Ofcom Refers Cloud Investigation Of Amazon, Microsoft To CMA

The United Kingdom moved a step closer to an official antitrust investigation of the two leading cloud service providers in the world.

Ofcom confirmed earlier reports, when on Thursday it announced that its market study had “uncovered features that could limit competition in the cloud segment,” and has therefore asked the UK’s antitrust regulator, the Competition and Markets Authority (CMA) to investigate Amazon and Microsoft’s dominance of the UK cloud market.

However Amazon Web Services contacted Silicon UK to say that it “disagrees with Ofcom’s findings and believes they are based on a fundamental misconception of how the IT sector functions, and the services and discounts on offer.”

Ofcom referral

Ofcom’s market study probe into UK cloud services “identified features that make it more difficult for UK businesses to switch and use multiple cloud suppliers. We are particularly concerned about the position of the market leaders Amazon and Microsoft.”

In essence, Ofcom was particularly concerns about high fees for transferring data out, committed spend discounts and technical restrictions which it alleges is making it difficult for business customers to switch cloud provider or use multiple providers.

Ofcom therefore referred the public cloud infrastructure services market to the Competition and Markets Authority for further investigation. The CMA will now conduct an independent investigation.

The move comes after Ofcom in September 2022 had announced it would “examine the position of Amazon, Microsoft and Google in cloud services,” as part of a “new programme of work to ensure that digital communications markets are working well for people and businesses in the UK.”

“The cloud is the foundation of our digital economy and has transformed the way companies run and grow their businesses,” said Fergal Farragher, Ofcom’s director responsible for the Market Study. “From TV production and telecoms networks to AI innovations – all of these things rely on remote computer power that goes unseen.”

“Some UK businesses have told us they’re concerned about it being too difficult to switch or mix and match cloud provider, and it’s not clear that competition is working well,” said Farragher. “So, we’re referring the market to the CMA for further scrutiny, to make sure business customers continue to benefit from cloud services.”

Specific concerns

Ofcom identified the two leading cloud infrastructure players n the UK: Amazon Web Services (AWS) and Microsoft, which had a combined market share of 70-80 percent in 2022.

It noted that Google is their closest competitor with a share of 5-10 percent.

“Collectively these firms are known as the ‘hyperscalers’ and the vast majority of cloud customers use their services in some form,” said Ofcom.

Ofcom said that 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, the features is is most concerned about are as follows:

• Egress fees. The charges that customers pay to transfer data out of a cloud and Ofcom alleges that the hyperscalers set them at significantly higher rates than other providers. It feels that 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 barriers to interoperability and portability. Ofcom feels these can result in customers needing to put additional effort into reconfiguring their data and applications so they can work on different clouds. This makes it more difficult to combine different services across cloud providers or to change provider, the regulator warned.
• 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, Ofcom alleged.

In summary therefore, Ofcom alleges these market features can make it challenging for some customers to switch or use multiple cloud providers.

AWS response

However Amazon Web Services (AWS) got in touch with Silicon UK to refute Ofcom’s assessment.

“We disagree with Ofcom’s findings and believe they are based on a fundamental misconception of how the IT sector functions, and the services and discounts on offer,” an AWS spokesperson told Silicon UK. “Only a small percentage of IT spend is in the cloud, and customers can meet their IT needs from any combination of on-premises hardware and software, managed or co-location services, and cloud services.”

“AWS designs cloud services to give customers the freedom to choose technology that best suits their needs,” said the AWS spokesperson. “UK companies, and the overall economy, benefit from robust competition among IT providers, and the cloud has made switching between providers easier than ever.”

“Any unwarranted intervention could lead to unintended harm to IT customers and competition,” the spokesperson added. “AWS will work constructively with the CMA.”

The spokesperson also added that AWS does not charge separate fees for switching data to another IT provider.

“Customers make hundreds of millions of data transfers each day in the ordinary course of business, and over 90 percent of our customers pay nothing for data transfer because we provide them with 100 gigabytes per month for free,” the AWS spokesperson concluded.

Structural issues?

The UK communications regulator said that making a market investigation reference is a significant step for Ofcom to take.

Alex Haffner, competition partner at UK law firm Fladgate got in touch with Silicon UK to offer his legal view on the regulator’s referral.

“The UK’s competition regulators have a range of tools at their disposal to deal with any perceived competition related concerns affecting the functioning of specific markets,” said Haffner.

“What is interesting here is that Ofcom has chosen to ask the CMA to open a market-wide investigation, which suggests that the regulators perceive there to be structural issues with the cloud computing market that need broader investigation and consideration.”

“It is also a sensible approach given the wide ranging impact that the cloud computing market has on many different industries and the broader economy, and fits with the CMA’s stated desire to target effective competition in digital markets,” Haffner told Silicon UK.

“That Amazon and Microsoft are the largest players on this market raises the stakes somewhat, although compared with recent skirmishes with Microsoft in particular, the fact that a market investigation can take 18-24 months overall means that this one will likely take on a more considered path,” Haffner concluded.