Upcoming study hints at ‘cartel-like’ behaviour by large legacy software providers

May 1, 2023 | News, Studies

During the inaugural CISPE Cloud Summit on the 22nd of March, renowned economics professor Frederic Jenny gave a presentation about his much-awaited follow-up study on anti-competitive practices in the market for cloud infrastructure services.

The CISPE-funded study, which is expected to be published in the coming weeks, will build on his famous first study that caused shockwaves in Europe by highlighting the unfair software licensing practices of large legacy software vendors such as Microsoft and SAP.

You can find below a summary of the main preliminary findings of Professor Jenny and his team.

The cloud infrastructure market is prone to competitive distortions

During the first part of his speech, Professor Jenny summarised the findings of his celebrated first study. He noted that on the Infrastructure-as-a-Service (IaaS) market, rapid expansion was accompanied by increasing concentration, mostly to the benefit of Microsoft.

Professor Jenny recalled that certain ‘integrated providers’ (those offering both cloud infrastructure services and productivity software) can leverage their dominance on adjacent markets to exclude rival cloud providers in core cloud markets.

Preview of the upcoming second study

Since the publication of the first study, Jenny and his team have been interviewing a number of European customers.

A selection of quote highlights some of the issues they suffer as a result of unfair software licensing:

“We are dealing with a market that is very close to what we have in organised crime scenes, to the point where you are risking your career if you say something

There is a pricing distortion in the market. When [company name] chooses to execute its workloads on third-party clouds, it costs significantly more than on native infrastructure”

”They have a stance against users deploying Microsoft products on non-Azure infrastructure.”

Issues around licence portability

At the heart of all the anti-competitive practices is the licence portability issue. According to Prof. Jenny, certain dominant software companies severely limit users’ freedom to deploy and virtualize on-premise licences on externally hosted infrastructure. The upcoming study will highlight that there are no specific technical reasons for doing so – this is entirely a strategic move on the part of the software companies.

The consensus emerging from the study is that the cost of repurchasing the licences was of the order of magnitude of 80 to 100% of the cost of the original licences. Prof. Jenny and his team is still in the process of assessing the aggregate cost of this policy, but based on their calculations the surcharge on the European Cloud market is in the order of magnitude of something like 20%.

‘20% is interesting because when you think about cartels, which is supposedly the worst thing you can do in competition, it’s usually considered that really bad cartels tend to increase price between 10% and 20%. So we are talking about the same order of magnitude.’

You can view Professor Jenny’s presentation below and see the slides outlining the findings of the first study and the early results from the second on this link and below:

You can also find a recording of Prof. Jenny’s presentation here:

Please check back for updates and the launch of the full follow-up study soon.