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This practice is a form of "bundling" in the antitrust sense, and while it is not inherently illegal different rules apply to such behaviors if you've been found to have monopoly powers.

It is not - it would be if they had a monopoly, but they clearly don't in this case.

They do have a monopoly on Windows licenses, and they are trying to leverage that to sell cloud hosting of Windows servers, which they do not have a monopoly on. In this case Microsoft's defense would probably be "Windows is not the only OS available", which may or may not be accepted by a government (it's gone both ways for them in the past).

The right question is if Windows Server has a monopoly - and the answer is no. Even in Azure more then 50% of servers run Linux.

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