UK CMA early findings indicate Microsoft restricts cloud choice

Pricing, licensing, ease of switching and more under the microscope

The UK’s competition watchdog says that Microsoft has a “significant degree of market power” in key software products, and that its licensing practices may therefore influence customer choice of cloud providers.

The Competition and Markets Authority (CMA) kicked off a probe into public cloud services last October, following a recommendation from telecoms regulator Ofcom, whose own report concluded that the local cloud market was not functioning as it should.

It has now published an initial analysis [PDF] focused on Microsoft, based on the reasoning that the Redmond giant has “significant market power in cloud services compared to other software providers,” thanks to its Azure platform playing host to between 30 and 40 percent of the cloud market in the UK.

However, the report also claims the majority of the concerns raised in submissions received by the CMA relate to Microsoft.

The CMA’s emerging view is that Microsoft has significant market power thanks to its software products, including Windows Server, Windows 10 and 11, SQL Server, Visual Studio and its productivity suites, which are widely used by organizations.

It found that the licensing of those products plays a part in a customer’s choice of cloud provider, although conceded that other factors are also involved. Microsoft’s licensing practices will therefore have an effect on which cloud provider a customer chooses, at least when it comes to running Microsoft workloads.

It should be noted that this is one of a series of consultative working papers to be published during the course of the CMA investigation. The inquiry group’s provisional decision report is currently scheduled for publication in September or October.

The CMA says in its analysis that it set out to examine the nature of Microsoft’s licensing practices, and whether these could disincentivize customers from using rival cloud providers.

This might be the case if customers of cloud services that purchase Microsoft's software products would find it difficult to switch away from them, if rivals do not have an effective counter strategy, or if Microsoft’s software products were provided at a higher price or lower quality to customers that chose one of Microsoft’s rivals as their cloud provider.

The CMA says it received submissions setting out various types of issues and concerns with regard to Microsoft’s software licensing practices, and that these related to both price and non-price factors.

With pricing, respondents told the CMA that there are differences between using Microsoft products on Azure compared to other clouds as a result of bring your own license (BYOL) restrictions that prevent customers taking advantage of license portability to clouds operated by listed providers, which include AWS, Google, and Alibaba.

In contrast, Microsoft’s Azure Hybrid Benefit allows customers with Software Assurance or qualifying subscription licences to use on-premises Windows Server and SQL Server licences on Azure for a reduced cost. The Reg highlighted this point a year ago.

The CMA says that it found that most customers it spoke to understand that using Microsoft software products is cheaper on Azure. In fact, Microsoft had marketed itself as being up to five times cheaper to run certain Microsoft software on Azure, as opposed to major rivals' clouds.

Meanwhile, non-price factors detailed in submissions are said to be wide-ranging, but include the observation that Redmond declines to make available certain of its products via its Services Provider License Agreement (SPLA) program, including Microsoft 365, Visual Studio, and Windows 10 and 11.

Microsoft is also accused of limiting security updates and features for its products that are run in other clouds than Azure. If the final report concludes that there is indeed an adverse effect on competition (AEC) in the UK cloud market, then the CMA will be required to decide if any remedial action should be taken to address this.

Potential remedies it says might be considered include: non-discriminatory pricing for Microsoft software products, regardless of which cloud they are hosted on; allowing customers to transfer previously purchased Microsoft software products to the cloud of their choice without additional cost; or increasing price transparency in relation to the use of Microsoft software products on Azure versus other clouds.

Addressing some of the non-price factors may require Microsoft to be obliged to provide parity in software products and product functionality available across Azure and third party clouds.

The CMA says that AWS, the Coalition for Fair Software Licensing (CFSL) and Euro cloud body CISPE advocated the introduction of principle-based remedies, such as the Ten Principles of Fair Software Licensing that include equal treatment for software licensing fees in the cloud and the freedom to bring previously purchased licences to the cloud.

In Microsoft’s defense, the CMA notes the software giant considers that restrictions on BYOL for Listed Providers are necessary to ensure it is “compensated fairly for its intellectual property,” and that it has concerns that allowing customers to transfer previously purchased Microsoft software products to AWS and Google’s clouds might significantly increase unlicensed use of those products.

In response to the CMA’s initial analysis, A Microsoft spokesperson told The Register:

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

Meanwhile, a spokesperson for CISPE said:

“The CMA has produced a thorough analysis and, on first sight, it is encouraging that its paper suggests that dominance in software markets can restrict customers’ choice of cloud. CISPE has been working with the CMA throughout this market investigation and has shared examples of the negative impact of unfair software licensing from its members and their customers.”

However, it was suggested only this week that Microsoft and CISPE might come to some sort of financial agreement to drop antitrust complaints such as this, a move that would not look good after the trade body lobbied hard for action to be taken against Redmond and it is quoted throughout the CMA paper.

Giving a legsal perspective, Alex Haffner, competition partner at UK legal outfit Fladgate, said:

“The clear focus of the CMA now appears to be on perceived barriers to switching providers and concerns that the significant in-built advantages of the main players on the market (Amazon and Microsoft) leaves new customers buying cloud services for the first time with effectively a limited choice of provider."

“It is clear overall that the market investigation is now moving into its critical phase and there is much for market participants to get stuck into and for the incumbents to seek to defend their current position,” Haffner added.

Nicky Stewart, former head of ICT strategy at the Cabinet Office and now non-exec director at Yellow Submarine AI, told us:

"Although the CMA's opinion is only an emerging one at this point it is quite clear that its current thinking is that Microsoft enjoys market power, with reported customer inertia to the issue mostly due to the consequences of proprietary lock in and a lack of viable competition.”

“The proposed remedies could in theory help the market, if the CMA is bold enough to take them forward, but whether they would be enough to change the game is another question altogether,” he added.

AWS and Google Cloud Platform were contacted for comment but had not replied at the time of publication. Both were previously critical of Microsoft's licensing policies. ®

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