Microsoft Secured Government Dependence on Its Goods through Complimentary Offers. Could Elon Musk's Starlink Inevitably Achieve Similar Results?
Rewritten Article:
(This story was originally published by ProPublica - Sign up for their newsletter to keep up with similar investigations)
A couple of weeks ago, my colleague, Doris Burke, and I stumbled upon a story in The New York Times that felt eerily familiar.
The article in question discussed Starlink, Elon Musk's satellite internet provider operated by SpaceX, providing free internet services to the White House to improve wireless connectivity and cell reception. The move left some former officials scratching their heads. But to us, it strongly resembled a cunning business strategy we had been digging into the previous year, focusing on deals between Microsoft and the Biden administration.
At the core of our Microsoft investigation was the realization that "free" typically comes with a catch. In 2021, after President Biden urged tech companies to bolster the nation's cyber defenses, Microsoft started offering "free" cybersecurity upgrades and consulting services to the federal government. However, their ulterior motive soon became apparent as we discovered the true nature of the White House Offer.
The ostensibly selfless offer by Microsoft hid a more complex, profit-driven agenda. Once the free trial period ended, federal customers who had adopted their upgrades would be practically trapped, as switching to a competitor at this point would be both costly and troublesome.
Former Microsoft employees we spoke to likened the offer to a drug dealer hooking users with free samples. "If we give you the taste, and you take the taste, you'll enjoy the taste," one admitted. "And once it's time for us to take the taste away, your users will plead with us not to. And you'll be forced to pay us."
As expected, when the free trials concluded, a significant portion of the federal government kept the upgrades and began paying the higher subscription fees, ensuring billions in future sales for Microsoft.
Microsoft asserts that all agreements with the government were "pursued ethically and in full compliance with federal laws and regulations" and that their only goal during this period was to "improve the security posture of federal agencies constantly under attack by sophisticated nation-state threat actors."
However, experts on government contracting raised concerns about the company's tactics. They found the maneuvers legally sketchy, as they evaded the competitive bidding process, a fundamental aspect of government procurement. By doing so, these tactics blocked potential competitors, stifling innovation in the industry.
Post reading the Times article about Starlink's freebie to the White House, I reached out to these experts.
"Whether it's Microsoft last year or Starlink today, or another company tomorrow, what's essential to understand is that such moves represent a sneaky back door around the competition processes meant to ensure the best goods and services from the best vendors," said Jessica Tillipman, associate dean for government procurement law studies at George Washington University Law School.
Typically, in competitive bidding processes, the government solicits proposals from vendors for the goods and services it desires. Vendors then submit their proposals to the government, which theoretically selects the most capable and affordable option. Giveaways bypass this entire process.
Commerce Secretary Howard Lutnick seems to be advocating for normalizing such donations across Washington. Last month, during an appearance on the Silicon Valley podcast "All-In," he proposed his concept of a "gratis" vendor who "gives product to the government" without undergoing the lengthy process of becoming a proper vendor because they're giving it away, he asserted.
Since President Donald Trump took office in 2017, Musk, who serves as an unpaid "special government employee," has made it a spectacle by providing his services and company products to the government at "no cost to the taxpayer." The White House donation and the subsequent transfer of 4,000 terminals to the Federal Aviation Administration for Starlink's satellite internet service deployment were just a couple of examples.
When probed during our Microsoft investigation, salespeople revealed that within the company, the ultimate goal was to convert government users to premium subscriptions post the free trial and thereby gain a foothold in the market for Azure, their cloud platform. It remains unclear what the end game is for Musk and Starlink. Neither responded to emailed inquiries.
Historically, federal law has sought to restrict donations to the government, primarily to preserve oversight on spending.
The Antideficiency Act, which originated in the 19th century, was enacted to prevent individuals from making contracts without obtaining necessary funding from Congress and placing taxpayers on the hook for unapproved spending. The act restricts "voluntary services" and attempts to guard against volunteers later demanding payment.
However, in 1947, the General Accounting Office granted an exception allowing "gratuitous services" as long as both parties agree in writing that the donor forsakes the right to payment. Microsoft seized this exception to transfer their valued $150 million in consulting services to government customers via "gratuitous services agreements." To provide free cybersecurity products, Microsoft offered existing federal customers a "100% discount" for up to a year.
It is unclear whether gratuitous services agreements were in place for Musk's giveaways. The White House, the FAA, SpaceX, and Starlink did not respond to our written inquiries.
For the experts consulted, the written agreements might satisfy the technicalities of the law, but ethically, they still fall short. "Just because something is technically legal doesn't make it right," said Eve Lyon, an attorney with a four-decade-long career as a procurement specialist in the federal government.
The implications of accepting a freebie, regardless of the method of transfer, can have far-reaching consequences. Government officials may not fully grasp the potentially harmful consequences at the outset, Lyon cautioned.
Tillipman agreed, emphasizing that the risk of ballooning obligations is particularly pronounced in technology and IT. Users can become dependent on a single provider, creating "vendor lock-in," she explained, which excludes other vendors and stifles competition. It's too soon to tell how Starlink's donations will unfold, but Microsoft's White House Offer offers a glimpse of the possible outcomes. In keeping with its initial objective, the world's biggest software company continues to expand its presence in the federal government while evading competition.
Doris Burke contributed to the research.
- Despite the claims by Microsoft that their tactics were ethical and in compliance with regulations, experts in government contracting raised concerns about the company's strategies evading the competitive bidding process, potentially stifling innovation and competition in the industry.
- Jessica Tillipman, associate dean for government procurement law studies at George Washington University Law School, highlighted that giveaways like Microsoft's offer and Starlink's free internet services to the White House circumvent the competition processes, allowing vendors to gain a foothold in the market.
- In the tech industry, accepting freebies can result in vendor lock-in, creating a dependence on a single provider, as implied in the acceptance of Microsoft's White House Offer and Starlink's free internet services, causing detrimental consequences and stifling competition in the long run.
- As the world's biggest software company expands its presence in the federal government, the examples of Microsoft and Starlink raise questions about the ethics of circumventing established competition processes with the use of gratuitous services agreements and free giveaways in the tech sector.
