The CMA recently published its provisional findings on the state of competition within the UK public cloud infrastructure services market.
This investigation, initiated by Ofcom and referred to the CMA under the Enterprise Act 2002, seeks to scrutinise the competitive dynamics of this lucrative sector. The market for cloud services, which includes IaaS (infrastructure as a service) and PaaS (platform as a service), is a critical component of the UK economy, with businesses spending approximately £9 billion each year. The CMA's investigation seeks to determine which features of the market are preventing, restricting, or distorting competition.
CMA findings
The CMA's provisional findings highlight several significant issues within the UK cloud services market. First, the market is highly concentrated, with AWS and Microsoft holding substantial market shares of 40-50% and 30-40% respectively in IaaS, and 30-40% each across both IaaS and PaaS markets.
The CMA identified that some providers have been "generating sustained returns from their cloud services substantially above their cost of capital in cloud services for a number of years". This market concentration is exacerbated by high barriers to entry and expansion, including the substantial capital investment required for data centres, networks, and servers, as well as economies of scale that favour larger providers. The broad product portfolios of AWS, Microsoft, and Google further entrench their positions, making it difficult for new entrants to compete.
Another finding is the presence of technical and commercial barriers that hinder customers' ability to switch providers or use multiple clouds. Watch out for egress fees which are charges for transferring data between cloud providers – these can be a real deterrent to switching and multi-cloud strategies. These fees, along with technical barriers, lock customers into their initial choice of provider, limiting their ability to respond to competitive offers or access innovative services from other providers.
CMA recommendations
The CMA has proposed several remedies to address the identified issues. The primary recommendation is to use its new powers under the Digital Markets, Competition and Consumers Act 2024. These powers enable the CMA to designate firms with 'strategic market status' (SMS) and "impose forward-looking requirements and pro-competition interventions".
The CMA suggests prioritising SMS investigations for AWS and Microsoft. If designated with SMS, these firms could face targeted interventions designed to mitigate their market power and promote competition. Potential interventions could include measures to reduce egress fees, address technical barriers to switching and multi-cloud, and modify licensing practices to ensure fair competition.
Our comment
These findings underscore the challenges facing the UK cloud services market. On the one hand, providers invest high levels of capital to supply these services and should be able to charge customers to turn a profit. On the other hand, the current high levels of market concentration and substantial barriers to entry and expansion can create an environment where competition is stifled and customers face fewer choices. The technical and commercial barriers, particularly egress fees, further entrench the positions of dominant providers, making it difficult for customers to switch or adopt multi-cloud strategies.
The CMA's investigation highlights the need for regulatory measures to ensure healthy competition in the cloud services market. The proposed remedies, if implemented proportionately and effectively, could transform the market, but bearing in mind the need for intense levels of capital investment and risk, it is a fine balance, as the CMA's new (economic growth-focused) Chair will well know.
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