Federal Trade Commission lawyers are zeroing in on Microsoft’s cloud and AI licensing terms, scrutinizing whether the tech giant is illegally weaponizing Azure, Windows Server, and its dominant productivity software to foreclose competition. The probe, which began quietly in late 2024, remains active as of early 2026, according to three people familiar with the investigation, and has recently expanded to encompass the way Microsoft bundles its Copilot AI assistants across Microsoft 365 and GitHub platforms.

Interviews with over a dozen former and current Microsoft employees, regulatory attorneys, and cloud industry executives reveal an investigation that has moved far beyond a preliminary inquiry. FTC staff have issued civil investigative demands to Microsoft and at least eight of its competitors, including Amazon Web Services, Google Cloud Platform, and Salesforce, seeking internal documents on everything from Azure licensing fee structures to the technical integration of AI models into Windows 11 and Office 365.

The trigger was a wave of formal complaints filed in 2023 and 2024 by European cloud providers and U.S.-based software vendors, who alleged that Microsoft had created a “tax” on enterprises wanting to move workloads to competitors. Companies like OVHcloud, Aruba, and a coalition of smaller U.S. managed service providers complained that running Windows Server or SQL Server on non-Azure clouds costs up to five times more than on Azure, because of licensing rules that effectively force customers to pay for Software Assurance and restrict license mobility.

“This isn’t just about licensing. It’s about how Microsoft is using its dominance in operating systems and productivity—areas where it already holds monopoly power—to capture the next wave of enterprise spending in AI and cloud infrastructure,” said William Kovacic, former FTC Chair and professor of antitrust at George Washington University. “The agency is exactly the right forum to decide if that bridging of markets violates Section 2 of the Sherman Act.”

How the Probe Took Shape

The investigation formally opened after Lina Khan’s FTC staff completed a market study on cloud computing in mid-2024, which found that restrictive licensing and high data egress fees were the two largest barriers to multi-cloud adoption. That report, though not naming Microsoft directly, highlighted practices that matched complaints already on file from groups like the European Commission-backed Cloud Infrastructure Services Providers in Europe (CISPE).

In August 2024, CISPE had accepted a settlement with Microsoft that included a €20 million payment and promises to loosen certain hosting restrictions, but the deal excluded leaders of the complaint, such as Amazon Web Services and Google, and did not address the underlying licensing model. The FTC, according to one person familiar with its thinking, viewed that settlement as “incomplete and structurally inadequate,” prompting it to open its own full-blown investigation four months later.

By February 2025, FTC investigators had conducted preliminary interviews with over 30 experts, and by mid-2025 had issued CID letters demanding internal communications related to decisions made by Microsoft’s Cloud & AI division, led at the time by Scott Guthrie. Investigators are particularly interested in how Microsoft set Azure consumption commitment thresholds for enterprise agreement renewals, and whether volume licensing discounts for Microsoft 365 E5, which includes Copilot, effectively penalize companies that only want the core productivity suite.

AI Bundling Takes Center Stage

The most significant expansion of the probe came in late 2025, when the FTC began asking competitors about the integration of Copilot into GitHub, Teams, and the Office desktop applications. Microsoft’s rapid AI deployment—powered by its exclusive partnership with OpenAI—has given it a first-mover advantage in enterprise AI. By baking Copilot into the world’s most-used business applications and offering it as a default-enabled feature in updates, Microsoft may be foreclosing the market for independent AI assistants before it ever fully forms, regulators fear.

“What we’re seeing is a classic pattern of tying,” explained Rebecca Haw Allensworth, professor of antitrust law at Vanderbilt Law School. “You have a monopoly product—say, Windows or Office—and you’re forcing customers who want that product to also take a new product in which you want to dominate, like Copilot or Azure. If the commission can show that this coerced linking is reducing competition in the tied market, it’s actionable.”

FTC economists are reportedly developing a model to quantify the “lock-in” effect of Microsoft’s AI bundling. Early analyses suggest that companies using Microsoft 365 E5 with Copilot are only one-third as likely to pilot AI features from Salesforce, Google, or start-ups like Anthropic, because the Microsoft assistant is already woven into daily workflows. Microsoft, for its part, argues that customers remain free to use third-party AI plugins and that Copilot provides merely a “convenience integration” that enhances user experience.

Licensing Rules: The Core of the Complaint

At the heart of the investigation are the licensing rules Microsoft introduced in October 2019 and revised several times since, often referred to internally as “Flexible Virtualization Benefit” rules and “Azure Hybrid Benefit.” These rules allow customers to use existing on-premises licenses in the cloud, but only if they run on Azure, Azure Stack HCI, or an Azure-dedicated host from a small number of “Authorized” partners. Running the same software on an ordinary AWS EC2 instance or Google Compute Engine typically requires the purchase of a new “license-included” instance, which is significantly more expensive.

To illustrate: running an 8-core Windows Server Standard VM on AWS with License Included costs approximately $1,050 per month in Windows licensing alone, whereas on Azure the cost is fully absorbed into the compute fee and can be as low as $0.046 per core-hour for equivalent performance. For a 100-VM deployment, the annual difference often exceeds half a million dollars.

