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October 5, 2023

Ofcom and CMA target AWS and Azure with UK cloud market antitrust probe

The regulators believe the hyperscalers are landing businesses with big bills and making it difficult to switch providers.

By Matthew Gooding

An antitrust investigation has been opened into cloud computing in the UK after concerns were raised about the dominance of the US hyperscale providers, particularly Amazon’s AWS and Microsoft Azure. The Competition and Markets Authority (CMA) has launched the probe on the recommendation of communications regulator Ofcom after it concluded a year-long study of the market.

UK cloud
Ofcom has recommended an investigation into the dominance of the UK cloud market by AWS and Microsoft Azure. (Photo by Tada Images/Shutterstock)

Today’s report follows an interim statement from Ofcom released in April, which raised worries about the state of the market and the position of AWS and Azure within that. Its final statement says that it has uncovered “features that could limit competition” and says it is often difficult and expensive for businesses to switch providers.

The cloud hyperscalers – AWS, Azure and Google Cloud – have found their control of cloud computing under the regulatory microscope around the world in recent months, with both Europe and the US investigating elements of the market.

Why Ofcom wants an antitrust probe into the UK cloud market

The Ofcom study found that AWS and Azure are even more dominant in the UK than they are globally, accounting for between 70–80% of the entire market. The two providers account for a combined 54% of all cloud infrastructure services in markets around the world, according to data from Synergy Research Group.

Within the UK, Ofcom says it found three particularly problematic elements. The regulator says egress fees, charges that customers pay to transfer their data out of a cloud, are significantly higher with AWS and Azure 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,” Ofcom said.

Adding to this, the regulator noted technical barriers to interoperability and portability, which “can result in customers needing to put additional effort into reconfiguring their data and applications so they can work on different clouds”. Many businesses are adopting hybrid cloud set-ups, covering multiple vendors or a mixture of cloud-based and on-premise infrastructure, but Ofcom says a lack of interoperability “makes it more difficult to combine different services across cloud providers or to change provider”.

It has also raised concerns about so-called 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,” Ofcom said.

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The cloud is the “foundation of our digital economy and has transformed the way companies run and grow their businesses”, said Fergal Farragher, Ofcom’s director responsible for the market study. “From TV production and telecoms networks to AI innovations – all of these things rely on remote computer power that goes unseen.”

He said that “some UK businesses have told us they’re concerned about it being too difficult to switch or mix and match cloud provider”, and added: “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.”

Sarah Cardell, CEO of the CMA, added: “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.”

A Microsoft spokesperson said: “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, a spokesperson for AWS said: “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.”

The spokesperson added that the company believes that “any unwarranted intervention could lead to unintended harm to IT customers and competition.” They said: “AWS will work constructively with the CMA.”

Cloud market comes under scrutiny around the world

The hyperscalers are facing regulatory pressures around the world, with the US government investigating their market dominance, and Microsoft fighting to ward off an antitrust investigation from the EU following a complaint from European cloud providers that its practices are anti-competitive. It has changed its licensing terms to try and avoid a formal probe, but discussions with European officials are reportedly ongoing.

European cloud industry group CISPE, which raised a complaint with the EU against Microsoft, says the company’s licensing terms should fall within the scope of the UK investigation. They have not been included as part of Ofcom’s initial recommendation.

Francisco Mingorance, secretary general of CISPE, said: “We welcome Ofcom putting a critical focus on unfair software licensing in its final report on the UK cloud market. But, Ofcom’s decision not to include software licensing in its market investigation reference should not prevent the CMA from investigating these pernicious anti-competitive, unfair software licensing terms.”

Mingorance added that “Ofcom clearly understands the significance of these technical interoperability and commercial lock-in practices, and how some software companies use their ‘strong position in software products to distort competition in cloud infrastructure’,” and said CISPE “urges the CMA to take an enforcement action on unfair software licensing in the cloud.”

Today’s news is a reminder to tech leaders that they should be prepared to look beyond the hyperscalers to find value for their cloud deployments, according to Adrian Bradley, head of cloud transformation at KPMG UK.

“The fact that public cloud runs as a utility model that lets users pay by the hour has opened cost-effective access to technology capabilities which have fuelled the digital revolution,” Bradley says. “There are commercial trade-offs to secure access to these capabilities, just as there are with non-public cloud alternatives to the hyperscalers, such as identifying the right combinations of cloud and non-cloud consumption to deliver best value for any given enterprise.

“Whatever the outcome of the CMA inquiry, organisations need to better understand and manage the costs of cloud to secure value from their investments.”

Read more: Oracle database services are coming to Microsoft Azure

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