Microsoft's new virtualization licensing model for its Windows Server System could dramatically lower costs for users and help advance industry efforts to define how software should be licensed as virtualization takes off on corporate networks.

Last week, Microsoft added licensing terms for its server operating systems that support virtual machine technology. The company also added various use-rights, including a pay-only-for-what-you-use model, for the other software it develops under the Windows Server System banner, including SQL Server, Exchange, SharePoint Portal Server and BizTalk.

While some users were pleasantly surprised by the licensing changes, analysts say in the long term Microsoft has only taken its first step into the evolving virtualization-licensing arena.

"This is better than I was expecting," says Lance Auman, director of enterprise infrastructure for the San Francisco Unified School District. Auman uses Microsoft's Virtual Server to consolidate infrastructure. "Up until now we have been treating virtual machines like regular hardware in terms of licensing," he says. "When you put these changes into [Microsoft's] educational pricing, cost is almost nothing. It is so negligible it is almost free."

With the virtualization licensing, which takes effect Dec. 1, users can run four virtual machines on top of the Enterprise Edition of Windows Server 2003 Release 2, which is slated to ship in December, without any additional licensing costs beyond the base server. Users can run any Windows server version within those virtual machines, including Windows 2000 and NT.

Microsoft says given current retail pricing a user would pay $4,000 for a Windows Server 2003 Release 2 license plus $1,000 each for four copies of Windows Server Release 2 Standard Edition to run within virtual machine technology, for a total of $8,000. Under the new licensing the same configuration would be half that price.

The company also changed its licensing for virtual copies, or images of Windows Server System software, such as SQL Server and Exchange, and will now charge only for virtual images that are active. Previously, Microsoft charged for every image of a system whether it was actively used or on standby for tasks such as failover.