This is What Matters in the EU Antitrust Case Against Microsoft Teams (Premium)

The EU antitrust investigation into Microsoft’s bundling of Teams with Office raises numerous issues worth discussing. Granted, I wrote an editorial on this topic back in April, but that was triggered by reports about the negotiations between Microsoft and the European Commission (EC) and largely covered the original Slack complaint that led us to this point. But now that the EC is moving forward—indicating that those negotiations broke down—we can perhaps understand how its research and discussions with both sides resulted in a formal investigation.

So, let’s identify the issues that matter most in an investigation that may very well end with antitrust charges against Microsoft. (And please do (re)read my previous editorial if you’re not familiar with the original, three-year-old Slack complaint, if needed.)

In its antitrust investigation announcement, the EC says that it will “assess whether Microsoft may have breached EU competition rules by tying or bundling its communication and collaboration product Teams to its popular suites for businesses Office 365 and Microsoft 365.” This already answers one niggling question we had about the informal investigation that preceded this, as there was some confusion about whether the concern was literally Office, the standalone productivity suite, or Microsoft 365/Office 365, the subscription service.

I had argued that it was probably both, and that the use of the term “Office” was meant broadly given the evolution of how its distributed to customers. But the EC never mentions Office as a standalone product, while it does specifically call out Microsoft 365 and Office 365. In retrospect, this makes some sense: Slack targets a business audience just as do the commercial versions of Microsoft 365/Office 365. It would not be concerned about standalone versions of Office, as no businesses of any size would ever purchase such a thing.

The EC defines Teams as “a cloud-based communication and collaboration tool. It offers functionalities such as messaging, calling, video meetings, file sharing and brings together Microsoft’s and third-party workplace tools and other applications.” Oddly, the EC does not define Slack, and the term Slack only appears once in the announcement, and then only to acknowledge that it was this company that filed the complaint that led to the investigation.

So I will turn to Wikipedia, our arbiter of all knowledge, for a definition. Slack, I am told, is “an instant messaging program … it has also been adopted as a community platform. Users can communicate with voice calls, video calls, text messaging, media, and files in private chats or as part of communities called workspaces … In addition to these online communication features, Slack can integrate with other software.”

And here I see an obvious concern: the EC’s definition of Teams underplays how much functionality this offering provides, and it makes Slack and Teams seem more comparable than they are. Teams is not just a cloud service, it is a full-fledged platform that dramatically exceeds the functionality provided by Slack. It is also notably the successor to a series of commercial Microsoft messaging and collaboration platforms that predate Slack, including Office Communicator, (2007), Lync (2010), and Skype for Business (2014): Slack didn’t launch until 2013.

The EC then gets into a curious discussion about the COVID-19 pandemic, noting that it “accelerated a shift to remote working as well as businesses’ transition to the cloud and the adoption of cloud-based software for communication and collaboration.” This is absolutely true: in fact, I literally made the same case using the same language at the start of the pandemic, that it “accelerated” industry shifts that were happening already anyway. But it’s unclear what that has to do with Slack and Teams specifically. In other words, did Teams succeed only because of the pandemic? And, if so, why wasn’t Slack—like Zoom and other popular non-Microsoft communications services—able to take advantage of that too? Didn’t COVID offer all these solutions a bump?

The timing matters. Slack, as noted, launched in 2013. Microsoft announced Teams in 2016, meanwhile, and it went public in 2017. But the pandemic didn’t happen until 2020. And so we must diverge from the EC narrative for a moment and discuss what happened before the pandemic.

Ready?

Despite its long pedigree with chat-based collaboration tools, there is no debate over whether Microsoft created Teams to take on Slack. The issue here is intent: Slack usage grew first and most quickly with the new and smaller businesses that ignored Microsoft’s top-heavy enterprise offerings, the same businesses that were adopting what’s now called Google Workspace (then G Suite). And so one might view the move to what was originally called Skype Teams as yet another rebranding exercise, at least in part.

Microsoft reportedly considered paying $8 billion in March 2016 to acquire Slack, which, yes, is a classic anti-competitive strategy employed by dominant parties like Microsoft. But pushback from co-founder Bill Gates, who was then advising CEO Satay Nadella and far more involved in Microsoft’s day-to-day operations and decision-making than the company ever admitted, scuttled that deal. This may be apocryphal, but the Gates argument was as simple as it was true: Microsoft already had all the pieces in place to beat Slack, so why waste $8 billion? But this was obvious to everyone, including me. I noted at the time that paying $8 billion for what was “a service that is perhaps a bit too similar to technologies Microsoft already owns” didn’t make any sense.

