Competition in the cloud: Microsoft's ‘unfair’ licensing tactics go under the microscope

Microsoft’s hold on the global cloud infrastructure sector is on the rise, with data released in the wake of its most recent set of financial results revealing that it’s gaining share at the expense of market-leader, Amazon Web Services (AWS).

According to figures published by Synergy Research Group in early February 2024, Microsoft’s share of the global cloud infrastructure market increased by two percentage points to hit an all-time high of 24% during the final quarter of 2023. AWS’s share of the market, meanwhile, fell by the same amount to 31%.

There could be multiple reasons why Microsoft’s share of the market is growing, but its success in denting the lead of its biggest public cloud rival is being overshadowed somewhat by long-running accusations about the company’s anti-competitive software licensing practices.

Specifically, it is the company’s policy of charging enterprises extra for running software they already own in the Microsoft Azure cloud, as well as its levying of extra charges on enterprises that opt to run Microsoft software, such as Office 365 and SQL Server, in its competitors’ clouds.

It is claimed that these types of licensing tactics make it cost-prohibitive for enterprise cloud users to run their own software anywhere but on Microsoft Azure, which could potentially give it an unfair advantage when it comes to building its share of the cloud infrastructure market.

On this point, research published by data intelligence company Savanta in February 2024 highlighted the restrictive impact these types of software licensing terms have on the amount of choice enterprises feel they have when deciding which cloud to run their workloads and applications in.

The Savanta research, funded by the Computer and Communications Industry Association Europe, is based on the responses shared by more than 1,240 IT decision-makers across the UK, France, Germany, Netherlands and Spain.

Research participants were asked if they had considered switching cloud infrastructure providers, and of those who had, 40% said “existing licensing terms prohibit their companies from taking on-premise licenses to another vendor”.

Long-standing concerns over software licensing

The Savanta study is far from the first time the concerns of IT decision makers about Microsoft’s licensing tactics have arisen. The UK communications market regulator Ofcom raised a red flag about the issue in its 254-page report about the inner workings of the UK cloud infrastructure market in October 2023.

The report is the result of a 12-month investigation into the UK cloud market by Ofcom, which brought to light several instances of anti-competitive behaviour displayed by both AWS and Microsoft.

“The [licensing] concerns centre on the way Microsoft sells and licenses some of its software products used by businesses…these include the Windows operating system, Microsoft SQL Server and the Microsoft 365 productive suite,” the Ofcom report stated.

“We have received submissions that say Microsoft engages in several practices that make it less attractive for customers to use Microsoft’s licensed software products on the cloud infrastructure of rival providers compared to Microsoft Azure. The submissions allege that this limits their ability to compete for customers.”

So much so, the market was referred by Ofcom the same month to the Competition and Markets Authority (CMA) for further probing, with the results of that investigation due to drop in April 2025.

The CMA has since confirmed the “software licensing practices [of] some cloud services providers” will be in-scope of its investigation to see if they “reduce competition or raise barriers to entry”.

As stated in the CMA’s October 2023 Issues Statement document, which set out the four “theories of harm” its investigation will focus on, it is “in particular Microsoft” whose software licensing practices have been flagged as a cause for concern.

“Ofcom received submissions… that allege these practices may make it less attractive for customers to use licensed software products on the cloud infrastructure of rival providers,” the Issues Statement said.

“We [the CMA] have decided that, as part of this market investigation, we should investigate the exact nature of the licensing practices of the relevant cloud service providers, and whether these practices disincentivise customers from using rival providers and consequently reduce competition or raise barriers to entry in cloud services.”

As stated in the Ofcom report, Microsoft “disputes the veracity” of the concerns raised about its software licensing tactics.

The company also provided a detailed breakdown, in its 14-page response to the CMA’s Issues Statement document, of the changes its made to its licensing practices during 2022 in response to complaints raised by “small cloud providers” to the European Commission.

The Microsoft response, published in November 2023, stated: “These licensing changes amounted to granting customers like-for-like economics on Microsoft software whether used on Azure or through another non-hyperscaler cloud.”

These changes were made after a 2019 licensing tweak that Microsoft acknowledges “inadvertently disrupted the business model of small cloud providers”.

“The [2022] licensing changes resolved the complaints [led by the smaller cloud providers] and apply globally, including in the UK.”

Enterprise cloud choice costing ‘billions’

Even so, research published by the non-profit Cloud Infrastructure Providers in Europe (CISPE) trade body in June 2023, claimed Microsoft’s licensing tactics meant European enterprises and public sector organisations are still being forced to pay billions of pounds extra every year to run software they already own in Microsoft Azure.

More than six months before going public with this research, CISPE filed a formal complaint about Microsoft with the European Commission’s Directorate-General for Competition (DG Comp) in November 2022, and urged the organisation to open an investigation into the firm’s alleged anti-competitive licensing practices.

Microsoft used its November 2023 response to the CMA’s issues statement to hit back at CISPE for its insistence that Microsoft makes its software available to its larger cloud rivals around the world on the terms that “those hyperscalers prefer”. It also lightly shaded CISPE by describing it as being “primarily funded” by its main cloud competitor, Amazon.

“The issue that CISPE and others are pursuing is fundamentally one relating to the commercial agreements between hyperscalers and therefore risks being a distraction from the broader industry-wide issues the CMA is considering,” Microsoft added

Despite being seemingly dismissive about the trade body’s concerns, news emerged in February 2024 that Microsoft has now entered discussions with CISPE to help resolve its ongoing concerns about, what it terms, Microsoft’s “unfair software licensing” practices.

In response to this development, a  Microsoft spokesperson told Computer Weekly the firm “continues to work constructively with CISPE to resolve concerns raised by European cloud providers”.

Microsoft has shared no further details about what prompted the start of its discussions with CISPE.

Nicky Stewart, former head of ICT in the UK government’s Cabinet Office and a vocal advocate for the need for a competitive cloud market, told Computer Weekly that the fact they are collaborating is an encouraging sign.

“While I support the complaint that CISPE has justifiably made to the European Commission [about Microsoft] and it’s encouraging that CISPE and Microsoft are in dialogue, we do not yet know the outcome of that dialogue,” she cautioned.

“I hope and expect that both the European Commission and the CMA will continue their investigations until such time as Microsoft has put a stop to its unfair licensing practices multilaterally, without discriminating against individual cloud providers or geographies. There is no place for regulation via backroom deals.”

Meanwhile, Steve Weber, a technology competition expert and professor of the graduate school at the University of California’s (UC Berkeley) School of Information, told Computer Weekly that its collaboration with CISPE could be considered an admission that Microsoft knows its licensing practices are anti-competitive.

“Microsoft’s piecemeal, behind-the-scenes steps to placate regulator pressure are, in fact, an admission that its overly complex and discriminatory licensing practices inhibit market competition,” said Weber.

“Microsoft needs to explain openly, in clear and simple language, why setting different licensing regimes for different customers and competitors is a reasonable and legitimate business practice.”

And the reason why these discussions need to happen in the open is because holding them behind closed doors gives Microsoft leeway to set different licensing terms for different customers and competitors.

Weber added: “[This is because] any eventual solution or agreement needs to level the playing field globally for all customers and competitors – not simply the ones that Microsoft chooses to favour.”

By 111 Tech

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