Ofcom accuses AWS and Microsoft of locking in UK cloud market

Amazon Web Services (AWS) and Microsoft are under fire from Ofcom, which says it has found evidence of “concerning practices” by the cloud giants in the UK.

Ofcom launched a study last year into the UK’s £15 billion cloud sector. It is examining whether the big cloud players are stifling competition in the market. In particular, it is investigating if hyperscalers are “making it difficult for other cloud providers to enter the market or smaller companies to expand.”

Now halfway through its research, Ofcom said it has “identified features and practices that make it more difficult for customers to switch and use multiple cloud suppliers.”

As a result, the regulator is looking to refer the UK cloud market to the Competition and Markets Authority (CMA) for further investigation.

“We’ve done a deep dive into the digital backbone of our economy, and uncovered some concerning practices, including by some of the biggest tech firms in the world,” said Fergal Farragher, Ofcom’s director responsible for the market study.

“High barriers to switching are already harming competition in what is a fast-growing market. We think more in-depth scrutiny is needed, to make sure it’s working well for people and businesses who rely on these services.”

Market dominance of a few players

AWS and Microsoft Azure dominate the UK cloud market. Between them they have a combined market share of 60-70 percent in the U.K. Google Cloud is their closest competitor with a share of 5-10 percent.

“High levels of profitability for the market leaders AWS, and substantial consistent growth in Microsoft’s profits, indicate there are limits to the overall level of competition,” said Ofcom.

“We are concerned that constraints on customers’ ability to use more than one provider could make it harder for smaller cloud providers to win business and compete with the market leaders. Revenues are already concentrated with a few players, and there is a risk [this] could lead the market to concentrate further towards the market leaders.”

Ofcom has highlighted three practices by the hyperscalers it said are restricting choice for cloud customers.

Egress fees: Ofcom found the hyperscalers set these charges 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 restrictions on interoperability: Imposed by the leading firms, the regulator said these prevent some of their services working effectively with services from other providers. This means customers need to put additional effort into reconfiguring their data and applications to work across different clouds.

Committed spend discounts: The regulator noted these can benefit customers by reducing their costs. However it found that the way the 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.”

Ofcom said these features all make it difficult for some existing customers to bargain for a good deal with their provider. “There are indications this is already causing harm, with evidence of cloud customers facing significant price increases when they come to renew their contracts,” it noted.

In addition, some customers are concerned about their ability to switch and use multiple providers where this limits their ability to mix and match the best quality services across different providers.

Growth of cloud in public sector

From the start of 2016 to the end of 2021, public authorities awarded approximately £4.43 billion worth of cloud services-related contracts.

Contract award data from Tussell’s data platform shows the value of contracts awarded now are worth 3.8x times more than they were in 2016, growing from a total contract award value of £340.1 million in 2016 to £1.3 billion in 2021.

Alongside this growth, the contract award volume has greatly increased from the 299 contracts awarded in 2016 to the 1,300 contracts awarded in 2021- a growth rate of 4.3x.

AWS were the overwhelmingly dominant supplier within the G-Cloud 12 framework, which ran up to 2022. It won a total contract award value of £324 million – almost 20x times more than the next supplier on the framework.

Mixed reaction to findings

In response, AWS said it will continue to work with Ofcom ahead of the publication of its final report.

“The UK has a thriving and diverse IT industry with customers able to choose between a wide variety of IT providers, said an AWS spokesperson in a statement. “At AWS, we design our cloud services to give customers the freedom to build the solution that is right for them, with the technology of their choice. This has driven increased competition across a range of sectors in the UK economy by broadening access to innovative, highly secure, and scalable IT services.”

Elsewhere, Francisco Mingorance, secretary general at Cloud Services Providers in Europe (CISPE) decried Microsoft’s “unfair software licensing practices [that] distort competition in the cloud market.

“More and more customers, competitors and regulators are waking up to the ways in which Microsoft continues to distort fair competition in the cloud. Private deals are unlikely to solve these sector-wide issues.

“Based on the mounting evidence it is important that both national and EU authorities open formal investigations into Microsoft’s unfair software licencing practices as an urgent competition issue.”

The CMA’s investigation will allow it to examine the nature and extent of barriers and look at ways to improve how the market works for customers.

Ofcom is inviting feedback on its interim findings, and its proposal to refer the cloud market to the CMA by May 17, 2023. It plans to publish a final report setting out its findings and recommendations by October 5, 2023.