As expectedUK regulator Ofcom has referred the county’s £7.5 billion cloud services market and its dominant providers to the Competition and Markets Authority (CMA).
Ofcom launched a review of the sector under the UK’s Enterprise Act 2022 last October and published its interim findings in April this year. Now in its final report On this subject, Ofcom states:
Ofcom has reasonable grounds to suspect that a feature or combination of features of the markets for the supply of these goods and services in the United Kingdom prevents, restricts or distorts competition. In particular, behaviors that may create barriers to switching and multi-cloud.
The three main areas of concern are cited as follows:
Exit fees. These are the fees customers pay to move their data out of a cloud, and hyperscalers set them significantly higher than other providers. The cost of exit fees can discourage customers from using the services of multiple cloud providers or switching to another provider.
Technical barriers to interoperability and portability. This may require customers to expend additional effort to reconfigure their data and applications to work across different clouds. This makes it more difficult to combine different services between cloud providers or switch providers.
Discounts on expenses incurred. These can benefit customers by reducing their costs, but the way these discounts are structured may incentivize customers to use a single hyperscaler for all or most of their cloud needs, even when higher quality alternatives are available.
Fergal Farragher, Ofcom director responsible for Cloud Services Market Researchconfirmed:
The cloud is the foundation of our digital economy and has transformed the way businesses manage and grow their businesses. From television production to telecommunications networks to AI innovations, it all relies on remote computing power that goes unnoticed.
Some UK companies have expressed concerns to us that it is difficult to change or mix cloud providers, and it is not clear that competition works well. We are therefore referring the market to the CMA for further consideration, to ensure that business customers continue to benefit from cloud services.
In the line of fire
The two main providers that will be subject to CMA scrutiny will be Amazon Web Services (AWS) and Microsoft, which Ofcom estimates have a market share of up to 80% in the UK, with Google Cloud far behind , between five and ten. percent. Ofcom states:
The high profitability levels of market leaders AWS and Microsoft indicate that there are limits to the overall level of competition. In the future, if customers have difficulty switching and using multiple providers, it could be more difficult for competitors to gain scale and effectively challenge AWS and Microsoft. In this scenario, we fear that the threat of customers moving away from market leaders could diminish, further dampening competition for new and existing customers.
Microsoft recently had a dispute with the CMA which initially blocked its acquisition of Activision, although this position was later softened after a deal was reached to sell the cloud streaming rights which will be managed by a third party. Today he kept his powder dry with a bland statement about the upcoming cloud services investigation:
We are committed to ensuring that the UK cloud industry remains innovative, highly competitive and an accelerator of growth across the economy. We will work constructively with the CMA on its investigation into the cloud services market.
Meanwhile, AWS was more categorical in its rebuttal of Ofcom’s findings:
We disagree with Ofcom’s findings and believe they are based on a fundamental misconception about how the IT sector works and the services and discounts offered. Only a small percentage of IT spending is dedicated to 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 the technology best suited to their needs. UK businesses and the wider economy benefit from strong competition between IT providers, and the cloud has made switching providers easier than ever.
The company said it would “work constructively” with the CMA investigation, although its statement also included the following:
Any unwarranted intervention could result in unintended harm to IT customers and competition.
Hmm, well, there is “constructively” and there is “constructively”. What AWS’ comment about “unintended harm” means, we’ll find out in due time, I imagine. For now, we’ll have to leave this to our individual interpretations.
What shall we do now? Nothing particularly fast. A CMA market study typically takes 18 months. Indeed, the Authority says it will conclude its investigation by April 2025. This will take it beyond the next general election in the United Kingdom, which, if current polls are to be believed, could well see a change from Conservative administration to Labor administration. .
It remains to be seen what impact this is likely to have on the government’s attitude towards the cloud services sector. Conservatives were everywhere at Microsoft – it seemed like barely a week would pass without a minister – or Prime Minister – appear in the lobby of the British headquarters for a photo session on the digital theme of the day. More recently, the focus of Labor and the Conservatives appears to have turned more to Google, with senior figures from both parties talking up all the potentially transformative technology the vendor has in its toybox.
Meanwhile, AWS keeps adding more and more market share.
If the CMA does indeed notice a negative effect of competition, it has several options:
The CMA has the power to impose its own remedies on businesses and it can also make recommendations to other bodies such as sector regulators or the government – where legislation might be needed for example.
The CMA can force businesses to change their behavior, including the way a product is sold in a particular market and the information made available to customers who purchase that product.
The CMA also has the power to impose structural remedies which may require companies to sell part of their business to improve competition.
I will now hold out my hand and confidently predict that the last option is a failed Brexit, with Britain clamoring for foreign investment from the tech superpowers. Are there any political leaders in either major party who would have the courage to do anything other than pose – see all the empty threats aimed at Facebook over the years – is a very debatable point.
As a British trade association techUK argues:
It is essential that any regulatory intervention strikes an appropriate balance between increasing competition, supporting multi-cloud and customer switching, and ensuring the UK continues to benefit from continued investment in infrastructure cloud and computing power that will be needed for the UK to succeed. most emerging technologies like AI and quantum computing.
So, is this a waste of time and effort that won’t really make a difference? Not necessarily.
I was struck by a LinkedIn blog post by Simon Hansford This sums up, I think, the current reality of the UK cloud services sector and why such an investigation is important. Hansford is the former CEO and founder of UKCloud, a UK provider specializing in dealing solely with UK public sector customers. A great example of the type of business that any UK government aspiring to become a digital economy should have supported all the way, you might think.
But in reality, AWS’s rise particularly in the UK public sector has taken its toll on UKCloud, which went into liquidation earlier this year. In his blog post today, Hansford says:
My view on this is clear: Amazon AWS and Microsoft’s stranglehold on the UK cloud computing market is damaging to UK businesses and consumers and to the sovereignty of our critical data. Their dominance stifles competition and innovation, hindering the growth of local cloud service providers and limiting customer choice. It also raises concerns about data security and resilience, as the country becomes overly reliant on a small number of select providers.
Additionally, the UK’s ability to establish itself as a leader in generative AI is under threat due to lack of access to the large data sets needed to effectively train AI language models. This harms our competitiveness on the global stage and hinders our ability to drive technological advancements.
One of the biggest changes that needs to happen is in the UK public sector, which has moved heavily towards the use of hyperscale cloud providers. This single-minded pursuit of convenience, at the expense of the development of local cloud providers, hinders the development of a vibrant domestic cloud industry. It is high time that the public sector re-evaluates its purchasing habits to ensure a more balanced and competitive cloud ecosystem and recognizes that cloud computing must be part of our national critical infrastructure.
He concludes :
Ofcom’s recommendation to investigate Amazon AWS and Microsoft’s dominance of the UK cloud computing market is a pivotal moment that could redefine the landscape for the better. It is imperative that we free ourselves from the grip of these hyperscalers, not only to nourish a more competitive market, but also to safeguard our technological sovereignty and encourage innovation.
Critics will, I imagine, dismiss comments such as sour grapes, but I have had occasional conversations with Hansford on this subject for years and he predicted problems throughout that period unless the government plays a more active role in safeguarding and promoting competition. in this space.
At a time when the current government boasts of its ambitions to become a world leader in digital technology, particularly in AI, a formal investigation into what is happening in the UK cloud services market is frankly overdue. We will follow the development of this matter with great interest.