Ofcom tempted to bring in competition watchdog to sniff the UK cloud market
As much as 80% in the hands of three companies – you can guess which
UK communications regulator Ofcom is to refer the domestic cloud market to the government's competition watchdog over concerns that dominance by the big players may be limiting competition.
Ofcom started inspecting the cloud services market in September, and although it is only halfway through its official probe, the regulator is already proposing to elevate the matter to the Competition and Markets Authority (CMA) for further investigation.
It will come as no surprise that the "hyperscale" global players dominate the market, but Ofcom said that in the UK this boils down to Amazon Web Services (AWS) and Microsoft's Azure taking a combined share of 60 to 70 percent of cloud infrastructure services.
Google's cloud accounts for a further 5 to 10 percent, meaning that as much as 80 percent of the Brit cloud services market is sewn up between these three US-based operators.
However, it is AWS and Microsoft that have particularly drawn Ofcom's attention. It said that the market study uncovered features and practices that make it more difficult for customers to switch supplier or use multiple cloud suppliers, and singles out the big two because of their market dominance.
The regulator listed a number of aspects seen in the UK cloud market that it says gave it cause for concern.
One is egress fees, charges levied on customers by the cloud operators to transfer their data out, and Ofcom said it found that hyperscalers set these fees at "significantly higher rates" than other providers. The cost of transferring data can discourage customers from switching to another provider or using services from more than one cloud, it said.
Another bone of contention regards technical restrictions on interoperability that put up a barrier against services provided by the big players working effectively with those from other operators. Ofcom claimed this meant extra effort was required on the part of users to make their data and applications work across different cloud platforms.
A third area of concern listed by Ofcom is committed spend discounts or committed use discounts, which offer customers lower prices in exchange for a commitment to use a minimum level of resources over a specified period. While cost savings can be seen as a benefit to customers, the regulator argues that the way discounts are structured acts as an incentive to use a single provider for all or most of their cloud needs, even if better alternatives are on offer.
As a consequence, Ofcom says it is more difficult for customers to negotiate for better terms, and some face significant price hikes when they come to renew their contracts.
In addition, restricting the ability to use more than one cloud makes it harder for smaller providers to win business and compete with the market leaders. The regulator cites high levels of profitability for AWS and "substantial consistent growth" in Microsoft's profits as indicators that competition is being stifled.
In calendar 2022, AWS made an operating profit of $22.84 billion, almost as much as HPE turned over in that year. In its fiscal year ended June 30 2022, Microsoft reported operating income of $32.7 billion from the Intelligent Cloud division.
One potential victim of hyperscaler dominance was British public sector IT provider UKCloud, which went into liquidation last year. The company suffered in recent years as more and more government contracts went to Azure and AWS instead.
But Ofcom is so far only proposing to refer the matter to the CMA for a full anti-competitive investigation, and is first inviting feedback on its interim findings. Interested parties have until May 17 to respond.
The CMA would be best placed to undertake a further investigation and consider if any interventions should be made to improve the way the market works for UK customers, Ofcom said. The final report from Ofcom setting out the agency's recommendations and whether a full market investigation is necessary is due by October 5.
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"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, the Ofcom director in charge of the cloud 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."
Both AWS and Microsoft denied that there was any competition deficit in the UK cloud market.
"We look forward to continuing our engagement with Ofcom on their cloud services market study," Microsoft said. "We remain committed to ensuring the UK cloud industry stays highly competitive, and to supporting the transformative potential of cloud technologies to help accelerate growth across the UK economy."
An AWS spokesperson insisted that the UK has a "thriving and diverse IT industry with customers able to choose between a wide variety of IT providers."
"At AWS, we design our cloud services to give customers the freedom to build the solution that is right for them, with the technology of their choice. This has driven increased competition across a range of sectors in the UK economy by broadening access to innovative, highly secure, and scalable IT services," the spokesperson continued.
"These are interim findings and AWS will continue to work with Ofcom ahead of the publication of its final report."
However, Civo CEO Mark Boost called it "a wake-up call for hyperscalers." His company focuses on services powered by Kubernetes, and he has previously spoken out about the big cloud players.
"It is welcome to see Ofcom not hold back in its criticism of the pricing and services offered by the major cloud providers. Our own research found that 37 percent of public cloud users have been stung by unexpected costs in the last 12 months," Boost said, citing opaque pricing that makes it difficult for users to monitor their cloud spending.
"For too long cloud services have drifted away from what users actually want from a provider. We now need to see the regulator, in partnership with industry, build a fairer and ultimately more successful cloud space," he added.
Trade body Cloud Infrastructure Service Providers in Europe (CISPE) stuck the knife into Microsoft over the terms it imposes for running its software in clouds other than its own.
"It is clear that Ofcom recognizes the potential for Microsoft's unfair software licensing practices to distort competition in the cloud market," said Secretary General Francisco Mingorance.
"Based on the mounting evidence it is important that both national and EU authorities open formal investigations into Microsoft's unfair software licencing practices as an urgent competition issue," he added.
CISPE, which represents 24 cloud infrastructure providers in Europe, lodged a formal complaint with the European Commission last year over Microsoft's licensing of software in the cloud.
Ofcom's move follows forecasts by market analyst Canalys that prices for using public clouds in Europe are set to jump by almost a third this year, driven by rising energy prices and the cost of borrowing for datacenter operators.
The price of Microsoft cloud products went up by 9 percent in the UK at the start of this month, increased 15 percent in Sweden and 11 percent in the other European countries. ®