In 2022, Ofcom conducted a market study into the UK market for cloud computing. Cloud computing services provide remote access to computing resources over a network. Businesses such as social media, streaming, broadcasting and communications are increasingly reliant on cloud services. The study focused specifically on cloud infrastructure services which are built on physical servers and virtual machines hosted in data centres around the world. These services include infrastructure as a service (IaaS), offering computing, storage and networking, and platform as a service (PaaS), and offering the software tools needed to build and run software applications.

The Final Report on Ofcom’s market study published on 3 October 2023 states that Microsoft and Amazon Web Services (“AWS”) had a combined market share of 70-80% of UK IaaS and PaaS revenues in 2022, and Google holds a market share of about 5-10% (“hyperscalers”). The hypercalers also host PaaS and software as a service (SaaS) products developed by independent software vendors (“ISVs”) and act as channels for customers to purchase those products. Beyond the hyperscalers, there are some small cloud providers such as Oracle and IBM.

In Ofcom’s view, competition in the market, for the largest cloud users in particular, was being limited by three features that make it more difficult for customers to switch or use multiple suppliers (“multi-cloud”) where it might make sense for them to do so. The benefits of a multi-cloud strategy, where a customer can mix and match the cloud services that most closely meet their needs, include access to the best quality products, building resilience into cloud architecture and strengthening the bargaining position with providers.

First, the charging of egress fees for transferring data between rival providers can discourage users from switching or using more than one cloud provider. Ofcom research found that egress fees can significantly increase the cost of changing service provider, and for some customers act as a barrier to doing so.

Second, technical barriers mean that customers need to put additional effort into reconfiguring their data and applications to work on different clouds. Lack of portability and interoperability can restrict the ability to switch or multi-cloud. Ofcom acknowledges that technical differentiation between cloud providers can be the result of innovation which benefits customers but remains concerned that some of the technical differentiation is not justified.

Third, hyperscalers offer significant discounts to customers in return for committed spend (the more a customer spends on the cloud services, the greater the discount). This can help customers negotiate a good deal. However, for Ofcom, the structure of these discounts acts as a barrier to multi-cloud by encouraging larger customers to use a single hyperscaler for all or most of their cloud needs. This could restrict competition by raising barriers to entry and expansion by smaller cloud providers.

Ofcom concludes that a material number of customers may face significant barriers to switching and multi-cloud which could lead to a “significant risk of harm”. These barriers can make it harder for competitors to gain scale and challenge the market leader. In turn, this can reduce competitive pressure on market leaders creating a risk that customers are paying higher prices than would otherwise be the case, a cost which might be passed on to consumers. Customers may also be harmed if, due to the barriers to switching, they are denied access to more innovative products on offer by a competitor.

Ofcom observes that the cloud computing market is growing and, whilst there some evidence that the market leaders have some incentive to compete to win new customers, there is a risk that it could become more concentrated in the future. As a result, it has exercised its powers to refer the cloud infrastructure market to the CMA to carry out a market investigation. This power may be exercised where Ofcom has reasonable grounds for suspecting that features of a UK market prevent, restrict or distort competition. The CMA will now conduct its own independent investigation to determine whether there is an adverse effect on competition. The first stage will be the publication of an issues statement for consultation.

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