Microsoft’s tactics to win cloud battle lead to new antitrust scrutiny

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Microsoft has escaped the recent backlash against the power and wealth of the biggest US tech companies.

Despite a stock market value that has soared to more than $2tn on its dominance of various parts of the business software market, it has avoided a repeat of the complaints that made it the most prominent target of antitrust action in the US and Europe at the end of the 1990s.

That is, until now.

Changes to some of the company’s core terms of business have caused growing unrest among some of its largest customers, as well as drawing complaints from rival cloud companies. Among the results has been a broad ranging, though still informal, antitrust review in Brussels.

According to its critics, Microsoft has used anti-competitive tactics to draw customers to its Azure cloud computing service and away from rivals, in particular Amazon Web Services, which dominates the cloud market. By using Windows and Office to feed the growth of Azure, the critics claim it is repeating the kind of illegal “tying” that was at the centre of the last round of regulatory actions against the company.

Microsoft said it was not “foreclosing” the market by blocking any rivals from running its software in their clouds, and that it was at liberty to offer more favourable terms to its software customers if they also used its Azure service.

However, Brad Smith, the company’s president, conceded Microsoft had been partially at fault, without pointing to specifics ⁠ — a marked contrast to the aggressive stance the company took when it faced competition complaints more than two decades ago.

“While not all of these claims are valid, some of them are, and we’ll absolutely make changes soon to address them,” Smith said in a statement. Microsoft, he added, was “committed to listening to our customers and meeting the needs of European cloud providers”.

The accusations of hard-nosed business tactics follow a period in which Microsoft became known for the conciliatory stance it took after its last round of antitrust battles in Washington and Brussels.

One large Microsoft customer, who declined to be named, said that Microsoft’s more stringent terms had hit its use of a version of Office running on Amazon’s cloud, affecting tens of thousands of its workers. The result would be “millions of dollars” a year in extra licensing fees, though Microsoft had delayed the onset of the higher costs after the customer complained. “Microsoft are really not looking out for the best interests of their customers,” this person said.

There are signs of a regulatory response. In an informal questionnaire sent to rivals last month, and seen by the Financial Times, the EU asked about the terms under which they could run Microsoft’s software, and whether this put them at a disadvantage.

At the heart of the controversy is a change to Microsoft’s licensing terms made in October 2019. The change affected the way the company charges for products such as Office when they are running in the data centres of Amazon Web Services, Google and Alibaba ⁠ — so-called “hyperscale” cloud services that compete with Microsoft’s Azure.

Microsoft’s Azure website on a mobile phone © Piotr Swat/Alamy

Customers were required to pay an additional licence fee, even if they had already paid Microsoft for running the software in their own data centre under an existing arrangement. Microsoft’s own cloud service, Azure, was included on the list of hyperscale groups affected by the higher charges, though customers were given a special discount that offset much of the increase.

“You can still run all of these products in someone else’s cloud, but you must be willing to pay a premium to do that,” said Wes Miller, a former company executive and now an analyst at Directions on Microsoft, which advises Microsoft customers.

Among the services affected was AWS’s Workspaces, a service launched in 2014 that made it possible to give workers a “virtual desktop”, an experience that looked like a Windows PC but was really being fed by software running in Amazon’s cloud. Microsoft did not launch a similar service of its own until shortly before it imposed the sweeping licence increases, making it more attractive for customers to opt to use Azure.

Microsoft said that rival productivity applications like those from Google provided an alternative, and that it made available individual parts of Office ⁠ — such as the Excel spreadsheet program ⁠ — for customers who only wanted to pay for part of the software.

Charging higher prices for using its software in rival clouds is only one way Microsoft has tried to steer more customers to its own cloud platform, according to critics. Other licensing terms, and the ending of technical support for certain services, added to pressure on customers to move to Azure, they said.

Another tactic that has come under fire ⁠ — and one also under review by the EU ⁠ — involves bundling, or packaging a number of services together in a single product, even if many customers only require one element.

For instance, the highest level of security is only available for customers of the Microsoft 365 package of software if they pay for a premium version known as E5. According to Directions on Microsoft, this is another “bundle” that also requires them to buy many other features.

Some of the accusations echo Microsoft’s last round of antitrust battles. They include a complaint that the company made it hard for users of the latest version of Windows to use a browser other than Microsoft’s own ⁠— a tactic it also stood accused of in the 1990s to destroy browser pioneer Netscape. Responding to the latest unhappiness, Microsoft two weeks ago made it easier for users to change the default browser in Windows.

Most Microsoft customers are on three or five-year contracts, known as Enterprise Agreements, meaning that many have yet to face a licence renewal since the 2019 changes. Also, Microsoft has also made one-off concessions in licensing negotiations with some customers to delay the impact of the new pricing formula.

Even if Microsoft’s tactics are not illegal under the current law, they could fall foul of new laws that are designed to prevent powerful tech companies from favouring their own services, said Frédéric Jenny, a French antitrust expert who was commissioned by a group of cloud companies in Europe last year to report on potentially anti-competitive behaviour by large software companies like Microsoft

Europe’s Digital Markets Act, adopted last month, aims to put new restrictions on companies deemed to be digital “gatekeepers”. Many details of the law have yet to be ironed out and it was initially targeted at consumer internet platforms, not business software companies like Microsoft.

However, focus is growing on the company. Customers are “very frustrated with what they perceive as Microsoft not letting them use the cloud of their choice,” said Michael Silver, an analyst at Gartner, who has advised the software company’s customers for more than 25 years. He added that, to many, the licensing furore “seems like a return to the old Microsoft.”

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