UK public cloud infrastructure services market investigation opened

Over the past year, Ofcom has conducted its own cloud services market study. In its final report (254-page / 3MB PDF) following its study, published earlier this month, the regulator identified concerns about the ease with which cloud customers can switch between service providers and use the services of more than one provider.

Sarah Cardell, CMA chief executive, said: “We welcome Ofcom’s referral of public cloud infrastructure services to us for in-depth scrutiny. This is a £7.5bn market that underpins a whole host of online services – from social media to AI foundation models. Many businesses now completely rely on cloud services, making effective competition in this market essential. Strong competition ensures a level playing field so that market power doesn’t end up in the hands of a few players – unlocking the full potential of these rapidly evolving digital markets so that people, businesses, and the UK economy can get the maximum benefits.”

“The CMA’s independent inquiry group will now carry out an investigation to determine whether competition in this market is working well and if not, what action should be taken to address any issues it finds,” she said.

In its report, Ofcom said that its study had found that competition between cloud providers is mainly focused on attracting new customers when they first begin to use cloud services. It said that while cloud customers can benefit from innovative products, discounts and a wide choice of software services, “a material number of customers, especially those with more complex requirements, may face significant barriers to switching and multi-cloud”.

There are three features of the UK’s cloud service market that Ofcom said attract the most concern.

First, it raised issue with the cost cloud customers face when transferring data between and to rival providers. It said the extent of these ‘egress fees’ “can discourage customers from using more than one cloud provider and in some cases make switching more costly”.

The second feature it highlighted was the lack of interoperability and portability. It said cloud customers “need to put additional effort into reconfiguring their data and applications to work on different clouds” and that these technical barriers “can restrict the ability of customers to switch and multi-cloud”.

Thirdly, Ofcom identified concerns with the way ‘committed spend’ discount schemes operate. While they can help cloud customers reduce costs, the way they are structured “can incentivise customers to use a single cloud provider for all or most of their cloud needs” and “make it less attractive to use rival providers as part of a multi-cloud strategy”.

Ofcom said it is concerned that the barriers to switching and multi-cloud it sees currently will impact a growing number of cloud customers as the market matures over time.

“Limits on the ability of customers to credibly threaten to switch away can reduce the competitive pressure on the market leaders, giving them a degree of market power,” Ofcom said. “This creates the risk of harm for cloud customers, either by paying higher prices than would have been the case or being denied access to innovative products, which in turn can lead to negative impacts for UK consumers.”

Ofcom said that if barriers to switching and multi-cloud persist, it could become harder for cloud service providers to compete effectively with Amazon Web Services and Microsoft, who are the current market leaders. It could also have implications for independent software vendors if they were to become reliant on those two providers for access to customers.

“A cloud infrastructure market that is working well is critical for businesses across the economy and everyone who makes use of digital services,” Ofcom said. “Given the concerns we have identified, we have decided to refer the cloud infrastructure 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.”

The CMA’s market investigation is expected to run until April 2025.