(Bloomberg) — The current tide of antitrust scrutiny and regulations focused on big technology companies has conspicuously omitted one company: Microsoft Corp., the software and cloud-computing behemoth that was the notorious target of a landmark U.S. government lawsuit in the 1990s. Microsoft, the thinking goes, was already humbled by years of intense government oversight, and since it largely caters to other companies, instead of consumers, it doesn’t belong in the same category as Facebook, Amazon, Google and Apple.But now some Microsoft customers, and some of its fiercest rivals, are making a bold claim: The software giant is again using its sway over one market to thwart competition in another. Microsoft three years ago overhauled the way it licenses some of its most ubiquitous software programs, including Windows and Office, in ways that increase the cost of running those programs on rival cloud-computing systems like Amazon Web Services and Google Cloud Platform. In some cases, the revamped agreements outright forbid using some products on competing cloud services. AWS and Google say they have complained to Microsoft on behalf of multiple customers. French cloud provider OVH, along with other unidentified companies, filed a complaint last year with European regulators about the practice, saying it’s also being hurt by Microsoft’s policies.
Major business software customers, some of which are only now starting to see the impact as they renew deals or replace aging programs, are also incensed. Over a six-month period, Bloomberg spoke with five Microsoft customers and three software resellers working with clients affected by the changes.After being contacted by Bloomberg News, Microsoft President and Vice Chair Brad Smith said the company will talk with customers and rivals and is committed to addressing the issues. “There definitely are some valid concerns,” he said in an interview. “It’s very important for us to learn more and then make some changes.”
Microsoft shares slipped less than 1% in New York on Tuesday.
CISPE, a European cloud-company policy group backed by Amazon and OVH, said it welcomes Smith’s comments but wants to see real changes. “European cloud infrastructure providers demand urgent action, not only vague commitments to talk,” the group said in a statement.
The impact has been felt at companies and organizations both large and small. A person familiar with the software systems at a Fortune 100 company said Microsoft’s rules don’t allow running its existing Office software on Amazon’s cloud, and require it to pay more to run the Windows operating system on its rival’s servers. One consultant tried to help a Fortune 10 customer move to Google Cloud, but the client abandoned the idea after finding it would increase the costs of Windows licenses by $50 million over five years. Customers, consultants and resellers spoke on the condition of anonymity because they weren’t authorized to discuss confidential license details publicly, and some said they feared retaliation from Microsoft.
“The excrement is about to hit the fan,” said Wes Miller, an analyst at Directions on Microsoft, a research firm that advises customers on Microsoft licensing. He said that using the company’s software on a competing cloud service is “significantly more expensive than it used to be, and more expensive than it costs you to do the same thing on Azure.”Microsoft’s practices cut across two of the most lucrative areas of technology aimed at businesses: cloud computing, where it’s playing catch-up, and productivity software, which it dominates. Amazon.com Inc.’s $62 billion cloud unit leads the market for cloud infrastructure services, which let companies tap computing power to run applications and store data. Microsoft’s Azure is a growing No. 2, while Alphabet Inc.’s Google Cloud is chasing Azure. More businesses are shifting their corporate programs—office software, databases, payroll programs and customer websites—into data centers owned by Amazon, Microsoft, Google and other cloud providers, sparing them the expense of owning and maintaining their own equipment.
But most companies still use Microsoft’s Windows and Office to run corporate computers and for tasks like sending email and creating spreadsheets and presentations. The Windows operating system held a 96% share of the personal-computer market last year, according to Gartner, while the Office suite captured 86% of its market in 2020. Many customers also use Windows Server software and the SQL Server database, which are also impacted by the rule changes.Linking a product with the market power of Windows to another offering, like Azure, to gain leverage with customers, or making the product work less well with a rival’s service, can be an antitrust violation called tying, said Herbert Hovenkamp, an antitrust law professor at the University of Pennsylvania, who consulted on the U.S. states’ antitrust case against Microsoft in the late 1990s and early 2000s.
“Microsoft is playing with fire here to a certain extent,” Hovenkamp said.
The 2019 changes technically applied only to the largest cloud providers, but smaller, regional sellers like OVH say they are also facing higher prices when hosting Microsoft programs on their servers. In order to sell customers OVH’s cloud services to work with Microsoft’s programs, OVH said it must sign on to a Microsoft license agreement under which Microsoft “charges higher prices for must-have products,” according to a confidential summary of the OVH complaint viewed by Bloomberg. OVH said it’s also forced to agree to “onerous and abusive clauses,” like submitting to audits and providing Microsoft confidential information about users. In March, European regulators sent a questionnaire to Microsoft cloud rivals and partners that asked about some of the issues OVH raised, according to copies of the document seen by Bloomberg.
In response to an inquiry about the licensing practices, Microsoft said it does offer discounts to existing customers who opt to run some of its programs in Azure, compared with the cost of using the same products with Amazon or Google—but it argues Google and Amazon could offer their own discounts to those customers to win their business. The company also said it does currently restrict using some versions of Office in Google, Amazon and Alibaba’s clouds.
The goal of these policies was not to put rivals at a disadvantage, Smith said, but there clearly have been some “unintended consequences.” In particular Microsoft wants to speak with European cloud providers and address their concerns. “We should be especially sensitive to the unintended impact on European cloud providers. We’re very interested in connecting directly with them and really listening to and understanding better what their concerns are,” he said. Smith didn’t elaborate on what changes the company is considering.