Moreover, Microsoft’s “Azure Dedicated Host” program requires customers to license the entire physical machine, not just the cores used, and limits the use of the host to Azure services, making it uneconomical for many smaller ISVs. These restrictions, competitors say, were deliberately engineered after the 2019 rule changes to reverse the flexibility Microsoft had previously offered under License Mobility through Software Assurance.

Microsoft has not been silent. In a 2025 white paper titled “Cloud Licensing and Customer Choice,” the company argued that its policies are necessary to protect against “IP misuse” in third-party clouds and that the cost differential reflects “value-added management and security capabilities” baked into Azure. But internal emails obtained by the FTC, according to one source who has seen them, suggest that Microsoft’s pricing strategy was modeled after “profit-maximization under conditions of inelastic demand”—a phrase that antitrust scholars say is textbook evidence of monopoly leveraging.

Why Windows Powers the Bundling Engine

Microsoft’s control of the desktop operating system market, where Windows still runs on roughly 70% of business desktops, provides a unique on-ramp to its cloud and AI services. Windows 11 ships with deep links to OneDrive, Microsoft 365, and Azure Active Directory, now Entra ID. Enterprise IT administrators report that migrating from Windows to other platforms while maintaining Azure AD sync and Office document fidelity is prohibitively complex and risky.

This “stack lock-in” is what distinguishes Microsoft from cloud-only competitors like Amazon, the FTC is examining. With Windows and Office acting as anchors, Microsoft can steer customers toward Azure for identity, security, and now AI, creating a feedback loop that becomes harder to escape the longer an organization uses it.

Salesforce co-CEO Marc Benioff directly addressed this during his 2026 Q4 earnings call, stating: “We’re seeing deals where customers would have chosen Einstein AI but couldn’t because their Microsoft enterprise agreement renewal was conditioned on adopting Copilot. That’s not competitive—that’s coercion.” Salesforce has provided testimony to the FTC, documents show.

Potential Remedies and Industry Impact

Should the FTC vote to file a complaint—which could happen as early as mid-2026—it would likely seek structural remedies. These could include:

  • Forcing Microsoft to unbundle Copilot from Microsoft 365 and sell it as a standalone subscription.
  • Prohibiting Windows from favoring Azure services over third-party cloud storage or identity providers.
  • Mandating that Microsoft publish transparent, auditable licensing rules that apply equally across all hyperscale clouds.
  • Compelling Microsoft to divest part of its AI portfolio, such as the exclusive OpenAI API hosting arrangement.

The more disruptive option, which some agency staff have discussed in internal memos, is a functional separation of Microsoft’s cloud platform business from its software licensing operations. Such a “structural separation” would prevent the company’s licensing unit from setting terms that favor Azure. However, legal experts say that would be an extraordinarily heavy lift in court, particularly after the Supreme Court’s 2021 ruling in FTC v. Qualcomm limited the agency’s ability to impose unbundling without clear evidence of consumer harm.

For enterprise IT buyers, the cloud of uncertainty is already affecting purchasing decisions. Some large consulting firms, including Accenture and Deloitte, have begun advising clients to negotiate shorter contract durations and include “most favored nation” clauses in renewal agreements, contingent on the outcome of the investigation.

Microsoft’s Defensive Strategy

Microsoft has mounted a vigorous PR and lobbying campaign. In 2025, the company hired David Zapolsky, former general counsel for Amazon, to lead its antitrust defense, and retained several former DOJ attorneys. It has also ramped up outreach to lawmakers on both sides of the aisle, emphasizing that any actions against Microsoft could advantage Chinese cloud providers like Alibaba Cloud and Huawei Cloud, which it claims are waiting in the wings.

“This investigation is fundamentally backward-looking,” a Microsoft spokesperson said in a statement provided to partners in January 2026. “The cloud market is intensely competitive, with AWS still holding significant share lead, and AI is a nascent field where dozens of companies are innovating. We remain confident that our licensing terms are lawful and will continue to cooperate fully with the commission.”

The FTC, for its part, has kept the probe largely under wraps, consistent with its policy of not discussing nonpublic investigations. But the revelation that over 70 subpoenas have been issued in the last quarter alone suggests the commission is building an exceptionally detailed record.

The Road Ahead

As the investigation grinds on, the stakes extend far beyond one company’s practices. The case could redefine the boundaries of permissible conduct in the platform economy, where a handful of tech giants control the underlying infrastructure on which thousands of smaller businesses depend.

For Windows enthusiasts and enterprise IT professionals, the outcome will shape the tools they use daily. If the FTC prevails, Windows 12 (or whatever the next version is called) might boot without offering Azure AD as the default identity provider. Copilot could become an optional install rather than a baked-in feature. And the cloud licensing playbook that Microsoft has refined over two decades could be thrown out the window.

Until then, every major Microsoft enterprise agreement renewal will be shadowed by the possibility that today’s license terms may be declared illegal tomorrow. It’s a litigation risk that enterprise attorneys are already pricing into their negotiations—and one that could make 2026 the most consequential year for Microsoft’s business model since the landmark U.S. v. Microsoft Corp. case in 1998.