[Editor's note: This story originally was published by Real Clear Policy.]
By Arthur S. Beeman & Joel T. Muchmore
Real Clear Policy
Competition policy and antitrust legislation are currently enjoying a renaissance in Washington and the technology industry is once again the target of much scrutiny. However, as the Biden administration and Congress debate how best to curb the ability of technology leaders to misuse their market power, they are ignoring the practices of legacy software providers such as Oracle and Microsoft. Despite their reputation for leveraging their dominant position to force unwitting customers into unwelcomed and restrictive licensing agreements, these companies appear to be flying under the radar in the current competition debate.
Through our representations of scores of software licensees, we have seen first-hand the harmful effects of unfair software licensing and audit tactics on both growing and established businesses. And we believe that there are more than sufficient grounds for policymakers to widen the scope of their current investigations to include review of these questionable software licensing practices and how they have negatively impacted business choice and utilization of cloud services. There is a strong case to be made that Oracle and Microsoft’s aggressive use of their software licenses has allowed them to gain a foothold and grow their cloud businesses despite being inauspiciously late entries into that dynamic market.
Oracle in particular has a history of weaponizing software audits to upsell — if not outright compel — licensees into cloud contracts. In many instances, Oracle makes precipitous allegations of underlicensing then, exploiting the resulting shock and awe, offers the customer steep discounts on the alleged amount due by purchasing (often unwanted) cloud credits. In one notable example (made public by CBS News through Colorado’s Open Records Act), Oracle audited the City of Denver, Colorado in July 2016. Contentious and confrontational out of the gate, Oracle ultimately alleged a staggering $10 million license gap before offering the city alternate resolution packages, one of which contained nearly $2 million in discounts simply for the purchase of unrelated cloud credits. (In the end, Denver paid Oracle almost $4 million to resolve the audit dispute.) In this and comparable ways, we have seen Oracle center its strategy to grow its cloud business around its predatory audits rather than a focus on innovative and superior products. (Oracle appears to have deemphasized, at least temporarily, certain practices in light of the currently pending securities litigation.)
Beyond its aggressive auditing, Oracle also penalizes customers for running Oracle software on a competitor’s cloud. A recent study by Professor Frédéric Jenny, Chairman of the Organization for Economic Co-operation and Development (OECD) Competition Committee, and commissioned by CISPE found that “Oracle’s licensing restrictions lead to a price multiple of 10 times when using Oracle software on a third-party cloud infrastructure (IaaS) when compared to running it on Oracle IaaS.” For many companies, Oracle’s strong market share in database software (which, according to Professor Jenny, is “used by more than 45% of database management users”) – coupled with the difficulty of deplatforming Oracle — makes these practices unavoidable for many long-time users.
Professor Jenny’s report also accused Microsoft of enforcing unfair licensing costs and charging customers more to use its Office software on third-party cloud platforms, citing the case brought to Microsoft by the Danish Cloud Community and the European Commission in 2018. In this case, Microsoft was alleged to have raised the price for software subscriptions for all customers — except for those using its software within its own cloud environments, Azure and Windows 365.
These actions have a real and tangible impact on the growth and productivity of all businesses, especially during this juncture in which many companies are strategizing how best to utilize emerging cloud technologies. Aggressive audit activity diverts valuable time and resources from core services as companies are intimidated (through sheer uncertainty, if not outright threats of license termination), from exercising otherwise beneficial deployment options. For many companies, this amounts to being effectively denied any reasonable choice as they are reluctantly compelled to restructure their cloud migration plans.
Despite the frequency of this behavior and significant cost borne, customers and competitors of Oracle and Microsoft alike have been reticent to speak up for fear of sparking retaliatory audits, increased licensing costs, or even targeted market foreclosure. Indeed, a recent Wired article noted that “the founder of an enterprise software startup said that Microsoft would ‘absolutely kill’ their business if they spoke out.”
For far too long, these companies have hidden their behavior in plain sight while legislators and regulators continue to disregard the software licensing market. If policymakers are going to continue their focus on big tech, which we believe is appropriate, it is imperative that they examine the actions of software providers such as Oracle and Microsoft. The growth and innovation potential of businesses transitioning to the cloud depends on it.
Arthur S. Beeman and Joel T. Muchmore were counsel of record for Mars in the seminal Mars v. Oracle matter and have subsequently built a practice specializing in software licensing and audit defense counseling. In June of 2020, after 60 combined years in BigLaw, Art and Joel launched the law firm Beeman & Muchmore, LLP in order to introduce the concept of GigLaw, a new model for the delivery of legal services that leverages emerging technologies and targeted specializations in order to relieve businesses from the unnecessary burdens of BigLaw. Learn more at www.beemanmuchmore.com.
[Editor's note: This story originally was published by Real Clear Policy.]
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