News & Insights

New Report Highlights How Software Providers’ Predatory Tactics Increase Costs to Taxpayers

Companies like Microsoft and Oracle Have Long History of Preventing Competition for Government Contracts 

By Ryan Triplette

A new research report from software and government procurement expert Michael Garland explores how legacy software providers like Microsoft and Oracle leverage their market dominance to restrict government IT systems.

As the largest IT customer in the world, there is no doubt that the fight for the U.S. government’s business is fierce. However, given that the business is paid for by taxpayer dollars, we have to ensure that the battleground for it is balanced.

The Garland report, titled “Vendor-Lock and the Lack of Competition in the Government’s COTS Software Estate,” shines an important light on how legacy software providers use the U.S. government’s dependance on dominant software to preclude competition in adjacent product markets – such as for cloud and cybersecurity services. These providers use restrictive licensing tactics – ranging from conditioning discounts on the adoption of these adjacent products to weaponizing software audits – to entrench their position with government customers. The report exposes how anti-competitive tactics not only decrease competition among government IT contracts but also cost taxpayers significant resources. 

Garland Report Finds Taxpayers Foot the Bill for Microsoft’s Anti-Competitive Behavior 

There are several key takeaways from the Garland report that demonstrate how the bullying tactics of certain legacy providers cost taxpayers, squash competition for government contracts, and limit the ability of the U.S. government to access best in class technologies.

Garland’s research specifically finds that:

  • A five percent improvement in price performance, due to enhanced software competition, could produce savings up to $750 million annually.
  • Microsoft and Oracle, the world’s two largest software companies, received 25 percent to 30 percent of their contracts without meaningful competition (and likely much more).
  • In one prime example: the government was willing to spend $112 million more to buy Microsoft Office than Google Workspace to avoid switching costs.

These are staggering numbers. All the more so because they are limited just to the federal government. When one bears in mind that this behavior is also rampant throughout the public sector – including the states – and the U.S. commercial sector, it is clear that the true cost of these practices is significantly more – both to organizational bottom lines and human resources. 

Lack of Healthy Competition Gives Legacy Software Companies Power Over the Government, Taxpayers, and Competition

Garland’s report also shines light on how software vendors can, “leverage their power to impose a number of harmful practices on the government.”

As noted in the report’s executive summary, this includes:

  • Licensing restrictions requiring the government to repurchase previously paid for software, in order to use those applications in competitive cloud environments.
  • Fixed, inflexible annual support fees, that cannot be reduced, even with reduction in software usage.
  • Predatory software audits (as documented by lawsuits) used to cement contract negotiations, and in one case, force the government to spend hundreds of millions of dollars unnecessarily.

If there is any question as to the frequency of these practices, one need look no further that a recent report by the Office of Inspector General for NASA questioned $35 million ($20 million in penalties and $15 million in overspend) to Oracle alone over the past five years, attributing the overspend to concerns about the about an audit of an old license.

The good news is that bipartisan members of Congress have already expressed concern over this predatory behavior. In a letter to the Government Accountability Office Comptroller General, Homeland Security and Governmental Affairs Committee Chairman Gary Peters and Senator Joni Ernst said, “We are concerned with recent reports that federal government contracting for certain software licensing agreements may be predicated on the use of a company’s cloud services…Specifically, we are concerned that such restrictions may reduce Federal agency capabilities, increase costs, and add unnecessary complexity to the contracting process.”

Further, the Strengthening Agency Management and Oversight of Software Assets (SAMOSA) Act – bipartisan and bicameral legislation from last Congress that we expect to be reintroduced later this year – would significantly improve the government IT procurement process as outlined in an earlier blog by the Coalition. The Senate should swiftly move to introduce this bill again and pass companion legislation soon.

The U.S. federal government is the largest single consumer of IT on the planet and companies like Microsoft and Oracle use restrictive licensing tactics to stamp out healthy competition for government contracts and drive up costs to taxpayers. The same can be said for the private sector where they drive up costs for businesses, regardless of size.

As stewards of our taxpayer dollars, regulators and lawmakers in Washington have a responsibility to ensure the competitive acquisition and efficient management of software assets by promoting clarity in licensing terms and choice of vendors. This not only helps to serve the purposes of IT customers in the US government, but will pave the way for IT customers throughout the public and commercial sectors.

Until then, taxpayers – and software customers around the world – will remain on the hook to pay for these companies’ predatory tactics.

 

As a healthcare software provider, our ability to utilize the cloud provider of our choice impacts more than just our business – it affects the health and well-being of patients everywhere. Restrictive software licensing imposes real-world threats like pricing increases that directly influence how we are able to assist healthcare providers and the patients they serve. We support the Principles of Fair Software Licensing to protect both cloud customers and the communities they serve.

Healthcare Technology Company

Cloud computing has brought low-cost, on-demand IT services to every corner of the economy, raising productivity and innovation levels at enterprises of all sizes. And intense competition and innovation among cloud providers continues to drive costs down while adding new customer capabilities.

But some incumbent IT vendors are imposing restrictive software licenses to limit how customers can take advantage of competing cloud offerings.

NetChoice supports the Principles of Fair Software Licensing as a roadmap to drive innovation, serve customers, and promote competition in IT services.

NetChoice

Frustration, use limitations, threatened audits, and significant additional expenses. That has been our experience with unfair software licensing. Organizations need transparency from their software providers.

