In This Blog
- Microsoft 365 vs. Office 365
- Keeping Cloud Costs in Check: Azure Pricing Basics
- Azure Arc: Bringing Hybrid and Multi-Cloud Under One Roof
- Microsoft Security Products
- AI and Copilot: What You Need to Know About Microsoft’s AI Licensing
- Strategic Licensing: Key Questions to Ask Yourself
- Final Thoughts
- FAQ
Microsoft licensing is vast and constantly evolving, which makes understanding it a
critical, but complex, task for IT leaders. With so many product tiers, bundles, and
add-ons, it’s not always clear how to structure a licensing strategy that balances cost,
capability, and flexibility.
I recently hosted a breakfast discussion with fellow CIOs on this topic, and I thought it was
worth sharing some of the insights we surfaced. Whether you’re running a lean IT shop or a sprawling enterprise architecture, your licensing strategy directly impacts your bottom line, your team’s flexibility, and your ability to innovate. Let’s break it down.
Microsoft 365 vs. Office 365
A common point of confusion we tackled early on is the difference between Office 365 and Microsoft 365. While the terms often get used interchangeably, they’re not the same thing.
Office 365 is mainly about productivity tools: Exchange, SharePoint, Teams, the core apps your teams rely on for collaboration and communication.
Microsoft 365 bundles Office 365 with Windows licenses, Intune for device management, Azure Active Directory Premium, and a set of security features.
|
Plan |
Includes |
Who it’s for |
Price |
|
Office 365 E3 (no Teams) |
Office apps (desktop/web/mobile), business email (Exchange Online), OneDrive (1 TB), SharePoint, Teams, etc. No Windows OS or advanced EMS security. |
Knowledge workers needing core productivity cloud services. |
~$20.75 user/month (annual) |
|
Microsoft 365 E3 (no Teams) |
Everything in O365 E3 + Windows 10/11 Enterprise OS, Intune device management, Azure AD Premium P1, basic threat protection & identity management. |
Organizations that want a complete productivity + device + security solution in one license. |
~$33.75 user/month (annual) |
|
Microsoft 365 E5 |
Everything in E3 + Power BI Pro analytics, Phone System for Teams, and all advanced security/compliance (Azure AD P2, Defender suite, Purview, etc.). |
Enterprises needing top-tier security, analytics, and voice features built-in. |
~$57.00 user/month (annual)¹ |
|
Microsoft 365 F3 |
Office web and mobile apps only (no desktop Office), Teams, email, limited OneDrive (2 GB). Includes Windows Enterprise for shared devices. |
Frontline/firstline workers (e.g. retail, factory) who share devices or use mobile only. |
~$8.00 user/month (annual) |
Many organizations mix and match these licenses. For example, E3 for most employees, E5 for security-sensitive roles, and F3 for frontline workers. Microsoft supports this blending, giving IT the flexibility to tailor capabilities by role. This approach not only optimizes costs but also ensures users get the right tools for their work, helping improve productivity while keeping security tight.
Keeping Cloud Costs in Check: Azure Pricing Basics
Azure pricing can spiral if left unmanaged. Generally, there are two main pricing approaches:
|
Azure Pricing Model |
Unit Cost |
Commitment |
When to Use |
|
Pay-As-You-Go |
Highest (e.g. full hourly or per-GB rate). |
None – cancel or scale any time. |
Variable or low utilization workloads; initial deployments and unknown demand. You pay only for actual use. |
|
1-Year/3-Year Reserved |
Discounted (e.g. 40–70% off PAYG rates).
Emergent would recommend reserving at about 80% of planned capacity usage |
1- or 3-year term (capacity pre-committed). |
Constant, predictable workloads running most of the time (to fully utilize the reservation). Great for core servers, databases, etc. to reduce cost. |
Plus, Azure Hybrid Benefit lets you apply existing Windows Server and SQL Server licenses to lower cloud expenses. Failing to leverage reserved instances or hybrid benefits can lead to unnecessary overspending, sometimes up to 30% or more annually.
Azure Arc: Bringing Hybrid and Multi-Cloud Under One Roof
For teams juggling hybrid setups or multiple clouds, Azure Arc is a game changer. It lets you manage resources running not only on Azure but also on AWS, Google Cloud, or on-prem servers, all from a single source. This unified approach helps enforce policies and security consistently, which is vital for industries with tough compliance requirements. Without tools like Azure Arc, organizations risk fragmented visibility and inconsistent controls that create compliance blind spots.
It allows you to:
- Bring non-Azure resources, like servers, Kubernetes clusters, and databases, into Azure Resource Manager.
-
Manage these resources just like native Azure services, using familiar tools such as Azure Monitor, Azure Policy, and Azure Security Center.
-
Support hybrid and multi-cloud environments with unified visibility, governance, and compliance across your entire IT landscape.
