UK regulator considers referring IaaS market to competition authorities, with AWS and Microsoft in the firing line

UK regulator Ofcom is proposing referring the UK cloud services market to the Competition and Markets Authority (CMA), picking out the market share and operating models of Amazon and Microsoft as being of particular concern. 

The move comes after an Ofcom review identified features which it argues make it harder for customers to switch or use multiple providers. Ofcom director Fergal Farragher said: 

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.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.

The Ofcom investigation has focused on the Infrastructure-as-a-Service sector, which in the UK was worth around £5 billion in 2021. Amazon Web Services (AWS) and Microsoft between them accounted for up to 70% of that business, with the next closest competitor being Google with a share of between five and ten percent. 

Ofcom’s interim report does find some evidence of “active competition”, especially where providers are competing to attract new customers who are moving to the cloud for the first time, and that this does provide some benefits, including product innovation, discounts and a wide choice of software services from ISVs. 

But it also concludes that competition is being stifled by market features that make it more difficult for customers to switch and use multiple suppliers. The features causing most concern are: 

Egress fees that customers pay to transfer their data out of a cloud. Ofcom finds that the hyperscalers set prices them significantly higher than most other providers, such that the cost of egress fees can discourage customers from using services from more than one cloud provider , or make it more costly to switch. The report notes: 

Egress fees can be particularly significant for cloud applications hosted on different clouds that need data to be moved regularly between them. For example, where a business uses servers and storage in one cloud but wants to use the analytics service of a rival cloud that better suits its needs. Egress fees are also a commercial consideration when customers want to switch their primary cloud provider, particularly where this involves a large one-off transfer of data between cloud...Egress fees are a key concern for existing customers because they may significantly increase the cost of taking a service from a different cloud provider. 

Our customer research found that 78% of respondents thought egress fees should be reduced or removed. We have heard examples where customers design their cloud architectures to intentionally avoid and reduce the cost of egress, which means they are unable to benefit from services from rival providers that may better suit their needs. This suggests that for some customers the costs associated with egress fees are likely to be significant enough to act as barrier to using multiple suppliers as part of a multi-cloud strategy

Technical restrictions on interoperability. Leading firms do this to prevent some of their services working effectively with services from other providers, with the result that customers need to go to extra effort to get their data to work on another cloud provider’s platform. The report states: 

We have seen evidence that AWS and Microsoft may limit the interoperability of some of their services by not openly sharing important technical information needed to interoperate with their service. This means they can only be used in their respective clouds, which prevents customers from using them in combination with products from rival providers. 

We have also heard that providers may be unnecessarily limiting the interoperability of their cloud services by using proprietary or ‘closed’ cloud technologies. In some cases, providers adopt open standards or application programming interfaces (APIs) initially, but then introduce modifications over time that have the effect of integrating the service more tightly to their ecosystem. These limitations are not always apparent to customers when they make the initial purchase.”

Committed spend discounts. These look good in terms of helping customers reduce costs, but the way these discounts are structured can incentivise customers to use a single hyperscaler for all or most of their cloud needs, squeezing out rival providers. The report argues: 

Customers with committed spend discounts account for a high proportion of the hyperscalers’ UK revenues. An important feature of the discount structure is that the more a customer spends on the provider’s cloud services, the greater the discount received. Discounting can help customers to negotiate a good deal by committing to a set level of spend. However, the structure of these discounts could act as a barrier to entry and expansion by encouraging mainly larger customers to use a single hyperscaler for all or most of their cloud needs. 

We have heard that this is an important commercial consideration for these customers, who feel discounting incentives encourage them to purchase most of their services from the same provider. In practice when a customer has new workloads to move into the cloud, the prospect of losing their existing committed spend discount could make it less attractive to use a rival provider. We think this is a particular concern where customers face barriers to switching their existing cloud use. Ultimately this could restrict competition by hampering the ability of rival providers to compete effectively for any new workloads as they emerge.”

AWS and Microsoft 

As for the focus on AWS and Microsoft, Ofcom states: 

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. There are indications these market features are causing harm today, with some existing cloud customers paying more or settling for lower quality services, which in turn can lead to negative impacts for UK consumers. We see evidence of customers already in the cloud facing significant price increases when they come to renew their contracts. We have also heard concerns from some customers about their ability to switch and use multiple providers, which limits their access to the best quality products. 

High levels of profitability for the market leaders AWS and Microsoft and a gradual increase in market concentration 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.

Microsoft’s licensing practices in relation to some of the enterprise software services it provides to business customers come in for particular attention, noting allegations that the firm sells certain services in a way that makes it less attractive to use them on rival cloud infrastructure compared to its own Azure:

The concerns centre on the way Microsoft sells and licences some of its software products used by businesses. Among others, these include the Windows operating system, Microsoft SQL Server (a database management system) and the Microsoft 365 productivity suite (known as Office). 

We have received submissions that say Microsoft engages in several practices that make it less attractive for customers to use Microsoft’s licensed software products on the cloud infrastructure of rival providers compared to Microsoft Azure. The submissions allege that this impacts on their ability to compete for customers. Microsoft disputes the veracity of the concerns. 

It is possible that the alleged conduct could risk dampening competition in cloud infrastructure services. Reaching a view on that would require detailed examination of the concerns raised, which stem from Microsoft’s position in an adjacent market – the supply of enterprise software. Our market study is not the appropriate tool to undertake that assessment and we have not sought to make any findings in this document. Ofcom and the CMA will consider the most appropriate way forward on these issues

For its part, Microsoft says it will continue to engage with Ofcom: 

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

Meanwhile Amazon states: 

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.

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

It will then publish a final report setting out findings and recommendations, including a decision on a market investigation reference, by no later than 5 October 2023.

My take

It is about time the competitive landscape here was subjected to more scrutiny. We’ve been hearing complaints very similar to the ones outlined by Ofcom for a long time. The only question here now is whether we’re trying shut stable doors after the horses have bolted. It will be interesting to see what happens next here. Brexit Britain’s political and administrative establishment have been awfully keen on AWS and Microsoft in recent years, particularly when it comes to attracting inward investment and digital clout. Meanwhile, have your say here.