From a usage perspective, Slack may not have been that different at a high level from the communications and collaboration solutions that Microsoft already had, but it is important to remember today that Slack was in fact quite different in use. For starters, Microsoft’s legacy solutions—Lync, Skype of Business, etc.—were at one time only available as on-premises servers, which required dedicated infrastructure that only the biggest businesses could afford. But Skype for Business was part of a wave of hybrid and cloud-based offerings in which Microsoft’s Office solutions were transitioning to what we now call Microsoft 365. And the only way to get these offerings was to subscribe to the whole thing: part of this evolution meant the end of standalone core services (for the most part).

This was a boon to Microsoft’s enterprise customers: instead of cherry-picking which servers to buy and use, it could get the whole enchilada for less money. It was a boon to Microsoft, because it was now easier to develop what was previously a family of separate products because they could always ensure that all the other servers were there too, making for better interoperability and reliability. But it was a problem for the new and smaller businesses that saw the cost of Microsoft 365 as expensive. This part of the business market tended to pick smaller, less expensive services from a variety of vendors. So this was, in effect, a boon to Slack. Ironic, isn’t it, given the coming complaint? Slack benefitted from Microsoft’s integration strategy for cloud services.

The differences between Microsoft’s traditional Exchange-based customer base and the free for all world in which Slack existed are stark. But Slack drew Microsoft’s attention for one reason and one reason only: Slack’s customer base found its standalone chat-based collaboration functionality so useful that many no longer relied on email. This is an interesting generational point—older workers prefer email, while younger workers don’t understand email and prefer more immediate forms of communication—but it also speaks to its customer base of newer, smaller companies.

Anyway, Microsoft had the tools and technologies it needed in place. And it could simply out-Slack Slack by rebranding and building off of its existing communication and collaboration tools, modernizing the UI by mimicking the structure of Slack, and leveraging the OneDrive for Business and SharePoint underpinnings of its Microsoft 365 platform for storage. It would make this tool available to existing Microsoft 365 subscribers to drive usage, just as it had (and has since) with so many other tools and services. And then it would expand Teams to become a full-fledged platform and, alternatively, a standalone product that could start to eat away at Slack’s lead.

It worked, And I think we must partially credit Microsoft’s incredible pace of innovation here, as it added new features on literally a monthly basis for years, expanding Teams far past the capabilities of Slack. Within a year, it was clear that Microsoft had a winner on its hands. In March 2018, Microsoft announced that Teams was in use by over 500,000 organizations, including 91 of the Fortune 100. Teams had 13 million daily active users by July 2019, and over 20 million by that November. By March 2020, the number was 44 million.

That date is important. March 2020, of course, is when the world locked down because of the COVID-19 pandemic. (And you thought I wasn’t going to get back to that.) Since then, Microsoft has added another 256 million users (though it now measures monthly active users, not daily active users.)

Put simply, Microsoft was able to leverage its existing tools and technologies and its Microsoft 365 customer base to propel Teams to 44 million daily active users in just three years. By comparison, Microsoft just revealed that its Microsoft 365 consumer offerings now have 67 million subscribers: it took the software giant 10 years to reach that milestone.

Is this … illegal? After all, discussions about antitrust are drenched in terms like leverage.

It’s worth debating. Microsoft, facing a new competitor in Slack, considered eliminating that competitor by acquiring it, just as it had with Netscape back in the mid-1990s. And then Microsoft instead decided to develop its own alternative, just as it had with Internet Explorer in battling Netscape in the 1990s. But Microsoft also took the additional step of bundling its new solution with a dominant product, in this case Microsoft 365 … just as it did when it bundled IE with Windows.

There’s more. In both cases, the smaller player made mistakes, too, and these missteps played a role in why it lost to the bigger Microsoft. (How the frick did Slack not benefit greatly from the pandemic as Team and Zoom did?) In both cases, the smaller player was acquired by a larger tech behemoth for huge sums of money (AOL bought Netscape for $4.2 billion in 2013, while Salesforce bought Slack for $28 billion in late 2020), dramatically undercutting the claim that Microsoft’s bundling harmed them in any way. And let’s not forget, in both cases, Microsoft simply created the better product over time while the smaller player moved more slowly or not at all to improve their own offerings.

Interesting stuff. But product bundling by a dominant player is a classic case of monopoly abuse. Case closed, right?

