Key Takeaways:
- CISPE, a trade body for infrastructure as a service cloud firms in Europe, issued a complaint Friday alleging that Microsoft’s licensing terms for running its software products on alternative clouds are destroying profit margins for rival cloud providers.
- The allegations stem from tweaks Microsoft made to its licensing terms in 2019, which required firms to buy a Software Assurance license and ‘mobility rights’ if they wanted to deploy Microsoft software on other cloud services.
- In its complaint Friday, CISPE showed an example where, between 2018 and 2023, one cloud firm saw revenues from selling Microsoft products climb over 300%, but profit margins plunged from a positive mid-twenties percentage to double-digit negative.
Microsoft was accused on Friday of leveraging the dominance of its Azure cloud computing unit to diminish or eliminate the profit margins of competing cloud platforms in Europe.
The allegation emerged in a complaint from CISPE, a trade body representing “infrastructure as a service” cloud companies in Europe. This accusation coincides with heightened scrutiny faced by the Redmond, Washington-based technology giant over its cloud computing and software licensing practices across the European Union, the United Kingdom, and the United States.
The complaint revolves around adjustments Microsoft made to its licensing terms in 2019. These changes required firms to acquire a Software Assurance license and “mobility rights” to deploy their Microsoft software on hosted cloud services offered by rival providers.
Moreover, customers were unable to utilize perpetual licenses they already owned to operate Microsoft applications on designated providers such as Alibaba, Amazon, Google, and Microsoft itself. Instead, they were compelled to purchase new licenses. Additionally, certain software, including Office 365 Windows Apps, was prohibited from operating on rival clouds.
These terms have generated significant discontent among competing cloud firms in Europe, including OVHCloud in France and Aruba in Italy, as well as major tech rival Amazon. They have also prompted an investigation by the European Commission to ascertain whether Microsoft’s cloud practices constitute anti-competitive behavior.
Microsoft declined to provide a comment when approached by CNBC. In 2022, Microsoft President Brad Smith penned a blog post announcing revisions to its licensing agreements, aiming to facilitate competition among cloud providers.
In its complaint on Friday, CISPE—largely funded by Amazon—presented research illustrating the financial impact on one member cloud firm, although the firm’s identity was withheld. This cloud vendor experienced a notable increase in revenues from selling Microsoft products like Windows Server and SQL Server services, surging over 300% since 2018, contributing to Microsoft’s overall growth.
However, despite this revenue growth, the profit margins of the unnamed cloud vendor did not align with Microsoft’s. Instead, the competing cloud provider witnessed a decline in profit margins from a positive mid-twenties percentage in 2018 to double-digit negative figures by 2023.
The most significant drop in profit margins for this cloud firm occurred in 2019, coinciding with Microsoft’s alteration of licensing terms favoring software licensing on Azure, as highlighted by CISPE. From 2019 to 2020, the concerned CISPE member experienced a plummet in margins from over 20% to zero.
Additionally, CISPE members shared evidence indicating that the prices charged for Microsoft’s SQL Server were significantly higher than those quoted by Microsoft for Azure users. For instance, companies licensing Microsoft software for application hosting and delivery would be charged 612.27 euros ($670) per 2-core SQL Server Enterprise product, an increase of 92.01 euros compared to the average price for Azure users (520.26 euros), according to CISPE’s data.
These findings supplement previous research conducted by Frederic Jenny, an economics professor at ESSEC Business School in Paris specializing in competition law, commissioned by CISPE. Jenny’s analysis revealed that Microsoft effectively imposes a 28% “tax” on businesses utilizing its software products on competing cloud services.
The European Commission confirmed receipt of multiple complaints concerning Microsoft, including those related to its Azure product, and indicated ongoing assessment according to standard procedures. The U.K.’s Competition and Markets Authority, responsible for a probe into competition in the U.K. cloud computing market, was unavailable for immediate comment when approached by CNBC.