Microsoft destroys rival cloud firms’ profit margins, Amazon-backed group alleges

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Ofcom said it received evidence showing Microsoft makes it less attractive for customers to run its Office productivity apps on cloud infrastructure other than Microsoft Azure.
Igor Golovniov | Sopa Images | Lightrocket via Getty Images

Microsoft was accused Friday of abusing the dominance of its Azure cloud computing unit to squeeze a — and, in some cases, evaporate — the profit margins of rival cloud platforms in Europe.

The claim came in a complaint from CISPE, a trade body for “infrastructure as a service” cloud firms in Europe. It also comes as the Redmond, Washington-based technology giant is facing intense scrutiny over its cloud computing and software licensing practices in the European Union, as well as the U.K. and U.S.

The allegations stem from tweaks Microsoft made to its licensing terms in 2019. Under those rules, Microsoft required firms to purchase a Software Assurance license and “mobility rights” if they wanted to deploy their Microsoft software on hosted cloud services offered by rival providers.

Customers also couldn’t rely on perpetual licenses they had already purchased to run Microsoft applications on so-called “listed providers” like Alibaba, Amazon, Google, and Microsoft itself. They’d have to buy new licenses, instead. Meanwhile, some software, including Office 365 Windows Apps, was forbidden from running on rival clouds.

The terms are the source of intense anger from competing cloud firms in Europe, like France’s OVHCloud and Italy’s Aruba, as well as Big Tech competitor Amazon. It also formed the basis of an investigation from the European Commission seeking to determine whether Microsoft’s cloud practices are anti-competitive.

Microsoft declined to comment when contacted by CNBC. In 2022, Microsoft President Brad Smith wrote a blogpost saying it was revising its licensing deals and making it easier for cloud providers to compete.

In its complaint Friday, CISPE — which is heavily funded by Amazon — showed an example in its research where one member cloud firm, the name of which was not disclosed, saw revenues from selling Microsoft products including Windows Server, and SQL Server services climb over 300% since 2018, contributing to Microsoft’s own growth.

But the growth of the unnamed cloud vendor’s profit margins didn’t match Microsoft’s, and in fact the competing cloud vendor saw their margins fall from a positive mid-twenties percentage in 2018 to double-digit negative profit margins in 2023.

The biggest decline in profit margins for this cloud firm occurred in 2019, the same year Microsoft changed its licensing terms to favor licensing software on Azure, the CISPE said. From 2019 to 2020, the CISPE member concerned saw their margin collapse from over 20% to zero.

CISPE also said that members shared evidence that the price they were charged for Microsoft’s SQL Server was much higher than the price quoted by Microsoft for customers using Azure.

For example, a company licensing Microsoft’s software for hosting and delivering their applications would have to pay 612.27 euros ($670) per 2-core SQL Server Enterprise product, 92.01 euros more than what Microsoft charges customers using Azure on average (520.26 euros), according to the CISPE’s data.

The complaint and the findings add to previous research from Frederic Jenny, a professor of economics at ESSEC Business School in Paris who specializes in competition law, for CISPE. Jenny found that Microsoft effectively charges businesses a 28% “tax” to run its software products on competing cloud services.

The European Commission told CNBC: “The Commission has received several complaints regarding Microsoft, including in relation to its product Azure, which we are assessing based on our standard procedures. We have no further comment to make at this stage.”

The U.K.’s Competition and Markets Authority, which took charge from media and telecommunications regulator Ofcom for a probe into competition in the U.K. cloud computing market last year, was not immediately available for comment when contacted by CNBC.

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