Windows 2016 will bring significant licensing changes, and although Microsoft claims the changes will make licensing more consistent, that consistency (such as it is) will come at a significant cost in complexity and dollars. Customers who want to take advantage of new License Mobility rights for Windows Server may find cost increases unacceptable.

We should note that the following analysis is based on preliminary announcements by Microsoft on Windows Server 2016 licensing. These announcements lack critical details, and the full rules will not be published until later--probably the month that the product itself is released in Q3, 2016. Many gaps in the licensing rules may be filled only at that time.

The December 2015 FAQ used as the primary basis for our analysis of changes to Windows Server licensing analysis can be found here. The document used as the basis for our analysis of new rights to use customer-owned licenses on Azure is an Azure for Microsoft Software FAQ found here.

The primary change is the migration of Windows Server from per-processor licensing to licensing by cores, which will be purchased in packs of two, with a minimum requirement of eight core licenses (four 2-core packs) per processor and a minimum of 16 cores per physical server, even on a one processor server.

This change adds complexity to licensing. Because Windows Server 2012 R2 licenses cover two processors, regardless of core count, many customers can tally most of their their Windows Server license requirements by simply counting the number of physical servers. Windows 2016 will add another dimension, cores per server, and higher costs for servers with more than 16 cores.

Microsoft customers must already count cores for SQL Server, but there are far fewer SQL servers than Windows Servers, so the scope of this data collection has been significantly expanded.

All cores on a server must be licensed, so a two-processor system with 20 cores will require additional licenses to cover the extra cores.

Licensing for virtual machines on Windows Server Standard still needs some refinements. Some documents hint that Windows Server 2012 R2 Standard will be limited to two virtual machines, period. although other documents say that additional VMs can be supported by assigning more Windows core licenses.

The latter seems logical, but remember, we are talking about Microsoft licensing here. What's not clear is the math on this. Can one purchase 8 more Windows cores and run one more VM or are 16 cores required? Does adding two or four cores provide any benefit?

Overall, costs will rise with this approach to licensing Windows Servers. Servers with more than 8 cores will require more licenses than before. The list price to license a four-processor server with 12 cores per processor is $1,754 with Windows Standard 2012 R2, but $2,631 with Windows Standard 2016. Windows Server Datacenter licensing costs increase from $12,236 to $18,354.

Software Assurance (SA) costs will rise when customers renew it. On our 4x12 server, one year of SA will rise from $439 to $658 for Standard and from $3,059 to $4,588 for Datacenter edition. Probably the most unfair tax will be levied on customers with less than 8 cores. Renewing SA on those servers will require them to purchase SA for 8 cores per processor, even if the server has only two, four, or six.

In my view, this is a software company taxing hardware companies--Intel and AMD--and walking away with more money than they, for no effort on the software company's part at all. (No additional coding is required to run the software on the same number of cores as before.)

Microsoft claims that this change is to somehow create greater consistency, although it's consistent with nothing else at the moment. Microsoft's real goal is to ensure that migration of on-premises servers to the cloud generates as much revenue as possible. While the change has merit in some respects, Microsoft is piling on other licensing restrictions that could dramatically increase revenue from Windows Server and System Center.

On premises, all Microsoft server licenses are assigned to physical servers. Even licenses for virtual machines are assigned to their physical hosts.

Windows Server is different from other Microsoft servers in one respect, however. It never has License Mobility, a right that permits a customer to reassign a license from one physical host to another less than 90 days from the previous move. License Mobility, which would cost somewhere between $135 and $200 a year for the minimum 16 cores for Windows Server Standard, and up to to $1,400 a year for Windows Server Datacenter, is important both for on-premises server farms (permitting vMotion or Live Migration of VMs) and also for customers who want to move licenses they have purchased with a volume discount to a cloud services provider. The on-premises flavor of Licensing Mobility is known as Licensing Mobility within Server Farms, the cloud flavor as License Mobility Through SA.

The on-premises server farm issue is resolved for Windows Server today by purchasing the more expensive Windows Server Datacenter edition, which licenses an unlimited number of Windows VMs per processor. Although Windows Server does not have License Mobility, VMs can move without requiring license reassignment if all the physical hosts have enough licenses in place for the maximum number of VMs that will run on them. In this scenario, Windows Server Datacenter licenses never need to be reassigned; when a VM moves it simply stops using a license on one host and picks up a new one from the unlimited supply on the new host.

In the cloud, in contrast, customers have no idea how many processors a shared physical host has and the hoster may change it any time. Thus, in the cloud assigning licenses to virtual machines is the only option.

By licensing Windows Server per core, and associating cores with virtual CPUs, Microsoft theoretically makes it easier to move a VM to Azure.

In practice today, this has not been a problem. Customers who want to move a Windows Server VM to the cloud can easily do so. Where does the Windows Server license for the VM in the cloud come from? The hoster provides it and remits payment to Microsoft. The cost of the required Windows server license is built into what the hoster charges for the Windows VM instance, and this cost is usually modest.

