New Evidence: Selling Microsoft Software Destroys Profit Margin for Cloud Service Providers in Europe

Brussels, 8th March 2024. Cloud infrastructure providers in Europe are faced with an impossible choice. Their customers want them to supply the ‘must have’ Microsoft software, including Office productivity tools, they need as part of cloud migration contracts, but doing so leads to negative margins that erode profits and undermine their financial viability. These compelling data points, presented to DG Comp and the UK’s CMA, build on the significant research of Professor Jenny who calculated a 28% ‘tax’ charged by Microsoft for the use its dominant products on competing cloud infrastructures, outside of Azure. The implications are clear. Microsoft continues to use preferential pricing to squeeze the margins of competing cloud infrastructure providers, locking in customers and raising prices.

Microsoft’s ongoing unfair software licensing terms lead directly to anti-competitive margin squeeze.

By leveraging the dominance of its productivity software using preferential features and pricing on its own cloud infrastructure, Azure, Microsoft is limiting customer choice whilst destroying the ability of other cloud providers to compete and innovate.

In one example, from CISPE’s European members, although revenues from selling Microsoft products including Windows Server, SQL Server and remote desktop services for productivity tools have increased over 300% since 2018 (thus contributing to Microsoft’s growth), its own margins on these products have fallen from positive mid-twenties (%) in 2018 to double-digit negative profit margins last year. The biggest fall occurred in 2019, the same year that Microsoft changed its licensing terms to favour those licensing software on Azure. From 2019 to 2020 this CISPE member saw margin collapse from over twenty per cent to zero.

Several members provided evidence that the price they were charged for SQL server was significantly higher than the price quoted by Microsoft to customers using Azure.

Technically possible, financially unviable

Virtual Desktop or Desktop-as-a-Service (DaaS) is a key feature demanded by many customers wishing to move to the cloud. By restricting the multi-session capabilities of Windows 10/11 virtual machines operating outside of Azure Virtual Desktop, Microsoft multiplies the cost to customers many times if they choose competing cloud infrastructures. There is no technical justification for imposing this limitation, other than to price out competitors from deploying such virtual Windows machines.

According to the Azure Pricing Calculator with the multi-session capabilities allowed on Azure, a customer can run a typical virtual desktop implementation supporting 32 users using just 3 virtual machines. The licensing restrictions on multi-session use of Microsoft software outside of Azure impose on CISPE members to provision 32 virtual machines, that is ten time more machines, to support the same number of users. Even with lower cost hardware (VM cost per hour) the cost of supporting 32 users for a CISPE member is 2.5 times higher than what Microsoft charges.

Commenting on this data, Francisco Mingorance, Secretary General of CISPE, said: “These figures are just the tip of the iceberg and demonstrate the stark reality of selling Microsoft software – it’s essential to meet the needs of customers, but it costs you every time.”

“This data represents prima facia evidence that Microsoft is acting against fair competition,” continued Mingorance “The unjustified feature and pricing discriminations imposed by Microsoft on its dominant software, Office and Windows, outside of Azure, squeeze the margins of rival cloud infrastructure providers, lock in customers and raise prices. It is clear that there is a straight-forward competition case here and that if these unfair licensing practices are not immediately ended by Microsoft voluntarily, legal and regulatory action should swiftly follow.”

These aggregated data represent a sub-set of recent commercial data provided by several European cloud infrastructure service providers to CISPE and presented to DG Comp in Europe, the CMA in the UK and as well as market investigations in other jurisdictions. They paint a compelling picture, yet also omit one key factor – the almost impossible to calculate cost of lost business as customers are left with no option other than to choose Microsoft Azure. In addition to feature and price preferencing, Microsoft completely disbars certain cloud providers, those it unilaterally designates as ‘Listed Providers,’ from licensing its software thereby excluding thousands of customers from fair prices.