Study proves economic damage from Microsoft's product bundling

[German]It's an explosive study that came to my attention last week. Microsoft's product bundling is causing economic damage because the licensing rules for Microsoft software restrict competition – to the detriment of customers and the general public. That's because when market-dominant vendors like Microsoft continue their bundling practices between software and the cloud, it leads to price increases, less choice, less innovation and poorer product quality. This has once again been demonstrated by a study conducted by economists at the Frankfurt School of Finance and ESMT Berlin.


Bundling of Software often makes no sense

The bundling of software by vendors is a proven means of extracting money from companies' pockets for unused products. I had already addressed this topic here in the blog several times.

The German blog post Software-Müll kostet USA und GB 34 Milliarden $ from 2016 addresses the this topic. The article is based on the Software Usage and Waste Report 2016 covered in this article. There is a business approach from vendors, to bundle software to generate revenue, but really costs the companies a lot of money. had pulled out the key statements. The report analyzed 149 companies from 16 industries with 4.6 million users. Specific license types were not considered in the study, but the ubiquitous cloud subscriptions were included. In the article at the time, you can read about what software is paid for but never used. Adobe (Adobe InDesign, 55%) and Microsoft (Microsoft Visio, 47%, Microsoft Project Professional, 46%) are right up there with their subscriptions.

And my German article Office 365-Lizenzierung: Die Geldverschwendung in Firmen from 2020 takes up this issue again using the example of Microsoft Office 365. The occasion for this article was a study by CoreView, which showed what companies are flaring down the chimney in terms of superfluous costs for Office 365.

New study from economists

At the end of January 2023, information about a new study by economists at the Frankfurt School of Finance and ESMT Berlin has now fallen into my hands. The study was commissioned by CISPE, the Association of European Cloud Infrastructure Operators. Below are some key points of the findings from the study.


Product bundling as a trap for customers

Many companies and government agencies have become dependent on Microsoft products in the past. Windows and Office are the predominant software solutions today. Microsoft is exploiting this market power to gain advantages in the cloud environment as well. The company tries to oust competitors and tie customers to its own Azure cloud. This practice has long been an issue among customers, CISPE writes.

The fact that such product bundling leads to disadvantages for users and therefore requires intervention by competition authorities has been investigated by researchers from the Frankfurt School of Finance and the European School of Management and Technology (ESMT) Berlin in an economic study.

Professor Dr. Markus Reisinger, Head of the Economics Department, Frankfurt School of Finance, summarizes the results: "So-called product bundling is harmless if it results in a welfare gain for the consumer. Our economic study shows that this is not the case with Microsoft. The relatively strong inequality between separate purchase and bundle purchase of the products leads to extensive discrimination. Therefore, the reduction in consumer welfare is substantial and the practice must be stopped."

Bundling as a predatory tool

Microsoft bundles its software products with cloud services. Customers who already have Microsoft software licenses can use these licenses in the Azure cloud at no or only low additional cost. Legally, however, customers must be able to use their existing software with other cloud providers.

However, Microsoft customers who want to host their Office solution in the cloud of one of the large competitors such as AWS or Google Cloud have to pay high fees for this. So customers only have a significantly more expensive alternative to Microsoft Bundle. This creates a crowding-out effect.

Professor Dr. Stefan Wagner from the European School of Management and Technology (ESMT) in Berlin explains: "This effect occurs even if a dominant manufacturer offers a lower-quality product in its bundle than a competitor who sells a rival product individually. Customers then often opt for the bundle for cost reasons. This leads to a drop in quality, which can also have an impact on end consumers. Business customers in this case have fewer opportunities for innovation and can produce fewer functional end products or offer their own customers a smaller variety of products."

Brakes innovation and price dictate

But it is not only the individual companies that are harmed by this practice, but also the general public. Unfair competition is expected to lead to a decline in innovation on the cloud market. This is because it is no longer worthwhile for the disadvantaged providers to invest in new developments. As more and more competitors then disappear from the market altogether, a vicious circle is created. The dominant provider can dictate prices and conditions ever more strongly.

When Microsoft surprisingly changed its licensing terms in 2019, some existing licenses suddenly lost their validity in the cloud. Those affected then had to pay again, even though they had actually expected to save money by migrating to the cloud. This can have significant knock-on effects: Consider a company that has to postpone the modernization of its data center due to the additional costs. Think of a municipality where the planned construction of a kindergarten falls victim to the increased license costs, or a medium-sized company that can no longer invest in increasing its internal IT team under these conditions. Under these circumstances, unplanned additional costs can lead to savings constraints elsewhere.

Provider diversity in the cloud

Cloud technology is indispensable for modern IT environments today. In Germany, 8 out of 10 companies are already in the cloud and have thus outsourced their stationary IT infrastructure to cloud service providers. A further 13 percent are currently planning or discussing this, according to the latest KPMG Cloud Monitor. The European Commission estimates that cloud technologies will have created €600 billion in economic output by 2020.

The choice of cloud provider and the development on the cloud market consequently have a decisive impact. Provider diversity on the cloud market is thus a decisive factor for the future viability of the German economy. The crowding-out effect with all its consequences often sets in within one product generation. This is because switching cloud providers usually involves a great deal of effort and high costs for customers. Most therefore stay with the provider they initially chose. Microsoft continues to drive these uneconomical conditions.

Antitrust complaints filed with the European Commission against Microsoft

These abuses are also addressed by the antitrust complaints currently being filed against Microsoft. In addition to the companies Slack, OVHCloud/Aruba and NextCloud, the industry association CISPE recently filed its own complaint with the European Commission. The goal of this complaint is to draw attention to Microsoft's unfair software licensing practices on an industry-wide scale.

Microsoft's recent announcements, including the update of its licensing terms to October 1, 2022, do not indicate that Microsoft intends to end its anti-competitive practices. CISPE is therefore seeking remedies that will benefit customers and vendors in a dynamic cloud market.

The full study in German can be found here (PDF document).

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