CMA working paper outlines concerns about Microsoft’s competitive hold on UK cloud market

The interim findings of the Competition and Markets Authority’s (CMA’s) investigation into Microsoft’s cloud software licensing strategy should be a significant cause for concern for the software giant, experts have warned.

However, Microsoft maintains its behaviour is having no impact on its nearest competitors, Amazon Web Services (AWS) and Google Cloud.

The UK competition watchdog published the latest in a series of working papers it is producing to give UK cloud market stakeholders an insight into how its anti-trust probe into the UK cloud infrastructure services market is progressing on Thursday 6 June.

The 102-page document is concerned with digging into concerns raised about Microsoft’s cloud licensing practices, which has seen the software giant previously accused of charging enterprises more for running its software in its competitors’ clouds.

Microsoft has also been similarly accused of charging customers more for opting to run software made by other IT providers in its Microsoft Azure public cloud.

Concerns about these practices have been raised in the past by Ofcom, whose own investigation into the UK’s cloud infrastructure services market prompted the communications regulator to refer the sector over to the CMA, and by overseas trade bodies.

Among the latter is the non-profit Cloud Infrastructure Providers in Europe (CISPE) trade body, which published research in June 2023 that claimed Microsoft’s licensing tactics means 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.

And, as detailed in the working paper, the CMA has been on the receiving end of similar accusations about Microsoft’s conduct during the evidence-gathering stage of its investigation.

“The majority of the concerns raised in submissions we have received relate to Microsoft,” said the CMA, in its working paper. “There are indicators that Microsoft has significant market power in cloud services compared to other software providers. As such, the potential for Microsoft’s licensing practices to have an adverse effect on competition is greater than in the case for other cloud providers.”

Weakening competition

The CMA working paper said the Authority is “considering two related ways” that Microsoft’s actions might serve to weaken competition in the UK cloud infrastructure services market.

“The first is that the practice of making software licences more expensive when used with rival cloud infrastructure compared to Microsoft’s Azure service may serve to raise rivals’ costs of supplying cloud infrastructure services,” said the working paper.

“The second is that Microsoft’s licensing practices may have the effect of making a significant proportion of customer demand less contestable to rivals. Over the longer term this may weaken its rivals’ ability to acquire sufficient customers to benefit from scale advantages in supplying cloud infrastructure services, such as economies of scale, learning effects and/or network effects.”

In a statement to Computer Weekly, a Microsoft spokesperson hit back at these assertions, and pointed to the financial results of both AWS and Google as proof its cloud pricing strategy is having no impact on their ability to compete.

“Our licensing terms enable our customers and other cloud providers to run and offer Microsoft software on every cloud,” said the Microsoft statement.   

“While the licensing terms for hyperscaler providers Amazon Web Services and Google Cloud are different, Microsoft’s software is available in their clouds as well, and as recent earnings reports demonstrate, both continue to compete effectively and grow cloud revenue rapidly.”

Even so, the CMA working paper said the evidence it has gathered to-date from users about how Microsoft’s pricing strategy effects their buying behaviours revealed a prevailing understanding that “most customers understand that using Microsoft software products is cheaper on Azure.”

Furthermore, its research showed that: “The cost or ease and/or ability to use licenses are selection factors for many customers we spoke to, and some particularly consider the ability to make use of their existing investment in licenses in the their choice of cloud provider.

“Existing skills and familiarity with the Microsoft ecosystem were also very important selection factors for many Azure customers we spoke to,” it said.

The CMA then went on to confirm that its “emerging view” on the issue, based on feedback from Microsoft customers, is that the firm’s licensing practices “may affect customers’ choice of cloud provider, at least for running Microsoft workloads, and possibly more widely”.

“Even for customers that would have chosen Azure due to their pre-existing use of Microsoft regardless of licensing terms, the licensing terms may still influence future decision-making and therefore potentially harm competition,” it said.

Suggested remedies

While the working paper is not intended to provide an indicator of the CMA’s final decision on this matter, the organisation confirmed that if evidence that Microsoft’s behaviour is having an adverse effect on competition, it has several proposed remedies it can take.

The first remedy would involve making Microsoft introduce non-discriminatory pricing on Microsoft software products regardless of which cloud infrastructure they are hosted on, while the second would see customers granted permission to transfer previously purchased Microsoft software products to the cloud infrastructure of their choice without incurring any additional costs.

The third proposed remedy would see Microsoft instructed to improve the price transparency about how the use of its software products when run on Azure compares with the cost of running them on other third-party clouds.

The fourth and final produced remedy is more technical in nature, the CMA acknowledged, but would require Microsoft to ensure there is no negative impact on the levels of functionality or customer experience for users that opt to run its software in its competitor’s cloud environments.

The CMA said it will now consult on the contents of the working paper, with market stakeholders encouraged to share their views with the Authority by 27 June 2024.

Since its publication, the paper’s contents has garnered some strong opinions from cloud market watchers, with trade body CISPE publishing a blog post in response that declared the publication of the CMA’s working paper as a “highly significant moment”.

“Although these are interim findings, they are highly relevant as they formally establish for the first time a link between dominance in adjacent software markets, and anti-competitive effects in the cloud [and] CISPE has long argued for customers to be free to take the software they own to run in the cloud of their choice,” the CISPE blog post stated. “As regulators around the world consider individual cases as well as wider market investigations, they should reference this detailed analysis from the CMA.”

Nicky Stewart, former head of ICT at the UK Cabinet Office, told Computer Weekly that, while it remains to be seen if the CMA will conclude that Microsoft’s market power is harming competition in the UK, the evidence presented in the working paper suggests it is.

“Given the evidence – and customers’ reported difficulties in migrating away from Microsoft – notably the costs of recalibrating knowledge and skills – I would expect it to be a foregone conclusion that Microsoft’s software licensing practices are harming competition,” she said.

Meanwhile, Owen Sayers, an independent security architect and data protection specialist who works principally in the law enforcement portion of the public sector, echoed CISPE’s sentiments and told Computer Weekly Microsoft “should be very worried” by the CMA’s interim findings.

“The CMA is clearly signalling the licensing situation needs direct action and resolution,” he said. “Whatever resolution they select – and to be honest, they don’t seem to have that many levers to pull that will affect these global players – it will definitely be principally to the detriment of Microsoft.

“That does not mean it will automatically be good for the consumer, since Microsoft might well simply deharmonise its global terms and create special UK ones. If they did so, the UK is hardly in a position to push back, and our level of dependence on Microsoft means that really they have the upper hand.”


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