In a significant development, the United Kingdom’s communication regulator, Ofcom, has taken a notable step by referring the public cloud infrastructure services market to the Competition and Markets Authority (CMA) for a thorough investigation.
The above chart prepared by research firm Canalys indicates the worldwide cloud market share of AWS, Microsoft Azure and Google Cloud during the first quarter of 2023. AWS is the market leader in the UK.
This market, primarily dominated by tech giants Amazon Web Services (AWS) and Microsoft, has raised concerns regarding limited competition and potential hindrances for UK businesses to switch and utilize multiple cloud service providers effectively.
Ofcom’s recent market study has identified critical features within the cloud computing sector that present challenges for businesses seeking to diversify their cloud service usage. The predominant concern revolves around the dominant positions of industry leaders such as Amazon and Microsoft, raising questions about equitable market dynamics and opportunities for other providers.
Cloud computing has become integral to various sectors of the UK economy, including telecommunications, broadcasting, and the public sector. It has revolutionized service delivery by providing remote access to essential resources like software, storage, and networking through data centers located globally.
The investigation traces back to October 2022 when Ofcom initiated a comprehensive study under the Enterprise Act 2002 to evaluate the efficiency of cloud services in the UK. The interim findings, released in April 2023, underscored the need to assess competition strength and identify features that could impede innovation and growth within the sector.
Fergal Farragher, Ofcom’s Director responsible for the Market Study, emphasized the significance of cloud services in the digital economy. He highlighted concerns raised by businesses about the difficulty in switching or selecting multiple cloud providers, leading to this referral to CMA for a more in-depth examination and ensuring continued benefits for business customers.
Market Structure: Amazon Web Services (AWS) and Microsoft collectively held a substantial market share ranging from 70-80 percent in 2022, establishing their dominance as the primary ‘hyperscalers.’ Google stood as their closest competitor with a market share of 5-10 percent.
Egress Fees: Customers face high egress fees when transferring data out of a cloud, discouraging the use of multiple providers or the switch to alternative providers.
Technical Barriers: Technical obstacles in interoperability and portability necessitate additional efforts to reconfigure data and applications, complicating the integration of services across various cloud providers or the transition to a different provider.
Committed Spend Discounts: While benefiting customers by reducing costs, these discounts often incentivize customers to use a single hyperscaler, limiting the adoption of better quality alternatives.
These identified features present challenges for customers in utilizing multiple cloud providers effectively, hindering their bargaining power and the ability to access the best services across providers. With AWS and Microsoft holding significant profitability levels, concerns about diminishing overall competition levels loom large.
Looking ahead, the difficulty in switching or utilizing multiple providers may impede competitors’ ability to challenge AWS and Microsoft effectively. Ofcom is deeply concerned that reduced threats of customer migration from market leaders could stifle competition and limit choices for both new and existing customers. The investigation seeks to address these critical market dynamics and foster a more competitive and accessible cloud services landscape for UK businesses.