Microsoft faces fresh scrutiny over UK cloud software licensing

The Competition and Markets Authority (CMA) last week confirmed that it intends to open a “strategic market status” (SMS) investigation in relation to Microsoft’s “business software ecosystem” under the Digital Markets, Competition and Consumers Act (DMCCA).

The investigation, which is due to start in May, could lead to an SMS designation for Microsoft by the CMA.

The Microsoft investigation is the fourth SMS designation procedure the CMA has initiated under the DMCCA, which is the UK's equivalent of the EU Digital Markets Act (DMA). Last year, the CMA completed three SMS designations, two involving Google and one involving Apple. 

In a statement, the CMA said that if it does decide to proceed with an SMS designation for Microsoft that this would allow it to act on concerns it has that the company is licensing software in a way that reduces competition in the UK’s cloud market.

That concern arose from a market investigation the CMA undertook into the supply of public cloud infrastructure services in the UK. In detailing its findings from the investigation last year, the CMA noted that Microsoft’s software is widely used in cloud environments and said the company’s software licensing practices could, in some cases, make it more challenging for other providers to compete on equal terms when customers wish to use Microsoft software in non-Microsoft environments.

The CMA investigation team’s recommendations included that the CMA Board consider SMS designation for the two largest providers in the market – Microsoft and Amazon Web Services (AWS).

While the CMA has now announced an SMS investigation in respect of Microsoft, no equivalent investigation has yet been announced in respect of Amazon. In its statement, however, the CMA confirmed that both Microsoft and Amazon had agreed to act in relation to other issues that it had identified during its market investigation.

“In consultation with the CMA, both firms are taking material steps to lower egress fees and improve interoperability…,” the CMA said. “These actions create benefits for UK businesses, enabling greater scope for multi-homing to support customer choice and the resilience of UK tech stacks.”

The CMA also said it is in “ongoing dialogue” with Microsoft and Amazon about enabling UK cloud customers to use, and switch more easily to, other service providers. It said it will seek views of customers and competitors to inform that dialogue and that its Board intends to review progress in six months’ time.

Competition law expert Alex Stratakis of Pinsent Masons said: “Building on the approach adopted in the Apple App Store and Google Play Store investigations, where negotiated ‘improvements’ were offered after the SMS designations, in this instance the CMA accepted improvements offered by Microsoft and AWS for all involved to avoid the lengthy process of SMS designation and potential conduct requirements/interventions. Such approach was arguably possible only because of the significant amount of engagement during the relevant market investigation. Only time will tell whether the CMA decision represents a pragmatic approach or a missed opportunity.”

Ian Hastings, who also specialises in competition law at Pinsent Masons, said: “The CMA’s approach in this case is notably more restrained than that of the European Commission, which opened EU Digital Markets Act (DMA) designation investigations into Amazon’s and Microsoft’s respective cloud services in November last year, as well as launching an assessment of the DMA’s wider application to cloud markets in the EU.”

“The CMA’s openness to ‘negotiated commitments’ from Microsoft and Amazon here reflects a continued willingness on the CMA’s part to accept voluntary undertakings from potential and designated SMS businesses, rather than to impose hard and fast enforcement orders. It will be interesting to see how the market views the efficacy of this approach in the context of cloud services,” he added.