I don’t know, and there is an important point to be made here that I think helps to at somewhat undercut this claim. And the clues are all over the history I provided above. Slack, you may recall, was mostly popular with the newer and smaller companies that were already avoiding what’s now called Microsoft 365. Teams, by contrast, was a feature of Microsoft 365, and it appealed to, and is used by, the enterprises and larger companies that prefer the familiarity and legacy functionality provided by Microsoft. These audiences do overlap here and there, of course, as small companies often get bigger, and Slack actually did get some wins with big organizations, like IBM.

But among many other reasons, Teams is interesting because it coexists in a Microsoft infrastructure with Exchange. It offers workforces a choice when it comes to collaboration, and ways to integrate communication that occurs over both Exchange (email) and Teams (chat). Shared files use a common SharePoint infrastructure no matter how users choose to collaborate, and this happens without them having to do a thing. It just works.

Slack, meanwhile, is still the same standalone chat-based communications and collaboration tool it always was. But it’s mostly an alternative to email, a different silo. And whatever integration bits exist are less natural and less well-integrated. Put another way, Slack still appeals mostly to smaller (unmanaged) companies while Teams still appeals mostly to bigger managed companies, Microsoft’s historical strength.

And we all know what happened since the pandemic: Team exploded in popularity and usage and Slack did not. So it is perhaps not coincidental that Slack’s original complaint to the EC happened in July 2020, months into our work-from-home mandate. Yes, Microsoft absolutely did exert leverage to help it beat Slack. It had the resources to evolve Teams rapidly and dramatically. And it had the existing commercial customer base, built over decades and with established trust, to make adopting Teams and a no-brainer. But is this leverage abusive? Anticompetitive?

One argument is that it was just good business, smart decision-making, and good timing. But I think the anticompetitive claim is somewhat less clear because of those two different customer audiences noted above. Not only is Teams a vastly different product from Slack because it does so much more, it basically competes in a different market. There is little Teams usage in small businesses, just as there is relatively little usage of Slack by enterprises.

To get this back to the EC announcement, its description of “the transition to the cloud” assumes there was only one transition that impacted all companies. But from what I can see, there are two transitions here, from a business productivity standpoint. There is the transition of the Fortune 500 and other enterprises from on-premises Microsoft solutions to managed, cloud-based Microsoft services. And there is a transition of small businesses from standalone software (Office, Skype, whatever) to ad-hoc cloud services from a variety of vendors (Google Workspace, Notion, Slack, etc.).

And here, we must address another key tenet of antitrust: market definition. Do Slack and Teams compete in a broadly-defined market of cloud-based productivity solutions? Or does Slack exist in a market of unmanaged smaller businesses while Microsoft 365 and Teams dominate a separate market comprised of enterprises and other larger, managed organizations?

Antitrust regulators can and do narrow or broaden this definition as needed to prove their accusations. But this is stacking the deck. Consider Windows, which is dominant in the “market” for x86 PCs but is a minority player in personal computing devices overall. Or consider the more recent example of Microsoft’s Activision Blizzard acquisition, where the U.S. FTC was keen to limit the market to consoles made by Sony and Microsoft and to not include those made by Nintendo, since that made Microsoft’s Xbox look even more feeble by comparison. It’s all about perspective, like lying with data.

So, yes, the EC is correct that Microsoft 365/Office 365 is “well-entrenched.” The question is whether this reality harmed Slack. As I noted above, it in many ways actually helped Slack because its smaller and less expensive offering appealed to a large audience of smaller businesses, and that relationship was apparently worth $28 billion to Salesforce. Then again, did the entrenched nature of Microsoft 365 create a barrier to Slack entering the lucrative enterprise market? This is a good question too. And go figure, both these competitive concerns are addressed by a succinct sentence in the EC announcement.

“The Commission is concerned that Microsoft may be abusing and defending its market position in productivity software by restricting competition in the European Economic Area for communication and collaboration products,” it notes. This is a logical and fair concern.

But then it veers off into interesting and curious territory.

“In particular, the Commission is concerned that Microsoft may grant Teams a distribution advantage by not giving customers the choice on whether or not to include access to that product when they subscribe to their productivity suites and may have limited the interoperability between its productivity suites and competing offerings.”

I don’t like this. Anyone can download and use Teams, and in 2021 Microsoft began offering a standalone Teams offering called Teams Essentials that, get this, targets small businesses. Teams Essentials is cheap—just $4 per user per month—and while it doesn’t offer enough of an advantage over the free version to warrant much research for you small business owners out there, the fact remains that this offering has never amounted to anything. Microsoft’s enterprise stink still serves to ward off the smaller businesses that gravitate to Slack and its ilk.

