Information Systems:Microsoft Licensing

Written by Darren Freedman May 19 2016

The topic of Microsoft Licensing is something that has a certain amount of "open to interpretation" to it. There are 3 main types of licenses and each of the 3 have a bunch of sub types. The easiest license type to understand is the retail license. This is boxed software that you can purchase at Best Buy. In recent years, Microsoft has leaned away from boxed retail licenses and started selling software as a subscription for the context of retail customers. A traditional retail box copy of Windows or Office could be only installed on 1 computer at a time but the software could be moved to a different computer as long as it did not exist on the previous machine. Retail boxed licenses are generally expensive and Microsoft does not want that type of license used in a business setting even though there is no technical restriction - you can even by retail licenses of Windows and Office from CDW.

The next type of license is OEM or "Original Equipment Manufacturer". PC makers like Lenovo sell their laptops and desktops with a pre-installed OEM license of Windows. (Servers never come with a OEM Microsoft license) The laptop or desktop will also have what's called a Certificate Of Authority COA sticker that shows the device is properly licensed. It's important to understand that the COA sticker used to show the version of Windows installed and the license key. That isn't the case anymore because the OEM's will often downgrade the Windows version even when the PC is licensed correctly. OEM licenses, whether they are for Windows or Office, are tied to that specific computer. An OEM license of Office can only be installed on 1 computer and that license and install cannot be moved to a different machine. Even if the PC is end of lifed or the motherboard pops, the license cannot be moved or re-used. This is why OEM licenses are the least expensive due to these restrictions. In recent iterations of OEM Windows on recent models, the product key is stored in the BIOS or UEFI space so that the OEM install activates automatically on the correct hardware and allows better security for Microsoft's product keys.

The third type of license is the volume license. This one is much more complicated than the first two, mostly because there are a lot more rules and regulations for system administrators in the corporate space to follow. Volume licenses are divided into 2 groups, 1 called Open Business and the 2nd being Open Value. Open Business licenses are for 1,2 or 3 year terms where the license comes with Software Assurance. More on Software Assurance below. Open Business license purchases are an upfront cost. Open Value are 3 year terms only with optional Software Assurance and optional split payments. Pricing is only slightly different between Open Business and Open Value, while the options between the two are variable.

Software Assurance is a set of benefits that can be linked to a purchased license. The biggest benefit is that the license gets a free version upgrade if Microsoft releases a new version of the program or OS during the Software Assurance term. Be aware that any "term" is referring to the Software Assurance, NOT the license. Once a software license is purchase by a company, it is owned forever - it's the Software Assurance that has a term limit. The other SA benefits are small amounts of free tech support and training materials and the right to install the licensed program or OS on a home computer...but not a second computer owned by the purchasing company. Volume licenses also cannot be installed on any computer that does not already have a COA sticker on it because all volume licenses are "upgrade" versions and require the COA sticker even when you actually install the full version of Windows for example. See told you this was full of rules and regulations. Both Open Business and Open Value have a minimum license purchase count of 5 for each individual purchase. It is not possible to purchase a single license of Office under a newly created Open Value or Open Business agreement, you must purchase 5 licenses. Resellers like CDW get around this restriction by selling 1 license of Office at $700 and 4 volume licenses of DVD player software at $5 each to hit the required license count. What Microsoft wants businesses to do is get a total count of say 100 users so that you can purchase 100 Open Value licenses of Office with 3 years of Software Assurance that you can then renew at the end of those 3 years to get another 1,2 or 3 years worth of benefits. The way to win the SA gamble, is to get that free version upgrade during the term because the cost of SA is always less than the cost of buying new licenses. If no version upgrade happens, then the cost of the SA is mostly wasted and doubly so if the SA is renewed and there is no version upgrade during that term either.

As mentioned above, one of the biggest differences between Open Value and Open Business is that Open Value allows split payments. This means that if, as in the above example, 100 Office licenses are purchased, the total upfront cost is split into 3 equal parts paid in installments over the 3 year term. At the end of the term the SA either expires or is renewed and the license to use and install the software is retained forever. This is not leasing or financing, its just split payments that the reseller has to keep track of.

There is also a third type of volume license that very large organizations use called an Enterprise Agreement. The only requirement is that a purchasing company needs a minimum of 500 employees. Other than that the costs, terms, types and numbers of licenses are all negotiable with Microsoft. Governments and multinationals will often tell Microsoft how many copies they need of a list of programs and OSes and Microsoft comes back with terms and a cost which is then negotiated.

Audits happen. Microsoft does thousands of license audits every day with the purpose being that they want corporate customers having the same number of installs as licenses owned. Microsoft does of course have a record of all volume license purchases that a company makes but the accuracy of that data is muddied when mergers and splits happen - especially when purchases are made from multiple resellers. Microsoft also has no way of knowing if a corporation is exclusively using retail or OEM licenses. The audit starts with either a phone call or email from a real Microsoft employee stating that a license audit is needed. A very sophisticated spreadsheet is then sent by email and the corporate customer has 30 days to complete the questions and fill in the license counts on that spreadsheet. Extensions on the 30 days are possible and very common. The questions on the spreadsheet are not survey style questions but rather "How many installs are present for this very long list of products?". In most cases there are zero installs of Office97 and Windows2000 and some number of greater than 1 for more recent versions. The questions are repeated for the number of CALs and all the different products like Exchange and SQL and SharePoint that have been released since the dawn of time. When the spreadsheet is filled out with numbers and zeros, its sent back to Microsoft and they determine if the corporate entity is compliant or not. If yes, then no additional action is taken. If no, then Microsoft tells the corporation how many additional licenses are to be purchased as soon as possible.

The bottom line on audits is that Microsoft is not out to punish small or medium sized corporations if they are not in compliance. A need to purchase say 5 extra licenses of Office is not going to get Microsoft's legal team knocking on the door, but they will insist strongly that the company make a purchase to become compliant. The legal team does get engaged when very large company's buy 5 licenses of Windows and then install it on 5000 desktops.

Furthermore, Microsoft has made license compliance slightly easier with built-in mechanisms to activate volume licenses using a server role called KMS. KMS does have some restrictions, but the purpose is to activate product keys automatically in certain situations.

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