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Ofcom wants UK cloud competition probe

April 5, 2023

By Colin Mann

At the halfway point of its probe into UK cloud services, regulator Ofcom is proposing to refer the market to the Competition and Markets Authority (CMA) for further investigation.

Ofcom’s market study has provisionally identified features and practices that make it more difficult for customers to switch and use multiple cloud suppliers. Ofcom is particularly concerned about the practices of Amazon and Microsoft because of their market position.

Cloud computing has become critical for many businesses across the economy – including telecoms companies, broadcasters and public sector organisations – and has transformed the way they deliver services on which we all rely every day. It uses data centres around the world to provide remote access to services such as software, storage and networking.

In October 2022, Ofcom launched a study under the Enterprise Act 2002 into cloud infrastructure services in the UK, to assess how well this market is working. Ofcom has examined the strength of competition and any features that might limit innovation and growth in this sector by making it difficult for other cloud providers to enter the market or smaller companies to expand.

Because the cloud sector is still evolving, Ofcom has looked at how the market is working today and how it expects it to develop in the future – aiming to identify any potential competition concerns early to prevent them becoming embedded as the market matures.

There are two leading providers of cloud infrastructure services in the UK: Amazon Web Services (AWS) and Microsoft, who have a combined market share of 60 per cent-70 per cent. Google is their closest competitor with a share of 5 per cent-10 per cent. Collectively these firms are known as the ‘hyperscalers’ and the vast majority of cloud customers use their services in some form.

While competitive market forces are delivering benefits to customers – especially where providers are competing to attract new customers – in the form of innovative products and discounts, other features of the market give cause for concern:

  • Egress fees. These are the charges that customers pay to transfer their data out of a cloud and the hyperscalers set them at significantly higher rates than other providers. The cost of egress fees can discourage customers from using services from more than one cloud provider or to switch to an alternative provider.
  • Technical restrictions on interoperability. These are imposed by the leading firms that prevent some of their services working effectively with services from other providers. This means customers need to put additional effort into reconfiguring their data and applications to work across different clouds.
  • Committed spend discounts. These can benefit customers by reducing their costs, but the way these discounts are structured can incentivise customers to use a single hyperscaler for all or most of their cloud needs, even when better quality alternatives are available.

These market features can make it difficult for some existing customers to bargain for a good deal with their provider. There are indications this is already causing harm, with evidence of cloud customers facing significant price increases when they come to renew their contracts.

In addition, some customers are concerned about their ability to switch and use multiple providers where this limits their ability to mix and match the best quality services across different providers. High levels of profitability for the market leaders AWS, and substantial consistent growth in Microsoft’s profits, indicate there are limits to the overall level of competition.

Ofcom is concerned that constraints on customers’ ability to use more than one provider could make it harder for smaller cloud providers to win business and compete with the market leaders. Revenues are already concentrated with a few players, and there is a risk that the features Ofcom has identified could lead the market to concentrate further towards the market leaders.

Accordingly, Ofcom has proposed to refer the cloud infrastructure market to the CMA to carry out a market investigation. This would allow the CMA to further examine the nature and extent of barriers and consider if there are interventions that could improve how the market works for customers and ultimately UK consumers.

Making a market investigation reference would be a significant step for Ofcom to take. Ofcom’s proposal reflects the importance of cloud computing to UK consumers and businesses, the significant concerns it have about the cloud infrastructure market and its view that the CMA is best placed to undertake any further investigation. Ofcom will continue to engage closely with the CMA during the second half of the study.

“We’ve done a deep dive into the digital backbone of our economy, and uncovered some concerning practices, including by some of the biggest tech firms in the world,” advises Fergal Farragher, Ofcom’s director responsible for the market study. “High barriers to switching are already harming competition in what is a fast-growing market. We think more in-depth scrutiny is needed, to make sure it’s working well for people and businesses who rely on these services,” he added.

Ofcom is inviting feedback on its interim findings, and on its proposal to make a market investigation reference into the supply of cloud infrastructure services in the UK, by May 17th, 2023.

Ofcom intends to publish a final report setting out its findings and recommendations, including its decision on a market investigation reference, by no later than October 5th, 2023.

“These are interim findings and AWS will continue to work with Ofcom ahead of the publication of its final report,” commented an AWS spokesperson. “The UK has a thriving and diverse IT industry with customers able to choose between a wide variety of IT providers. At AWS, we design our cloud services to give customers the freedom to build the solution that is right for them, with the technology of their choice. This has driven increased competition across a range of sectors in the UK economy by broadening access to innovative, highly secure, and scalable IT services.”

Francisco Mingorance, Secretary General at trade body CISPE (Cloud Infrastructure Services Providers in Europe) said: “It is clear that Ofcom recognises the potential for Microsoft’s unfair software licensing practices to distort competition in the cloud market – it devoted a whole chapter of its interim report to these practices and noted it ‘will consider the most appropriate way forward on these issues’ with the competition authority.”

“More and more customers, competitors and regulators are waking up to the ways in which Microsoft continues to distort fair competition in the cloud. Private deals are unlikely to solve these sector-wide issues.”

“Based on the mounting evidence it is important that both national and EU authorities open formal investigations into Microsoft’s unfair software licencing practices as an urgent competition issue.”

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