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 run afoul of antitrust laws, according to people familiar with the matter. In recent weeks, FTC attorneys have been conducting interviews and setting up meetings with Microsoft competitors.

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

This was the so-called bundling issue A recent ProPublica investigationThat detailed how, starting in 2021, Microsoft used the practice to vastly expand its business with the US government while boxing competitors out of lucrative federal contracts.

At the 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 offered to upgrade those license bundles for free for a limited time, giving the government access to its more advanced cybersecurity products. The company also provided consultants to install the upgrades.

Vast swaths of the federal bureaucracy, including all military services in the Department of Defense, took over — and then began paying for those enhanced services when the free trial 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 upgrades once installed. Microsoft’s offering not only displaced some existing cybersecurity vendors but also took market share from cloud providers like Amazon Web Services, as governments began using products running on Microsoft’s own cloud platform, Azure.

Some experts told ProPublica that the company’s tactics could violate laws governing contracts and competition, and the news agency reported that even Microsoft’s own attorneys have antitrust concerns about some of the deals.

Microsoft said its offer was “structured to avoid antitrust concerns.” The company’s “sole goal during this period was to support an urgent request by the administration to enhance the security posture of federal agencies that are constantly being targeted by sophisticated nation-state threat actors,” Steve Fehl, Microsoft’s federal business security leader, told ProPublica.

Some of these attacks were the result of Microsoft’s own security flaws. The so-called SolarWinds attack involved Russian state-sponsored hackers, ProPublica reported in June. Exploitation of a vulnerability in a Microsoft product The theft of sensitive information from the National Nuclear Security Administration and the National Institutes of Health, among other victims. Years before the attack was discovered, a Microsoft engineer alerted product leaders to the flaw, but they refused to address it for fear of alienating the federal government and losing ground to competitors, ProPublica reported.

While the engineer’s proposed fix would have kept customers safe, it would have created a “speed bump” for users logging into their devices. Adding such “friction” was unacceptable to managers of the product group, which at the time was in fierce competition with competitors in the market for so-called identity tools, the news agency reported. These tools, which ensure that users have permission to log into cloud-based programs, are critical to Microsoft’s business strategy because they often lead to demand for the company’s other cloud services.

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

Microsoft has defended its decision not to address the SolarWinds-related flaw, telling ProPublica in June that the company’s assessment at the time included “multiple reviews” and that its response to security issues was “based on potential customer disruption, exploits and available mitigations.” Promises to keep “above all else”.

The FTC sees the fact that Microsoft has won more federal business even as it puts the government at risk of hacking as an example of the company’s problematic power in the marketplace, a person familiar with the investigation told the news agency.

The Commission is not alone in this view. “These guys are like 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 step up the antitrust side of the house, to deal with the abuse of antitrust.”

The FTC’s investigation of Microsoft, which first reported it Financial Times And BloombergThis is far from the company’s first brush with federal regulators over antitrust issues. More than two decades ago, the Department of Defense sued the company in a landmark antitrust case that nearly led to its breakup. Federal prosecutors alleged that Microsoft maintained an illegal monopoly in the operating system market through anticompetitive conduct that prevented rivals from gaining a foothold. Ultimately, the Justice Department settled with Microsoft and a federal judge approved Consent decree The company has restrictions on how it can develop and license software

John Lopatka, a former consultant to the FTC who now teaches Penn State’s antitrust law, told ProPublica that Microsoft’s actions followed a “very familiar pattern” of behavior detailed in a recent report by the news agency.

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

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

Company spokesman David Cuddy did not comment on the specifics of the investigation but said the FTC’s demands were “broad, sweeping, and asking for things that are beyond the possibility of even being reasonable.” He declined to provide on-the-record examples. 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 was terminated, the FTC said it had “an ongoing interest in whether or not”sure Business practices are hindering competition.”

The latest claim against Microsoft represents one of the final moves by FTC Commissioner Lina Khan as chair, and the investigation appears to be picking up steam as the Biden administration winds down. The commission’s new leadership, however, will determine the future of the investigation.

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

Trump also said he would nominate Republican lawyer Mark Meador as commissioner, describing him as a “antitrust enforcement” 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.