Comms regulator says UK cloud market should be referred to competition watchdog

Ofcom takes quick glance, says: It's off to the CMA with you

The cloud infrastructure market should be referred to the UK’s Competition and Markets Authority (CMA) for investigation, says telecoms regulator Ofcom in a freshly filed interim report.

In the report, Ofcom says there are clear indications the local cloud infrastructure market isn't working as well as it should, and is concerned that unless interventions are made, there may be a further decline in competition in what it identifies as a critical market for digital services and the UK economy.

Ofcom, or the Office of Communications, announced its investigation last September, saying it wanted to scrutinize in particular the role played in the country's cloud services market by the big providers – Amazon, Microsoft and Google.

In fact, Ofcom states there are basically two leading cloud providers in the UK, with AWS and Azure accounting for 60 to 70 percent of the market. Google comes a distant third with a share of 5 to 10 percent, but still gets lumped in with them as their nearest competitor.

Earlier this year the regulator was already hinting that it was minded to refer the matter to the CMA. But this interim report is still only part-way through the study, with Ofcom saying the purpose of it is to provide an update on progress and test out its initial findings with stakeholders. A final report will be published by 5 October 2023, it said.

For the purposes of this study, Ofcom has taken “cloud infrastructure services” to include both infrastructure as a service (IaaS) and platform as a service (PaaS).

According to Ofcom, its study has found active competition in cloud infrastructure services, especially where providers are competing to attract new customers who may be moving to the cloud for the first time.

However, the report also states that competition is being restricted in some areas by market features that make it more difficult for customers to switch or to use multiple suppliers – adopt a multi-cloud strategy, in other words.

Ofcom calls out egress fees, technical restrictions on interoperability and committed spend discounts as the aspects of the cloud market that it is most concerned may be stifling competition.

Egress fees, as Reg readers know, are a well-known bugbear of online services, where the host charges a customer to transfer their data out to somewhere else. Ofcom asserts that the big cloud operators charge significantly more than other providers, and this may discourage customers from using services from more than one cloud provider as well as making it more costly to switch.

When it comes to technical restrictions, Ofcom said it had noted the level of effort required by customers to set-up for a preferred cloud architecture and tailor applications so they can run on it, as well as the time and costs required to develop the skills needed to use different clouds.

The report also notes that each cloud defines different APIs, protocols and workflows that customers must follow for their application to work with its cloud services, and that customers often need to change parts of their application in order to operate with a different provider.

Ofcom concedes that the big cloud players provide services to facilitate switching and multi-cloud operations but said its analysis suggests take up of these services may be limited.

In particular, it claims market research found that 52 percent of customers cited a lack of interoperability between services from different IaaS/PaaS providers as a key concern, and at least half of IaaS/PaaS users in the market only made use of a single cloud provider because of these concerns.

Ofcom also found that the top two challenges cited by customers when using multi-cloud were moving data across IaaS/PaaS providers and greater costs/less cost efficiency from doing so.

The latter may partly be due to committed spend discounts, which are discounts offered by cloud providers (but in particular the big players) to those customers who commit to using a particular amount of resources over an agreed period of time.

Such discounts can be seen as beneficial to customers by helping to reduce their costs, but the way these discounts are structured can incentivise customers to use a single provider for all or most of their cloud needs, Ofcom said.

The report also notes that for many customers, forecasting how much their cloud resources were going to cost them was a challenge, because of complexity in the way usage was billed and a lack of price transparency.

As a result, Ofcom expressed concern that many customers, especially those with more complex requirements, may face “material barriers” to multi-cloud or switching providers, which could leave some “locked in” to one of the big clouds.

It claims there are indications that some cloud customers are paying more or settling for lower quality services, as well as facing significant price increases when they come to renew contracts.

Ofcom has heard concerns from customers about Microsoft’s licensing practices, including allegations that Microsoft sells particular services in a way that makes it less attractive to use them on rival clouds to its own Azure platform. Microsoft is already being gently probed by the European Commission's antitrust team over the same allegations.

The potential interventions Ofcom suggests include measures to address its main areas of concern.

On egress fees, it suggests requiring cloud providers to set these in line with other charges, i.e. that of internal data transfers within the same cloud, or to set price controls that restrict egress fees to “at cost” charges. Alternatively, the abolition of egress fees altogether.

Addressing technical interoperability is likely to be fraught with unintended consequences, as Ofcom admits, and so it is seeking stakeholder views on measures such as requirements for the big clouds to make their own services easier to interoperate with third-party services, and for there to be greater transparency about interoperability.

On committed spend discounts, Ofcom suggests prohibiting or restricting certain discount structures that may be loyalty-inducing and risk distorting competition. However, it concedes that discounts are in general a positive feature of markets, leading to lower prices and promoting competition between providers.

Omdia Chief Analyst Roy Illsley disagreed with some of Ofcom’s conclusions, saying that there is a lock in at some point with every provider.

“The way customers are locked in to a cloud provider is not the real point here, let’s be frank, it is no different from legacy infrastructure vendors,” he told us.

However, he conceded that “a difference with cloud service providers is in this finding that egress charges are an obfuscated way of locking customers in, as you only discover the true impact once you are in. So on that point I do think they have a case for cloud providers to answer.”

“I think the argument from the hyperscalers would be that while there is lock in, it has not stopped multi-cloud from becoming a reality, and the price per unit has decreased over the years. So they would say it is not anti-competitive,” Illsley said.

AWS told us that it has delivered a response to Ofcom that addresses the findings in the interim report and that it looks forward to further constructive dialogue.

“At AWS, we design our services to give customers freedom of choice and we believe the concerns expressed in the Interim Report are based on fundamental misconceptions about how the IT sector functions and the services and discounts on offer. The regulatory interventions proposed would be unwarranted, and could lead to significant unintended harm to customers and competition,” the company said in a statement.

Microsoft told us that "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."

Google was not immediately available to comment. ®

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