An interim report by the UK’s Office of Communications, commonly known as Ofcom, has identified a monopoly in cloud services, proposing further investigation into the matter by the Competition and Markets Authority (CMA).

The report identified a strong dominance of the market by Amazon Web Services (AWS) and Microsoft. The companies held a combined market share of 60-70% in 2021. Google, with a 5-10% share, is their closest competitor.

Ofcom refers to these firms collectively as “hyperscalers”. While a vast majority of customers use their cloud services in some form, a diverse set of independent software vendors (ISVs) build their products on cloud infrastructure from the hyperscalers, but also compete directly with some of their services.

Competition limited

Ofcom’s provisional view is that competition is being limited by market features that make it more difficult for customers to switch and use multiple suppliers (known as ‘multi-cloud’). So it is recommending the market is referred to the CMA for a market investigation.

The features identified were:

• Egress fees are the charges that customers pay to transfer their data out of a cloud and the hyperscalers set them significantly higher than most other providers. The cost of egress fees can discourage customers from using services from more than one cloud provider and in some cases can make it more costly to switch.
• Technical restrictions on interoperability are imposed by the leading firms. 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 on different clouds.
• Committed spend discounts can benefit customers by reducing their costs, but the way these discounts are structured can incentivise customers to use a single hyperscaler for all or most of their cloud needs. This can make it less attractive to use rival providers as new needs emerge.

“Looking ahead, we think there is a significant risk that the market becomes more concentrated as it matures, with less intense competition between the leading players,” the report said, adding there is concern that the level of competition could deteriorate further over the long term.

The report also says: “We have also identified other barriers that may require intervention, in particular technical skills and transparency of billing. The impact of these issues, and the ability to design an effective intervention if required, is less certain. We welcome stakeholder views on these areas.”

Market power

Ofcom is also considering how to move forward on addressing separate concerns over Microsoft’s licencing practises.

The UK Government is expected to introduce a Digital Markets, Competition and Consumer (DMCC) Bill that will give the CMA the power “to apply binding Conduct Requirements to manage the effects of market power”.

Ofcom will publish its final report by October 5, 2023.