Feds are investigating Microsoft’s bundling practices

The Federal Trade Commission is investigating Microsoft in a wide-ranging investigation that will examine whether the company’s business practices violate antitrust laws, according to people familiar with the matter. In recent weeks, FTC attorneys have been conducting interviews and setting up meetings with Microsoft’s competitors.

One of the people, who spoke on condition of anonymity to discuss the matter, said how the world’s largest software provider is bundling its popular Office products with cybersecurity and cloud computing services.

This was the so-called closing topic recent ProPublica investigationStarting in 2021, it details how Microsoft is using that experience to vastly expand its business with the US government, while also using lucrative federal contracts to box out competitors.

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

Wide swaths of the federal bureaucracy, including the entire military at the Department of Defense, adopted it and then began paying for these enhanced services after the free trial period ended. Former sales leaders involved in the effort likened it to a drug dealer hooking a user with free samples because they knew federal customers would effectively be locked into 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 running on Microsoft’s own cloud platform, Azure.

Some experts told ProPublica that the company’s tactics could violate contract and competition laws, and the news organization reported that even some Microsoft lawyers have antitrust concerns about the deals.

Microsoft said its proposal was “structured to avoid antitrust concerns.” Steve Faehl, security leader for Microsoft’s federal business, told ProPublica that “the company’s sole purpose during this period was to support the Administration’s urgent request to enhance the security posture of federal agencies that are continually targeted by nation-state threat actors.”

Some of these intrusions were the result of Microsoft’s own security breaches. As ProPublica reported in June, Russian state-sponsored hackers were involved in the SolarWinds attack Microsoft exploited a vulnerability in its product stealing sensitive information from the National Nuclear Security Administration and the National Institutes of Health, among other victims. ProPublica reports that a Microsoft engineer alerted product managers to the flaw years before the attack was discovered, but they refused to address it for fear of alienating the federal government and losing ground to competitors.

While the engineer’s proposed fix would keep customers safe, it would also create a “speed bump” for users accessing their devices. Adding such “friction” was unacceptable to product group managers, who at the time were in fierce competition with rivals in the identity tools market, the news organization reported. These tools, which ensure that users have access to cloud-based applications, are important to Microsoft’s business strategy because they often create demand for the company’s other cloud services.

One such identity product, Entra ID, formerly known as Azure Active Directory, is another area of ​​the agency’s investigation, according to a person familiar with the FTC’s investigation.

Microsoft defended its decision against fixing the SolarWinds-related flaw to ProPublica in June, saying the company’s assessment at the time included “multiple reviews” and that its response to the security issues was “based on potential customer disruption, exploitability and existing mitigations.” promised to put security “above all else”.

A person familiar with the investigation told the news organization that the FTC sees it as an example of the company’s problematic power over the market, despite Microsoft winning more federal business and exposing the government to hacking attacks.

The Commission is not alone in this respect. “These guys are kind of a ‘too big to fail,'” said Sen. Ron Wyden of Oregon, who chairs the Senate Finance Committee and has long been a critic of Microsoft. “I think it’s time to strengthen the antitrust side of the house, to deal with antitrust abuses.”

The FTC’s investigation into Microsoft was the first to report this Financial Times and Bloombergfar from the company’s first brush with federal regulators over antitrust matters. More than two decades ago, the Justice Department sued the company in a landmark antitrust case that nearly brought it down. Federal prosecutors alleged that Microsoft maintained an illegal monopoly in the operating system market through anticompetitive behavior that prevented competitors from gaining a foothold. Ultimately, the Justice Department agreed with Microsoft, and a federal judge a consent decree placed restrictions on how a company could develop and license its software.

John Lopatka, former counsel for the FTC now teaches Antitrust law at Penn State told ProPublica that Microsoft’s actions, detailed in the news organization’s latest report, follow a “very familiar pattern of behavior.”

“It mirrors Microsoft’s work from decades ago,” said Lopatka, who co-authored a book on the case.

In the new investigation, the FTC sent Microsoft a civil investigative demand, the agency’s version of a subpoena forcing the company to hand over data, people familiar with the investigation 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 was “broad, sweeping, and asking for things that cannot even be reasonable.” He refused to show the examples mentioned. The FTC declined to comment.

The agency’s investigation follows a public comment period in 2023 seeking input on the business practices of cloud computing providers. When that ends, the FTC said it remains interested in whethercertain business practices hinder competition”.

The latest demand against Microsoft represents one of FTC Commissioner Lina Khan’s last moves as chairman, and the investigation is accelerating as the Biden administration leaves office. However, the new leadership of the commission will decide the future of the investigation.

President-elect Donald Trump announced this month that he will nominate Republican attorney and commissioner Andrew Ferguson to lead the agency. Ferguson after the announcement An inscription in X says“At the FTC, we will end Big Tech’s vendetta against competition and free speech. We will make sure 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 lawyer Mark Meador as commissioner. “antitrust” previously worked at the FTC and Department of Justice. Meador is also a former aide to Utah Republican Sen. Mike Lee, who introduced legislation to break up Google.