Understanding Microsoft Licensing – hitchhiker’s guide

“As long as the installation wizard takes the Product Activation Key, we’re good!”
“Peel off the COA and keep it handy before you throw that old computer away.”
-Administrator’s famous last words

“Just get SA. It’s so easy… and cheap.”
-CDW representative

Since installing and migrating several machines from physical over to virtual and the slew of discussions on the IT listserv regarding licensing costs, I became uneasy about our licensing choices.  At first glimpse, it seemed logical that as long as I keep physical accountability of the machines that have OEM licenses tied to them would serve as proof of a base license should I be audited.  Technically, the license is already paid for and the hardware is on-site; should it really matter if it is installed on a physical machine or a virtual one?

I have a license, right?

Simply put, the answer is “Yes”.  After reading several documents on MS licensing I discovered that it isn’t as simple as it used to be.  Back in the MS DOS 2.11 days, if you have the original boot floppy in your possession, you were licensed to run MS DOS.  Thinking that things haven’t deviated much from the beginning, I always assumed that if you had the certificate of authenticity (COA), you could run the OS.  Unfortunately, there is no simple, concise description of Microsoft licensing because there is nothing simple about it. Some of the license models remind me of the exotic investment instruments that got the housing and lending markets in trouble last decade.  This enforces my thinking that if it is too confusing to understand, it probably is…

When license agreements were easy...

After researching this subject, I found that there are two licensing programs that would apply to me: Individual and Volume.  Licensing commercial Microsoft software is neither simple nor straightforward. There are many options, conditions and criteria that make it difficult to understand.  The further you go down this list, the more complex the licensing schemes will become.  There is a trade-off: the more complex licensing is, the less-expensive it is; however, with complexity and potential cost savings comes confusion.  In many cases and in my opinion for smaller shops and businesses like cooperatives, simplicity is worth the cost.

Individual License Programs

Individual license programs are the most simple to understand licenses to get involved with.  There are basically two that the common man will deal with: Retail and OEM.

Retail Licenses

To keep it simple, I stayed on the retail license program bandwagon with many of my clients.  It’s really simple: as long as you have the box, you can run the OS or Application in accordance with the EULA.  The EULA normally stipulates that you can only run the product on a single machine at a time.  Full retail and Upgrade retail products can be used to create a clean install and also come with free phone support from Microsoft for the life of the product. The only difference in the upgrade version is that it will check for the existence of a qualifying OS. Also, if you use an Upgrade Retail product, you cannot sell or transfer the qualifying upgrade product to anyone else because an upgrade license does not represent a “base license”. It is a continuation of the previous base license. The Retail License is, however, transferable to a separate machine.  To transfer an Upgrade Retail License, you will have to also transfer all of the qualifying OS products tied to that license.

The easiest to understand: Individual Retail Licenses

I personally have had a positive experience with this simple license program.  While it is quite possibly the most expensive way to license a host, it is absolute and easy to understand for management and auditors.  It is easy to understand because all you have to keep is that COA and a record of where the license is currently being used.  The license can be transferred to another host at any time.  I call it “absolute” because you can always invoke Downgrade Rights if future license terms change.

Example:  One client required a terminal server to operate a remote call center.  The new W2K3 server just changed its licensing terms and fees for terminal server; essentially, I had to pay $22 for every connection.  “With Microsoft Windows 2000 Terminal Services licensing, if a client device is running the most recent version of the Windows desktop operating system, it does not have to have a TS CAL to satisfy the licensing requirement. However, with Windows Server 2003, a TS CAL is required for each device that or user who is using Terminal Services functionality, regardless of the operating system that is running on that device.” (KB823313) So, with a W2k terminal server license, an unlimited number of W2k Pro and XP, Vista and Windows 7 hosts could connect to the terminal server.  So, I went on E-Bay and bought the customer a W2k terminal server license and installed it on some hardware.  To this day he is still running it and all of his business applications still run fine on W2k.


An OEM license is a lower cost license that is obtained when the OS is purchased in conjunction with some hardware. You are probably familiar with this when you buy a Dell or a system at Wal-Mart.  Typically, the hardware is the entire computer; however, there are other qualifying hardware such as hard drives, CPUs, motherboards and video cards. OEM licenses do not include phone support from Microsoft and can only be used for clean installations and not upgrades.

The most important thing to realize about these is that they are bound to the hardware they were purchased with. They cannot be separated from the hardware, transferred to other machines, or resold as separate licenses for installation on replacement hardware.

OEM licenses can be upgraded using a retail upgrade product, however.  If you ever choose to install a retail Windows license on a machine with an OEM license, keep in mind that you will not be able to use the OEM license on any other piece of hardware than what it came attached to.  Rule of thumb: if the hardware dies and cannot be repaired, so does the license.

Volume License Programs

Volume licenses allow qualified corporations, cooperatives, schools, small businesses, and other organizations to obtain OS licenses at a discount, and with tools to manage and deploy the licenses.

