A new report, commissioned by CISPE (Cloud Infrastructure Services Providers in Europe), sees Professor Frédéric Jenny looking into the “prevalence and impact” of alleged unfair licensing terms from software vendors – with particular relation to the cloud. CISPE believe that the legacy software vendors are making it more difficult and/or expensive for organisations to move to the cloud.
The report is based, in part, on discussions with cloud using end-user organisations, and it states that the report’s goal is to:
“to collect first hand testimonies on the users’ experience dealing with integrated cloud service providers, and to gather evidence of the different ways in which providers leverage their market power to impose unfair conditions on customers and customers alike”
Who is Professor Jenny?
He has quite the distinguished background – his bio states that he is currently:
- Chairman of OECD Competition Committee
- Emeritus Professor of Economics at ESSEC Paris Business
- Co-Director of the European Center for Law and Economics of ESSEC since 2008
Previously he was:
- Non-Executive Director of the Office of Fair Trading in the United Kingdom
- Judge on the French Supreme Court
- Vice Chair of the French Competition
- Chairman of the World Trade Orgnisation’s Working Group on Trade and Competition
So certainly a heavyweight in this kind of area and he makes some very good points in the report. That said, there are a few areas where I disagree with the conclusions and/or the understanding of the background behind certain measures.
Redmond in the firing line
Microsoft are a primary target of the report (with Oracle getting an honourable mention) with various claims made about their current sales and licensing practices – some with more merit than others in my opinion.
The report makes the case that Microsoft may meet the criteria for anti-competitive behaviour as:
- They have a dominant position
- They are “tying” unrelated products – i.e. productivity software and IaaS cloud – together
- There are barriers for potential competitors to enter the market
However, the extent to which these occur and the extent to which they negatively impact customers, can vary considerably depending on one’s viewpoint. Additionally, as stated in “Intel Corp v European Commission (C-413/14 P)”:
“it must be borne in mind that it is in no way the purpose of Article 102 TFEU to prevent an undertaking from acquiring, on its own merits, the dominant position on a market. Nor does that provision seek to ensure that competitors less efficient than the undertaking with the dominant position should remain on the market”
So these things are not inherently prohibited – it all depends who is affected and how…and that’s where it can be difficult.
The report further suggests that Microsoft is guilty of predatory pricing of Azure and that the rapid cloud growth may be:
“due to Microsoft’s presence in adjacent product segments.”
“The effects of the anti-competitive practices…might thus be materialising very rapidly”
Let’s take a look at some of the claims here:
“Microsoft demands customer information from its CSPs, allegedly in order to directly bill them for the software used, but instead uses such information to try to convince the customers to switch cloud infrastructure services providers”
I’m not totally clear what this refers to – perhaps that Microsoft are directly contacting end user customers and trying to convince them to swap from AWS/GCP et al to Azure?
The report also points out that Microsoft’s licensing rules very much hindered other companies in their attempts to develop cloud hosted VDI (Virtual Desktop Infrastructure) environments, giving them the chance to catch up and then steal a march on competitors with the release of Azure Virtual Desktop and Windows 365.
I think anyone who has tried to buy, sell, or license a Windows based VDI solution in the last 10-15 years will agree!
Extended Security Updates
The report also highlights the preferential treatment of Microsoft Azure when it comes to the availability of Extended Support Updates (ESU) which, previously, were available free of charge on Azure but required paying for on any other platform. Now, availability for the original ESUs has been extended by 12 months…but is only available in Azure.
This is an important element of competition law and is a concept that Microsoft have run afoul of before:
As Microsoft have such as wide portfolio and offer various different product suites such as Office 365 and Microsoft 365, this is again an area where they face scrutiny. The CISPE report includes a customer who states that Microsoft bundling Teams into Office 365 negatively impacts competitors as there is “little incentive in repaying for something that does 90% of the job”. This is a sentiment shared by Slack, who filed a compliant with the EU back in 2020 – a complaint which is being progressed by the EU as they send out questionnaires to Microsoft’s rivals.
Another person mentions that purchasing the components of Office 365 individually can lead to price increases of up to 70%. This is a tricky area in my eyes as being forced to buy things you don’t want isn’t ideal…and, once they’re purchased in that manner, it may lead to organisations using them “because they’re there” and not purchasing from a competitor. Conversely however, receiving a discount for buying multiple products is very common (and expected) and this bundling can help some organisations acquire and access useful technology that they otherwise never would.
Claim 1: Office 365 is more expensive on 3rd-party clouds
The report says:
The de facto price for the Microsoft Office productivity suite is higher when purchased for use on third-party clouds.
Microsoft has made critical changes to the way it licenses Office365 through its channel partners to allow it to charge different prices for the same product. Service providers, able to sell Office365 using their own cloud infrastructure, have seen prices rise 10-15%. Service providers, selling the same product, but hosted on Microsoft Azure (as a Cloud Infrastructure Service Provider) have seen no increase in the licence fees.
The report appears to be saying that Microsoft SPLA providers have seen price increases to Microsoft Office but other partners, who host on Azure, have not. Two points arise for me:
- How many partners host Office 365 on Azure?
