March 5. 2024. 1:19

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The risk of Microsoft owning the operating system for digital economy

As competition authorities worldwide consider Microsoft’s proposed acquisition of leading games developer Activision Blizzard, they must determine whether this acquisition further strengthens Microsoft’s dominant position.

Auke Haagsma is the former head of unit at the European Commission and strategic advisor to CISPE.

Back in 1996, New York Times writer John Markoff wrote about Microsoft’s “Embrace, extend, extinguish” strategy as what he called the ‘PC King’ battled to control the fledgling internet. Ultimately this led to anti-trust enforcement with high penalties.

Today, Markoff’s article has a new scary resonance. In 1996 Microsoft wanted to become the ‘operating system of the Internet’; today, that ambition has not changed, only grown. Activision is just one piece in a play to control three key pillars of the next-generation digital economy: gaming, cloud and AI. Controlling any of these three presents significant competition issues – controlling all three will effectively make Microsoft the operating system of the entire digital economy for decades.

Most attention around the Activision acquisition has centred on its potential to control access to vastly popular titles such as Call of Duty. But, even if Microsoft continues to offer fair access to competitors like Sony for the next decade, as they appear to have promised, the real issue is control of the engines behind these games.

Graphics will be essential to the next generation of digital experience. It seems certain that the internet of databases and screens will be supplanted by a more immersive experience, and graphics engines will be crucial in delivering these. The second engine that drives gaming is the cloud. The era of consoles is ending. Games sold as physical discs are already being replaced by downloads, and online gaming is the norm. All this depends on the cloud.

Cloud services benefit from scale – not just in terms of cost efficiency but in harvesting, mining and driving insights from the masses of data that cross them. With control of Activision’s stable of games and gamers, Microsoft will bolster the scale and capability of its own Azure cloud whilst locking millions of gamers into its ecosystem. It will have the power to leverage games to build its cloud dominance just as it has done with Office365 and Windows Server.

The same can be seen with its recent investment in OpenAI – the innovative business behind ChatGPT. This could give Microsoft an immediate edge and encourage consumers to use its Bing search engine.

While that would finally bring meaningful competition to Google, the danger is that one dominant player will simply replace another. Natural language, AI-powered search, as well as the stunning capability of AI to deliver answers rather than just a list of results could transform this market.

More importantly, ChatGPT gives Microsoft additional means to tie its already-dominant suite of productivity software even more tightly together and to Azure, effectively excluding alternative solutions and providers.

OpenAI will give Microsoft two even more, important advantages. Not only do all AIs require prestigious amounts of processing power and data storage, but they collect enormous amounts of information. Every interaction feeds into the learning algorithms to improve and hone the AI. Once again, the scale effects massively favour those providing cloud infrastructure supporting these AI.

And, at the heart of Microsoft’s investment is the commitment to Azure as the exclusive cloud infrastructure for OpenAI. Not only does this lock OpenAI and ChatGPT into Azure, but means that any future customers looking to use or integrate ChatGPT will also use Azure.

And so, the third pillar, the cloud itself, is core to every one of these areas. The raft of complaints, filed with the European Commission last year by cloud infrastructure vendors make this very point. Through unfair software licensing practices – the very behaviour which it has exhibited and been criticised for since the early 1990s – Microsoft is seeking to lock customers into its own cloud.

The plaintiffs are not the only ones who have noticed. CISPE’s Ten Principles for Fair Software Licensing were created with the collaboration and support of hundreds of CIOs of businesses across Europe and the US who see how Microsoft leverages its monopolies in productivity and server software to force them into its cloud ecosystem.

Complaints from Nextcloud and Slack allege similar practices designed to foreclose competitors by locking customers into Microsoft-only monocultures. All share a common perspective that Microsoft is, once again, leveraging its dominance through Office and Windows Software to unfairly take control of an adjacent market. And once again, it is likely that only formal investigations and imposed remedies or the threat thereof will force Microsoft to change its behaviour.

The cloud, AI and gaming are the foundations of the next wave of growth and innovation in the digital world. Allowing dominance to develop in any one of these areas would stymie European businesses’ opportunity to compete and damage the EU’s wider digital and sustainability goals.

Allowing one company to dominate all three critical elements would be catastrophic to competition in digital markets.