UK competition watchdog to probe cloud services sector

• British digital services and telecom regulator Ofcom has been reviewing the UK cloud services market 
• It has concerns about anticompetitive practices
• Now the UK’s Competition and Markets Authority (CMA) has launched a formal investigation
• Microsoft Azure will come under particular scrutiny for its licensing practices
• AWS hits back at Ofcom, saying the regulator doesn’t understand the sector

Following a probe and referral by regulator Ofcom, the UK’s Competition and Markets Authority (CMA) has launched a market investigation into the country’s £7.5bn-a-year public cloud infrastructure services market that is currently dominated by Amazon Web Services (AWS) and Microsoft Azure, which together command between 70% and 80% of the market. 

Ofcom launched its initial probe in October 2022 and reported in April this year that it was “particularly concerned” about the practices of AWS and Microsoft because of their market position (Google Cloud commands only about 10% of the UK market). “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,” stated Ofcom director Fergal Farragher at the time. 

Now the regulator says it has uncovered practices that “could limit competition” and made a referral to the CMA “for further investigation”. In today’s Ofcom statement, Farragher noted: “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 announcing the start of its investigation, the CMA noted that Ofcom had identified “a number of features in the supply of cloud services that make it more difficult for customers to switch and use multiple cloud suppliers.” The features Ofcom has highlighted for particular attention are: 

• Egress fees – charges that cloud customers must pay to move their data out of the cloud
• Discounts – which may incentivise customers to use only one cloud provider
• Technical barriers to switching – which may prevent customers from being able to switch between different clouds or use more than one provider.

Ofcom noted that such 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.” In addition, “high levels of profitability for the market leaders AWS and Microsoft indicate there are limits to the overall level of competition,” the regulator noted.

In addition, Ofcom has also highlighted “concerns it has heard about the software licensing practices of some cloud providers, in particular Microsoft,” the CMA noted. 

Sarah Cardell, CEO of the CMA, stated: “We welcome Ofcom’s referral of public cloud infrastructure services to us for in-depth scrutiny. This is a £7.5bn market that underpins a whole host of online services – from social media to AI foundation models. Many businesses now completely rely on cloud services, making effective competition in this market essential.

“Strong competition ensures a level playing field so that market power doesn’t end up in the hands of a few players – unlocking the full potential of these rapidly evolving digital markets so that people, businesses, and the UK economy can get the maximum benefits. The CMA’s independent inquiry group will now carry out an investigation to determine whether competition in this market is working well and if not, what action should be taken to address any issues it finds,” she added.

That independent inquiry group will soon publish a statement that sets out the proposed focus of the CMA’s investigation, but that will be the start of a lengthy process that could take up to 18 months and might not conclude until April 2025. 

If the investigation identifies features of a market that have an adverse effect on competition, the CMA has the power to impose its own remedies on businesses and can also make recommendations to other regulators or, if legislation is required, the UK government.  

The UK team at AWS is naturally miffed. 

“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,” a spokesperson noted in a statement shared with TelecomTV. “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. Any unwarranted intervention could lead to unintended harm to IT customers and competition. AWS will work constructively with the CMA,” added the spokesperson. 

But what about the pricing tactics? “AWS does not charge separate fees for switching data to another IT provider. Customers make hundreds of millions of data transfers each day in the ordinary course of business, and over 90% of our customers pay nothing for data transfer because we provide them with 100 gigabytes per month for free,” stated AWS, skirting the issue. 

Microsoft had not responded to a request for comment as this article was published. 

- Ray Le Maistre, Editorial Director, TelecomTV