Microsoft Security Products
Microsoft offers a range of security products to cover endpoint protection, identity management, cloud app security, and compliance governance. Here’s a high-level breakdown:
|
Product |
Standalone Pricing (approx.) |
Included in E5? |
Included in E3? |
|
Microsoft Sentinel (SIEM) |
Usage-based: ~$2.46 per GB ingested (Sentinel analytics cost). Azure Log storage ~$2.3/GB. Volume discounts up to 60% off for commitments. |
N/A (Service, not a user license). However, E5 gives free 5 MB/user/day data ingestion into Sentinel. |
N/A (Sentinel is an Azure service; E3 has no effect, though no data grant). |
|
Defender for Endpoint (EDR) |
Plan 2: ~$5.20 per user/month standalone (covers 5 devices per user). Plan 1: ~$3.00 user/month. Server licenses ~$5 per server/month. |
Yes – M365 E5 includes Defender for Endpoint P2 for each user/device. |
No (Windows E3 includes only basic anti-malware; full EDR not included). Can purchase standalone or via E5 Security add-on. |
|
Defender for Office 365 (Email/Collab ATP) |
Plan 2: ~$5.00 user/month; Plan 1: ~$2.00 user/month (often included in O365 E3). |
Yes – E5 includes Defender for O365 Plan 2 (advanced phishing, Safe Attachments, etc.). |
Partially – O365 E3 has Plan 1 (basic Safe Links, etc.). For full capabilities (Plan 2: Threat Explorer, hunting, etc.), need E5 or add-on. |
|
Defender for Identity (Azure AD identity threat protection) |
~$6.00 user/month (was included with Azure AD P2 or EMS E5). Not sold separately now (part of E5 Security bundle). |
Yes – included in E5 (via Azure AD P2 and Microsoft 365 Defender). |
No – requires Azure AD P2 or E5. Can get via Entra ID P2 license or E5 Security. |
|
Defender for Cloud Apps (MCAS) |
~$5.00 user/month (standalone CASB). Also included in EMS E5. |
Yes – included (full MCAS) in M365 E5. |
No – EMS E3 (in M365 E3) included a limited version of Cloud App Discovery, but not full MCAS governance. Need add-on for full features. |
|
Microsoft Intune (Plan 1) |
$8.00 user/month standalone. (Plan 2 add-on $4; Suite $10). |
Yes – included in E5 (EMS E5 contains Intune P1; some advanced features need Suite add-on). |
Yes – included in E3 (EMS E3). Core MDM/MAM available. |
|
Azure AD Premium P2 (Entra ID P2) |
~$6.00 user/month (or via EMS E5 bundle ~$11 with other components). |
Yes – included (E5 has full Entra P2). |
No – E3 includes only AAD P1 (no PIM, limited Identity Protection). P2 needs add-on (via E5 Security or standalone). |
|
Purview Compliance (E5) – Advanced Data Governance, eDiscovery, etc. |
~$10.00 user/month for "E5 Compliance" add-on (includes all Purview features). Individual components: AIP P2 ~$2, Insider Risk ~$4, eDisc/Audit ~$3… (bundled in add-on). |
Yes – E5 includes full Purview suite (DLP, auto-classification, Insider Risk, etc.). |
No – E3 has basic compliance only (manual labels, basic DLP, 90-day audit). Need E5 Compliance add-on for advanced features. |
AI and Copilot: What You Need to Know About Microsoft’s AI Licensing
Microsoft is investing heavily in AI, embedding Copilot tools across its platform. Here’s the current landscape:
|
AI Service |
Pricing Model |
Details |
|
Microsoft 365 Copilot (enterprise Office apps) |
Per user license – $30.00 user/month (add-on to E3/E5). |
Unlimited use of GPT-4 powered assistance in Word, Excel, Outlook, Teams, etc. Requires base M365 license. Enterprise-grade data privacy. |
|
Copilot Chat (Bing Chat Enterprise) |
Included with Microsoft 365 plans (no extra cost). |
AI chat in web/M365 app with work data protection. Does not require Copilot license. Azure subscription needed only if using custom plugins/agents. |
|
Copilot Studio – Pay-go |
Consumption – ~$0.01 per message. |
Build custom AI agents/bots; charged per AI message (prompt/response or action). No upfront commitment. Good for variable or low usage. |
|
Copilot Studio – Message Pack |
Subscription – $200 per 25,000 messages/month. |
Prepaid capacity for predictable agent usage. Unused messages expire monthly, overages billed at pay-go rate. Lowers effective cost ~20%. |
|
Copilot Studio via M365 |
Included with M365 Copilot license. |
Users licensed for M365 Copilot ($30) get unlimited Copilot Studio agent usage within M365 apps (no per-message fees for internal agents). |
|
Azure AI Foundry – Serverless |
Consumption – Pay per model invocation (tokens). |
E.g. GPT-4 at ~$0.03 per 1K tokens; fine-tunes ~$1.70 per 1M tokens. Scales automatically; no min. cost. Best for unpredictable or lower volumes. |
|
Azure AI Foundry – Provisioned |
Reserved Capacity – fixed hourly or monthly cost for dedicated AI capacity. |
Commit to model throughput units (e.g. a dedicated GPU cluster). ~40% cheaper rates vs pay-go if fully utilized. 1-year term typical. Use it or lose it (ideal for high constant load). |
Azure AI Foundry offers flexible, serverless pricing or reserved capacity, letting organizations start small and scale AI workloads as needed. One common pitfall is rolling out AI tools broadly without a clear use case, which can lead to underused licenses and wasted spend. Starting with targeted pilots often yields better adoption and ROI.