Open Licensing

Open licensing was designed for customers with 5 or more user PC’s.  This licensing scheme allows a one-time transaction process with the flexibility of acquiring licenses from a reseller channel like CDW or PC Connection.  Open Licensing is similar to retail licensing in that the base license is sold to you and you get phone support from Microsoft; however the support is limited to the terms of Software Assurance (SA) option purchased.

Software Assurance (SA)

When you purchase a full retail package license of software, you get support for the life of the product from Microsoft.  With Volume Licensing programs, the equivalent to this is what they call “SA”.  SA is purchased in a given interval from 2 to 3 years.  It gives you full Microsoft phone support for the term of the agreement and access to any upgrades that they come out with during that term.  So, if you purchased Vista Enterprise under Open Licensing with 3 years of SA in January 1, 2009, you are entitled to the latest enterprise OS edition upgrade that comes out before January 1, 2012.  You are given an option to extend SA after the contract expiration; however, this is a gray area and will require lots of research.

Some important things to note about SA:

1)      it can be applied to some OEM licenses.

2)      it cannot be applied to all retail licenses (you will most likely need to purchase the upgrade retail product)

3)      it is confusing and you will probably end up purchasing two or three times to get it right.

4)      you will need to research here to determine what products are covered.


If you are using these licenses in a virtualization environment, there are some caveats that you should know about each licensing scheme.  Most of my reasons for researching Microsoft licensing related to virtualization anyway.  So, here are some of the things that I picked out that related to me.

Microsoft’s Take on Virtualization

They are going to get their money.  Please don’t think that virtualizing is going to save you some MS licensing fees.  This is simply not true.  You virtualize for consolidation purposes and to ease datacenter recovery – plain and simple.  Microsoft has a Volume Licensing document online that details how licensing works in a virtualized environment.  Some key takeaways from this publication:

1)      A server is a physical hardware system capable of running server software

2)      An instance of software is the Microsoft product

3)      Assigning a license simply means that you designate that license for one device or user

  1. You may use whatever manual or technical method that works for you to ensure that you have the correct number of licenses to cover your software use.***

4)      Use of technologies that create virtual OS’s does not change the licensing requirements for the operating system and any applications running in the OS.

5)      Reassigning software licenses for server products can be accomplished, but not on a short-term basis (i.e., not within 90 days of the last assignment). They may be reassigned sooner only if you retire the licensed server due to permanent hardware failure.

  1. There is a new rule for license mobility within a server farm. Microsoft waives the 90-day reassignment rule, allowing you to reassign licenses from one server to another within a server farm as frequently as you need to. This change does NOT apply to software licenses for the Windows Server operating system. Please read the Application Server License Mobility Volume Licensing brief for more details.

Key points I got from this is that you will continue to pay for each instance of a running server whether it is physical or virtual.  Licenses may be assigned across servers (servers being “hardware”) but not on a short-term basis.  License mobility only applies to application licenses and NOT Operating systems – this is huge!

Downgrade rights

I wanted to P2V a machine that was running on an OEM W2k3 license on some outdated hardware.  Knowing that my Dell OEM license is tied to the Dell hardware, I needed to purchase a new full retail or open license to migrate it to my ESXi HP server.  Now, the license I purchased can be the latest and greatest OS – like 2008.  I can invoke downgrade rights. I do NOT need to reinstall it from scratch simply because I have a new activation key. The OS merely requires a license on file.  It is important to remember that the activation code used to activate a server is NOT the license.

Note: Downgrade rights allows me to move from, say Windows 7 Enterprise to Windows Vista Enterprise.  Microsoft calls this “N-1” and “N-2” in the downgrade rights document meaning you can go from the current version minus 2 versions.  There are exceptions to this downgrade rule mainly in the application arena:

1)      for all non-business licenses. (There are no downgrade rights for Windows 7 Starter, Windows 7 Home Basic, or Windows 7 Home Premium)

2)      for retail packaged application licenses. (Downgrading from Microsoft Exchange Server 2007 to 2003 would not be supported; however, this does not apply to just about all of MS server OS’s with the following statement:

  1. DOWNGRADE. Instead of creating, storing, and using the software, for each permitted instance you may create, store, and use an earlier version. This agreement applies to your use of the earlier version. If the earlier version includes different components, any terms for those components in the agreement that comes with the earlier version apply to your use of them. Microsoft is not obligated to supply earlier versions to you. At any time, you may replace an earlier version with this version of the software. (W2k8 Standard License Agreement)

3)      for OEM versions of application licenses. (Downgrading from MS Office 2007 to MS Office XP would not be supported)

4)      for some Volume Licensed applications without SA

VMotion, anyone?

If you are looking at virtualization, one of the cool-guy things you can do is Vmotion. Vmotion allows you to move licensed instances of software from one physical server to another. A common feat described in demos is when one instance of a guest OS is overloading the physical host. VMotion can move it to a less-loaded box and then back to its home after the heavy processing load is completed.  This feat is not supported by the Microsoft license agreement unless you:

1)      have a separate OS license to run on each piece of hardware (CALs not included!)

