The single most important development in the digital economy of the past ten years is: the architectural transformation of on-premise servers and software to “the cloud”, including computing and software as a service. Nothing has been more important for lowering the cost of startup innovation, rapidly scaling up and down computing capacity in line with demand, and making cybersecurity advancements. This cloud-enabled digital infrastructure will be essential to make next-generation machine learning applications widely deployable across the economy – which in turn is our best bet for generating the productivity we need to escape risk. of stagflation as we emerge from the COVID-19 crisis.
Given this high stakes, getting the conditions of cloud competition right is now a critical economic and technology policy objective.
Competition in the cloud is not an easy problem to solve. Cloud providers are essentially a business with economies of scale, where the bigger you are, the better. There are also likely to be some benefits to some degree of vertical integration: packing raw computing power with integrated software packages, data security, and other related products all running on demand can offer price and performance benefits. So there are natural tendencies towards consolidation and at the very least oligopoly.
But that is precisely why we need to be extra alert to the business models and licensing practices of the major cloud service providers.
If these platforms are set up to amplify monopolistic tendencies, it can and will exacerbate competitive barriers, which in turn will reduce the positive impact the cloud revolution can have on the overall economy.
We need to lean decisively the other way and positively promote business models and practices that increase competition from top to bottom in the cloud stack.
The European Union pushed in exactly this direction, and big tech companies have taken notice. In May, Microsoft publicly responded in a blog post titled: “Microsoft’s European Cloud Principles.” Microsoft announced plans to ease a series of licensing restrictions that had led to higher prices for customers using Microsoft business software licenses on competing cloud services — but only for smaller cloud providers, and only those in Europe.
This is not nearly enough.
While Microsoft’s response was a reasonable half-step in the right direction, it falls short on crucial points. Fair competition is not a game where you can choose who to compete with. In this case, it would be necessary to move to a truly level playing field that all cloud services – regardless of size and geography – are freed from discriminatory pricing practices. This has consequences not only for direct competitors, but for the economy in general.
As long as Google Cloud and Amazon AWS customers continue to be penalized by Microsoft’s enterprise software pricing scheme, most European customers will continue to pay higher prices for some key business applications if they choose not to “switch” to a bundle that comes in Azure state. †
What could be the justification for limiting the change in license restrictions to small cloud providers based in Europe? And why should these principles apply in Europe and not elsewhere?
In fact, Microsoft’s offering weighs more heavily on the public relations angle than the actual business angle, and it harks back in unfortunate ways to the ‘bad old days’ of anti-competitive bundling practices that we simply cannot afford to sneak back into the cloud environment.
From a purely political and public relations standpoint, providing what appears to be relief (but remember: it is relief from what was arguably an anti-competitive stance to begin with) targeting smaller companies in Europe would be a smart move to try to immediate pressure from regulators and legislators in Brussels. But it doesn’t do enough to advance what should be the purpose of cloud competition principles and policies.
The unfortunate fact is that bundling applications with platforms can be an attractive way for major technology players to protect themselves from competition and increase the cost of switching to such an extent that it becomes prohibitively expensive for customers to even consider it. It’s attractive to the potential monopolist, but it’s bad for customers and it’s bad for innovation.
Regulators in both the US and Europe have long ago opposed this bundling strategy when it comes to operating systems and web browsers. Currently, both are going against this strategy again when it comes to app stores and apps, search and businesses appearing in search results and even ecommerce platforms and in-house products. These are important developments in competition policy, but they also target markets that are somewhat mature and where the damage has already been done. Do we really want to wait for the same kind of problem to further hinder the development of competition and innovation in the cloud?
Principles are one thing; policy, pricing and licensing decisions that really affect how markets function are another.
Now is the time to push for a better and more comprehensive solution to the cloud competition challenge, one that supports broad economic growth and innovation more than public relations.
Steve Weber works at the intersection of technology markets, intellectual property regimes and international politics. He has published numerous books, including “The End of Arrogance: America in the Global Competition of Ideas” and “The success of open source”, and is a professor at the Graduate School, School of Information, UC Berkeley. He has collaborated with and received research funding from a number of technology companies, including Google and Microsoft.