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    UK’s Competition Regulator Analyses Microsoft’s Market Dominance in Cloud Space

    The UK’s Competition and Markets Authority (CMA) released a working paper investigating Microsoft’s market power in the cloud services market and the potential impact of its licensing practices on competition on June 6. The paper suggests that Microsoft has “significant market power in cloud services compared to other software providers.” It focuses on licensing concerns surrounding five software products owned by Microsoft —Microsoft’s Windows Server, Windows 10/11, SQL Server, Visual Studio, and Microsoft 365— and gathers evidence based on customer feedback. 

    Evidence accumulated from speaking to customers reveals that it is cheaper to use Microsoft software products on Azure than on any other cloud provider’s service. It also suggests that the licensing of Microsoft’s software products (Microsoft 365 and others which come clubbed with the cloud service) can be a consideration in their choice of cloud provider. Despite this, CMA clarifies that its evidence gathering is still ongoing and that its thinking will continue to evolve as the market investigation progresses. The paper is open for comments until June 27, 2024.

    This analysis comes after the CMA began its probe into the cloud services market in October last year. This paper is one of a series of consultative working papers that will be published throughout the investigation.

    Key the findings of CMA’s analysis:

    The difference in the features offered by Windows 10/11 can act as a source of market power: While some customers said that they could use alternatives to Windows 10/11 like MacOS and Linux desktop OS, some others said there were no alternatives. When asked why they chose Windows 10/11 rather than its alternatives, some customers told the CMA that they value the additional functionality provided by Windows 10/11. Several customers said that a reason for using Windows 10/11 was usability/user familiarity. Other reasons included: staff preference and skillset, support for required applications, compatibility with a wide range of hardware, required by other applications, and significant cost to move to an alternative. 

    CMA says that these reasons could be considered a barrier to switching. Most customers said they wouldn’t switch to alternatives even if Windows 10/11 had a 5% price increase. However, some said that they are considering switching, regardless of the price rise. For example, some customers use MacOS for some of their staff or were considering allowing users to bring their own devices in the future.

    Customers cannot deploy all their business applications on an alternative to Windows 10/11: Most said that they would be able to deploy some of their applications on an alternative desktop OS but no customer said they could deploy all of them. Customers told CMA that some applications are more compatible with other desktop OSs than others. Applications that tend to be easier to move are software as a service (SaaS) or browser-based or are sold by a major vendor. Apps that tend to be harder to move include those developed in-house or by a smaller third party, Internet Explorer-based and those requiring client installation. CMA observed that the fact that customers use some applications that can only be deployed on Windows can explain why they are unlikely to switch to alternatives.

    Customers unlikely to switch to alternatives of SQL server: Some customers reported monetary considerations such as high cost of porting applications/ database migration, or return on investment. One customer mentioned that its software only runs with the SQL server. There were few customers who were able/willing to switch away from SQL Server and even though there are alternatives available, most customers would not switch to these.

    Google Workspace is the key alternative to Microsoft 365: Almost all customers CMA spoke to named Google Workspace as an alternative that they could use. Of these, most customers considered it the sole alternative. One customer mentioned Microsoft Office desktop-installed apps as an alternative.  Some customers also listed open-source productivity suites. However, no customer mentioned a complete mix-and-match solution that included individual applications that would fully cover Microsoft 365 functionality. 

    Customers value the different products included in the Microsoft 365 package over competitors: When asked why they choose Microsoft 365, over alternatives, customers said that they value the large ecosystem of apps/functionality. Some customers value the collaborative functionality of Microsoft 365 (which is availed through Microsoft Teams). 

    CMA asked customers using Microsoft 365 on the public cloud, if they would switch to an alternative if there was a 5% price rise. Almost all customers said that they would be unlikely or had a very small chance of switching away. Even those who were open to switching away mentioned they would be unwilling to do so for the next five years. Customers highlighted that the alternatives had reduced functionality which made them not as good substitutes for Microsoft 365.