I also don’t like the notion that Microsoft adding a feature to an existing offering—and doing so without raising prices—somehow disadvantages the customers who already pay for that offering. That’s crazy, and one of the sad facts of Microsoft 365 (and probably other subscriptions) is that many subscribers don’t take advantage of many of the features it offers.

Likewise, I hope you understood my point about the integration advantages of Microsoft 365 vs. the previous world of standalone servers, because the EC doesn’t. In the past, Microsoft’s customers would have to pay for each server they used, leading to big costs for those that wanted more than one. And Microsoft had to design each server such that they could work well by themselves or work even better when one or more other servers were present. With Microsoft 365, you get it all (at least all the core foundational bits that used to be standalone servers.) This is a win-win, not a problem.

But the EC seems to be arguing that the old way is better. Microsoft can offer a standalone but basic Microsoft 365 offering, but each time a business needs additional services, they should have to pay more to put those additional services on equal footing with third-party services.

In the EC’s view, “these practices may constitute anti-competitive tying or bundling,” and if so, they are anti-competitive and harmful to third parties like Slack. In turn, this disadvantages customers in the EU, presumably because Microsoft’s bundling makes it prohibitively expensive to use Microsoft 365 and Slack. I mean, why bother? You already get Teams for free.

This is fair, but only in isolation. Remember: Teams does much, much more than Slack and is thus a different kind of product, or at least a superset of Slack. And Teams and Slack target different markets, depending on your definition.

It’s still worth debating. And the EC may very well find that Microsoft’s business practices, which do amount to bundling a free service to better compete with a potential threat in one of its most important markets, are indeed anti-competitive. I guess I sort of see both sides there.

So we’ll see what happens. Microsoft could offer more meaningful concessions that address both the original Slack complaint and the EC’s concerns. And as is so often the case with antitrust, the action to address abuse, should it come, may be too late. Today, Microsoft claims 300 million monthly active users of Teams, while the most recent figures I found for Slack were in the 30 to 40 million daily active users range.

History tells me that this disparity is not explained by abuse alone, that Slack bears some of the blame, just as Microsoft’s dramatic evolution of Teams deserves some of the credit. But we know that monopolists must abide by different roles than less dominant companies. And to the contrary, that there are recent examples of Microsoft bundling that have been far less successful, suggesting that bundling alone cannot be the reason for the success of Teams.

So let’s end with that. Here are two examples.

In 2015, Microsoft announced Windows 11 as the successor to Windows 10 and, as part of that announcement, a new consumer version of Microsoft Teams would replace Skype, with a front-end called Chat that would replace Meet Now. Teams consumer, as I call this product, looks like Teams. But it is not Teams, and neither it nor its Chat front-end has driven any usage gains. Indeed, usage of this solution is so low that Microsoft is removing the Chat integration from the Windows 11 UI in the next release of that system this coming fall. In this case, “bundle it and they will come” is not a strategy, it’s a failure.

Then, in 2021, Microsoft announced yet another new feature for Microsoft 365 called Loop. Backed by a technology called the Fluid Framework that Microsoft had announced two years earlier, Loop is to content creation what Teams is to collaboration, in this case a more modern app and backend service that will at first sit alongside legacy apps like Word, PowerPoint, Excel, and OneNote, and then later, if successful, replace them. But it wasn’t enough for Microsoft to just announce Loop. Where it rapidly iterated Teams and transformed it into a new platform and Microsoft’s most successful Office offering in decades, Loop has languished. A public preview didn’t land until March 2023, and while the promise remains, Loop today is a non-event, and its client looks like an outright copy of Notion, especially, but also of other similar ad-hoc solutions like Obsidian that target individuals and the same small businesses as Slack. Here again, we see that bundling—and using a 1990s-era Microsoft strategy of pre-announcing something to harm competitors—hasn’t changed the market at all.

The European Commission may not view this case as broadly as I do. But these issues are complex, and not easily settled. Where the agency lands is anyone’s guess at this point. But given its eagerness to take on Big Tech, I feel like Microsoft is best served by following the same strategy of compromise it did with the Activision Blizzard scenario. Surely there is a happy middle-ground here where Teams and Slack can coexist, regardless of market definition, and serve their respective customers bases to the manner to which they are accustomed.