Ofcom’s year-long probe into the inner workings of the UK public cloud infrastructure market has concluded with an instruction from the communications regulator for the Competition and Markets Authority (CMA) to investigate the sector further.
Ofcom’s work uncovered three types of prevailing anti-competitive behaviour and practices within the UK public cloud market, which is what prompted it to refer the sector over to the CMA for a more thorough probe.
This behaviour included the charging of egress fees when customers attempt to extricate their data from a public cloud provider’s servers, the existence of interoperability issues between competing cloud platforms and the offering of committed use discounts to incentivise cloud customers to stick with one supplier.
According to Ofcom, Amazon Web Services and Microsoft (which boast a combined market share of 70-to-80% in 2022) are both guilty of “displaying some form of” these concerning behaviours.
“We are most concerned in relation to AWS and Microsoft, given their market position and the fact they display some form of all of the above behaviours that limit competition,” said Ofcom, in its interim report.
Perhaps unsurprisingly, AWS and Microsoft both issued lengthy public responses to Ofcom’s assessment of their respective behaviours, where they both argued against Ofcom’s proposal to involve the CMA, with both parties claiming the move was unnecessary and unwarranted.
Despite their protestations, the CMA now has until April 2025 to decide what market interventions (if any) it will make to help correct some of these behaviours and level the playing field for the other providers that make up the UK cloud market.
Alex Haffner, competition partner at UK law firm Fladgate, said the CMA has a “range of tools at its disposal” to mitigate any “perceived competition-related concerns”, but it is unlikely any of them will be used in haste.
“What is interesting here is that Ofcom has chosen to ask the CMA to open a market-wide investigation, which suggests that the regulators perceive there to be structural issues with the cloud computing market that need broader investigation and consideration,” said Haffner.
“It is also a sensible approach given the wide-ranging impact that the cloud computing market has on many different industries and the broader economy, and fits with the CMA’s stated desire to target effective competition in digital markets.”
What also complicates matters slightly is that the two entities the CMA will need to take to task in its work are the largest public cloud firms in the world.
“That Amazon and Microsoft are the largest players on this market raises the stakes somewhat, although the fact that a market investigation can take 18-24 months overall means that this one will likely take on a more considered path.”
What actions can the CMA take?
Ofcom detailed some of the possible interventions, based on market stakeholder feedback, the CMA could enact in its 254-page final report on the inner workings of the cloud market.
The CMA could intervene by prohibiting cloud providers from charging data egress fees, offered Ofcom, which – in turn – would make it easier for customers to switch providers as needed or integrate the cloud offerings of other firms into their IT estates.
Mark Boost, CEO of Stevenage-based cloud services company Civo, said he would fully support any move by the CMA to tackle the issue of high egress fee charges.
“Action will need to be a balancing act. It will be particularly important to tackle egress fees, either through significant price controls or the most ambitious choice: abolishing them entirely,” he said.
“The price point charged on egress by hyperscalers is out of control, and creates huge practical and financial obstacles for customers to move to another cloud provider.
“Urgent changes are also needed to how hyperscalers structure their services to enable customers to reap the benefits of simultaneously accessing multiple different providers, as well as a review of the fairness of incentives for loyal customers.”
To address the interoperability issues that make it harder for firms to move their applications and workloads to alternative clouds, Ofcom said a potential intervention could be ordering the hyperscalers to be more transparent about how nicely (or not) their services and tools work with their competitors’.
Additionally, there could be requirements introduced to increase the degree of standardisation that exists between competing cloud platforms and make their cloud services easier to interoperate with.
Where the issue of committed spend discounts are concerned, any interventions here could have damaging implications for customers, Ofcom acknowledged.
This is because while these setups do incentivise firms to use one form of cloud technology over another, the money customers save is important to them but these schemes also provide some degree of investment certainty for suppliers.
“Any intervention would need to be targeted at addressing the structure of the discounts that risk distorting competition”, said Ofcom.
“It would be important to preserve the ability of cloud providers to gain the commitments of customers to the extent that these are necessary to protect investment and innovation, and the ability of customers to exercise their bargaining power to gain lower prices and other concessions from cloud providers.”
The Ofcom document goes on to acknowledge that any interventions have the potential to incur costs or lead to unintended consequences for providers, and that some could work better in combination with other corrective pieces of action.
“We note stakeholder concerns on these issues and note that these points will be considered in the round during the CMA market investigation,” Ofcom added.
Whatever form of intervention the CMA decides is necessary, the overall aim should be to reduce the barriers for enterprises that want to embrace a multicloud strategy or switch between providers with greater ease, said Ofcom.
“It could enable greater scope for smaller providers to gain scale by challenging the market leaders for all or some of the workloads of their customers… [because] we think there are real risks that smaller providers will find it increasingly difficult to expand as the growth of new customers slows,” said Ofcom.
“And an increasing number of existing customers face material barriers to switch all or substantial parts of their demand away from the ecosystems of the market leaders – AWS and Microsoft.”
While the Ofcom report touches on the plight of smaller cloud providers and the threat AWS and Microsoft’s practices pose to their businesses, what it does not talk about is the damage that has already been done to some of the smaller cloud firms that used to operate in the UK.
Since both firms opened their UK datacentre regions in late 2016, a handful of homegrown cloud service providers have either been acquired, gone into administration or been forced to pivot their business models in new directions to make up for the loss of business.
One of the highest profile casualties in this group is the now defunct public sector-focused infrastructure-as-a-service (IaaS) provider UKCloud, which was placed into liquidation in October 2022.
Until 2017, UKCloud was the third-biggest provider of cloud services to the public sector, based on the government’s own G-Cloud spending data, with the firm achieving a sales peak of £8.1m during the first quarter of 2016/17. The firm’s 2017 financial report also saw it post a profit of £4.4m.
In the wake of Amazon and Microsoft’s UK datacentres opening, the company experienced a downturn in profit, revenue and customer usage, with its 2018 accounts attributing this to the increased competition in the UK from the US cloud giants. That year the firm posted a loss of £2.5m.
The company’s former CEO, Simon Hansford, repeatedly spoke out about the threat the US cloud giants posed to the UK’s homegrown suppliers in the years leading up to the firm’s collapse. And, in a blog post published on the professional social networking LinkedIn in the wake of the Ofcom report, he reiterated his concerns once more.
“The stranglehold that AWS and Microsoft have on the UK’s cloud computing market is detrimental to British businesses, consumers and the sovereignty of our critical data,” Hansford wrote.
“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.
“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. As the inquiry unfolds, it will be fascinating to see how the balance of power in the UK’s cloud industry shifts, and how it impacts businesses, consumers and the nation’s digital future.”