- Microsoft have just announced price increases of up to 25% for Office 365 via CSP/VL
The typical customer organisation purchases Office 365 and installs Microsoft 365 Apps for Enterprise (formerly Office 365 ProPlus) on their own hardware. Installing it on cloud hosted servers is, in my experience at least, very rare and thus this comparison between SPLA partners and Azure partners is something of a non-starter. Furthermore, the recently announced price increases weaken the argument that Microsoft have been increasing costs in one area but not another.
Claim 2: Bring Your Own Licensing (BYOL) deals have disappeared
The report says:
Previously it was possible to move previously purchased software licenses for software hosted ‘on premises’ (i.e. on a company’s own computers) to a cloud infrastructure of their choice without the need to ‘re-buy’ the license. However, in October 2019 Microsoft simultaneously launched a new feature called Azure Dedicated Hosts and introduced the requirement for businesses to purchase new licenses in order to move software they already own to Microsoft’s most significant cloud infrastructure competitors.
They also state that this change requires:
“the repurchase of the same Microsoft software licence for cloud infrastructure other than Azure”
And, on page 27 Jenny states:
“Microsoft also sets licensing surcharges for users wishing to exploit their licences on rival clouds”
This appears to be a misunderstanding of the Listed Provider changes, the existing BYOL rules, and Azure Dedicated Host licensing.
BYOL, that is using your on-premises software on shared servers such as AWS, Google AND Azure has long required “License Mobility through Software Assurance (SA)” rights – which are obtained by purchasing SA. This hasn’t changed and there is no favouring of Azure over other cloud providers.
What changed on October 1, 2019 was that the “License Mobility through Software Assurance” right is now required for an organisation to use their on-premises licenses in dedicated environments hosted by the “Listed Providers”. This only applies to the vendors defined as Listed Providers meaning it may actually be a benefit for other Microsoft hosting partners such as RackSpace and plenty of smaller organisations.
Existing licenses without Software Assurance (SA) purchased before October 1, 2019 (or added after that date via an existing agreement) can continue to be used in these environments as can any subsequently purchased licenses with SA – as long as the product is eligible for the “License Mobility through Software Assurance” right.
You only need to “re-buy” licenses to use on Listed Provider dedicated hardware if they don’t already have Software Assurance. If they don’t have SA, you can’t use them in any public cloud environment nor can you use them on Azure Dedicated Host.
From Microsoft’s site:
Azure Hybrid Benefit
If there is any part of Microsoft cloud BYOL strategy that seems to invite competition-related attention, it is the Azure Hybrid Benefit (AHB). Available only within Microsoft Azure, AHB allows organisations to make savings of “up to 85%” over standard Pay-as-you-Go (PAYG) pricing – which seems a clear example of “self-preferencing” by Microsoft. That said, this concept appears only briefly in the report.
Claim 3: Oracle cloud licensing
The report says:
The research identified stories of different charging procedures for own and third-party cloud infrastructure installation. Oracle for example charges for each CPU (the core processor within each computer) running its database when hosted in Oracle Cloud. If hosted in a third-party cloud infrastructure it charges for every CPU that could ‘potentially’ use its software. As clouds are ‘pools’ of hundreds of virtual computers that could be deployed, this massively inflates the licence fees for which the business is liable – as much as 10-times more according to some respondents – even if it actually uses exactly the same number of CPUs.
Oracle actually recognise two third-party “Authorised Cloud Environments” – Microsoft Azure and Amazon EC2 & RDS – where the licensing rules for cloud hosting are defined in this (non-contractual) document. However, the potential for “licensing the entire cloud” does appear to exist if you use other providers that are not covered in that document. It is to be noted that the on-premises equivalent of this issue- “Oracle on VMware” – can often be negotiated away with the presence of certain technical limitations, and this may also be possible within cloud environments.
Ensuring that large organisations do not abuse a dominant position they may enjoy is important – it helps ensure a healthier market for customers with more innovation and lower prices. However, exactly what constitutes an unfair practice can be very difficult to define and, with something like the bundling of cloud services, there are often several different viewpoints that must be considered.
It seems likely that a group comprised of cloud providers will have a certain view of this issue but it’s also important to consider that end user organisations will likely have a range of opinions on all of this. For some, the bundling of certain products means they’re paying for things they don’t want and may find themselves feeling “stuck” with a vendor…but for others, the same products in the same bundle, may well help them reduce their supplier portfolio and access new technologies they wouldn’t otherwise have. In my opinion it isn’t a binary issue and any action the EU (or other authorities) may eventually taken must ensure it doesn’t move the problem onto a different set of customers.
I have plenty of thoughts on this report – not all of which are contained in this article – and would love to have conversations about this with you, whatever your viewpoint! I’m sure it’s a topic that we will return to in the future as new products, programs, and initiatives are launched. I encourage you to read the full report (it’s 59 pages so settle in!) and let me know your thoughts when you do.
Download the report: https://www.fairsoftwarestudy.com/
About Rich Gibbons
A Northerner renowned for his shirts, Rich is a big Hip-Hop head, and loves travel, football in general (specifically MUFC), baseball, Marvel, and reading as many books as possible. Finding ways to combine all of these with ITAM & software licensing is always fun!
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