    Microsoft’s bundling and pricing practices act as barriers to entry for productivity software: One software provider told CMA that Microsoft’s practices of bundling productivity software with other non-related products and aggressive pricing strategies are barriers to entry in the productivity software market. For example, the software provider explained that if customers do not wish to purchase Microsoft’s enterprise cloud-based productivity applications but still wish to purchase Windows Desktop, and/or other Microsoft products, they must purchase those must-have Microsoft products individually, resulting in a significantly higher total cost than if purchasing one of Microsoft’s enterprise packages.

    The most popular alternative to Windows Server on the public cloud is Linux:  When asked to identify alternatives to the Windows Server, most customers listed server OSs (operating systems) from the Linux family, for example, Ubuntu, SUSE, RedHat, Amazon Linux, CentOS and Debian. Some also named server OSs from the UNIX family, for example, IBM AIX and Oracle Solaris. 

    Microsoft Windows Server is differentiated from the next closest competitor: One of the main differences is that Windows Server is proprietary, and its competitor Linux distributions are open-source. When customers were asked why they picked Microsoft Windows Server over alternatives, they said that they could relate to the functionality of Windows Server. Many customers also mentioned that other software or applications require Windows Server, or integrate with it. One customer said security and technical support was an additional reason. 

    Most customers wouldn’t switch to an alternative OS even if Windows Server prices increased by 5%: This is because it is required for some software, and switching to an alternative would lead to expenditure in re-building custom applications. It would also require the customer to re-train staff and they would also lose functionality and integrations with other Microsoft products.

    Alternatively, some customers said that they wanted to move away from Windows Server regardless of a 5% price hike. Reasons included wanting to move individual workloads to Linux to improve portability, or that Linux is their preferred type of server OS. Those customers switching away told CMA that they were still likely to have certain workloads on the Windows server.

    Potential licensing remedies that could alleviate Microsoft’s market dominance:

    • Non-discriminatory pricing for Microsoft software products, regardless of which cloud infrastructure they are hosted on
    • Allowing customers to transfer previously purchased Microsoft software products to the cloud infrastructure of their choice without additional cost
    • Increasing price transparency in relation to the use of Microsoft software products on Azure and third-party cloud infrastructure
    • Requiring parity of Microsoft software products and product functionality for use on Azure and third-party cloud infrastructure

    The authority emphasized that it is at an early stage (given that this is the first of a series of working papers) of considering potential remedies. As its understanding of the market and potential issues develops, the remedies being considered might change as well. 

    Stakeholders views on licensing remedies:

    Amazon Web Services (AWS), the Coalition for Fair Software Licensing (CFSL), and Cloud Infrastructure Service Providers in Europe (CISPE) advocated for “principle-based remedies which could be applied industry-wide, as well as interventions which target specific Microsoft licensing practices.” AWS said that the best way to eliminate unfair licensing practices for all customers is to embrace the Ten Principles of Fair Software Licensing as standard practice for the industry. CISPE suggested that one of the ways to enforce a principle-based remedy is for it to be monitored and enforced by an independent body including through the use of audit controls.

    Google’s submission focused on interventions targeted at Microsoft’s software licensing practices, particularly targeting Listed Providers. Microsoft introduced this category of service providers in 2019 which includes Microsoft, Alibaba, Amazon, and Google. The new licensing terms prohibit customers with perpetual on-premises software licenses from deploying these existing licenses on the dedicated hardware offered by Listed Providers, except for Microsoft’s own Azure cloud service. While Microsoft includes itself as a listed provider, according to Google, it applies different rules to itself. 

    Google submitted that some of these remedies could be relatively straightforward to implement through changes to contractual terms, such as removing the bring your own license (BYOL) restrictions that currently apply to Listed Providers. BYOL refers to the ability of customers to use their existing software licenses from on-premises deployments on cloud services or dedicated hardware provided by third-party providers. With the 2019 changes, listed providers could no longer use their existing Microsoft software licenses under the BYOL models. 

    Also read:

    The post UK’s Competition Regulator Analyses Microsoft’s Market Dominance in Cloud Space appeared first on MEDIANAMA.

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