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In July 2021, the UK government invited startups, businesses, and policymakers to a consultation about the most pressing competition problems in the tech industry, ahead of the launch of its new Digital Market Unit (DMU). One person familiar with the discussions says that something odd was happening behind closed doors. In private discussions entrepreneurs claimed Microsoft was behaving in a way they thought was detrimental to healthy competition; yet none dared to publicly call Microsoft out in the consultation.
Most startups complained about Microsoft’s tendency to “bundle” new features in its products that directly competed with the startups’ core creations. But the source says startup founders were too scared of Microsoft’s reaction to go public with their gripes. The founder of an enterprise software startup said that Microsoft would "absolutely kill" their business if they spoke out, the source claims– implying that they feared the tech giant would make their products incompatible with Microsoft’s software ecosystem.
The DMU consultation is slated to conclude on October 1 – whether any British startup will publicly denounce Microsoft is anyone’s guess.
The episode is indicative of an ongoing shift. While Microsoft has been largely absent from heated discussions about Big Tech’s anticompetitive practices for nearly a decade, new entrants are increasingly worried – if not necessarily vocal – about the company’s dominance in both the enterprise software and cloud domains. Regulators in the UK and Europe might soon start taking notice of that, too.
In the past, Microsoft’s tendency to bundle its software products – such as browsers and media players – together in a way that was considered damaging to competition was slapped down by the EU with multimillionaire fines. But since 2014, under the stewardship of CEO Satya Nadella, Microsoft has managed to pull off two great pivots. First, it swore off a software licence model in favour of Office 365’s cloud-based subscription-based model. Then it restyled itself as a tranquil benevolent actor, a far cry from both the second-wave tech giants routinely on the front pages of newspapers for data gluttony and fake news, and Microsoft’s own cutthroat reputation of yore. But several companies, especially in the less headline-grabbing b2b sector where Microsoft is king, think that it has not really changed.
“In the business enterprise environment, Microsoft is still very strong, and particularly the Office suite is very strong,” says Maurits Dolmans, a partner at law firm Cleary Gottlieb Steen & Hamilton. “There are people in the market I’ve heard suggest that Microsoft is using that very strong position in the enterprise environment to convert people and drive them to the Microsoft Cloud.”
One recent example is ValueLicensing, a British company specialised in buying and reselling pre-owned software licences, and notably Microsoft’s lifetime licences. In April, the company sued Microsoft for £270 million in damages in a case that will be heard by the High Court in London in March 2022. ValueLicensing alleges that Microsoft is intent on killing the second-hand licence market by offering companies that are switching to cloud services like Office 365 to give up their lifelong licences – rather than reselling them – in order to get a discount.
“Since 2016 Microsoft has been effectively removing the licences from the market using what we describe as ‘anti-resale terms’,” ValueLicensing founder Jonathan Horley says. “Microsoft was draining the entire market of these perpetual licences and these are billions of pounds worth of licences, which should have been competing with Microsoft [Office 365] and give consumers more choice and cost-saving options.”
Horley says that this practice also infringes a 2012 decision by the European Court of Justice affirming a buyer’s right to resell a software licence. Microsoft has applied to have the case struck out, maintaining that the High Court has no jurisdiction; it declined to comment on ongoing legal matters.
Outside of the UK, the noisiest grumblings have been coming from European cloud providers. Industry insiders maintain that Microsoft is attempting to leverage the popularity of the Office suite to crush rival cloud service providers, and promote Microsoft’s own Azure through discounts and extra functionalities for Azure users as well as limitations to the usage of Microsoft software on competing cloud services.
Francisco Mingorance, executive secretary of cloud providers trade group CISPE, says that cloud services providers feel like they are being undercut by big software companies.
“What [cloud services providers] are seeing is customers saying: ‘Look, we like your solution, it’s better than what we are using and there’s more flexibility. We’d love to contract with you but our current providers said that if we bring their software to your cloud we will have to pay extra money’,” he says.
He adds that while several client companies find these practices disadvantageous, they also keep mum in public. “[They] fear retaliation,” Mingorance says. “Many big firms don’t want to go on the record because of software audits.” That means that they are wary of catching a software provider’s attention and risking being slapped with swingeing penalties if found in breach of its terms of services.
Still, software companies’ grip over the market could be challenged by new EU regulation. The Digital Markets Act (DMA), a new, ambitious technology legislation proposal unveiled by the European Commission in late 2020, is expected to deal with some of the issues arising in the cloud sector, by focusing on so called “digital gatekeepers” and disciplining some anti-competitive practices from the get-go rather than waiting for them to play out and spoil the market.
The Commission’s own impact assessment study explicitly references “Microsoft 365 bundling with cloud services” as a potential example of an unfair practice. Mingorance says that, partly as a consequence of an awareness campaign orchestrated by CISPE and others, several MEPs have brought forward nearly 1,200 amendments to the DMA aimed at strengthening its rules on competition in the cloud space.
That is not Microsoft’s only European headache. The most high-profile case involving the company has less to do with the cloud, and more with another alleged case of software “bundling” – and it was brought forward by workplace messaging giant Slack. Last year Slack filed a complaint against Microsoft to the European Commission, alleging that Microsoft’s inclusion of its own communication system, Teams, for free in the Office 365 suite was unfair. It said Microsoft’s action amounted to an “illegal and anti-competitive practice of abusing its market dominance to extinguish competition”. Slack has previously suggested that Teams is merely a ripoff of its own product, and that Microsoft is using it to unfairly undermine Slack with paying business users. Microsoft has dismissed the allegations – and has arguably doubled down: when the company’s new Windows 11 operating system launches on October 5, it will feature a pre-installed Teams button on every desktop. In a statement, a Microsoft spokesperson says that the company “created Teams to combine the ability to collaborate with the ability to connect via video, because that’s what people want,” and that that gave the service an edge over Slack.
The EU Commission’s investigation into Slack’s complaint is ongoing.
Microsoft appears to be steeling for an impending change. The company is already the third biggest lobbying spender in the EU – behind Facebook and Google – according to a study by pressure groups Corporate Europe Observatory and Lobbycontrol. In June, Microsoft president Brad Smith announced an increase of the company’s legal staff by 20 per cent, according to Axios, owing to the expectation that the next decade will be characterised by “expanded tech regulation around the world”. After nearly ten years of relative quiet, Microsoft might have to enter the fray once again.
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This article was originally published by WIRED UK