Strategic Licensing: Key Questions to Ask Yourself
When reviewing your Microsoft licensing, consider:
- Can we simplify security by leveraging E5 fully rather than patching multiple tools?
-
Who really needs M365 Copilot versus custom agents via Copilot Studio?
-
Are our Azure Reserved Instances sized right, or is there room to optimize?
-
How do we balance E3, E5, and F3 licenses to match user roles and control costs?
-
Are we using Azure Arc effectively to govern hybrid and multi-cloud resources?
-
Should we commit to Fabric reserved capacity or stick with pay-as-you-go based on our analytics maturity?
Answering these helps keep your licensing strategy aligned with long-term goals and ensures you’re making smart investments.
Final Thoughts
Microsoft licensing might seem overwhelming, but the right approach unlocks real value, including stronger security and better cloud cost control to smarter AI adoption and more effective analytics. To get there, start by auditing your current licenses and usage: identify where you might be overpaying or missing out on features that could simplify your environment. Then, align your licensing mix to match your teams’ needs without overspending. Finally, keep an eye on emerging tools like Copilot and Fabric, which can drive productivity and insights if deployed thoughtfully.
If you want a fresh perspective on your Microsoft licensing strategy or need help navigating this complex ecosystem, feel free to reach out. Together, we can build a plan that maximizes value today and sets you up for future growth.
FAQ
What’s the biggest mistake enterprises make when negotiating Microsoft licensing?
One of the most common pitfalls is overcommitting to a license tier like E5 without fully understanding the actual needs of your workforce. Microsoft makes a compelling case for E5 because it bundles the most features, but that doesn’t mean it’s the right fit across your entire organization. Companies often miss the opportunity to mix and match E3, E5, and F licenses to optimize for both cost and functionality. Before committing, it’s essential to conduct a user segmentation analysis—who needs advanced security, who requires analytics, who’s on the frontline with minimal digital needs. Starting with this clarity can save hundreds of thousands in unnecessary spend.
How do I know if Reserved Instances in Azure are right for my business?
Reserved Instances in Azure work best when you have predictable, steady workloads that won’t fluctuate significantly over time. If your engineering teams or applications have stable demand for cloud resources, committing to a one- or three-year reserved instance can offer deep discounts compared to pay-as-you-go pricing. However, if your workloads are highly variable. like seasonal spikes or project-based dev/test environments, pay-as-you-go might provide better flexibility even if the unit cost is higher. It’s also worth adopting a hybrid strategy: reserve around 80-85% of your baseline consumption and leave the rest flexible to handle unexpected peaks.
What is Azure Arc, and why should CIOs care about it?
Azure Arc is essentially Microsoft’s way of extending cloud-native management tools to on-premise and multi-cloud environments. For CIOs managing hybrid infrastructure or navigating regulatory environments that prevent full cloud migration, Arc provides a unified control plane. It lets you manage VMs, databases, and Kubernetes clusters as if they’re native Azure resources, even if they’re running in your data center or on AWS or GCP. This not only simplifies governance and security but can also unlock cost savings, such as discounted Defender pricing when servers are Arc-enabled. It’s a forward-looking strategy for organizations balancing legacy systems with cloud aspirations.
Is Microsoft Copilot worth the price?
That depends on the use case and your user base. For knowledge workers deeply embedded in Office apps, think analysts, project managers, executives, the productivity gains from having AI directly embedded in Teams, Word, Excel, and Outlook can quickly justify the cost. However, for employees with minimal interaction in the Microsoft suite, that $30 might be better spent on building custom Copilot Studio agents that serve narrow, specific tasks. It’s also worth piloting Copilot Chat first (which is free) to understand the potential before diving into enterprise-wide licensing. A phased rollout with clear ROI tracking is the smartest approach.
How can I balance security needs without upgrading everyone to E5?
If your security risks are unevenly distributed, say, your engineering and finance teams handle more sensitive data than your operations staff—then selective E5 upgrades make sense. You can maintain an E3 base for the majority of users while layering on Defender or Purview add-ons for teams that require advanced protections like insider risk management or auto-classification of data. This lets you tailor your security investment without paying a premium across your entire user base. Additionally, consolidating on Microsoft’s security tools (rather than a patchwork of best-of-breed solutions) can streamline operations and often yield cost advantages that fund these selective upgrades.
