Feds Probe Microsoft Over Bundling Practices

The Federal Trade Commission is investigating Microsoft in a wide-ranging probe that will examine whether the company’s business practices ran afoul of antitrust laws, according to people familiar with the matter. In recent weeks, FTC lawyers have conducted interviews and set up meetings with Microsoft’s competitors.

A key area of ​​interest is how the world’s largest software provider bundles popular Office products together with cybersecurity and cloud computing services, said one of the people, who asked not to be named discussing the matter. confidential.

This so-called bundling was the subject of a recent investigation by ProPublicawhich detailed how, in early 2021, Microsoft used the practice to widely expand its business with the US government while boxing competitors out of lucrative federal contracts.

At that time, many federal employees used a software license that included the Windows operating system and products such as Word, Outlook and Excel. In the wake of several devastating cyberattacks, Microsoft has offered to upgrade those license packages for free for a limited time, giving the government access to its most advanced cybersecurity products. The company also provided consultants to install the updates.

Vast swaths of the federal bureaucracy accepted, including all military services in the Department of Defense — and then began paying for those enhanced services when the free trial ended. Former sales executives involved in the effort likened it to a drug dealer hooking a user with free samples, as they knew federal customers would effectively be locked into the updates once installed. Microsoft’s offering not only displaced some existing cybersecurity vendors, but also took market share from cloud providers such as Amazon Web Services, as the government began using products that ran on Azure, Microsoft’s cloud platform.

Some experts told ProPublica that the company’s tactics may have violated laws governing contract and competition, and the news organization said even some of Microsoft’s lawyers had antitrust concerns about the deal. .

Microsoft said its offer was “structured to avoid antitrust concerns.” “The company’s sole purpose during this period was to support an urgent request from the Administration to strengthen the security posture of federal agencies that were continually targeted by sophisticated threat actors to the nation’s state,” Steve Faehl, the head of security for Microsoft’s federal business. he told ProPublica.

Some of these incursions were the result of Microsoft’s security lapses. As ProPublica reported in June, Russian state-sponsored hackers in the attack called SolarWinds exploited a weakness in a Microsoft product to steal sensitive data from the National Nuclear Security Administration and the National Institutes of Health, among other victims. Years before the attack was discovered, a Microsoft engineer warned product managers about the flaw, but they refused to address it for fear of alienating the federal government and losing ground to competitors, reported ProPublica.

While the engineer’s proposed fix would have kept customers safe, it would have also created a “bump” for users accessing their devices. Adding such “friction” was unacceptable for the managers of the product group, which at the time was in a fierce rivalry with competitors in the market for the so-called identity tools, the news organization said. These tools, which ensure that users are allowed to access cloud-based programs, are important to Microsoft’s business strategy because they often lead to demand for the company’s other cloud services.

According to a person familiar with the FTC’s investigation, one such identity product, Entra ID, formerly known as Azure Active Directory, is another focus of the agency’s investigation.

Microsoft defended its decision against addressing the SolarWinds-related flaw, telling ProPublica in June that the company’s assessment included “multiple reviews” at the time and that its response to the security concerns was based on “disruption customer potential, exploitability and available mitigations.

The FTC sees the fact that Microsoft won more federal business even as it left the government vulnerable to hackers as an example of the company’s problematic market power, a person familiar with the probe told l news organization.

The commission is not alone in this view. “These guys are sort of a version of ‘too big to fail,'” said Sen. Ron Wyden, an Oregon Democrat who chairs the Senate Finance Committee and a longtime critic of Microsoft. “I think it’s time to strengthen the antitrust side of the house, deal with antitrust abuses.”

The FTC’s investigation of Microsoft, which was first reported by the Financial Times and Bloombergit’s far from the company’s first brush with federal regulators over antitrust issues. More than two decades ago, the Justice Department sued the company in a landmark antitrust case that nearly resulted in its breakup. Federal prosecutors alleged that Microsoft maintained an illegal monopoly in the operating system market through anticompetitive behavior that prevented rivals from gaining a foothold. Ultimately, the Department of Justice settled with Microsoft, and a federal judge approved the consent decree which imposed restrictions on how the company could develop and license software.

John Lopatka, a former consultant to the FTC who now he teaches The antitrust law at Penn State, told ProPublica that the actions of Microsoft detailed in the recent report of the news organization follow “a very familiar pattern” of behavior.

“It echoes the Microsoft case” from decades ago, said Lopatka, who co-authored a book about that case.

In the new investigation, the FTC sent Microsoft a civil investigation request, the agency’s version of a subpoena, forcing the company to turn over information, people familiar with the probe said. Microsoft has confirmed that it has received the document.

Company spokesman David Cuddy would not comment on the specifics of the investigation, but said the FTC’s request is “broad, broad, and asking for things that are beyond the realm of possibility to be also logical”. He declined to provide examples on the record. The FTC declined to comment.

The agency’s investigation follows a public comment period in 2023 during which it sought information about the business practices of cloud computing providers. When it concluded, the FTC said it had a continuing interest in being “certain business practices impede competition.”

The recent inquiry into Microsoft represents one of FTC Commissioner Lina Khan’s latest moves as chairman, and the probe appears to be picking up steam as the Biden administration winds down. The new leadership of the commission, however, will decide the future of the investigation.

President-elect Donald Trump said this month that he would nominate Commissioner Andrew Ferguson, a Republican lawyer, to lead the agency. After the announcement, Ferguson said in a post on X“At the FTC, we will end Big Tech’s vendetta against competition and free speech. We will ensure that America is the world’s technology leader and the best place for innovators to bring new ideas to life.”

Trump also said he would nominate Republican attorney Mark Meador as commissioner, describing him as a “antitrust enforcer” who previously worked at the FTC and the Department of Justice. Meador is also a former aide to Sen. Mike Lee, a Utah Republican who introduced legislation to break up Google.