Ofcom has referred the public cloud infrastructure services market to the Competition and Markets Authority for further investigation.
Its market study has identified features that make it more difficult for UK businesses to switch and use multiple cloud suppliers. Ofcom says that it is particularly concerned about the position of the market leaders Amazon and Microsoft.
It points out that cloud computing has become critical for many businesses across the UK 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 UK businesses with remote access to services such as software, storage and networking.
In October 2022, Ofcom launched a study under the Enterprise Act 2002 into cloud services in the UK to assess how well this market is working, and published its interim findings in April 2023. It 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, which had a combined market share of 70-80% in 2022. Google is their closest competitor with a share of 5-10%. Collectively these firms are known as the ‘hyperscalers’ and according to Ofcom, most 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, the features Ofcom is most concerned about are:
- 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 barriers to interoperability and portability. These can result in customers needing to put additional effort into reconfiguring their data and applications so they can work on different clouds. This makes it more difficult to combine different services across cloud providers or to change provider.
- Committed spend discounts. These can benefit customers by reducing their costs, but the way these discounts are structured can provide incentives to 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 challenging for some customers to switch or use multiple cloud providers. This can make it difficult to bargain for a good deal with their provider, or to mix and match the best quality services across different providers. High levels of profitability for the market leaders AWS and Microsoft indicate there are limits to the overall level of competition.
Looking ahead, if customers have difficulty switching and using multiple providers, it could make it harder for competitors to gain scale and challenge AWS and Microsoft effectively. In this scenario, Ofcom is concerned that the threat of customers switching away from the market leaders will reduce, further dampening competition for new and existing customers.
Ofcom has now referred the UK public cloud infrastructure services market to the Competition and Markets Authority (CMA) to carry out a market investigation. The CMA will now conduct an independent investigation to decide whether there is an adverse effect on competition, and if so, whether it should take action or recommend others to take action. It says it will report by April 2025.
