UK competition regulator's cloud probe remedies have global implications

Egress fees? Ticked. Spend discounts? Not yet. Software licensing? Might need to shape up, Microsoft

Britain's competition watchdog is scheduled to announce a provisional decision in the coming weeks on its examination into whether the major cloud players engage in practices that may limit customer choice. Its ruling could have far-reaching implications for the cloud sector.

The Competition and Markets Authority (CMA) announced last October that it was beginning an investigation into the local cloud services market following a recommendation from telecoms regulator Ofcom, whose own report claimed the cloud market did not appear to be functioning as it should.

The next provisional report is due in September or October. A final report is expected in April 2025.

Described (by us) as "the scourge of US tech execs," the CMA has a track record of following its own path in deciding what needs acting on, forcing Meta to reverse its buy of Giphy at a steep loss, for example, and getting concessions from Microsoft in return for allowing its takeover of Activision Blizzard.

On the issue of cloud services, working papers published by the CMA have considered concerns such as technical barriers for organizations to switch provider (different APIs, protocols); licensing practices (in particular, key products like Microsoft software on non-Azure clouds); committed spend agreements, where a customer gets a discount for committing to a minimum spend; and egress fees to get data out of a cloud platform.

On the global stage there are three cloud titans, yet in the UK there are effectively two as AWS and Azure account for 60 to 70 percent of the market (according to Ofcom's estimate last year). Google comes a distant third with a share of 5 to 10 percent, but still gets lumped in with them as their nearest competitor

What will happen if the CMA decides that one or more of these issues are causing an adverse effect on competition by impacting customer choice?

The CMA told us it wasn't at liberty to say at this stage. It previously published a working paper on potential remedies [PDF].

The cloud providers are no doubt pleased to see that the CMA says it is "not currently minded to prioritise further consideration of structural or operational separation remedies," which might have resulted in forcing a sale or split of the cloud operations of one or more of the companies, for example.

Yet potential remedies the CMA might consider include behavioral ones, such as controlling outcomes – price caps, supply commitments, and service level undertakings, for example – while technical barriers to moving might be addressed by imposing mandatory standards or the use of abstraction layers.

One of the areas that has been a bone of contention for cloud users is egress fees, or charges for moving your data out of a particular cloud platform. The CMA has suggested restricting the level of egress fees, or banning them outright.

But wait, didn't the big three companies decide to do away with egress fees earlier this year, after the CMA started its investigation? Well, yes and no.

Google announced in January that it would waive data migration fees for those leaving its cloud, and AWS followed suit a couple of months later. Microsoft made the same move just a week afterwards.

The important thing to note here is that all three are only waiving fees if you are effectively removing your data from their platform. In the case of Microsoft and Google, you also have to be terminating your account. As The Register noted at the time, if an AWS customer wants to use a data lake in Azure, those egress fees on the data are still going to apply.

"Egress fees have been the hyperscalers' way of piling on more pain, adding an additional monetary cost of migrating data to alternative platforms," Mark Boost, CEO of UK-based cloud operator Civo, told us.

"In response to the EU Data Act, hyperscalers have dropped certain egress fees. However, in reality, this will likely make little difference to the overall landscape. This is why it's crucial for investigations and any consequent regulation to be thorough and, if meaningful change is to be made, to understand and mitigate potential loopholes. The big question is whether the CMA will think the hyperscalers have done enough – which, of course, they have not."

Microsoft, in its response to the CMA working papers, claimed the evidence shows that egress fees do not prevent UK customers from switching or using multi-cloud deployments, saying: "Egress fees are an irrelevance compared to the multitude of other factors customers take into account when considering complex switching/multi-cloud decisions."

Another issue the CMA is due to tackle is committed spend discounts (CSD), where the CMA is considering banning these, or setting restrictions on them such as a maximum duration.

Not surprisingly, the big cloud players claim there is no harm in these, with AWS in particular claiming: "The CMA acknowledges that discounts and price competition produce benefits for customers and can only give rise to competition concerns in specific circumstances."

AWS added that the CMA "presents no evidence suggesting CSDs can be expected to, or do in fact, harm competition by foreclosing rivals."

