Microsoft has found a way to hurt the partnership between Amazon Web Services and VMware by raising prices for customers using non-Microsoft clouds (MSFT, AMZN, VMW)

In the chess game between the top cloud computing vendors, Microsoft has just made a clever but dangerous move to try and undermine the alliance between Amazon and VMware.
Microsoft has changed its licensing agreements to make it more expensive for its customers to transfer their on-premises Microsoft apps to competitors’ clouds including Amazon Web Services and Google Cloud.
This change specifically applies to customers who use VMware’s software with Microsoft software on these other’s clouds.
The goal is to keep its own customers (which encompasses most of corporate America) from defecting to rival clouds, using an old-school competitive of the type previous Microsoft CEOs might make.
And Amazon is not pleased.
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Microsoft has changed the way it’s charging customers who use its technology on rival clouds.

This change will effectively raise prices — often significantly — when customers choose to run certain types of Microsoft software, such as its database running on Windows Server, on another cloud like Amazon Web Services or Google Cloud.

"They changed the rules for everyone, even themselves," Wes Miller, a well-known analyst for the equally well-known market research firm Directions on Microsoft, tells Business Insider.

While that’s true, Microsoft has another licensing program, called "Azure Hybrid Benefits," that basically offsets this new change and its higher prices.

So the higher prices "will definitely affect prices for its customers using VMware in AWS and the recently announced VMware in Google Cloud," says Miller, but not for most Microsoft Azure customers.

The software licensing rabbit-hole

To understand what Microsoft is doing, you first have to understand a little bit about the wonky, expensive and often draconian rules involving how companies buy software.

Companies don’t actually "buy" software.

They license it, meaning they pay to use the software in specific ways: in certain locations, such as their own data centers’; for a specified number of a certain size of servers, and for a specific timeframe, typically three years.

What Microsoft did was essentially eliminate a loophole intended to cover software used in a company’s own data center but managed by someone else, aka, old-school outsourcing.

The loophole was that the "outsourcer" designation still applied even if the company moved the Microsoft software into a cloud like Amazon’s or Google’s, as long as they used a so-called "dedicated servers," where the customer controls the whole cloud server, not sharing it with others.

Much of cloud computing doesn’t involve dedicated servers. The original public cloud model involves sharing all the data center technology. In the jargon of the industry, this concept is called "multi-tenant". With everyone sharing equipment in a massive data center, cloud computing can give customers affordable access to virtually unlimited supercomputing power.

But there are apps that companies don’t want to put into a shared system. They may be restricted by government regulations, or the app may have persnickety performance requirements, or the company may just feel like the app and its data are too precious for that.

These apps are often extremely lucrative for IT vendors to supply, and there’s a land grab among cloud computing vendors going on now for enterprise customers who still have these precious apps in their own data centers.

Read: How VMware became a secret superpower in the cloud wars and why Amazon Web Services should not be happy but Google and Microsoft are thrilled

What Microsoft changed is this: Microsoft now says that with all new license agreements signed after October, 2019, specific clouds are no longer covered by the outsourcing loophole around dedicated servers. (Remember, companies have to continuously renew their licenses in order to legally keep using the software that they are already have in place.)

Microsoft says that any customer that wants to run its software on dedicated servers on the cloud will also have to buy a special service called Software Assurance (SA), that includes "mobility rights."

SA is sort of like Microsoft’s extended warranty. It gives enterprise customers a package of extra features. But it’s pricey, usually adding an additional 25-30% to the cost of licensing, depending on the products.

If customers don’t buy Software Assurance and "mobility rights," then they can’t get an unlimited usage license for Microsoft’s software. They will revert to "pay as you go" fees, which will almost certainly cost them more every year.

Microsoft names the following cloud providers as being disqualified from being labeled an outsourcer: Microsoft Azure, Alibaba, Amazon (including VMware Cloud on AWS), and Google.

But, again, although Microsoft has lumped itself in there, it offers another licensing program that allows its customers to move their Microsoft apps into Microsoft’s cloud.

"The end result is that the costs in Azure will basically stay the same when running on dedicated hardware (like VMware in Azure or the new dedicated hosts for Azure VMs), but will go up dramatically for other clouds," Miller says.

Smackdown on the AWS/VMware marketing strategy

This change will particularly bash a top sales strategy used by Amazon Web Services and its close partner VMware. Those two are jointly trying to get VMware’s customers to move to Amazon’s cloud. Many of VMware’s customers use its software to run Microsoft applications.

VMware has now allowed its software to run on Microsoft’s cloud, as well as Google’s, Alibaba’s and IBM’s. But Microsoft and Google have made it happen by working with some of VMware’s partners. Amazon Web Services is the only cloud where VMware is doing joint engineering and joint sales.

How important was this licensing loophole to Amazon? Enough so that Amazon talked it up in its marketing materials:

Amazon

And AWS has showcased Microsoft customers who saved a lot of money thanks to the loophole when moving their Microsoft apps to AWS.

The brass at AWS is not happy about Microsoft’s decision. Although Amazon insists it doesn’t focus on what its competitors are doing, CTO Werner Vogels sent a tweet condemning Microsoft’s licensing change on Monday.

He called it a bait-and-switch, saying that Microsoft has now rolled back a couple of programs involving "bring your own license" to the cloud.

Just like the old Microsoft

While this old-school competitive move under Microsoft CEO Satya Nadella is clever, it’s also dangerous. It’s the kind of thing former CEOs Bill Gates or Steve Ballmer might have done.

If Microsoft’s customers feel the company is ratcheting up costs on them unfairly, they will look at ways to get rid of Microsoft’s products, which has become easier to do now than ever before.

In fact, CERN, the famous scientific lab where the web was born, grew so upset after Microsoft massively hiked prices by changing its licensing terms, it has embarked on a program to replace all of Microsoft software and to help others do the same.

Now read: CERN, the famous scientific lab where the web was born, tells us why it’s ditching Microsoft and helping others do the same

This is the third time this summer that Microsoft has caused a controversy by raising its prices. Besides CERN’s price hikes, Microsoft also came under fire for wanting to charge its reseller partners for their use of software, too, but it eventually bowed to pressure and abandoned the plan.

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