The Billion Euro Unfair Software Licence Tax on EU Customers

A summary of Professor Jenny’s Report: A quantification of the cost of potentially unfair surcharges in the cloud sector

New research from Professor Jenny reveals that European businesses and public sector organisations are paying an additional ‘tax’ of billions of Euros every year, just to be able to run the software they own in the cloud infrastructure of their choice.

Based on conversations with large software users from across Europe, and detailed analysis of price discrimination, Professor Jenny’s new research suggests significant unfair, additional costs are being levied on customers who choose to license software to run on cloud infrastructure provided by independent service providers.

As a model, Jenny compared the cost to license Microsoft’s SQL Server in an independent cloud with the cost of the same software running on Microsoft Azure cloud. He found the additional charges levied on those choosing a non-Microsoft cloud sucked an additional €1,010,394,489 out of the European economy in 2022. The same model applied to the pervasive Office 365 Suite of productivity tools found Microsoft surcharges for use on non-Microsoft clouds to be a further €560,000 per year. This equates to a 28% premium, or tax, on the software licence, just for the pleasure of using it on a third-party cloud. With dozens if not hundreds of software products seen as essential to the business operations, Microsoft could be adding hundreds of billions to the cost of digital transformation in Europe. The Jenny Report states:

“Microsoft’s BYOL policy change in 2019, which ended users’ ability to deploy on-premise Office 365 Licences on third-party infrastructure, may have resulted in first year licence repurchase costs equivalent to €560m for the European market. An additional surcharge of €1bn, relating to licensing surcharges imposed on non-Azure deployments of SQL Server, may further be attributed to the policy change.”

These findings build on Professor Jenny’s previous research conducted for CISPE in October 2021. The first Jenny study unearthed many unfair software licensing practices that could limit the choice and increase costs for customers looking to move productivity IT systems into the cloud. It showed how legacy software companies including Microsoft, Oracle and SAP could use tying, bundling and discriminatory pricing to direct customers to their own cloud infrastructure.

This new research, conducted since the October 2022 changes to Microsoft’s licensing terms, shows how those unfair software licensing practices are costing the European economy many millions of Euros every year.

If this Microsoft tax equals one billion Euros per year for just one product among potentially hundreds, then the overall cost to the European economy as it looks to move enterprise and productivity computing to the cloud, must be estimated to be significantly higher.

This money diverted from growth, innovation and a faster and more effective digital transformation, and these unfair costs will most likely lead to higher prices for consumers. In the case of the public sector, or when EU recovery funding is accesses, this is taxpayers’ money being unfairly diverted to already dominant players.

Many, of course, will be dissuaded by the higher prices and forced to select Microsoft’s own cloud solutions, depriving them of flexibility to build the cloud set-up they desire, and unfairly excluding competing providers. Professor Jenny’s research provides in-depth analysis of how dominant software companies use unfair licensing terms to enforce both input foreclosure and customer foreclosure to squeeze competitive cloud infrastructure providers out of the market.

Speaking to Jenny under conditions of anonymity, European customers revealed their own concern and frustration with how dominant companies, including Microsoft, tilted the market in their favour. These comments from customers reveal the increasing frustration at being locked into software ecosystems that deprive them of choice.

One, speaking about the fear of potential reprisals for speaking out, commented:

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

There are no technical reasons why prices are higher for software licensed to run on independent cloud infrastructure, but rather that price differentials are engineered to raise rival’s costs.

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

Several products, including SQL Server, Microsoft Dynamics and Active Directory, are used as gateway products to steer customers into an exclusionary Azure ecosystem.

“Microsoft leverages users’ familiarity with its products to drive adoption of the Azure ecosystem […][and has] a stance against users deploying Microsoft products on non-Azure infrastructure.”

Plus, as one respondent noted on key metrics such as latency and downtime, Azure performs less well than competitive clouds – yet customers are still pushed towards forgoing those competing services because of the price implications of selecting them.

Another added that the inability to license Office 365 to work with competing virtual desktops forces customers to switch to Windows Cloud PC rather than the preferred 3^rd party cloud.

Jenny reflects the language of many of his respondents when he concludes that:

“The dependency on Microsoft products can be such that certain respondents characterise the relationship with the software and cloud provider as a “marriage,” from which it is extremely difficult to create conditions of escape.”

As with his first study, Professor Jenny has once again provided all the evidence needed for the Commission to take swift action to bring an end to these unfair, unnecessary, unilaterally applied software licence taxes. Customers must be allowed fair choice to run the software they license in whichever cloud they want free of technical, financial or legal penalties. The 800lb gorillas of the software world must not be allowed to leverage their dominance to capture the emerging world of cloud computing and squash the innovative European new entrants.