Are unfair software licensing practices leading to cloud vendor lock in?

By Yogesh Hirdaramani

New research suggests that large cloud service providers may engage in unfair software licensing practices, limiting users’ choice of cloud infrastructure providers, says Professor Frédéric Jenny, Co-Director of the European Center for Law and Economics of ESSEC, to GovInsider.

Competition expert Professor Frédéric Jenny recently met with competition authorities in Japan and Seoul, South Korea, to share on his latest research. Image: CISPE via LinkedIn

Across the United States Department of Defense, restrictive software licence practices have increased the amount spent on cloud computing and restricted choice of cloud service providers, found the country’s Government Accountability Office in September 2023.

Some software vendors have limited the use of their software to only selected cloud providers or charged extra fees to use their software with third party cloud providers, highlighted the report. The Office recommended that the Department fully identify, analyse, and mitigate these impacts.

Such restrictive practices could cost European businesses and public sector organisations over a billion Euros a year, alleges a new report commissioned by the nonprofit organisation, Cloud Infrastructure Services Providers in Europe (CISPE).

Global competition authorities, like the United Kingdom’s Competition and Markets Authority, are currently investigating these vendor practices, alongside claims that large cloud providers also make it difficult to use multi-cloud architecture and more expensive to transfer data, according to The Register.

GovInsider speaks to the report’s author, Frédéric Jenny, Emeritus Professor of Economics at ESSEC Paris Business and Co-Director of the European Center for Law and Economics of ESSEC to learn more about the impact of such practices.

Study finds that legacy software providers bundle software with infrastructure

His research has found that legacy software providers often bundle the use of their dominant software systems with their cloud infrastructure, making it difficult for customers to switch to independent cloud providers even if they wish to.

“In other words, they impose costs on firms if the firm's clients do not use their own cloud infrastructure and if they want to move that data to an independent cloud infrastructure provider,” says Professor Jenny to GovInsider.

For example, organisations who licence Microsoft’s SQL Server in an independent cloud rather than on Microsoft Azure may have had to pay an additional 28% to do so.

*Professor Frédéric Jenny's new research suggests that restrictive software licensing practices could unfairly reduce competition in the cloud infrastructure space. Image: CISPE*

This was the result of a policy change in 2019 which ended users’ ability to deploy their existing on-premises Office software licences on third-party infrastructure. This may have resulted in first-year licence repurchase costs, equivalent to 560 million Euros (nearly 600 million USD) for the European market, according to the report.

Other restrictive software licensing practices include making it more expensive for firms to transfer data or storage to an independent cloud provider, limiting their software’s interoperability on other providers, and giving software discounts to firms who use their cloud infrastructure, says Jenny.

Over the course of his research, Professor Jenny spoke to more than twenty large cloud users across Europe to collect first-hand testimonies of such practices and analysed price discrimination to determine the total potential costs.

Slowing competition in the cloud space

These practices can unfairly reduce competition and raise costs, says Professor Jenny.

“Buyers were under a lot of pressure, which they tended to consider unfair or anti-competitive, limiting their ability to choose their infrastructure providers,” says Jenny.

These practices make it difficult for independent providers to access the market, he explains. According to Statista, independent providers have gone from holding nearly 50 per cent of the cloud infrastructure market share to only 18 per cent of the market in 2022.

*Independent cloud providers’ share of the public cloud infrastructure as a service market has decreased from 48.4% to 18.9% from 2015 to 2022. Image: Statista*

This benefits firms which can provide both cloud infrastructure and software, he notes. As the market becomes more highly concentrated, large legacy firms can charge more for their services as it is harder for customers to turn to independent providers.

“There is an element that suggests that maybe this evolution is not entirely due to the fact that they are more efficient, but because there may be practices which would be worth investigating, because they could be either anti-competitive or unfair,” he says.

He urges competition authorities to investigate these practices and determine whether these players are leveraging their market power to distort competition. He highlights that such practices affect all markets.

Last week, Professor Jenny met with the Japan Fair Trade Commission, the country’s competition authority, and competition representatives in Seoul, South Korea to draw attention to these practices.

Governments in Southeast Asia, including Singapore and Malaysia, are increasingly turning to hybrid multi-cloud models to leverage on emerging technologies and cost-savings offered by the public commercial cloud.