We support the work of the Coalition for Fair Software Licensing to protect customers and ensure IT spend is effective and free from surprises.

Global Building Materials Supplier

Unfair software licensing practices in the cloud are a global issue, and CISPE is pleased that the Coalition for Fair Software Licensing is taking the Principles to North America.

Originally launched and jointly conceived by customers and cloud providers in Europe, we encourage customers around the world confronted with unfair software licensing practices to consider the Principles as a powerful framework for positive change.

CISPE

As start-ups, it is essential that we retain flexibility to use the cloud infrastructures that fit best our aspirations and those of our customers. The Principles of Fair Software Licensing help the next generation of software and service providers to avoid lock in and ensure a fair playing field for all. Seeing their adoption in North America adds weight to this important movement for innovators in Spain and worldwide.

Carlos Mateo Enseñat

President, Asociación Española de Startups (AES), and Promoter of the NUBES Initiative in Spain

Developed in Europe by CIOs and cloud providers, the Principles of Fair Software Licensing are supported by digital organizations in Italy such as Assintel. Assintel welcomes the Coalition for Fair Software Licensing’s embrace of the Principles in North America. Fair licensing of software in the cloud is a global issue for businesses of all sizes. In Italy, our government recognises this challenge and just updated its antitrust bill to put an end to unfair software licensing practices.

Businesses in North America can benefit just as well as those in Italy from a best practice framework for software licensing.

Paola Generali

President, Assintel

As a longtime advocate for open systems and open networks, CCIA supports the competitive ideals reflected in the Principles of Fair Software Licensing for Cloud Customers as the Coalition embarks upon its efforts in North America.

Matt Schruers

President, CCIA

Some legacy software providers are attempting to extend their current on-premise market dominance into the cloud market through aggressive and restrictive contracts, licensing terms, and software audits.

While many promote ‘cloud freedom,’ in actuality they are employing tactics designed to lock out competition and innovation while increasing profits for themselves at the expense of their customers. No longer can legacy software providers be allowed to disguise their predatory practices.

I am proud to align myself with the Coalition for Fair Software Licensing in shining a light on these issues and putting forth actionable solutions.

Craig Guarente

Founder and CEO, Palisade Compliance

Despite the current spotlight on antitrust issues in Washington, behemoth software providers continue to misuse their legacy status and market power to target business customers with predatory audits and trap those customers in restrictive licensing agreements.

Through our practice — dedicated to representing software licensees against these very tactics — we have seen first-hand the real world effects of such licensing practices. Both growing and established companies are routinely kneecapped by unexpected costs, forced to waste immeasurable resources in spurious audit defense, and stymied in their efforts to make the technology changes they believe are necessary for their business.

We support the Principles of Fair Software Licensing and believe they represent an excellent and necessary step towards much needed business consumer relief and will help open the market to smaller providers in the cloud ecosystem.

Arthur S. Beeman & Joel T. Muchmore

Founding Partners, Beeman & Muchmore, LLP

Consumers benefit from a competitive, dynamic information technology marketplace. Competition drives innovation and ensures that customers get the benefit of fair pricing.

Overly restrictive, abusive licensing agreements from IT companies with market power, on the other hand, impose costs on government and corporate customers of reduced innovation and long-term price increases. We support the Principles of Fair Software Licensing and policies that encourage innovation, competition, and licensing practices that give customers the freedom to mix and match solutions from a wide variety of vendors.

This is particularly critical in the market for cyber security solutions since hackers are innovating every day, leveraging new strategies, new tactics, and new technologies to support their illegal campaigns. The only way to defeat nation states and trans-national criminal organizations is for the government to ensure that the IT market for cyber security is as competitive as possible and customers have the freedom to choose.

Cybersecurity Provider

The Alliance for Digital Innovation supports the Coalition for Fair Software Licensing’s efforts to protect customer choice and advocate for access to modern, secure commercial solutions.

As advocates for public sector customers, we think that government mission owners and enterprise information technology and cybersecurity leaders should have access to as many modern commercial solutions as possible.

These solutions are critical components to driving digital innovation and security in the public sector, and ADI supports removing barriers that slow adoption of those solutions, including restrictive licensing practices.

Alliance for Digital Innovation

As an attorney, I have represented enterprise software customers for years and have routinely seen enterprise software companies deploy predatory business practices, including falsely inflating alleged non-compliance gaps, to increase profits and limit customers’ ability to go elsewhere.

These practices produce causal effects throughout the economy including increased prices, as businesses across various sectors are forced to spend resources dealing with these unforeseen issues. I support the work of the Coalition for Fair Software Licensing to help my clients and enhance an economy that provides opportunities to all.

Pam Fulmer

Founder and Partner, Tactical Law Group LLP

We believe licensees should be able to deploy licensed software in a way that best suits their business, including their choice of cloud provider at no additional cost. Having experienced licensing practices inconsistent with the Principles of Fair Software Licensing, we support the Principles and urge others to support both them and the Coalition for Fair Software Licensing.

Insurance Industry Business

Startups, often operating with limited resources, need the freedom to assemble the technology infrastructure that best suits their needs.

Cloud computing infrastructure is central to startup growth, and the Principles of Fair Software Licensing will help maintain accountability, mitigate unnecessary costs, and promote innovation in this environment.

Industry-wide adherence to these principles will level the playing field for startups.

Engine

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