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Ofcom to refer UK’s cloud market for investigation

Ofcom has detailed a number of concerns, including egress fees, technical restrictions on interoperability, and committed spend discounts

As part of its probe into the UK’s cloud services, regulator Ofcom has said it is proposing to refer the industry to the Competition and Markets Authority for further investigation.

Ofcom said its study has provisionally identified features and practices that make it more difficult for customers to switch and use multiple cloud suppliers.

It stated it has particular concerns about the practices of Amazon and Microsoft because of their market position.

Among the regulator’s concerns are the cost of egress fees, which it says can discourage customers from using services from more than one cloud provider or to switch to an alternative provider.

Ofcom is also concerned about technical restrictions on interoperability imposed by the leading firms that 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, said the regulator.

The third concern laid out by Ofcom is around committed spend discounts, which can benefit customers by reducing their costs, but the way these discounts are structured can incentivise customers to use a single major cloud provider for all or most of their cloud needs, even when better quality alternatives are available, it said.

There are indications this is already causing harm, with evidence of cloud customers facing significant price increases when they come to renew their contracts, warned Ofcom.

It added that some customers are concerned about their ability to switch and use multiple providers where it limits their ability to mix and match the best quality services across different providers. 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.

“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,” added Ofcom. “Revenues are already concentrated with a few players, and there is a risk that the features we have identified could lead the market to concentrate further towards the market leaders.”

This has led Ofcom to propose referring the cloud infrastructure market to the CMA to carry out a market investigation, which it says would allow the CMA to further examine the nature and extent of barriers and consider if there are interventions that could improve how the market works.

“Making a market investigation reference would be a significant step for Ofcom to take,” said the regulator. “Our proposal reflects the importance of cloud computing to UK consumers and businesses, the significant concerns we have about the cloud infrastructure market and our view that the CMA is best placed to undertake any further investigation. We will continue to engage closely with the CMA during the second half of the study.”

Ofcom is now inviting feedback on its interim findings, and on the proposal to make a market investigation reference into the supply of cloud infrastructure services in the UK, by 17th May 2023.

It intends to publish a final report setting out its findings and recommendations, including the decision on a market investigation reference, by no later than 5th October.

In response to the announcement, an AWS spokesperson said: “These are interim findings and AWS 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. 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.”