The CMA itself has signed a CSD with AWS, while overseeing the probe into the use of discounts in the private sector. The CMA told us in June it will investigate CSDs in the public sector too and is currently gathering evidence.

Boost had a very different take to AWS: "Cloud credits seem generous on the surface, but in reality, they are part of tactics used by hyperscalers to trap customers and squeeze startups.

"By offering free credits that can last months or even years, big companies tempt businesses (often smaller ones lured by the promise of cost-cutting) into long-term deals from which it's very hard to escape."

The CMA's working paper found that customers with a CSD made up a large share of the total UK cloud revenue for both AWS and Azure, so the pair will be keen to ensure these are not banned or irrevocably changed.

The regulator's working paper also noted that many customers saw no problem with the agreements, and even that the discount was the reason they picked that provider.

Which brings us to the last and one of the most publicly contested issues: Licensing practices. This is largely centered on a squabble between the cloud giants themselves and not just a customer complaint. Chiefly, it is about Microsoft having widely used business software such as SQL Server, Visual Studio, and its productivity suites, which are either unavailable or more costly to use on major rivals' clouds other than Azure, thanks to Microsoft's licensing policies.

In fact, Google told us that it does not think that there is anything untoward in the cloud market for the CMA to investigate other than "software licensing practices adopted by legacy vendors," which it believes are "directly harming UK customers, particularly small and medium-sized enterprises (SMEs)."

Google also makes the target clear: "With Microsoft's licensing restrictions in particular, UK customers are left with no economically reasonable alternative but to use Azure as their cloud services provider, even if they prefer the prices, quality, security, innovations, and features of rivals."

AWS has similar complaints, pointing us to this in its CMA response: "When Microsoft changed its licensing terms in 2019 and again in 2022, it made it more difficult for customers to run some of its popular productivity software offerings on Google Cloud, AWS, and Alibaba. To use many of Microsoft's software products with these other cloud services providers, a customer must purchase a separate licence even if they already own a licence for the software."

Naturally, Microsoft sees it differently and believes that rival clouds are lucky to be able to run its software at all, saying: "This dispute on pricing terms only arises because Microsoft grants all rivals IP licenses in the first place to its software that is of most popularity for use in the cloud. It does this not because there is any legal obligation to share IP with closest rivals in cloud, but for commercial reasons," as The Register reported.

Redmond's brusqueness might be understandable, given that AWS and Google have been lobbying hard for antitrust investigations into software licensing in the cloud, both in the UK and EU. But this could prove a mistake, given that the CMA had already found in its preliminary report that most customers it spoke to understand that using Microsoft software products is cheaper on Azure, and that this could be a significant factor in which cloud they choose.

Indeed, the CMA is considering non-discriminatory pricing for Microsoft software products, and allowing customers to freely transfer previously purchased products to the cloud of their choice as potential remedies.

The software giant avoided a formal antitrust probing of its licensing in the EU by inking an agreement with the Cloud Infrastructure Service Provider of Europe (CISPE) trade group, acceding to certain conditions and paying a lump sum (estimates range from €10 million to €30 million) to the organization.

Boost was scathing of this, and said he hoped the CMA would be more steadfast.

"The CISPE deal made it clear that the hyperscalers cannot self-regulate. The deal looks to be exclusive to CISPE members, and though they may benefit in the short term, the cloud industry and their customers will pay the price in the long term.

"The CMA's cloud investigation can ensure the UK forges a different path to the EU. I hope it will not waste this opportunity and take decisive action across the board, including ending the skewed system of cloud credits, and anti-competitive software licensing."

For its part, CISPE appears to be cheering on the UK market regulator.

"The CMA's market investigation is looking at all the right things, and its early conclusions underline the well informed and diligent nature of its enquiries," the organization told us in a statement.

"The challenge now is to act on this information to create opportunity for UK cloud service providers, and their customers, without hobbling the utility and scope of hyperscale solutions."

If the CMA does act on its findings to force non-discriminatory software licensing on Microsoft or ban committed spend agreements, for example, the effect will likely go beyond the UK market.

Customers and regulators in other territories are likely to demand similar conditions of the big cloud players before long. ®