Written by Ofcom
- Amazon (AWS) and Microsoft are the leading providers of cloud infrastructure services in the UK
- Ofcom market study uncovers features that could limit competition
- High fees for transferring data out, committed spend discounts and technical restrictions are making it difficult for business customers to switch cloud provider or use multiple providers
- If left unchecked, competition could deteriorate in a critical digital market for the UK economy
Following its probe into UK cloud services, Ofcom has referred the public cloud infrastructure services market to the Competition and Markets Authority for further investigation.
Our market study has identified features that make it more difficult for UK businesses to switch and use multiple cloud suppliers. We are particularly concerned about the position of the market leaders Amazon and Microsoft.
Cloud computing has become critical for many businesses across the UK economy – including telecoms companies, broadcasters and public sector organisations – and has transformed the way they deliver services on which we all rely every day. It uses data centres around the world to provide UK businesses with remote access to services such as software, storage and networking.
In October 2022, we launched a study under the Enterprise Act 2002 into cloud services in the UK to assess how well this market is working, and published our interim findings in April 2023. We have examined the strength of competition and any features that might limit innovation and growth in this sector by making it difficult for other cloud providers to enter the market or smaller companies to expand.
Because the cloud sector is still evolving, we have looked at how the market is working today and how we expect it to develop in the future – aiming to identify any potential competition concerns early to prevent them becoming embedded as the market matures.
Fergal Farragher, Ofcom's Director responsible for the Market Study, said:
“The cloud is the foundation of our digital economy and has transformed the way companies run and grow their businesses. From TV production and telecoms networks to AI innovations – all of these things rely on remote computer power that goes unseen.
“Some UK businesses have told us they’re concerned about it being too difficult to switch or mix and match cloud provider, and it’s not clear that competition is working well. So, we’re referring the market to the CMA for further scrutiny, to make sure business customers continue to benefit from cloud services.”
What we found
There are two leading providers of cloud infrastructure services in the UK: Amazon Web Services (AWS) and Microsoft, which had a combined market share of 70-80% in 2022. Google is their closest competitor with a share of 5-10%. Collectively these firms are known as the ‘hyperscalers’ and the vast majority of cloud customers use their services in some form.
While competitive market forces are delivering benefits to customers – especially where providers are competing to attract new customers – in the form of innovative products and discounts, the features we are most concerned about are:
- Egress fees. These are the charges that customers pay to transfer their data out of a cloud and the hyperscalers set them 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 barriers to interoperability and portability. These can result in customers needing to put additional effort into reconfiguring their data and applications so they can work on different clouds. This makes it more difficult to combine different services across cloud providers or to change provider.
- Committed spend discounts. These 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, even when better quality alternatives are available.
These market features can make it challenging for some customers to switch or use multiple cloud providers. This can make it difficult to bargain for a good deal with their provider, or to mix and match the best quality services across different providers. High levels of profitability for the market leaders AWS and Microsoft indicate there are limits to the overall level of competition.
Looking ahead, if customers have difficulty switching and using multiple providers, it could make it harder for competitors to gain scale and challenge AWS and Microsoft effectively. In this scenario, we are concerned that the threat of customers switching away from the market leaders will reduce, further dampening competition for new and existing customers.
Market investigation reference
We have referred the UK public cloud infrastructure services 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.
Making a market investigation reference is a significant step for Ofcom to take. Our reference reflects the importance of cloud computing to UK consumers and businesses and the significant concerns we have about the cloud infrastructure market.
