It’s déjà vu all over again as governments put Microsoft in their crosshairs

When Satya Nadella took over as Microsoft CEO nearly 20 years ago, he turned Microsoft into tech’s choirboy. Under his leadership, the onetime corporate shark that the US government prosecuted for violating antitrust laws became meek and mild, played nice with competitors rather than squashed them, and even worked hand-in-hand with the open-source movement.

It paid off. Freed from government’s harsh spotlight, Microsoft’s market value soared, and at $2.15 trillion today, it’s the second most valuable company in the world by market cap, second only to Apple’s $2.56 trillion.

But Microsoft is no longer the tech world’s choirboy. Governments across the world are accusing it of violating antitrust laws, filing lawsuits against it, considering levying hundreds of millions of dollars in fines, and proposing regulations that would require it to drastically change its business practices. The actions are targeted at the company’s push into gaming, its attempt to control the cloud business in Europe, and its aggressive drive to dominate artificial intelligence.

What does this mean for the future of the company? Here’s what you need to know about government pushback against Microsoft.

The $69 billion Activision gamble

In January 2022, Microsoft announced plans to by the video game maker Activision for $68.7 billion. If the deal goes through, it will be the biggest consumer-related tech deal since the purchase of Time Warner by AOL two decades ago.

That’s a big “if,” though. In December 2022, the Federal Trade Commission sued to block the takeover. Holly Vedova, director of the FTC’s Bureau of Competition, explained, “Microsoft has already shown that it can and will withhold content from its gaming rivals. Today we seek to stop Microsoft from gaining control over a leading independent game studio and using it to harm competition in multiple dynamic and fast-growing gaming markets.”

As I wrote in a column about the lawsuit, even if Microsoft wins the suit, it may end up losing if it gets so distracted by the legal action that it misses out on other potential opportunities and executes poorly on its existing businesses.

The bigger problem: What about the cloud?

Microsoft faces a bigger problem than the Activision lawsuit. It’s facing multiple government actions that target the engine turbocharging the company’s growth: the cloud.

At the moment, the company’s biggest cloud problem is in Europe. A year ago, the European Union began looking into Microsoft’s cloud business practices when several European cloud providers, including Germany’s NextCloud and France’s OVHcloud, claimed they were anti-competitive.

A questionnaire sent to the company by EU investigators noted, “The Commission has information that Microsoft may be using its potentially dominant position in certain software markets to foreclose competition regarding certain cloud computing services.”

Based on the investigation, in October 2022 Microsoft made licensing changes that it said addressed the issues. Competitors disagreed. In November, the European cloud provider trade group CISPE made a formal complaint against the company with the EU. CISPE secretary general Francisco Mingorance explained, “Leveraging its dominance in productivity software, Microsoft restricts choice and inflates costs as European customers look to move to the cloud, thus distorting Europe’s digital economy.”

Specifically, CISPE complains that Microsoft leverages its dominance in operating systems, Windows 10 and 11, to direct European businesses and customers to the company’s Azure cloud infrastructure and to its OneDrive storage platform. The EU has yet to rule on the complaint. But its central claim, that Microsoft uses Windows to harm competitors in other businesses, almost eerily echoes the ‘90s US antitrust suit that sent Microsoft reeling into its “lost decade” years ago.

It’s not just in Europe that Microsoft faces scrutiny about its cloud practices. Reuters reports that the Federal Trade Commission has begun looking into the “business practices [of cloud providers] including details on their market power, competition and potential security issues.”

FTC Chair Lina Khan said, “Swathes of the economy now seem reliant on a small number of cloud computing providers,” and went on to say the agency “is seeking public input on how the current market structure and business practices of cloud providers affect competition and data security.”

The FTC didn’t name names about which companies might be targeted, but the Reuters article notes that the biggest cloud providers are Amazon, Microsoft, Google, and Oracle. Given that the FTC is already suing Microsoft, the company has a lot to fear.

The biggest target of all: AI and chatbots

A possibly bigger concern for Microsoft is whether governments will look into regulating AI and chatbots like the one built into Bing. Microsoft believes AI and chatbots will transform computing, the economy, and the way we live and work — and is essentially betting its future on it.

There’s already evidence that European governments and possibly the US may regulate artificial intelligence. Given that Microsoft is the market leader, any regulations would hurt Microsoft more than its competitors.

The fear is that generative AI chatbots like Microsoft’s could do immeasurable harm if not reined in with the proper guardrails. A New York Times investigation, “In A.I. Race, Microsoft and Google Choose Speed Over Caution,” found that both Google and Microsoft ignored warnings by their own employees and company ethicists about the harm chatbots could cause, and released them prematurely to gain market share.

The article notes that nearly a year ago, Microsoft employees and ethicists “wrote in several documents that the A.I. technology behind a planned chatbot could flood Facebook groups with disinformation, degrade critical thinking and erode the factual foundation of modern society.”

Microsoft ignored the warnings and released its chatbot anyway. Since then, more than 1,000 tech researchers and leaders, including Elon Musk, Steve Wozniak, and Rachel Bronson, president of the Bulletin of the Atomic Scientists organization that manages the Doomsday Clock, called for a pause in developing powerful AI because the technology presents “profound risks to society and humanity,” they warned.

The group added, “If such a pause cannot be enacted quickly, governments should step in and institute a moratorium.”

Governments are paying attention. Italy temporarily banned ChatGPT, the brains behind Microsoft’s Bing chatbot, and other European countries are eyeing similar measures. The EU has proposed laws that would regulate AI. EU industry chief Thierry Breton explained, “As showcased by ChatGPT, AI solutions can offer great opportunities for businesses and citizens, but can also pose risks. This is why we need a solid regulatory framework to ensure trustworthy AI based on high-quality data.”

Even the US, which is typically hands-off when it comes to regulating technology, has taken notice. President Biden, in talking about AI, said, “Tech companies have a responsibility to make sure their products are safe before making them public.” When he was asked whether AI might be dangerous, he answered, “It remains to be seen. Could be.”

Biden’s comments may ultimately prove to be more than just words. On April 11, the National Telecommunications and Information Administration (NTIA), an agency of the Commerce Department that advises the White House on telecom policy, asked for public input into possible AI regulations. The agency said it wants to ensure “that AI systems are legal, effective, ethical, safe, and otherwise trustworthy.”

NTIA Administrator Alan Davidson explained, “Responsible AI systems could bring enormous benefits, but only if we address their potential consequences and harms. For these systems to reach their full potential, companies and consumers need to be able to trust them.”

The upshot

Freed from government oversight for decades, Microsoft has thrived. Now, though, it’s become far more aggressive than it’s been in the past, and its attempt to dominate the gaming market, grow its cloud presence, and become the AI leader has put it into governments’ crosshairs across the world.

Aggressive companies typically draw more government attention because they’re more likely to go up to or cross legal boundaries — but they may also reap greater market share and profits, and so it’s worth the cost to them. On the other hand, government antitrust actions can crush a company, as happened to Microsoft once before.

It’s not clear yet which will happen to Microsoft. For the moment, at least, government actions haven’t directly hurt it in its cloud business — and the company is reportedly trying to stay one step ahead of EU antitrust investigators by offering to change its cloud licensing practices yet again. And so far, there’s been more talk than serious actions about regulating AI.

However, all that could change fast. And if so, Microsoft’s fortunes will as well.