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November 8, 2023

Have the hyperscalers broken the UK cloud market?

Regulators are probing the UK cloud market for structural failings because of the dominance of a trio of US hyperscale providers. Critics say they should have started earlier.

By Greg Noone

The UK government loves the public cloud – and the public cloud loves the UK government. Announcements of new collaborations abound. Last year, Whitehall spent £3bn on cloud market services through its G-Cloud framework, two-thirds of which was disbursed among conglomerates. The big winner, as in the previous year, was Amazon’s cloud platform, AWS. Contracts in the value of £238m were awarded to provide cloud and support services across the government, from hosting ERP services for the Department of Transport to enhancing digital skills at the Ministry of Defence

Spending with Microsoft Azure, meanwhile, was a comparatively measly £30.6m. However, while the Redmond-based software giant has failed to keep up with AWS in government contracts, it more than makes up for its performance in the private sector, a market in the UK that, as of 2022, was worth £7.5bn and in which it held a 25% share compared with AWS’s 40%. Together with Google Cloud’s 16% slice, these so-called ‘hyperscalers’ dominate the sector (more so than they do the global market), to the detriment, critics fear, of their smaller, homegrown rivals.

Simon Hansford is one of these critics. Formerly the chief executive of another provider, UKCloud, Hansford was for many years one of the chief movers and shakers in public-sector cloud outsourcing. The arrival of the hyperscalers into the market, however, saw that influence diminish markedly until, in October 2022, UKCloud was forced into liquidation. Hansford blames its collapse on an unstated government preference for its hyperscale competitors at the expense of small providers. “The fact that the hyperscalers are dominant and they’ve got great technology does not mean that there isn’t room for high-quality advanced UK cloud providers,” says Hansford.

A recent investigation by Ofcom also suggested that hyperscale providers are employing tactics to actively shut down competition from their smaller, homegrown competitors. In a mammoth 254-page report, the UK media regulator described how the hyperscalers would compete tooth and nail for new business with generous allotments of free credits but would then effectively “lock in” those customers a combination of hefty egress fees, complex builds and other technical barriers. As such, Ofcom concluded that there was enough evidence to suggest serious market inequities in the UK cloud sector, and formally recommended the Competition and Markets Authority (CMA) launch its own investigation and institute formal remedies to address these issues.

The decision, says Hansford, is long overdue. Indeed, the former UKCloud chief executive claims to have spent the past six years lobbying MPs, ministers, civil servants and regulators to investigate hyperscaler dominance, requests that until very recently have been met with polite dismissals – including, he says, from the CMA. The regulator, “quite frankly, was not interested” in an inquiry when he approached them in 2020, says Hansford, who sent a comprehensive letter to its chief executive as a prelude to a possible meeting. None was forthcoming. 

“They wrote back and said, ‘Not a priority’,” says Hansford (a CMA spokesperson confirmed that there was an exchange of letters between its chief executive and Hansford, but declined to share its half of the correspondence with Tech Monitor). He now wishes they’d taken the meeting. “I feel that we’re now in a position where their [hyperscalers] dominance is so large, and poses such a risk to our nation and the growth of our economy, that it’s going to take an awfully long time, and a significant amount of money, to right-size the market again – which it desperately needs.”

An AI-generated image of the UK built out of cloud servers, a metaphor for this country's reliance on cloud services.
The UK economy is becoming increasingly reliant on cloud services. That so many of these are being provided by foreign hyperscalers has begun to worry regulators like Ofcom and the CMA. (Photo via Shutterstock)

UK cloud market inequities

Ofcom is not the first regulator to investigate complaints of anti-competitive behaviour among the hyperscalers. In June 2022, the Japan Fair Trade Commission concluded that a combination of data transfer fees, self-preferencing for software licences and the preferential treatment of exclusive partners among major cloud service providers had led to a real possibility that “the market structure may become non-competitive in the future”. Similar investigations by French and Dutch regulators over the following months were in agreement. The cloud industry, said the French Autorité de la concurrence, was characterised by “competition for the market rather than on the market”. Another investigation by the US Federal Trade Commission, meanwhile, is still ongoing. 

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For its part, the cloud had been on Ofcom’s radar since at least 2020, though as its consumer protection director Fergal Farragher explained to Tech Monitor, it did not feel late to the party in questioning the hyperscaler trade practices. Neither did its ultimate conclusions deviate significantly from those of its foreign counterparts, though Farragher was personally struck by how hard it was for select businesses to deploy a multi-cloud strategy, involving cloud services from a range of providers. “If you take that at face value, you imagine a picture of lots of moving about, and being very free and easy,” he says. “What we heard directly from customers is that’s not always the case.”

Mark Boost was one of the stakeholders who provided feedback to Ofcom. In fact, Boost’s own cloud company, Civo, was partly founded to meet what he perceived as market demand for simple, affordable cloud computing solutions that fell through the cracks of the typical hyperscaler offering. The entrepreneur also had form with competing against these gigantic companies directly when helming ServerChoice, a data centre operator based in Stevenage.

However, it has not been plain sailing. “We had…a client, a very well-funded start-up that’s very well-known in the UK, that landed £50m in funding,” recalls Boost. As such, the company was poised to acquire eight new server racks to bootstrap its expansion. Then, suddenly, Boost heard that the client had taken up an alternative offer of free credits over several years and a strategic partnership with a hyperscaler. “Overnight, we lost that business,” he says.

It is this practice that has proved especially offensive to both Hansford and Boost, with Ofcom reporting that some hyperscalers are offering free credit worth millions of pounds to new businesses to secure their loyalty. It’s an offer that smaller providers like Civo cannot afford to match and one that the regulator says pushes businesses into a proprietary ecosystem that precludes any possibility of a multi-cloud strategy. It also effectively prevents any upstart firms from entering the UK cloud market, says Boost: “How can any new player get some initial traction?”

