Understanding the Service Provider License Agreement (SPLA) program and Microsoft licensing in general has  always been a bit challenging. Recently SmarterTools has been getting questions from customers and associates regarding new terminology introduced to them by their SPLA representatives called “Outsourced” and “non-Outsourced” during SPLA audits. These new terms are being called “replacements” by some for previously applicable terminology “authenticated” and “anonymous”—but we view them not as replacements, rather as entirely new terms designed for a specific purpose. The problem is that there are no clearly understood definitions of these terms—even among the resellers and reps. This has started a minor flurry of forum and blog topics trying to figure this all out. This is REALLY important to hosting companies because the so-called Outsourced licensing of core Microsoft technology in SPLA is many times more expensive.

On first blush, the introduction of the new terminology appears to be intended to clear up misconceptions and potential abuse of the SPLA program. But because there has been no advance notice, there is a nebulous communication plan associated with the language change that appears to be a bit arbitrary, and the fact that individual SPLA resellers are passing on this information in the finest oral tradition of pre-literate Kalahari Bushmen (lots of clicking and grunting) the effort to make things more clear has only added uncertainty and the fear of unknown costs.

Some hosting companies have long-term contracts with customers and—for now at least—they do not understand what their costs are. Not good.

Closing the Loophole

SPLA was designed specifically to provide a cost-effective method of providing services. This seems obvious. Shared Web hosts, email servers, database servers, and others could license Windows Server—with multi-tenancy—at greatly reduced rates to provide Web sites, email (including SmarterMail), database space, and more to smaller customers effectively. Further, this pricing is month-to-month. Everybody wins.

Why would Microsoft do this? Simple—it brought millions of Web sites, email users, and the rest onto the Microsoft platform cost effectively. As those customers grew and needed their own servers and software, those customers would graduate to full, independently-licensed products. This worked well so long as the market consisted largely of shared environments, service-based applications, andunmanaged dedicated server shells that customers would load up themselves.

This created a loophole. The fully-managed dedicated and VPS server market has exploded—meaning that larger businesses are not just leasing a server shell. Hosting companies are providing them with a box that is fully loaded with all the software that their company needs in one package. Let’s use a mail server as an example. The hosting company provides the box, Windows Server 2008, SmarterMail 6.x, and maybe a few other things. So—is this truly a service or just another way for a company to purchase what they need?

Customers have been flocking to this model for flexibility and—specifically because hosting providers get the super-low SPLA rates—real cost savings. Well, it appears that Microsoft has recognized this and is attempting to close the loophole. They say that this is an example of “Outsourced” email since the customer might otherwise have had to install it in their own office, has total control of the server and what goes on it, and is the sole entity being served. It is a single-tenant dedicated system for which Microsoft would like to be paid at their going rate.

Based upon some of the forum posts that I have read there are some SPLA resellers out there saying things like “if it is a mail server it is Outsourced” and we think that this is not likely the intent. If it is, that does not make any sense. Shared email environments are most definitely a service. Reading Microsoft’s text you can make the argument that an independent, one-tenant mail server is not and might qualify under their definition of an “Outsourced” application.

Again—we think that the most likely and logical differentiator is single-user/single-tenancy so that hosting companies and/or customers do not use the SPLA program to avoid paying the higher licensing fees for dedicated environments. Think of it like your car. You can pay cash for the car (fully owned), you can finance the car (ownership over time), or you can lease a car (pay as you go)—but you still pay the full title and registration fees on that car. All these methods are simply different ways to “own” the vehicle and it is entirely for your use. We read Microsoft’s intent as that “non-Outsourced” SPLA is for when you are riding the bus.

We are not saying that this is what Microsoft should do, only that this is likely what they are doing.

Microsoft has published a Volume Licensing Brief dated July, 2009, that we believe supports our interpretation.  But it is hard to accurately nail down their definition.  This document provides the following definition:

Outsourcing is an application or service which a Service Provider manages on behalf of its customer. For purposes of this definition, the managed application or service is:

• Used by its customer’s employees, contractors, agents, or vendors, and
• Not the Service Provider’s intellectual property

Not exactly clear and unambiguous.  Interestingly enough, this also applies to Microsoft applications—including hosted MS Exchange servers. But there are several very important distinctions in the scenarios described, including the following notes:

Non-outsourcing applies if:
The Service Provider is providing an application or service that is the IP of the Service Provider (the Service Provider is an ISV).

