We recently told you about a virtual desktop service for iPads and other devices that seems to exist only because it breaks Microsoft's Windows licensing rules in order to provide an unbeatable price: free, with the option to upgrade to a more robust service for just $5 a month.

The hosted virtual desktop service, from gaming company OnLive, has virtualization vendors who play by Microsoft's rules seething. Instead of suing OnLive, as one might expect, Microsoft responded to criticism of OnLive's favorable arrangement with a blog post stating "We are actively engaged with OnLive with the hope of bringing them into a properly licensed scenario."

The people who are angry include Guise Bule, CEO of tuCloud. He accuses Microsoft of playing favorites with OnLive—whose CEO is a former Microsoft executive—while regularly auditing license compliance for companies like tuCloud that provide legitimate virtual desktop services. Bule is so mad that he says he is forming an entirely new company called DesktopsOnDemand to provide a service identical to OnLive's, complete with licensing violations, and dare Microsoft to take him to court. Bule hopes to force Microsoft into lifting restrictions on virtual desktop licensing that he says inhibit growth in the virtual desktop industry, and seem to apply to everyone except OnLive.

"Unless I receive a lawyer's letter from Microsoft clarifying their position and threatening legal action, I will build a service to match OnLive's and compete directly with them in the form of DesktopsOnDemand," Bule told us. "Any other business that launches that platform will get sued by Microsoft, which is kind of what we're hoping because we want to have that conversation with them in court."

Origins of the desktop licensing controversy

Both Microsoft and OnLive have declined interview requests from Ars, and neither has explained publicly what licensing scheme OnLive is using to deliver the OnLive Desktop service, which gives users access to Windows 7 and Office 2010. We do know from Microsoft's blog post that vendors can only host Windows 7 desktops in a virtual desktop infrastructure setting if the customers buy their own licenses from Microsoft. Even if this requirement is met, the vendor must host the desktops on separate physical hardware for each customer, ruling out a multitenant arrangement.

Separately, Microsoft partners with a Service Provider License Agreement (SPLA) can offer desktop-like functionality using Windows Server and Remote Desktop Services. This does not allow delivery of a real Windows 7 desktop, but it does allow hosted instances of Microsoft Office.

OnLive has apparently followed none of the proper licensing rules. The IT analyst firm Gartner called out OnLive for not revealing its licensing situation, and said Microsoft "has not provided clear guidance" on how users of OnLive's service should go about complying with licensing requirements.

Brian Madden, a member of Microsoft's MVP (Most Valuable Professional) program, publicly quit MVP after Microsoft refused to answer his questions about OnLive. Madden wanted to know how it could be possible to offer such a service without flouting Windows licensing rules. "Based on everything we know about Microsoft licensing, this [the OnLive service] should be in clear violation of Microsoft's policies," Madden wrote.

How Bule plans to violate Microsoft's licensing rules

So, what are Bule's plans? They very much revolve around what he hasn't been able to do with tuCloud. The company provides virtual desktops with a design that bolsters personal and corporate security by dismantling the virtual desktop each time a user logs off and then rebuilding it—complete with user preferences and settings—the next time the user logs in. By offering a non-persistent desktop that looks like a persistent one, tuCloud says it can nearly eliminate proliferation of viruses without an outcry from end users.

But providing that service requires customers to purchase Virtual Desktop Access licenses from Microsoft, or the expensive Microsoft licensing program known as Software Assurance (which includes virtual desktop rights), effectively limiting it only to big customers, like the Lawrence Livermore National Laboratory, which has deployed it to 5,000 users.

Bule says he has to turn away two-thirds of his leads because the licensing model doesn't work for small customers that don't purchase Microsoft's Software Assurance. It's not economical to build separate physical infrastructure for each customer to provide Windows 7, and the "desktop-like functionality" that can be provided through Windows Server and Remote Desktop Services isn't compatible with tuCloud's non-persistent desktop model, according to Bule. He's been publicly criticizing Microsoft's licensing model for more than a year.

DesktopsOnDemand will use roughly the same technology as tuCloud, he said, but it will use a licensing scheme that violates Microsoft's rules. Although DesktopsOnDemand will provide each user a genuine retail copy of Windows 7, it will violate the prohibition on providing hosted Windows 7 desktops on multi-tenant infrastructure, as well as the requirement to have Software Assurance or Virtual Desktop Access licenses.

Each desktop will cost about $25 a month. Providing the same pricing as OnLive "should be impossible," Bule said. "They're breaking every rule in the book to do that." By contrast, a properly licensed Windows and Office service for the iPad being developed by the vendor Nivio will cost $5 for each ten-hour increment.

Press releases from tuCloud and its partner Desktone say DesktopsOnDemand will be a tuCloud service launching in the second quarter, as early as April, but Bule told us he will incorporate it as a separate company. "TuCloud has never and will never break Microsoft licensing regulations," he said. "My clients are too important to risk my business that way."

The new company will be formed in the next couple of weeks, he said. Bule is investing $100,000 into the new venture, and a couple other unnamed people from within the desktops-as-a-service business are funding it as well. The technology is almost ready, he said. It will consist of VMware server virtualization on the back end, Nexenta storage, Desktone's virtual desktop infrastructure, and Citrix's HDX protocol, and is likely to be hosted on Rackspace. Virtual desktops will be delivered either through a Web browser or the Citrix Receiver client, making it available on Windows PCs, Macs, Linux, Android, and iOS.

"It's the dream infrastructure that we should have, and Microsoft won't let us," Bule said. Bule argues that Windows licensing restrictions have prevented the virtual desktop industry from taking off in the way industry analysts have expected it to.

"I will scream 'antitrust'"

"If I had a billion dollars in the bank I'd take them to court tomorrow," Bule said. Instead, DesktopsOnDemand is how he will "provoke Microsoft by proxy."

"If they sue that business, I'll appear in court and shout and scream 'antitrust, anticompetitive behavior,'" Bule said. "I don't think they want that because they can't justify their licensing."

Bule says tuCloud and other companies like it get calls from Microsoft two or three times a year to audit compliance with licensing rules. While no one seems to know for sure how OnLive's licensing arrangement with Microsoft works, Bule says he is suspicious of the connection between the companies because its CEO and founder is Steve Perlman, a former Microsoft division president. Perlman sold a previous company, WebTV Networks, to Microsoft, and founded a company, Moxi, that later merged with Digeo, a company founded by Microsoft co-founder Paul Allen.

DesktopsOnDemand will be able to serve up to 1,000 desktops. However, Bule said the company will have a limited amount of money, and once it runs out he will let it go bankrupt.

In other words, buyer beware.

"We can't build a serious business because it's illegal," Bule said. "This is not a serious business by any means."