Should this matter to your average CIO? Few businesses are going to turn down the offer of free credits: their priority, after all, will often be to migrate their workloads as efficiently and cheaply as possible. Hyperscalers also promise long-term competitive pricing, analytics services second to none, and stability, with serious outages remaining few and far between. Their hefty budgets also mean their security set-ups are the envy of many.

Hansford agrees that AWS, Azure and Google do deliver some benefits to their customers. “They have got some amazing products,” he concedes but adds that their computational heft is often wasted on many businesses. “They’re the Ferrari [of the cloud market],” Hansford says of the hyperscalers but continues, “does my grandmother need a Ferrari to go to the local shop? No, is the answer.”

That hyperscalers undercut their smaller competitors on price is also a misconception, argues Boost. And while the current crop of domestic cloud providers cannot hope to compete with the hyperscalers in usage discounts, he argues, that’s more than made up for the general lack of egress fees and other technical impediments that thwart any attempt at a multi-cloud strategy. Pursuing such a strategy, argues Hansford, should always be the priority of any CIO. In so doing, he says, “You’re putting the right workload on the right platform and that, therefore, should improve your resilience, your security profile, and demonstrate a better value for money for you.” 

Why, then, are British businesses lumped with a marketplace where the opportunities for a multi-cloud strategy are so limited? A big reason, argues Hansford, is the government’s laissez-faire attitude towards the sector, and its own belief – expressed in letters, emails and in person whenever the former UKCloud chief executive lobbied ministers and civil servants on this issue – that bigger was generally better when it came to the cloud. 

“I remember…a very senior director in the Cabinet Office could not believe that we had the customers that we did at UKCloud, and thought it was outrageous that such sensitive and important data was held by a small company,” recalls Hansford. Other meetings with civil servants were just as productive. “Quite frankly, you’re talking, but no one’s listening.”

Others have also complained that the relationship between Whitehall and the cloud hyperscalers is too close, pointing to the many discounts afforded to the former that smaller competitors could ill-afford to make and the myriad training programmes and initiatives run by AWS and Microsoft in the name of reducing the UK’s digital skills gap – a key government priority.

When approached for comment on these points, the Cabinet Office responded that around 90% of businesses on the G-Cloud 12 framework were SMEs and that 40% of its spend in that program went to SME suppliers. “Amazon Web Services is just one of the Government’s thousands of cloud service providers and our procurement decisions are always based on getting value for taxpayers and the best quality services,” said a spokesperson. “The Procurement Act is increasing opportunities for SMEs in a variety of ways, from transparently publishing contract pipelines to simplifying bidding processes.” For his part, however, Hansford remains adamant that the government’s preference for hyperscalers directly contributed to the fall of UKCloud. “I think it’s important,” he says, “to recognise that [it was] because of government policy.” 

A phone screen displaying the icons of the three leading cloud providers in the UK market: Google Cloud, Microsoft Azure, and Amazon Web Services.
Just three foreign hyperscalers – Google Cloud, Microsoft Azure and Amazon Web Services – occupy up to 80% of the market share in the UK cloud sector, a pattern that critics say will inevitably lead to serious drawbacks for businesses in the long term. (Photo by Tada Images/Shutterstock)

Future hopes

The hyperscalers’ reaction to Ofcom’s final report was mixed. AWS disputed the regulator’s findings, claiming that it did not charge “separate fees for egress” and that over 90% of its customers paid nothing for data transfer anyway because they were provided with a monthly 100GB allowance for this “for free”. Microsoft and Google, meanwhile, reaffirmed their commitment to a competitive, transparent and innovative UK cloud market. All three pledged to work with the CMA in its forthcoming investigation. 

In the meantime, the CMA continues to solicit stakeholder input ahead of the first round of its investigation. Should the regulator also find evidence of market inequities, it has ample powers at its disposal to correct them, explains Alex Haffner, an expert in competition law at Fladgate LLP. “From the top, they can impose structural remedies,” explains Haffner, going as far as to hive off sections of a conglomerate should they feel it necessary to impose order in the marketplace. More realistically, he adds, the CMA will stick to the possible remedies delineated in their issues statement, namely technical measures that improve the interoperability and transparency of public clouds and the abolition of specific types of discount structures.

For their part, Hansford and Boost hope that the CMA will crack down on the hyperscalers’ practice of giving away free usage credits to businesses in exchange for their years-long loyalty. “Smaller providers just can’t do that… they’re kind of buying the market, really, in my opinion,” says the Civo founder, though he stops well short of advocating that the CMA compel the hyperscalers to hive off sections of their business as some have suggested.

Hansford’s nightmare scenario is little to no action at all from the CMA, where “all they do is move the chairs around, maybe give some access to Oracle and Google, but fundamentally don’t change the landscape”. If that happens, he argues, the independence of the public and private sectors from decisions made by hyperscalers will continue to diminish: the UK government’s ambition to transform the country into an AI powerhouse, for example, could be hostage to the goodwill of these cloud giants. Outages within and cyberattacks upon hyperscaler infrastructure, too, could also have outsized impacts on the functioning of UK businesses, adds Hansford, though both have proven rare to date. 

In the meantime, says Boost, a bit of fairness needs to be injected back into the UK cloud market. Any future market reform, he says, should aim at “levelling the playing field”, so that British businesses are given a real choice when it comes to cloud services – one that, in these straightened economic times, is in greater demand than ever before. 

Read more: How green is your cloud?

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