Ofcom calls for investigation into UK cloud infrastructure market

Ofcom has proposed that the UK cloud infrastructure market should be referred to the Competition and Markets Authority (CMA) in an interim report. The UK regulator expressed concerns around a decline in competition.

The Cloud Services Market Study stated that cloud customers are paying more than they should for data transfers or settling for lower-quality services, while hyperscalers are pricing their fees above those of their competitors.

Customers who have complex requirements may also face ‘material barriers’ when switching cloud providers or adopting a multi-cloud infrastructure. This problem is expected to grow for more customers as the market matures.

Ofcom summarised its report into three key concerns: egress fees, technical restrictions on interoperability, and committed spend discounts.

Egress fees occur when customers pay to transfer their data out of a cloud. Technical restrictions on interoperability are imposed by leading firms to prevent services from working effectively with services from other providers, causing customers to reconfigure their data. Committed spend discounts can reduce costs, but also incentivise customers to choose a single hyperscaler.

“We are most concerned in relation to AWS and Microsoft, given their market position and the fact they display some form of all the above behaviours that limit competition,” said Ofcom.

Combined, AWS and Microsoft have a market share of between 60% and 70% in the UK. Google is their closest competitor with a share of 5% to 10%. Meanwhile, many independent software vendors assemble their products on cloud infrastructure provided by these tech giants, but also compete with their services.

The Ofcom report cited high levels of profitability for the market leaders AWS and Microsoft and a gradual increase in market concentration, which prevents market 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,” added Ofcom.

As a result of its investigation, Ofcom is consulting on a proposal to refer the cloud infrastructure market to the CMA.

A cloud infrastructure market that is operating well is integral for businesses across the economy and those who utilise digital services, Ofcom noted. This would allow the regulator to examine any interventions that could address the roadblocks identified in the report and improve the market for customers.

AWS, Microsoft, and Google respond

In response, AWS has sent a response to Ofcom and looks forward to a ‘constructive dialogue’.

“There are thousands of providers delivering value to customers through easily accessible, low cost, high-quality, innovative IT services, and switching between them is easier than ever before,” said AWS in a statement.

The cloud giant also said that it designs its services to give customers freedom of choice.

The statement continued: “We believe the concerns expressed in the Interim Report are based on fundamental misconceptions about how the IT sector functions and the services and discounts on offer.”

AWS suggested that the proposed regulatory interventions would be unwarranted and could lead to significant unintended harm to customers and competition.

Microsoft also said that they remain committed to ensuring the UK cloud industry stays highly competitive, and supporting the transformative potential of cloud technologies to help accelerate growth across the UK economy.

“It would be a particularly unfortunate outcome if UK businesses and public sector customers faced less vibrant and competitive cloud solutions on a global stage than those available to their rivals in the EU, the US and China,” added Microsoft in a 58-page statement.

Google also said the UK’s cloud competition is ‘generally working well’, but shared some of Ofcom’s concerns.

“We share the wider industry’s concern that the unfair licensing practices and commercial strategies deployed by certain legacy on-premises IT providers are causing significant harm to the cloud sector and UK customers at this critical inflection point by creating commercial lock-ins,” said Google.

Ofcom’s final report is expected to be completed by 5 October, 2023.

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