Federal Authorities Examine Microsoft's Methods Regardingbundle Offerings
Federal Authorities Examine Microsoft's Methods Regardingbundle Offerings
The Federal Trade Commission is scrutinizing Microsoft in an extensive examination, exploring potential violations of antitrust regulations due to its business practices, as per sources familiar with the situation. Recently, FTC legal advisors have been conducting interviews and scheduling meetings with Microsoft's competitors.
A significant point of examination revolves around Microsoft's practice of bundling popular Office products with cybersecurity and cloud computing services, as disclosed by one of the sources, who wished to remain anonymous due to the confidential nature of the matter.
This bundling strategy was the focus of a recent ProPublica investigation, which exposed how, starting in 2021, Microsoft utilized this tactic to dramatically expand its business partnership with the U.S. government, while minimizing opportunities for rival companies in lucrative federal contracts.
At that time, numerous federal employees relied on a software license that incorporated Windows and apps like Word, Outlook, and Excel. In response to a series of severe cyberattacks, Microsoft provided the opportunity to upgrade these license bundles at no cost for a limited period, granting the government access to its advanced cybersecurity services. The company also supplied consultants to facilitate the upgrades.
A multitude of federal departments and military branches, including the Defense Department's armed services, adopted these enhanced services following the limited-time offer. Subsequently, they began paying for these advanced services when the promotional period concluded. Ex-sales leaders associated with the initiative compared this process to a drug dealer administering free samples, knowing full well that federal customers would become reliant on these upgrades following installation. Microsoft's offer displaced some cybersecurity vendors while also diminishing market share for cloud providers like Amazon Web Services, as the government began utilizing products operating on Azure, Microsoft's proprietary cloud platform.
Experts informed ProPublica that Microsoft's strategies might have infringed laws regulating contracting and competition, while ProPublica reported that even Microsoft's own attorneys held antitrust concerns over these deals.
Microsoft has maintained that its offer was "designed to avoid antitrust concerns." In response to this period, Steve Faehl, Microsoft's federal business security leader, told ProPublica that the company's primary objective was to bolster the security posture of federal agencies, which were frequently targeted by advanced foreign threats.
Some of these intrusions were the result of Microsoft's security lapses. As ProPublica revealed in June, Russian-sponsored hackers, part of the so-called SolarWinds attack, exploited a vulnerability in a Microsoft product to pilfer sensitive information from the National Nuclear Security Administration and the National Institutes of Health, among other targets. Before the attack was identified, a Microsoft engineer had warned product leaders about the flaw, but they refused to address it out of apprehension of antagonizing the federal government and losing ground to competitors, according to ProPublica.
The proposed fix by the engineer would have safeguarded customers but may have introduced inconvenience for users logging into their devices. Adding such "friction" was deemed unacceptable by product group managers, who were in the midst of a fierce rivalry with competitors in the identity tools market.
According to an individual familiar with the FTC's investigation, Microsoft's identity product, Entra ID (previously named Azure Active Directory), is another focus of the agency's examination.
Microsoft has defended its decision not to address the SolarWinds-related flaw, citing multiple assessments and the company's response to security issues being based on "potential customer disruption, exploitability, and available mitigations." It has reaffirmed its commitment to prioritizing security above all else.
The FTC views Microsoft's continued business growth despite leaving the government susceptible to hacks as an indication of the company's problematic market control, as per a source familiar with the investigation.
The FTC is not alone in sharing this perspective. "These guys are essentially 'too big to fail,'" said Sen. Ron Wyden, an Oregon Democrat who chairs the Senate Finance Committee and a longtime critic of Microsoft. "I believe it's time to intensify antitrust enforcement actions against such abuses."
The FTC's investigation into Microsoft, which was initially reported by the Financial Times and Bloomberg, is far from the company's initial encounter with federal regulators over antitrust concerns. Over two decades ago, the Department of Justice filed a landmark antitrust lawsuit against the company, alleging that Microsoft maintained an unlawful monopoly in the operating system market through anticompetitive behavior, preventing competitors from gaining a foothold. Ultimately, the Department of Justice reached a settlement with Microsoft, and a federal judge approved a consent decree that imposed restrictions on how the company could develop and license software.
John Lopatka, a former FTC consultant who now teaches antitrust law at Penn State, informed ProPublica that the Microsoft actions highlighted in the news organization's recent report mirrored a "familiar pattern" of behavior.
"It does resonate with the Microsoft case from decades ago," said Lopatka, who co-authored a book on that case.
In this new investigation, the FTC has served Microsoft with a civil investigative demand, the agency's equivalent of a subpoena, compelling the company to provide information, according to sources familiar with the probe. Microsoft confirmed receiving the document.
Company spokesperson David Cuddy did not comment on the specifics of the investigation but claimed that the FTC's demand was "far-reaching, all-encompassing, and requests information that is beyond the realm of possibility to even be logical." He declined to provide specific examples. The FTC declined to comment.
The investigation by the agency stemmed from a public comment period in 2023, where they requested information on the competitive practices of cloud computing providers. Upon concluding this process, the FTC expressed continued interest in evaluating if specific business tactics were hampering competition.
This latest inquiry towards Microsoft represents one of FTC Chair Lina Khan's final actions before stepping down. The investigation seems to be gaining momentum as the Biden administration approaches its end.
The forthcoming FTC leadership, though, will determine the investigation's trajectory.
President-elect Donald Trump announced his plan to promote Commissioner Andrew Ferguson, a Republican lawyer, to head the agency. In response, Ferguson stated on X, "At the FTC, we will put an end to Big Tech's hostility towards competition and free speech. We will strive to make America the global leader in technology and the most appealing place for innovators to foster their fresh ideas."
Trump also pledged to appoint Republican attorney Mark Meador as a commissioner. Describing him as an "antitrust enforcer," Trump highlighted Meador's previous experience at the FTC and the Justice Department. Meador was also a former aide to Sen. Mike Lee, a Utah Republican who launched a bill to dismantle Google.
Credit for research goes to Doris Burke.
In the future, the outcome of the FTC's investigation into Microsoft's business practices could potentially reshape the tech industry's antitrust regulations. The tech giant's use of technology, such as bundling services, has been a point of contention, withsome experts raising concerns about its impact on competition within the industry.
Moreover, as technology continues to advance, the FTC's scrutiny of tech companies like Microsoft could inspire stricter regulations to promote fair competition and prevent monopolistic practices, ensuring that smaller tech companies have an equal chance to thrive.