A recent study by “Center for Sustainable Transformation” (zNT) at Quadriga University Berlin shows that unfair software licensing practices, including lock-in effects, non-transparent cost structures and limited freedom of choice not only create financial burdens for companies, they negatively impact efficiency, innovation and growth potential.
The study, which was based on a survey of 190 public companies in Germany, examined the cloud adoption as well as the licensing practices of dominant software providers.
The study found that with the increased adoption of cloud solutions, unfair software licensing practices by legacy software providers represent a considerable burden for public companies, including:
- Economic Barriers of Software Costs: 71% of enterprises could not transfer their existing software solutions to a cloud provider of their choice without incurring additional software licensing costs. 60% of surveyed enterprises reported that these additional software costs made accessing their preferred cloud solution economically unfeasible.
- Restricting Choice of Cloud Providers: 56% of enterprises see the additional software costs associated with using preferred cloud services as not only uneconomical but also as restricting their choice. 70% of respondents had to repurchase new software licenses to use with preferred cloud providers. These additional software license costs can range between an estimated 27 million and 120 million euros per year for public companies. This figure relates to the estimated 309,000 employees in the member companies of the Verband kommunaler Unternehmen (VKU), an association of municipal companies in Germany, and thus results in additional costs of around 87 to 388 euros per employee per year.
- Market Distortion Through Lock-in Effects and Tied Bundling Deals: Technical dependencies, a lack of interoperability and legal barriers prevent companies from accessing preferred IT providers or using more cost-effective alternatives. Discounts and rebates from software providers conditioned on agreements to adopt software-cloud combinations further reinforce vendor lock-in effects. Software providers use these tactics to exclude and effectively price-out competitors who only offer software or cloud solutions.
- Lack of Transparency: 25% of enterprises complain about unclear contractual conditions, exacerbated by confidentiality agreements imposed by providers.
- Fear of Retaliation: Enterprises fear that criticizing software licensing practices may lead to disadvantages in other areas of cooperation with providers.
These unfair and predatory software practices result in increasing software costs, technical and financial dependencies, and unpredictable licensing terms for companies. As a result, we see less efficiency, less innovation and less potential for growth.
One recommendation to curb these practices is for companies to take action themselves to create greater transparency regarding contractual terms and license models. The study points to recommendations from the U.S. Government Accountability Office (GAO) report from November 2024, which recommends federal agencies establish clear responsibilities for dealing with restrictive license terms and implement policies to analyze and reduce such practices.
The study also found there is an increased desire for politicians and regulatory authorities to act in order to curb the abusive behavior of dominant software companies. Many countries, including Denmark, the UK, France and Spain, have already taken targeted regulatory steps to conduct greater oversight of these activities. For example, the UK Competition and Market Authority (CMA) found, as part of its investigation into the cloud computing market, that Microsoft’s software licensing practices create an unfair advantage for its own cloud computing services and thus potentially harms competitors. In the U.S., it has been reported that the Federal Trade Commission (FTC) has launched a comprehensive antitrust investigation into the competitive impact of Microsoft’s licensing practices, including software licensing.
In Germany, enterprises are calling for stronger and faster intervention from the Federal Cartel Office, which has already classified Microsoft as a company that could potentially engage in abusive behavior due to its dominant software position. But more action needs to be swiftly taken by the Federal Cartel Office to protect customers. The new government also has an opportunity to address unfair licensing practices and existing market distortions by promoting clarity in software licensing terms and choice of vendors.
The heavy dependence of public companies on dominant legacy software providers, coupled with a lack of transparency in licensing terms and rising costs, makes regulatory intervention urgently necessary. This oversight is the only way to reduce the considerable burden on public companies, increase competition and support digital transformation in the long-term.
Read the full report here.