Ofcom proposes to refer UK cloud market for investigation

• Amazon (AWS) and Microsoft are the leading providers of cloud infrastructure services in the UK
• Ofcom market study uncovers practices and features that could limit competition
• High fees for transferring data out, committed spend discounts and technical restrictions are making it difficult for business customers to switch cloud provider or use multiple providers
• If left unchecked, competition could deteriorate further in a critical digital market for the UK economy

At the halfway point of its probe into UK cloud services, Ofcom is proposing to refer the market to the Competition and Markets Authority for further investigation.

Our market study has provisionally identified features and practices that make it more difficult for customers to switch and use multiple cloud suppliers. We are particularly concerned about the practices of Amazon and Microsoft because of their market position.

Cloud computing has become critical for many businesses across the economy – including telecoms companies, broadcasters and public sector organisations – and has transformed the way they deliver services on which we all rely every day. It uses data centres around the world to provide remote access to services such as software, storage and networking.

In October, we launched a study under the Enterprise Act 2002 into cloud infrastructure services in the UK, to assess how well this market is working. We have examined the strength of competition and any features that might limit innovation and growth in this sector by making it difficult for other cloud providers to enter the market or smaller companies to expand.[1]

Because the cloud sector is still evolving, we have looked at how the market is working today and how we expect it to develop in the future – aiming to identify any potential competition concerns early to prevent them becoming embedded as the market matures.

What we have found

There are two leading providers of cloud infrastructure services in the UK: Amazon Web Services (AWS) and Microsoft, who have a combined market share of 60-70%. Google is their closest competitor with a share of 5-10%. Collectively these firms are known as the ‘hyperscalers’ and the vast majority of cloud customers use their services in some form.[2]

While competitive market forces are delivering benefits to customers – especially where providers are competing to attract new customers – in the form of innovative products and discounts, other features of the market give cause for concern:

• Egress fees. These are the charges that customers pay to transfer their data out of a cloud and the hyperscalers set them at significantly higher rates 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.
• Technical restrictions on interoperability. These are imposed by the leading firms that prevent some of their services working effectively with services from other providers. This means customers need to put additional effort into reconfiguring their data and applications to work across different clouds.
• 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.

These market features can make it difficult for some existing customers to bargain for a good deal with their provider. There are indications this is already causing harm, with evidence of cloud customers facing significant price increases when they come to renew their contracts.

In addition, some customers are concerned about their ability to switch and use multiple providers where this limits their ability to mix and match the best quality services across different providers. High levels of profitability for the market leaders AWS, and substantial consistent growth in Microsoft’s profits, indicate there are limits to the overall level of competition.

We are concerned that constraints on customers’ ability to use more than one provider could make it harder for smaller cloud providers to win business and compete with the market leaders. Revenues are already concentrated with a few players, and there is a risk that the features we have identified could lead the market to concentrate further towards the market leaders.

So we have proposed to refer the cloud infrastructure market to the CMA to carry out a market investigation. This would allow the CMA to further examine the nature and extent of barriers and consider if there are interventions that could improve how the market works for customers and ultimately UK consumers.

Making a market investigation reference would be a significant step for Ofcom to take. Our proposal reflects the importance of cloud computing to UK consumers and businesses, the significant concerns we have about the cloud infrastructure market and our view that the CMA is best placed to undertake any further investigation. We will continue to engage closely with the CMA during the second half of the study.

Fergal Farragher, Ofcom's Director responsible for the Market Study, 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.”

Next steps

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

We intend to publish a final report setting out our findings and recommendations, including our decision on a market investigation reference, by no later than 5 October 2023.