Microsoft explains value of E7 usage-based pricing | Computer Weekly

The Microsoft 365 E7 licensing model was among the big focus areas during the earnings call for the company’s latest quarterly results.

Microsoft reported revenue of $82.9bn, an increase of 18% over last year’s third-quarter results.

Microsoft 365 Commercial cloud revenue increased 19%, and its Productivity and Business Processes business posted revenue of $35bn, an increase of 17% over the same period last year.

While the headline figure is its growth in cloud revenue, the company is attempting to shift to a value-based software licensing model, tied to a user-based licence base, with usage-based pricing to cover additional usage.

This additional usage is positioned by Microsoft executives as a way to show that the greater use of the software is generating additional business value for the customer.

The Microsoft 365 E7 licence becomes generally available on 1 May. The licensing model has been introduced to help fund the investments Microsoft is making to support artificial intelligence (AI) and the broader use of agentic AI across its product portfolio.

The E7 plan bundles base usage rights into seat-based pricing. According to Microsoft, it offers customers a convenient way to purchase consumption packs tied to seats or agents. Beyond the base usage covered by the user licence, customers are charged on pure consumption-based pricing, tied to token usage and consumption.

Over the next three to five years, Microsoft’s mix of consumption versus traditional seat-based models will evolve. It anticipates that customers will increasingly adopt hybrid models like E7, balancing predictability with the flexibility of consumption-based pricing. It expects IT budgets to adapt to this new model, driven by business outcomes and the value derived from token usage.

When asked about the shift in licensing, chief financial officer Amy Hood said: “As we go through using a model that’s been historically thought of as a per-seat business, suddenly, if you think about getting work done and being more productive, it’s thinking about being a seat or a worker plus an agent.”

She described the shift as a “licence business plus a consumption business”. “It’ll still have that per-seat licence logic, but it’ll also have a meter, just like you see in Azure.”

What this means for IT departments is that they will procure E7 licenses, but will also need to account for usage costs on top.

CEO Satya Nadella said this model will be rolled out to all software that is licensed on a per-user basis. “Any per-user business of ours, whether it’s productivity, coding, security, will become a per-user and usage business,” he said.

Given the intensity of usage the company has experienced, his response to the question on licensing changes implies that Microsoft needs to somehow fund investment in infrastructure. “Where are these dollars going to come from,” said Nadella. 

He argued that Microsoft business customers, who see their costs decrease or revenue increase as they roll out AI agents, will drive greater usage. “It may not be, by the way, pure seat coverage-type of motions, like in the past,” said Nadella. “This is more about getting intense users and intense usage, and that’s what we’re focused on.”