Microsoft’s June and July 2025 Product Terms updates bring meaningful changes to AI governance, licensing definitions, and compliance practices. While not all updates will impact every organization, many signal Microsoft’s evolving strategy around AI responsibility, healthcare compliance, external user licensing, and Azure governance.

Our experts have reviewed both months’ updates to highlight what’s new, what’s changed, and what it means for your organization

Summary of key updates

1.   AI Responsibility & Governance: The customer is now fully liable

Microsoft has added new language under the Responsible Use of Microsoft AI Services that explicitly shifts accountability:

• Microsoft is not responsible for any applications customers build with its templates, code samples, or tools.
• Customers must ensure any AI-powered apps comply with applicable laws, regulations, and ethical guidelines.
• Templates or tools from third-party contributors, even if hosted by Microsoft, are governed by the third party’s terms.

Why it matters: Organizations cannot rely on Microsoft’s guidance or tools as a compliance shield. Strong internal governance frameworks for AI usage are now essential.

2.   Copilot Studio licensing & grounding exclusions

Copilot Studio is now:

• A Covered Product under Microsoft’s licensing terms.
• Included in the Customer Copyright Commitment, which offers some protection for customer-created content.

However, Microsoft also introduced a key caveat:

• When Copilot Studio is used with Grounding via Bing Search or Bing Custom Search, the grounding function is not covered by the Data Protection Addendum (DPA).
• It is instead governed by Bing’s Terms of Use, meaning data protection and processing obligations may fall outside your standard compliance perimeter.

Why it matters: This distinction is critical for organizations in regulated sectors or those with strict data-handling requirements. Copilot use with grounding needs to be reviewed and risk assessed.

3.   Dragon Copilot: EU-ready & certified for compliance

Microsoft’s healthcare-focused Dragon Copilot has been:

• Added to EU Data Boundary Services, supporting customers with EU or EFTA data residency requirements.
• Certified under SSAE 18 SOC 1 Type II and SSAE 18 SOC 2 Type II, strengthening its privacy and security posture.

Why it matters: This opens the door for compliant healthcare and public sector deployments in Europe, while still requiring organisations to validate downstream privacy practices.

4.   Azure Changes: Renaming, recording consent, and model availability

A number of updates to Azure services and terminology were made:

• Azure OpenAI Service has been renamed to Azure AI Foundry Models.
• A Microphone usage clause has been added for Azure Communication Services – developers must notify end users when a mic is being accessed.
• Acceptable Use clause was removed from Azure AI Foundry terms; this clause previously prohibited collection of harmful content.
• Entra ID Governance can now be assigned only to External Users.

Why it matters: The rebranding of Azure OpenAI into AI Foundry reflects Microsoft’s shift toward formalized AI-as-a-service. At the same time, microphone usage and removed acceptable use protections mean organizations need to step up their own compliance and consent mechanisms.

5.   Licensing Clarity: Cloud add-ons, definitions, and purchase alignment

Key updates to licensing structure and terminology:

• “Add-on” has been replaced with “Cloud Add-on to SA” in the Glossary. This:
  • Applies only to User SLs
  • Requires an associated Qualifying License with active Software Assurance (SA)
• Microsoft updated the Online Services Purchasing Rules to specify that only Cloud Add-ons to SA must be purchased under the same agreement as the base license—not all licenses with pre-requisites.
• The following new/updated definitions have been introduced:
  • Azure Direct Model: An AI model deployed as a “direct” offering within Azure AI Foundry.
  • Covered Product: Now defined as any non-preview Copilot or Azure AI Foundry model available via paid subscription or volume licensing.

Why it matters: These changes affect how add-ons are licensed and interpreted contractually. They also signal a more rigid structure for AI licensing, aligning definitions more closely with Microsoft’s strategic product groups.

6.   External User Alignment: Dynamics 365 & governance

Dynamics 365 language has been updated to align with the October 2024 External User definition, which states:

• are not employed by a company nor its affiliates.
• do not typically work more than 30 hours per week on average.
• are not onsite every working day.

More information available: Microsoft Product Terms Updates – Q4 2024: Key changes and Insights – ITAA

Why it matters: Many organisations license Dynamics for contractors or partners. This update offers clarity but may also require internal process changes to ensure compliance during audits.

Final Thoughts

Microsoft’s June and July Product Terms updates may appear technical, but they represent significant strategic shifts in:

• Who bears responsibility for AI-powered applications,
• How AI services like Copilot are licensed and protected,
• Where data protection boundaries begin and end, and
• What compliance safeguards customers must now manage independently.

Organisations must now treat Product Terms updates not as admin detail, but as strategic levers for risk management, licensing optimisation, and future procurement planning.

How ITAA can help

Navigating Microsoft’s evolving Product Terms can be daunting – but it doesn’t have to be.

At ITAA, our consultants interpret these updates in the context of your actual agreements, licensing structure, and compliance risk profile. Whether you’re planning AI adoption, reviewing license assignments, or preparing for a renewal – we can help.

Our 2025 Microsoft Product Terms Updates

Read the rest of our summaries on Microsoft Product Terms updates for 2025 here:

• January
• February
• March
• April & May
• June & July
• August

Robert Wright, Microsoft Consultant

Robert Wright is an ex-Microsoft auditor turned Licensing Consultant. He focuses on license compliance with a strong emphasis on cost-saving strategies. With a proven track record, he excels in optimizing licensing portfolios across various industries, particularly in the public sector.