Software licensing rules are lengthy and complex, and Microsoft’s policies vary for each product. The issue creating tension now affects customers that bought rights to use software in their own data centers and offices, but now want to use those programs in the cloud—meaning the software would be delivered via Amazon, Google, Alibaba or Microsoft’s own Azure cloud.Microsoft outlined the restrictions in new licensing agreements starting in 2019, saying certain programs “cannot be deployed with dedicated hosted cloud services offered by the following public cloud providers: Microsoft, Alibaba, Amazon (including VMware Cloud on AWS), and Google.”
Office, the software package that includes common business programs such as Word, Excel and PowerPoint, is “the worst and most complicated,” according to Directions on Microsoft’s Miller. One version of the Office suite—the one used in cloud-computing environments—is no longer allowed for use on rival cloud providers. And newer versions of the traditional Office product have similar limitations. Instead customers must either rely on old versions of Office, which will lose support in 2025, or pay a higher price for a version of Office that is authorized. For many customers, that fee comes on top of the cost of copies of Office cloud apps they had already purchased, Miller said.
Customers say Microsoft’s extra costs are restricting choices. A representative from a large educational institution that is accelerating a move to the cloud wants to take a multi-cloud approach rather than relying on one vendor, and wants to begin shifting Windows Server applications to other cloud systems. But the organization’s license says the products can be used in their own offices or hosted “on Microsoft Azure only,” according to a copy of the agreement with Microsoft viewed by Bloomberg. The institution may try to persuade Microsoft to amend the agreement when it’s next up for renewal, anticipating that trying to use Amazon or Google could cost more. When the U.S. Justice Department sued Microsoft in the late 1990s, the company was accused of illegally tying the omnipresent Windows to the Internet Explorer browser, and using that bond to crush Netscape Navigator. Microsoft was ultimately found guilty of illegally defending its Windows monopoly. A trial court judge also found the company guilty on the tying charge, but that part of the ruling was set aside by an appellate court, and the U.S. government declined to pursue it further.
One of the biggest current pain points for customers concerns the use of technology called a virtual desktop, which lets software like Windows and Office run on PCs through the internet, instead of installing individual copies of the programs on each machine. Amazon offers a service for this called WorkSpaces. Microsoft has competing products, including Azure Virtual Desktop and the new Windows 365 Cloud PC—and clients and software resellers said the Redmond, Washington-based company has gotten more forceful in trying to push customers to it.
This is the issue that ensnared a Fortune 100 company that uses Amazon’s cloud software along with Windows. A person familiar with the company said it started using AWS when it began rolling out mobile devices to employees. The company used its Amazon and Windows combination successfully for several years, until the changes in late 2019. The conflict came to a head more recently, when the company began renewing its contracts with Microsoft—to keep using Windows on virtual desktops via Amazon’s cloud, the customer is required to buy a license that was formerly included, adding millions of dollars to the total cost.
The company considers this a penalty, the person familiar said, because Azure customers get that additional license for free. The customer isn’t allowed to run Office software through a competing cloud at all without violating the terms of its license with Microsoft, the person said. The company spent months negotiating with Microsoft on the issue, eventually getting a reprieve of several years. After that expires, this customer will again be out of compliance.
A person familiar with another client, a financial-services firm, said it wasn’t given any extension to the old policies, so its use of Office with a rival cloud now violates the terms of its license. Using Office on another cloud often requires companies and their software developers to “do all of these exotic, weird modes to be able to try and get something like that to work,” said Miles Ward, a former Google employee who is now chief technology officer at SADA Systems, which helps customers move to Google Cloud. “That sits inside what seems like sort of a comprehensive, intentional program to create friction for clouds other than Azure.”
AWS and Google said their complaints to Microsoft have gone nowhere. “It’s probably Microsoft’s biggest competitive lever to force their licensees to use Azure,” said Matt Garman, a senior vice president for AWS sales and marketing. Google declined to elaborate on its complaints.
Amazon is also lobbying regulators to look at Microsoft’s behavior. In February, CISPE, the cloud-computing group that includes AWS, started pushing the European Union to include Microsoft in a sweeping law being planned on digital markets. It argued that business software makers were abusing licenses to box customers into their own cloud infrastructure. In other words: Microsoft was up to its same old tricks.
Though much of the recent criticism of big U.S. technology companies has omitted Microsoft and instead focused on social media platforms and other consumer services, regulators in the EU have expressed concern about cloud providers, including Microsoft. French competition authorities are probing providers to examine “competitive dynamics” in the cloud industry and contracts between providers that team up to offer services.
“This is a really screwy convergence of nerd porn and accounting,” Directions on Microsoft’s Miller said. “Regulators seem to get and respond to consumer concerns much better than they are able to get enterprise concerns.”Even if the company is offering incentives to use more than one of its products as a bundle, there are ways to successfully argue that such tying is legal, Hovenkamp said.
“I’m not telling you that there is a violation—I don’t know,” he said. Still, “they’re in dangerous territory when they try to use monetary leverage, or leverage in terms, to switch Windows users or Office users to Microsoft cloud services and away from alternative services.”
When the new licensing rules were unveiled in 2019, they officially applied to Azure, too, meaning that technically the higher costs to run these programs in the cloud would be levied on Microsoft’s own service. But Microsoft also put in place programs like the Azure Hybrid Benefit, which offers discounts on Azure for moving existing Windows Server and SQL Server to the cloud. Since that benefit doesn’t exist for rivals, in practice, it’s cheaper to select Microsoft’s cloud.
In fact, Microsoft recently bragged about how customers can save money by using Azure Hybrid Benefit to move traditional licenses to Azure, listing 50% savings in a January blog post, compared with the cost of buying those licenses through the standard pay-as-you-go Azure rate.Customers who want to use the software on AWS or Google Cloud are stuck with the higher rates.
(Adds comments from rival cloud group in seventh paragraph.)
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