On 3 October 2023, Ofcom published the final report of its 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 processing, storage and networking, and platform as a service (PaaS), offering the software tools needed to build, test, run and manage software applications in the cloud.

The study found that Microsoft and Amazon Web Services (“AWS”) had a combined market share of 70-80% of UK IaaS and PaaS revenues in 2022, with Google holding a market share of about 5-10% (“hyperscalers”). In Ofcom’s view, competition in the market, for the largest cloud users in particular, is 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 on cost with providers.

The three features identified are the charging of egress fees for transferring data between rival providers, which can discourage users from switching or using more than one cloud provider, technical barriers, meaning that customers need to put additional effort into reconfiguring their data and applications to work on different clouds, and the offer by hyperscalers of significant discounts to customers in return for committed spend (the more a customer spends on the cloud services, the greater the discount).

Ofcom concluded that a material number of customers may face significant barriers to switching and multi-cloud which could make it harder for competitors to gain scale and challenge the market leaders. Consequently, Ofcom exercised its powers to refer the cloud infrastructure market to the CMA to carry out a market investigation.

The CMA is now required to decide whether the features of the cloud infrastructure market have an “adverse effect on competition” (“AEC”) by preventing, restricting or distorting competition in the UK. The recently published Issues Statement sets out the CMA’s initial hypotheses on which features of the market may have an AEC and which potential remedies may be suitable to address any AEC found. These hypotheses, or theories of harm, match the three features identified by Ofcom (egress fees, technical barriers and committed spend discounts). The CMA will also look at software licensing practices where it is alleged that software licensed by the cloud providers (e.g. Microsoft’s Windows OS) is cheaper, has more features and works more efficiently on the provider’s own infrastructure compared to the infrastructure of rivals, and will also investigate the providers’ profitability to assess whether prices of cloud services are above those that would be found in a competitive market.

The Statement sets out a list of potential remedies for each of the theories of harm including capping or preventing egress fees, requiring providers to offer interoperability at service level, on data migration or in relation to the migration of applications and workloads to another cloud provider, prohibiting certain discount structures and, in relation to software licensing, increasing pricing transparency or prohibiting the sale of cloud services bundled with software. Crosscutting remedies might include requiring providers to divest particular assets or, alternatively, to implement operational separation.

These are the CMA’s early thoughts on the scope of its investigation and the purpose of the Statement is to enable interested parties to focus on the issues the CMA considers relevant. Respondents are invited to give reasons, supported by evidence, of why the issues identified should not be in scope or whether there are further issues that should be considered. The CMA has stated that it will conduct hearings with interest parties and expects to publish further documents before publishing its provisional decision report.

For more information, click here. Submissions should be sent to CloudMI@cma.go.uk by 9 November 2023.