Ofcom to recommend detailed inquiry into UK's cloud market

Concerns raised about lack of competition, as Azure and AWS dominate

Ofcom is expected recommend the Competition and Markets Authority (CMA) probe the UK's cloud industry, amid concerns about anti-competitive practices.

"We've certainly been given some heavy hints that there will be a recommendation to the CMA to open an inquiry into the cloud market for competitive reasons," one source close to a cloud provider told The Register.

The source further said the CMA's investigation would likely encompass aspects such as egress fees, data portability and interoperability. It may even extend to an examination of software licencing, and its potential to influence the market dynamics.

Another source said the investigation is expected to focus on both the technical and non-technical barriers to interoperability, which encompass aspects related to licensing agreements.

"It would also focus on egress, which is a big debate, and might look into the topics of cloud credits in the context of AI."

Following Ofcom's recommendation, the CMA will have approximately two weeks to decide whether to initiate its investigation.

The investigation is anticipated to last up to 12 months, and any actions or solutions it leads to are expected to be implemented within a timeframe of six to 10 months, a source told The Register.

"There will be a market investigation referral and we're told it will be broad, so the inclusion of multiple things," the person said.

An Ofcom spokesperson said: "We'll be announcing our decision on whether or not to refer the market to the CMA by the statutory deadline, which is Thursday 5th October 2023."

Ofcom launched a market study into the £15 billion UK cloud services market in September last year, with the aim of ensuring that digital services benefit both local businesses and consumers.

The regulator also said it would evaluate any market features that could "impede innovation and hinder growth" in the cloud services sector.

Specifically, it sought to identify factors that might create obstacles for smaller companies, preventing them from competing effectively and expanding their market presence.

At the halfway point of its market study, in April, Ofcom proposed forwarding the issue to the CMA for further investigation.

"Our market study has provisionally identified features and practices that make it more difficult for customers to switch and use multiple cloud suppliers. We are particularly concerned about the practices of Amazon and Microsoft because of their market position," the regulator said.

Microsoft and Amazon collectively hold a market share of between 60% and 70% in the UK cloud market.

As businesses and the public sector increasingly depend on cloud services, this dominance raises concerns about limited customer choice and market imbalance.

"If left unchecked, competition could deteriorate further in a critical digital market for the UK economy," Ofcom said.

Ofcom's preliminary findings centred on three primary areas of concern:

• High data egress charges: These charges make it costly for users to switch suppliers, essentially creating a lock-in effect, where customers are bound to one platform due to the expense of transitioning to another.
• Technical interoperability restrictions: These checks restrict users to the vendor's platform, making it more challenging to migrate to an alternative cloud service provider.
• Committed spend discounts: These discounts can encourage customers to rely on a single hyperscaler for the majority of their cloud requirements, even when superior alternatives are available.

As of August, AWS charged $0.09 per GB for outbound data transfer to the public internet for the first 10 TB, with pricing decreasing on a tiered basis. These rates apply to both EC2 virtual machines and S3 storage services.

Digital Ocean, a US-based cloud service provider, says AWS egress fees can be up to five times more expensive than those of smaller competitors, including its own offerings.

According to Microsoft's marketing materials, running Microsoft products on AWS, Google, or Alibaba costs five times more than using Azure, even though there is no technical justification for this price difference.

Update 5th October

AWS responded to Ofcom's announcement, saying: "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.

"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.

The company also said it does not charge separate fees for transferring to another provider.