Outlook prompts the user to log in, but logging in will fail as it's effectively requesting credentials to authenticate against the O365 service, rather than Hosted Exchange credentials. This causes problems for customers who aren't using O365 for their mail service (our Hosted Exchange customers), especially if the user has an unused mailbox within the O365 service, or if the the user has a personal O365 subscription using their business email address. A recent update by Microsoft to the Outlook 2016 Click2Run version has introduced a functionality change whereby Outlook is prioritising Office 365 for the autodiscover queries above all other autodiscover methods.
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