Ofcom recognises the reference to the CMA as a ‘significant step’ reflecting the importance of cloud computing to UK consumers and businesses.

Cloud computing has become a critical infrastructure service for many businesses across the economy – including telecoms companies, broadcasters, and public sector organisations – and has transformed the way they deliver the services the UK relies on everyday.

In October, Ofcom launched a study under the Enterprise Act 2002 into cloud infrastructure services in the UK to assess how well the market is working, examining the strength of competition and any features that might limit innovation and growth by creating entry barriers for smaller companies.

Findings

In the UK market, there are two leading providers of cloud infrastructure services: 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.

Ofcom says that while competitive market forces are delivering benefits to customers – especially where providers are competing to attract new customers – in the form of innovation and discounts, other feature are a cause for concern:

• Egress fees – charges that customers pay to transfer data out of a cloud. Hyperscalers set these at significantly higher rates than other providers, which can discourage customers from using services from more than one cloud provider or to switch to an alternative provider.
• Technical restrictions on interoperability – impositions to prevent some firms’ services working effectively with services from other providers. This means customers nee to put additional effort into reconfiguring their data and applications to work across different clouds.
• Committed spend discounts – while these can benefit customers by reducing costs, the way these discounts are structures can incentivise customers to use a single hyperscaler for all or most of their cloud needs, even when better quality alternatives are available.

Only at the halfway point of its probe, Ofcom has already found indications that this is causing harm, with evidence of cloud customers facing significant price increases when they come to renew their contracts.

Additionally, 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.

Ofcom is therefore concerned that the 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.

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Revenues are already concentrated with a few players, and there is a risk that the features Ofcom identified could lead the market to concentrate further towards the market leaders.

Because of this, Ofcom has proposed to refer the cloud infrastructure market to the CMA to carry out a market investigation, which would allow the CMA to further examine the nature and extent of barriers. As well, the investigation would consider if there are possible interventions to improve how the market works for customers and UK consumers.

“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,” said Fergal Farragher, Ofcom’s director responsible for the market study.

“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.”

Ofcom intends to publish their final report setting out their findings and recommendations, as well as their decision on a market investigation reference, no later than 5 October 2023.