Microsoft's decision to encourage—and perhaps someday require—customers to provide their own Windows Server licenses in the cloud will have far-reaching consequences.

In particular, customers should be concerned about how Windows Server's core model collides with SQL Server's core model.

Microsoft has associated virtual CPUs with cores in SQL Server as far back as SQL Server 2005, although it did not adopt core licensing by default until SQL Server 2012. Equating a virtual CPU with a physical core relationship is a handy way to measure the amount of CPU resources that a VM consumes, allowing the cost of licensing Microsoft software in a given VM to roughly track the portion of a processor's time the VM consumes.

Windows Server 2016 core licensing does not match SQL Server core licensing, however. SQL Server is licensed with a minimum of four cores, while Windows Server will be licensed with a minimum of eight cores. That creates a dilemma for customers when choosing hardware.

A customer who wants to control SQL Server costs may purchase a two-processor server where each processor has four cores. Since that's the minimum, the customer does not save money by purchasing two-core processors, but it is less costly than licensing a physical server with six or more cores.

When a customer puts Windows Server 2016 on that same host, however, it will have to throw some Windows Server licenses away. The minimum is eight core licenses per processor, even though the customer needs only four.

The situation on premises is small potatoes compared with what could happen when the customer moves SQL Server to the cloud. Here's where the mismatch between SQL Server and Windows Server could really bite.

SQL Server has one way to license SQL Standard VMs, and two ways to license SQL Server Enterprise VMs.

The model both editions share is the "license by VM" model, which requires that a SQL VM be licensed with at least four SQL core licenses (two 2-license SQL packages). The advantage of this model on premises is that it allows a single SQL Server VM to run on a 48-core host without requiring that all 48 cores be licensed. Doing the math, one can calculate that this model reaches its limits on a 48-core host when the number of SQL VMs reaches 12, at which point the licenses should be assigned to the host cores rather than to the VMs.

(The other SQL Enterprise model is to assign a SQL core license to each physical core. The customer can then run one SQL VM, with any number of virtual CPUs, for each core license. This is the most cost-efficient way to license SQL Enterprise 2012 and later VMs.)

Azure perpetuates the "license by VM" model in the cloud. When customers move their own SQL Server licenses to Azure, via the License Mobility Through SA right, each Azure VM must be licensed by a minimum of four cores or the number of virtual CPUs, whichever is greater.

However, Windows Server will likely require that the minimum Azure VM have eight virtual CPUs, matching the minimum for a single processor. Customers who migrate their own SQL Server licenses to a VM with eight virtual cpus will find that the minimum cost of a SQL Server VM has just doubled.

​It is already extremely expensive. The lowest list price to license a SQL Enterprise per-core VM on premises is $4,440, using the 1 VM per core licensing model with perpetual licenses. On Azure, the minimum is four cores per VM and customers must add Software Assurance at 25% of the license price per year. That puts the three-year cost of that same SQL VM to more than $31,000. Require a minimum of eight SQL cores and we're looking at more than $62,000, 14 times the cost of an on-premises SQL virtual machine.

(These numbers build in the cost of the SQL Server license, a cost that customers who move an existing SQL Server license to Azure. without replacing the on-premises license, will not face. Neverthless, they must maintain SA on those licenses to keep them on Azure, which, over three years, costs three times the on-premises minimum, and if an eight-core minimum is set, six times.)

New rules governing Windows Server 2016 VM and version rights on Azure defy common logic and even some Microsoft licensing agreements, and will trap or confuse many customers. One rule governs how many VMs each Windows Standard or Datacenter license covers. Another addresses what on-premises license rights remain when a customer's Windows Server license is moved to an Azure VM.

Given that Datacenter edition costs about seven times what Standard edition costs, one would expect it to offer greater virtualization rights, but that is not true on Azure. Both editions get the same virtualization rights: 2 VMs on up to eight cores each or one on up to 16 cores.

The logic, presumably, is that Datacenter's unlimited virtualization per host processor on premises is not viable in an environment where the host processors are invisible to the customer. But this creates a Catch 22 for the customer. Given that on-premises Windows Standard licenses cover only two VMs by default, Datacenter Edition becomes much more attractive on premises. But Datacenter is far less attractive on Azure, where its much higher cost delivers no net VM rights. Thus, there's little incentive to move Windows Server licenses back and forth, since the optimal license on premises is not optimal on Azure and vice versa.

Making this choice even more complicated, when customers move a Windows Server 2016 Datacenter license to Azure, they will will be permitted to assign the same license to a server on premises. In contrast, Windows Server 2016 Standard licenses, once moved to Azure, may no longer be used on premises.

This creates a quandary for customers. Those who want to move workloads permanently to Azure will be best served with Windows Standard. Windows Datacenter might be a better choice when a firm wants to temporarly expand its server base, say to handle seasonal loads. Here the customer does not want to move or reduce server capacity, but only wants to temporarily increase it.

