Monday, August 29, 2022

New Microsoft software licensing terms to take effect on October 1: revisions designed to strengthen smaller cloud solution providers--and to address Amazon-orchestrated EU antitrust complaint

This is only the second time in more than ten years for this blog to comment on enterprise software licensing. The first instance was about two years ago when I expressed skepticism regarding EU antitrust complaints by certain SAP customers. Now I have seen an announcement by Microsoft that deserves a closer look. Microsoft's policy team (Microsoft On the Issues, @MSFTIssues, a Twitter account that I follow and vice versa) retweeted the following:

Today's announcement by Microsoft's Chief Partner Officer Nicole Dezen is a follow-up to a May 18, 2022 blog post by Microsoft President Brad Smith, Microsoft responds to European Cloud Provider feedback with new programs and principles. I will look at the specific licensing changes in more detail and comment on them tomorrow. For now, I'd just like share a few thoughts and observations:

  • The backdrop is that a group named Cloud Infrastructure Services Providers in Europe (CISPE) has been alleging for a while that Microsoft engages in an "anti-competitive tying of productivity suites with cloud infrastructure services." What they essentially claim is that smaller European cloud service providers can't compete on a level playing field with Microsoft's Azure cloud because many enterprise customers rely on Microsoft software (such as Windows, Office, and SQL Server) and can't bring their existing Microsoft licenses to third-party cloud services as easily as CISPE believes should be the case.

  • CISPE is largely funded by Amazon, whose AWS is the world's largest cloud service (I used it for the backend of two mobile games). The other members are smaller European cloud hosters. It is undoubtedly a challenge for anyone to compete with the behemoths in a business characterized by major economies of scale, but some of CISPE's members--and various significant European cloud service providers who are not CISPE members--prove that there are opportunities for innovative, creative, and flexible players. The part that I struggle to understand is that those smaller European companies view Amazon--the biggest bully on the block--as a political ally. Let's face it: if you're in the cloud business, particularly in the Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) segments, your top three competitive challenges are

    1. AWS,

    2. AWS, and don't forget:

    3. AWS.

  • CISPE is complaining not only about Microsoft, but also about Oracle and SAP. And in at least one of the papers they also voice concerns over Google. In other words, they're against everyone except themselves and... AWS.

  • Microsoft hasn't acknowledged an antitrust violation per se. The message in May was that there is enough substance to some of the concerns that Microsoft deems it appropriate to amend its software licensing terms with a view to outsourcing and hosting.

  • The European Commission hasn't launched full-blown investigations of a formal complaint filed by OVHcloud, a French company, in March. And it may never have to if Microsoft's new licensing terms satisfactorily address the issues. The measure of a competition authority's effectiveness is not how many investigations it launches or the fines it levies: it's all about safeguarding the competitive process. In some other antitrust contexts, particularly those involving Apple and Google, voluntary changes fell far short of what was needed, so DG COMP had no choice but to launch formal investigations. But Microsoft has a fundamentally different attitude than the two companies I just mentioned. After the antitrust cases they dealt with 20 years ago, they've been careful to avoid regulatory scrutiny.

  • Here's a quick first look at the "three primary goals" Microsoft (re)stated today:

    1. "Make it easier for customers to bring their software to the partner’s cloud."

      An example of what was criticized is that license fees in a multitenant environment (one server, multiple customers) were based on physical CPU cores, while cloud services are all about virtual machines. Microsoft says "[e]xpanded use rights [now] allow customers to run their software, including Windows 11, on hosters’ multitenant servers and more easily license virtual machines for Windows Server."

    2. "Ensure partners have access to the products necessary to sell cost-effective solutions that customers want"

      The blog post describes this as creating "more opportunities for partners to work with more customers, to sell the solutions they need, and to run them where they prefer."

    3. "Empower partners to build hosted solutions with speed and scale"

      Microsoft's partners will be better enabled to "build hosted desktop and server solutions to help directly fulfill customers’ hosting needs." The new program, is called "Cloud Solution Provider -- Hoster" (CSP-Hoster) and enables both license-included hosting (the CSP sells a service to its customer along with the prerequisite software licenses) and BYOL ("bring your own license") solutions.

  • While it appears that Europe is the only jurisdiction in which a formal complaint had been brought, today's blog post says "[t]hese changes will be applicable worldwide." The timing of the announcement (after European business hours) underscored that this is not just about Europe--and globally consistent terms are another notable difference between Microsoft and the likes of Apple and Google, who favor piecemeal resolution and make commitments only jurisdiction by jurisdiction.

  • The new licensing options are available to all cloud service providers except a set of Listed Providers. That is no surprise as it is consistent with what Microsoft said in May. A footnote again clarifies today that "Listed Providers include Alibaba, Amazon Web Services, Google, and Microsoft, and any outsourcer using a Listed Provider as part of the applicable outsourcing service. Customers that want to use a Listed Provider for outsourcing can acquire licenses directly from the Listed Provider."

    In other words, all of CISPE's members except for the driving force behind those complaints--Amazon--get the benefit of the terms announced today. This ups the ante for CISPE to credibly claim that the organization is all about better enabling small European cloud service providers to compete...

    I also interpret this as a denial of there being any anticompetitive harm when it comes to AWS, Google, and Alibaba: there is no indication that those major players can't compete with Microsoft.

Tomorrow I'll do a follow-up to this post and comment in more detail on the licensing terms Microsoft unveiled today, and on CISPE's grievances, such as a "study" by a French competition law professor.