Outsourcing applies if:
The Service Provider is providing managed hosting for Microsoft applications (Microsoft Exchange Server, Microsoft SQL Server® database software, etc.) or third-party applications (Oracle, Siebel, etc.), which are not the IP of the Service Provider to their customer’s internal users. [emphasis added]

Non-outsourcing if:
The Service Provider is providing an application or service only to external users of the customer.

The first scenario suggests that providing SaaS makes you an ISV and therefore Shared mail can be run as non-outsourced.  The second suggests that dedicated hosted applications of all types are outsourced.  The third suggests that companies like The Planet, Rackspace, and 1&1 that provide reseller platforms to other hosting companies qualify as non-outsourced.  Clever wording indeed.

Challenges

We think that Microsoft will face some challenges in making this newly-defined restriction stick because the marketplace now has several years of accepted practice and rampant adoption of managed hosting.  A new enforcement action will also be hard to justify when the video advertising the SPLA program on the Microsoft Website features several companies that are potentially in violation of this new, untested definition—including Rackspace who openly discusses managed hosting in their segment. (see the video by clicking the link in the lower right hand side of this Microsoft page)

Attempting to use a heavier and seemingly arbitrary hand in this area now might be a rallying-call for insurrection amongst the masses.

Creative Destruction or Just Plain Destruction?

Microsoft has done things like this is the past.  With the launch of Windows Server 2008 they introduced pricing that was untenable in the market-space.  Microsoft soon retraced their steps on that one.  Perhaps there will be another outcry that causes Microsoft to reconsider again.  Microsoft continually maintains that each operating unit is a separate and distinct business with its own profit center and separate goals and objectives from the others.  Ostensibly this is to reassure us all that we can make vendor deals with the SPLA team or the Service Provider Network without worrying about undue influences and cross-purposes from other Microsoft divisions that might be better described as competitors.  But this second attempt at what appears to be price pressure aimed at weakening segments of the hosting industry begs the question: Is this part of a larger effort to tenderize the market for other Microsoft initiatives such as Azure and Office Live or are they simply reaching for more cash in a fumbling, ham-fisted way?

How Now for Cloud?

Now—what is Microsoft going to do when this issue comes up in Cloud Computing structures? These are flexible and—most importantly—elastic environments. In effect, a customer may be using a full server in a “dedicated-like” way one moment, a small piece of that server the next, and then not at all the following day. We totally understand closing loopholes and needing to get paid properly on a licensing model. But given the state of the economy, the heavy competition for market-share, and the advent of developing Cloud technology this may be precisely the wrong time for Microsoft to turn this particular screw.  And if we are right and Cloud computing has the potential to devalue the brand of Operating Systems (OS) in general, will not this kick in the shorts to hosting providers encourage them to lean toward alternatives as the more adventurous of us build Cloud environments for Web and application hosting?  Who will choose Windows Server 2008 with HyperV as a virtualization solution in an effort to build an efficient Utility data center when the makers of the products are looking for new and creative ways to dig into your wallet and steal customers?  What SaaS provider will code to a more expensive solution from a provider with business-trust issues when the end user will not “know”—and likely not care—what OS the application is running on?

We think that this change is ill-considered and ill-timed and we think that the hosting community is not shy about expressing themselves with their voices and their technology decisions.

SmarterTools is Engaged

SmarterTools has literally thousands of customers and millions of users worldwide that could be impacted by this Microsoft effort.  We have reached out to our contacts in the industry and will update this post with additional information as we can.

Additional reading:

Related Parallels forum thread, Microsoft’s SPLA program info, related SmarterTools forum thread, related cPanel Blog post.

Important Disclaimer: SmarterTools is an independent software vendor (ISV) not directly associated with Microsoft Corporation and we do not pretend to have inside knowledge of Microsoft’s intent. But our team has significant experience in the hosting industry and SPLA in the past. Further, hosting companies use SmarterMail, SmarterTrack, and SmarterStats to deliver collaborative email, customer service, and Website analytics to literally millions of their customers every day. We have also done additional research and inquiries into this topic. As such, this post reflects our opinions, understanding, and experience on the subject.

Microsoft, Exchange, Azure, office Live, and Sharepoint are tradmarks of Microsoft Corporations (MSFT).  Rackspace is a trademark of Rackspace US Inc.  The Planet is a trademark of The Planet. 1&1 is a trademark of 1&1 Internet Inc.  All other trademarks are the property of their respective owners.

This post was written by Jeff H., vice-president of business operations for SmarterTools. If you liked this post, please consider subscribing to the SmarterTools Blog so you don’t miss an update.