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How do ArcGIS concurrent licenses and hardware keys work?
Concurrent use licenses are protected by a digital 'combination lock'. The license manager that controls the licenses is comprised of 3 parts: the license manager software, a physical parallel- or USB- hardware key that plugs into the computer, and a license file.
The license file is a simple ASCII text based file that contains the various features the customer is licensed for. The integral parts of the license are: the hostname of the computer, the hardware key number, an eight digit number that always starts with '371', and the ESRI feature codes; four long alpha-numeric character strings. When a license file is generated, it takes the eight digit hardware key number and generates the long alpha-numerical license codes for the requested features. That license file does not work with a different hardware key.
The license manager runs as a service on the computer (arcgis.exe). It regularly checks that the hardware is plugged in and working. When a license is requested, the ArcGIS on the client machine regularly checks that the license it has from the license manager is still available. If the license manager stops because the hardware key is no longer plugged in, the license service stops and the client exits out of the software.