On-site or remote support is offered to Select and EA customers through Microsoft Consulting Services or experts from Microsoft Certified Partners. Engagements range from one to ten days, and are aimed at providing tools, technology, and best practices for deployment. For more information, refer to Microsoft’s Desktop Deployment Planning Services page.
» Information Work Solution Services. Designed to help customers get more value out of their Microsoft Office investments. Open Value customers can convert SA Training Vouchers to Information Work Solution Services that include a one-day Work Value Discovery Workshop (two Training Vouchers) and a two-day Information Work Architecture Design Session (four Training Vouchers).
» Microsoft Windows Pre-installation Environment (Windows PE). This tool allows IT staff to build custom, automated solutions that speed up deployment. Windows PE can run Windows setup, scripts, and imaging applications. For additional information, refer to Microsoft’s Windows Preinstallation Environment page.
» Windows Vista Enterprise. Windows Vista Enterprise Edition is being offered exclusively to SA customers. EA customers receive this edition anyways, but customers with Vista Business Edition and SA also have the right to use Vista Enterprise Edition for the duration of their SA subscription. Vista Enterprise includes BitLocker Drive Encryption, support for Unix-based applications, and licensing support for PC virtualization

via Windows Vista Enterprise Centralized Desktop. To find out more about the benefits of the Enterprise Edition versus the Business Edition, refer to the ServiceXen Advisor research note, “Which Version of Vista?”
» Training vouchers (desktop products only). Companies can receive training vouchers for certain Official Microsoft Learning courses from Certified Partners for Learning Solutions (CPLS). Vouchers start at a minimum of 50 MS Office licenses covered by SA on the application side (2 days of training) and a minimum of 50 MS Windows licenses covered by SA on the system side (1 day of training). The number of vouchers received scales up (although not linearly) as the number of licenses covered by SA increases (at 250 licenses, 2,400 licenses, 6,000 licenses, and many more increments all the way up to 600,000 licenses, which yields 1,400 training days on the application side and 700 days on the system side).
» E-Learning. Includes one set of Office training library and one set of Windows training library per qualifying Office/Windows SA license. For additional information on this offering, refer to Microsoft’s Software Assurance E-Learning page.
» Home use rights (Office systems software only). Includes the full Office suite, Project, Visio, FrontPage, and Publisher. Home use allows employees to install a licensed copy of Office desktop programs on a home computer for the duration of their employment (provided they are covered under an SA agreement at work). As an added bonus, employees receive Office Professional for home use, regardless of the edition of Microsoft Office licensed under the volume licensing agreement. For additional terms and conditions related to home use rights, refer to Microsoft’s Home Use Program page.
» Employee purchase program (productivity and consumer products only). Provides employees with significant discounts off retail pricing on Microsoft productivity and consumer products (including Microsoft Xbox games). To initiate this benefit, a designated Benefits Administrator must enroll the organization on the MVLS site. For more information on the employee purchase program, refer to Microsoft’s Employee Purchase Program page.
» Enterprise source licensing program (Windows client only). Eligible customers (minimum of 1,500 licensed desktops) are afforded access to Microsoft Windows source code for internal development and support. IT staff are permitted to make improvements to systems and related applications and implement improved debugging. For additional terms and conditions related to enterprise source licensing, refer to Microsoft’s Enterprise Source Licensing Program page.
» 24×7 problem resolution. Provides customers access to around the clock phone support for business-critical outages on all Microsoft products eligible for SA, including servers, systems, and Office applications, as well as unlimited Web-based support for qualifying servers. For customers with Microsoft Services Premium Support contracts, phone incidents earned through SA can be converted to Premium Problem Resolution incidents. Microsoft asserts that for companies with SA on all products pools, the free “incidents” received “should cover a significant portion of your support needs.” For additional terms and conditions regarding problem resolution, refer to Microsoft’s 24×7 Problem Resolution Support page.

» Corporate error reporting. Allows IT professionals to monitor and review error information so they can control deployment of fixes and resolutions.
» Cold backups for disaster recovery (server products only). Customers with SA for server software, as well as the related CALs, can license additional “cold” servers for disaster recovery purposes. Cold servers are defined as those servers “that are turned off until an emergency situation requires them to be activated.”
» TechNet Plus (server products only). TechNet Managed Newsgroups and TechNet Plus subscription media feature resources such as the Microsoft Knowledge Base, access to over 100 Managed Newsgroups, software updates, utilities, drivers, evaluation software without time limits, pre-release versions of Microsoft products, complimentary technical support incidents, and how-to articles to help managers. To learn more about this
offering, visit the TechNet Plus Subscription page.
» Windows Fundamentals for Legacy PCs for SA. Windows XP-based OS is designed to provide a bridge solution that enables companies to get additional life out of legacy PCs. Windows Fundamentals (code named “Eiger”) offers the same security and manageability as Windows XP SP2 while providing a smooth migration path to the latest hardware and operating systems. It is not a general-purpose OS, but is designed to work with Terminal Services, such as Microsoft’s Remote Desktop Connection and Citrix’s ICA client. To learn more, refer to Microsoft’s Windows Fundamentals for Legacy PCs page.
» Extended hot-fix support (server products only). Allows SA customers with Premier or Essential Support agreements to request hot-fixes for products in the Extended Lifecycle Support without signing an Extended Hot-fix Support Agreement (EHSA) prior to determining a need. Customers are free to sign up at any time during the term of their SA subscription. SA coverage is in lieu of the annual program fee for the EHSA, but hotfixes are still provided as needed for a fee.
» Enterprise Edition Step-Up. Gives SA customers the ability to migrate from the Standard edition of a select list of products to the Enterprise Edition without having to purchase a new license, paying only the difference and maintaining their current SA coverage. To find out more about this program, refer to Microsoft’s “Step-Up License Brief” document.

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