AWS and Microsoft's dominance of cloud services to come under anti-competitive scrutiny in the UK

 

As expected, UK regulator Ofcom has referred the county’s £7.5 billion cloud services market and its dominant vendors to the Competition and Markets Authority (CMA). 

Ofcom launched a study under the UK Enterprise Act 2022 into the sector last October and published its interim findings in April this year. Now, in its final report on the subject, Ofcom says: 

Ofcom has reasonable grounds to suspect that a feature or a combination of features of the markets for the supply of those goods and services in the United Kingdom prevents, restricts or distorts competition. In particular, conduct which may create barriers to switching and multi-cloud.

The three main areas of concern are cited as: 

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 incentivise customers to use a single hyperscaler for all or most of their cloud needs, even when better quality alternatives are available.

Fergal Farragher, Ofcom's Director responsible for the Cloud Services Market Study, confirmed: 

The cloud is the foundation of our digital economy and has transformed the way companies run and grow their businesses. From TV production and telecoms networks to AI innovations – all of these things rely on remote computer power that goes unseen.

Some UK businesses have told us they’re concerned about it being too difficult to switch or mix and match cloud provider, and it’s not clear that competition is working well. So, we’re referring the market to the CMA for further scrutiny, to make sure business customers continue to benefit from cloud services.

In the firing line

The two main providers that will come under the grill from the CMA will be Amazon Web Services (AWS) and Microsoft, which Ofcom says have a market share in the UK of up to 80%, with Google Cloud well behind on between five and ten percent. Ofcom states: 

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, we are concerned that the threat of customers switching away from the market leaders will reduce, further dampening competition for new and existing customers.

Microsoft has had recent conflict with the CMA which intitially blocked its acquisition of Activision, although this stance was later softened after an agreement was reached to sell cloud streaming rights to be managed by a third party. Today it kept its powder dry with a bland statement about the forthcoming cloud services investigation: 

We are committed to ensuring the UK cloud industry remains innovative, highly competitive and an accelerator for growth across the economy. We will engage constructively with the CMA as they conduct their Cloud Services Market Investigation.

Meanwhile AWS was more full-blooded in its rebuttal of Ofcom’s findings: 

We disagree with Ofcom’s findings and believe they are based on a fundamental misconception of how the IT sector functions, and the services and discounts on offer. Only a small percentage of IT spend is in the cloud, and customers can meet their IT needs from any combination of on-premises hardware and software, managed or co-location services, and cloud services. AWS designs cloud services to give customers the freedom to choose technology that best suits their needs. UK companies, and the overall economy, benefit from robust competition among IT providers, and the cloud has made switching between providers easier than ever. 

The firm said that it will “work constructively” with the CMA inquiry, although its statement also contained the following: 

Any unwarranted intervention could lead to unintended harm to IT customers and competition.

My take

Hmm, well, there’s ‘constructively’ and there’s ‘constructively’. Quite what AWS’ comment on “unintended harm” turns out to mean, we shall find out in due course, I expect. For now, we’ll have to leave that to our individual interpretations. 

So what happens now? Nothing particularly quickly. A CMA market investigation usually takes 18 months to complete. Sure enough, the Authority says it will conclude its investigation by April 2025. That takes it beyond the next General Election in the UK, which, if the current polls are to be believed, may well see a change from a Conservative to a Labour administration.

How much impact that’s likely to have on government attitudes to the cloud services sector remains to be seen. The Conservatives used to be all over Microsoft - it seemed that barely a week would pass without some minister - or Prime Minister - popping up in the foyer at UK HQ for a photo shoot on the digital topic du jour. In more recent times, the focus from both Labour and Conservatives seems to have leant more towards Google, with senior figures from both parties talking up all the potentially transformative tech that the vendor has in its toy box. 

Meanwhile AWS just keeps adding more and more market share. 

If the CMA does find that there’s an adverse effect of competition, it has several options: 

The CMA has the power to impose its own remedies on businesses and it can also make recommendations to other bodies such as sectoral regulators or the government – when legislation might be required for example.

The CMA can compel firms to change behaviour, such as the way a product is sold in a particular market and the information that is available to customers buying that product.

The CMA also has the power to impose structural remedies which can require companies to sell parts of their business to improve competition.

I’ll stick my neck out now and confidently predict that the last option there is a non-starter in a Brexit Britain crying out for inward investment from tech superpowers. Whether there are any political leaders in either of the main parties who’d have the nerve to do anything more than posture - see all the empty threats aimed at Facebook over the years - is a very moot point. 

As UK trade association techUK argues: 

It is vital that any regulatory intervention strikes an appropriate balance between reinforcing competition, supporting multi-cloud and customer switching, and ensuring the UK continues to benefit from ongoing investment in the cloud infrastructure and computing power that will be needed for the UK to make the most of emerging technologies like AI and quantum computing.

So is this all a waste of time and effort that isn’t really going to change much? Not necessarily.

I was struck by a LinkedIn blog posting from Simon Hansford that I think sums up the reality of the cloud services sector in the UK today and why such a probe is important. Hansford is the former CEO and founder of UKCloud, a British provider that specialized in only dealing with UK public sector customers. A prime example of the sort of company that any UK Government aspiring to be a digital economy ought to have supported up to the hilt, you might think. 

But in reality, the march of AWS in particular into the UK public sector took its toll on UKCloud, which went into liquidation earlier this year. In his blog post today, Hansford states: 

My opinion on this matter is clear: the stranglehold that Amazon AWS and Microsoft have on the UK's cloud computing market is detrimental to British businesses, consumers, and the sovereignty of our critical data. Their dominance stifles competition and innovation, hampering the growth of local cloud service providers and limiting customer choice. It also raises concerns about data security and resilience, as the country becomes overly reliant on a select few providers.

Furthermore, the UK's ability to establish itself as a leader in generative AI is under threat due to the lack of access to the vast datasets required to train AI language models effectively. This hampers our competitiveness on the global stage and inhibits our potential to drive technological advancements.

One of the most significant changes that needs to happen is in the UK Public Sector, which has leaned heavily towards using hyperscale cloud providers. This single-minded pursuit of convenience, at the expense of nurturing local cloud providers, hinders the development of a vibrant domestic cloud industry. It's high time that the public sector reevaluates its purchasing habits to ensure a more balanced and competitive cloud ecosystem and recognises that cloud computing needs to be part of our National Critical Infrastructure.

He concludes: 

Ofcom's recommendation to investigate the dominance of Amazon AWS and Microsoft in the UK's cloud computing market is a pivotal moment that could redefine the landscape for the better. It's imperative that we break free from the grip of these hyperscalers, not only to nurture a more competitive market but also to safeguard our technological sovereignty and foster innovation.

Critics will, I imagine, dismiss such comments as sour grapes, but I’ve been having conversations on and off with Hansford for years on this topic and he’s been predicting problems throughout that time unless government took a more active role in safeguarding and fostering competition in this space. 

At a time when the current government boasts of its ambitions to be a digital world leader, particularly around AI, a formal investigation of what’s going on in the UK cloud services market is frankly long overdue. We shall be following the progress of this with considerable interest.