2)      move the server only when the current server is being permanently replaced

3)      move the server for more than 90 days at a time

“In 2005, Microsoft introduced licensing changes that permitted greater mobility of software. This latest set of changes complement those 2005 enhancements, by allowing greater mobility of licenses across servers within data centers and server farms. With the changes, both licenses and software can move more freely across servers in a server farm, potentially reducing the number of licenses needed to support your workloads. Effectively, the changes mean instead of counting instances or processors and licensing by server, you are able to count instances or processors and license by server farm.

This is accomplished by allowing customers to reassign licenses freely across servers within a server farm. The changes apply to software licenses for certain server applications and all external connector (EC) licenses. In these cases, the limitation on short-term (90 days or less) license reassignment is waived. This change does not apply to software licenses for the Windows Server® operating system, Client Access Licenses (CALs), User Subscription Licenses (USLs), Device Subscription Licenses (DSLs), Add-on Subscription Licenses (Add-on SLs), or Management Licenses (MLs). This change applies only to licenses acquired under a Volume Licensing program. It does not apply to licenses acquired through other retail sources.”

Kind of kills the cool-guy aspect of VMotion, doesn’t it?  Please read the Application Server License Mobility Volume Licensing brief for more details on this.

Summary – What I chose to do

After all was said and done, what I found was that there are so many ways to tackling the Microsoft licensing task.  I’m sure that everyone has their way.  As for me, I opted to keep it simple.  Even though it is considered the most expensive way to license MS products, I think the simplicity of the choice shows some value.   Considering that I was up against high administrative and management turn-over, not knowing what kind of licensing we actually had, having to explain to non-technical people who don’t understand what a software license is, and dealing with all of the idiosyncrasies of what you can and can’t do with certain versions/editions/programs, I believe I made the right choice.

For my physical servers, I converted them to virtual machines.  Some of them already had Open Licenses with expired SA contracts.  This is fine.  I don’t need SA anymore.  The license chosen for those operating without licensing were replaced with the retail full-version licenses or full packaged product (FPP).

The FPP’s remind me of the titles that prove my ownership to my numerous automobiles.  So, if you are like me and plan on driving until the wheels fall off of your car, you are going to get the best bang-for-buck just buying it outright.  Being that these servers are virtualized, the proverbial “wheels” will never get old and fall off.  An FPP could run forever!  The philosophy here is: “I need to get a job done…”

The other licensing schemes remind me of lease agreements. So, if  your car is used primarily as a fashion statement and is viewed second for functional transportation purposes, you probably lease.  If you chase tech daily e.g. you own an iPod Classic, Nano, Shuffle, Touch, with every variation of the slick colored earphones, love that iPad, own an iPhone, and every version thereof, then you’d probably like SA with a Volume license scheme. The philosophy here is: “If they build it, I will come…”

License Tracking

According to the Licensing Microsoft Server Products in Virtual Environments Volume Licensing brief published in December 2009, after you have assigned a software license to a server (a.k.a. hardware), you are permitted to run the software on that server. You may use whatever manual or technical method that works for you to ensure that you have the correct number of licenses to cover your software use.

I chose to use a manual paper form to track my licenses and note which server they were installed on.  This paper also notes that date that the license was transferred.  This keeps me “legal” because we can only transfer the server to another host (virtual or physical) every 90 days (unless there is a hardware failure or server retirement).  The form looks similar to this:

License Number License Type Server(2) Host/Server (3) Transfer Date
12345 Open Leka ESXi162 1/1/2010
12345 Open Kahuna ESXi162 1/1/2010
12345 Open Bumblebee ESXi162 4/10/2009
1ABR1 FPP TSS ESXi11 3/10/2010
1JNX3 FPP NEC-Backup HPDL380 – SN### N/A (OEM)
1BXJ5 OEM (1) Technik ESXi162 N/A (OEM)

Bold is in pen; everything else is in pencil.

Notes: (1) this OS instance was installed on the same VM server host.  While I could legally virtualize this OS and run it as a guest in the same ESXi host hardware, its license movement is restricted to only this machine without purchasing an additional retail or volume license.  So, I chose to keep it on the same hardware until the ESXi server needs to be replaced. (2) this is the name of the Windows server as we refer to it on the network. (3) this is the virtual host or the physical machine that the Windows OS is installed on.

This form is a cover sheet to my three ring binder titled “Licensing”.  All of my Volume licenses were printed out on paper with supporting documentation, a licensing rationale brief, CD/DVD images, license agreements, and EULA’s.  My thinking is that if an auditor comes on location, I will hand them this book and it will outline all of my licenses, note where they are installed and for how long. If I ever leave or get fired, the next administrator/manager will have all of the licenses in a neat binder with an explanation as to why I went the direction I did.

With that:  good luck to those who care!  To all others: have fun interpreting your agreements!


One Comment on “Understanding Microsoft Licensing – hitchhiker’s guide”

  1. […] For my research as virtualization applies to Microsoft licensing, click here. […]

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