REG - OFCOM - Ofcom refers cloud market to CMA for investigation

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RNS Number : 7321O  Office of Communications  05 October 2023

5 October 2023

 

Ofcom refers UK cloud market to CMA for investigation

 

·    Amazon (AWS) and Microsoft are the leading providers of cloud
infrastructure services in the UK

·    Ofcom market study uncovers features that could limit competition

·    High fees for transferring data out, committed spend discounts and
technical restrictions are making it difficult for business customers to
switch cloud provider or use multiple providers

·    If left unchecked, competition could deteriorate in a critical
digital market for the UK economy

 

Following its probe into UK cloud services, Ofcom has referred the public
cloud infrastructure services market to the Competition and Markets Authority
for further investigation.

 

Our market study has 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.

 

Cloud computing has become critical for many businesses across the UK economy
- including telecoms companies, broadcasters and public sector organisations -
and has transformed the way they deliver services on which we all rely every
day. It uses data centres around the world to provide UK businesses with
remote access to services such as software, storage and networking.

 

In October 2022, we launched a study under the Enterprise Act 2002 into cloud
services in the UK to assess how well this market is working, and published
our interim findings in April 2023. We have examined the strength of
competition and any features that might limit innovation and growth in this
sector by making it difficult for other cloud providers to enter the market or
smaller companies to expand. 1 

 

Because the cloud sector is still evolving, we have looked at how the market
is working today and how we expect it to develop in the future - aiming to
identify any potential competition concerns early to prevent them becoming
embedded as the market matures.

 

Fergal Farragher, Ofcom's Director responsible for the Market Study, said:
"The cloud is the foundation of our digital economy and has transformed the
way companies run and grow their businesses. 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. So, we're referring the market to the CMA for
further scrutiny, to make sure business customers continue to benefit from
cloud services."

 

What we found

 

There are two leading providers of cloud infrastructure services in the UK:
Amazon Web Services (AWS) and Microsoft, which had a combined market share of
70-80% in 2022. Google is their closest competitor with a share of 5-10%.
Collectively these firms are known as the 'hyperscalers' and the vast majority
of cloud customers use their services in some form. 2 

 

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 we are most concerned
about are:

 

·    Egress fees. These are the charges that customers pay to transfer
their data out of a cloud and the hyperscalers set them at significantly
higher rates than other providers. 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. 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.

 

·    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.

 

These market features can make it challenging for some customers to switch or
use multiple cloud providers. This can make it difficult to bargain for a good
deal with their provider, or to mix and match the best quality services across
different providers. High levels of profitability for the market leaders AWS
and Microsoft indicate there are limits to the overall level of competition.

 

Looking ahead, if customers have difficulty switching and using multiple
providers, it could make it harder for competitors to gain scale and challenge
AWS and Microsoft effectively. In this scenario, we are concerned that the
threat of customers switching away from the market leaders will reduce,
further dampening competition for new and existing customers.

 

Market investigation reference

 

We have referred the UK public cloud infrastructure services market to the
Competition and Markets Authority (CMA) to carry out a market investigation.
The CMA will now conduct an independent investigation to decide whether there
is an adverse effect on competition, and if so, whether it should take action
or recommend others to take action.

 

Making a market investigation reference is a significant step for Ofcom to
take. Our reference reflects the importance of cloud computing to UK consumers
and businesses and the significant concerns we have about the cloud
infrastructure market.

 

Please visit the Ofcom website for further details:

https://www.ofcom.org.uk/consultations-and-statements/category-2/cloud-infrastructure-market-investigation-reference

 

ENDS

 

Notes to editors:

 

1.    Market studies are examinations into the causes of why particular
markets may not be working well in the interests of consumers. We carried out
this cloud market study using our powers as a competition authority under the
Enterprise Act 2002.

 

2.    2022 market shares of supply by revenue in UK public cloud
infrastructure services market (source: Ofcom analysis of data provided in
response to our information requests and data from Synergy and IDC).

 

 

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