Microsoft takes stand on 'virtual' licensing

The software giant revamps its software licensing to tackle "virtualization" technology, which could shake up the industry.

Microsoft is taking a stand on an emerging technology that threatens to reshape software pricing models.

The company on Monday is expected to detail changes to its server product licensing to better accommodate virtualization software, an emerging technology that big companies are eyeing as a way to consolidate servers and cut costs.

Advocates argue that virtualization lets companies reduce the number of servers they need by letting jobs run more efficiency on a smaller number of machines. Virtualization software such as Microsoft's Virtual Server, EMC's VMware and XenSource's Xen lets a server simultaneously run multiple operating systems, or multiple instances of the same operating system. Each instance essentially behaves as a self-contained computer.

News.context

What's new:
Microsoft will change its licensing practices to address emerging technology called virtualization. Rather than charge per physical processor, server products will be priced based on the number of instances that are running.

Bottom line:
Microsoft executives said the new pricing scheme is meant to encourage use of virtualization, where a single server runs multiple operating systems. Analysts said other software vendors will likely alter their policies for virtualization as well.

More stories on virtualization

However, much like multicore processor-based server technology, virtualization software throws the widely used per-processor licensing model out of whack. Currently, most server software is licensed based on a per-processor basis. Virtualization skews that formula, since many "virtualized" instances of an operating system, each running applications like a database or e-mail server, can exist on any given physical server. That scenario can lead to sticker shock for customers, and an unmanageable mess for software makers.

Microsoft's new policy seeks to reconcile new technology and old licensing models. Starting in December, the company will calculate the cost of server software products by the number of running instances of that product on any given server, rather than the number of physical processors contained in that server.

The shift will benefit customers, Microsoft says, by allowing them to parse up the processing power of a machine in a cost-effective manner. The company is looking to expand the use of virtualization with its own products, within partner programs and through its pricing policies, said Andy Lees, Microsoft's corporate vice president of servers and tools marketing.

"Things like pricing and licensing get in the way of the adoption of technology," Lees said. "And customers want to know they're not heading down a cul de sac."

Virtual processor licensing

Before: the price of SQL Server is the license fee multiplied by the number of processors in a server. For example, $2500 x 4 processors, or $10,000.

After: Using virtualization software, customers can choose dedicate two "virtual processors" to SQL Server, rather than the four physical processors, to cut the price in half.

Source: Microsoft

Analysts were quick to note that the new policy also helps Microsoft stay one step ahead of competitors by staking out a policy that others will eventually be forced to respond to.

Any significant changes to license policies from virtualization and other emerging technologies pose potential risks for software vendors, said Gartner analyst Tom Bittman.

"Software vendors are scared--the whole paradigm is forcing them to change how they price and they don't want to reduce revenue in the whole picture," he said.

With the current policy, a company that runs a virtualized server application would have to pay for a full four-processor license even though only some fraction of the server is dedicated to running that application. Under the new policy, a company could choose to dedicate only two virtual machines to a server application on a four-processor machine, and pay accordingly.

The new policy is meant to set an example of how software vendors should cope with virtualization as it becomes more widespread, Lees said.

"The licensing scheme enables customers to utilize virtualization technology. Today that is not the case," Lees said.

More broadly, Microsoft's decision will likely cause other software makers to reassess their policies, said Gartner analyst Alvin Park.

"It will force other vendor to rethink their licensing strategies and over time will cause them to make changes to stay competitive with Microsoft," Park said.

Some of those companies, such as Oracle, SAP and BEA Systems weren't immediately available to comment on Microsoft's policy. A few of Microsoft's competitors in the operating system market, contacted on Friday, said they have made already made accommodations for virtualization.

Novell's policy allows customers to run "virtual images" for SuSE Linux Enterprise Server at no additional charge.

Scott Crenshaw, who leads product strategy for Red Hat Enterprise Linux, said the company offers a program designed to "significantly reduce the costs of deploying (Red Hat) Enterprise Linux in virtual environments." Crenshaw didn't offer additional details.

Doing the math
Under the new policy, Microsoft said Windows Server 2003 R2 Enterprise Edition, due by the end of the year, will include four virtual machine licenses for free. And in the Longhorn edition of Windows Server, which is due in 2007, Microsoft will allow customers to run an unlimited number of virtual machines for the price of the high-end Data Center edition.

Also, the policy changes will allow customers to reassign licenses from one machine to another, which is an important step to allow customers to provision software and hardware in a more fluid manner to meet changing workloads, Lees said.

Regardless of whether Microsoft's plan becomes the industry norm, it's clear that a change in licensing policies is needed. A recent Gartner survey found that 90 percent of its customers already use virtualization in some form and intend to do more. But the technique, meant to save customers on hardware costs, can inflate software license fees.

For example, a company may want to run an e-mail server and database application on a four-processor server. Currently, the software licensing cost for that arrangement would be the fee for the operating system plus two four-processor licenses for each application. If the company adds virtualization, the cost of that installation goes up. In addition to the application licenses, each virtual machine requires a different operating system license.

With the forthcoming policy, a customer could potentially lower cost by dedicating a virtual machine running on two processors to the e-mail server. Right now, a customer needs to pay for a four-processor license even if only two virtual processors are being used, Microsoft executives explained.

Initially, the new licensing plan will operate on the honor system. Microsoft will have no technical mechanism to track virtual machines and instead will rely on a customer's word, executives said.

Microsoft's virtualization strategy does not pose a significant financial risk to the company because it has set its policy before wide-scale adoption of the technology, said Gartner's Park.

New technologies that strive to make computing gear more efficiently have been creating havoc with software licenses. During the past year, infrastructure software providers have come to grips with licensing changes to accommodate multicore chips, which pack two or more processors on a single piece of silicon to raise performance without generating too much heat.

In October 2004, Microsoft set a policy of counting a multicore processor as one processor for licensing purposes, a move endorsed by chip makers but not by all software vendors.

Within several months, however, Microsoft's largest competitors in server software, including IBM, Oracle and BEA Systems, altered their policies as well.

Whether Microsoft's new virtualization policy will drive the industry is unclear. Lees said that Microsoft's policy is meant to address how customers are using virtualization today--mainly for consolidating several computing jobs on a single machine--as well as future scenarios. By allowing customers to move instances of Windows among different machines without having to purchase a new license for each instance, customers will be able to automatically provision servers over a network to meet changes in computing demand, Lees said.

In addition, over the next two years Microsoft will update its management tools to keep track of each virtual operating system on a machine. Having separate tools to monitor physical servers as well as virtual machines will raise the complexity and cost of running corporate data centers, he said.

Currently, Microsoft's main virtualization product is Windows Virtual Server. Use of the virtualization technique on Windows stands to be more widely used when it introduces a Windows "hypervisor" technology, a different technique that relies on a stripped version of Windows to host other virtual machines.

That hypervisor product will come out in the "wave" with Longhorn Windows Server, company executives said. Gartner's Bittman expects the hypervisor to be completed in 2008 or 2009. He noted that Microsoft is trying to catch up to market leader VMWare.

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