Customers should move cautiously. Our view, admittedly cynical but based on substantial prior experience with changes in Microsoft licensing, is that these novel rules will not last another version upgrade. The "free" Datacenter on Azure will get clawed back, perhaps in the guise of a new Software Assurance "benefit." Customers who designed their hybrid architecture around free Datacenter on Azure will get hurt.

In addition, it conflicts with recent changes to MIcrosoft Enterprise Agreements, which say customers must pay for the maximum number of instances in use over the previous year. (Previous language only cared about counts at specific dates and ignored what happened between those dates.) Without amendments to those agreements, customers who assume they get free Datacenter licensing on Azure may end up paying for the extra Datacenter licenses anyway.

Finally (readers may want to take a second or third aspirin here, assuming they have already consumed one), the purchasing requirements for customer-owned Windows Server licenses on Azure are very steep, with rules that Microsoft has yet to apply to any other product. While SQL Server 2012/2014 only require Software Assurance on licenses that are moved to Azure, Microsft will grasp the customer's pocket book with more determination with Windows Server.

First, to gain License Mobility Through SA for Windows Server, customers must purchase all Windows Server licenses via a Core Infrastructure Suite (CIS) bundle. The bundle includes not only Windows Server, but a System Center suite, Microsoft's management software. Customers will end up with lots of System Center software, most of which they probably will not use.

After all, one of the reasons customers move their servers to the cloud is to get Microsoft to manage them, but customers won't save a penny on server management software in this case.

Another new prerequisite for License Mobility Through SA for Windows Server is that the CIS suite must be purchased through a Server and Cloud Enrollment (SCE). This agreement, probably the most destructive to the customer's pocketbook of any Microsoft licensing agreement (see our presentation on the Server and Cloud Enrollment), requires licensing the customer's entire Windows Server and System Center installed base, including all on-premises and all cloud servers.

Customers get a one-time 15% reduction on new license prices but commit to pay 25% per year on all old and new licenses. For the vast majority of customers the discount benefit will never exceed the additional costs. (In our analysis of customer SCE agreements we assume the customer will pay about four times as much for some licenses, such as Windows Server and SQL Server, as they would by simply purchasing the licenses they need, when they need them.

In the SCE every Windows license needs a System Center licenses, so a customer with a surplus of one component will need to purchase enough licenses for the other component until they all match.

What about legacy servers that have never been upgraded and on which SA was either never purchased or has lapsed? The customer must actually repurchase those licenses and add SA to them, or purchase a subscription that will cost approximately 120% of the license price over three years (but will not net any new licenses). Any Windows servers NOT included in the SCE must be turned off.

In other words, customers must not only pay more to move their Windows licenses to the cloud; they must also pay more for all the licenses that they do not move to the cloud.

It is highly likely that Microsoft will also try to leverage Windows Server in the SCE with the real prize: SQL Server in the SCE. SQL Server costs at least four times as much as Windows Server and most customers have large investments in older servers that are not covered with Software Assurance. Via the SCE, Microsoft gets customers to repurchase licenses they already own and pay for upgrades they will likely never exercise.

It is difficult to see these changes as anything but a revenue grab. There are few visible customer benefits, and those come at a very high cost, coercing more revenue from the same hardware and software.

Yes, Microsoft is offering a significant discount on Azure VMs for customers who bite on the License Mobility for Windows Servers. We have not analyzed the net impact of those discounts, given the uncertainty of the licensing rules themselves, but we must point out that a promotional discount will be removed at some time. In our experience, many discounts offered by Microsoft actually cost the customer more, in related licensing requirements, than the discount saves. Customers will need to calculate the effective discount for their particular situation and should be cautious about major architecture adjustements that could become uneconomical in the future.

Having launched this new revenue maximization effort with Windows Server and System Center, where will Microsoft move next? We guess is that the company could make SQL Server “consistent” with Windows Server and change the four-core minimum to an eight-core minimum, thereby generating another surge of revenue.

License Mobility for Azure for other servers could also be linked to the SCE, again in the name of consistency.

At some point, however, customers will feel enough pain to look at alternatives. They initially swallowed the SQL Server processor-to-core conversion, but for the first time our firm is seeing several large customers (totaling about 400,000 employees) seriously considering alternatives. One has resolved to have no Microsoft SQL Server in use anywhere (on premises or in the cloud) in three years. They will run alternatives on Linux, with lower costs and far fewer bundling and licensing restrictions. Another, which expects its Windows Server count to decline in coming years as it makes broader use of Linux, is also considering an open-source solution for thousands of commodity SQL boxes.

As for other customers, they might want to take a pass on License Mobility for Windows Server. With its CIS bundling and SCE requirements, Windows Server on Azure is entangled in obscure exceptions and costly licensing gotchas that will cost customers dearly.

Microsoft may have trouble raising the price of the current model, in which customers simply rent Windows Server from the cloud hoster, since competitors like Amazon are constantly driving down prices. Most customers may be far better served by sticking to that approach as long as possible.

(This article was updated March 1, 2016 to incorporate additional information and clean up a few typos. Our thanks to Radovan Mráz for his suggestions around VM entitlements for Windows Server Standard.)