On 29 June 2023, the French Competition Authority (the authority) released its opinion on competition in the cloud computing (the cloud) sector (the opinion).1 The opinion sets out the authority's thoughts on possible market definitions in the sector, and provides some relatively detailed analysis of what it identifies as particular challenges in this area. The opinion adds to the growing body of thought leadership about the cloud by relevant authorities around the world, but stands out, perhaps most notably, due to its novel proposal of a methodological framework for defining relevant markets in the sector and its analysis of theories of harm in different time scenarios.
By way of background, cloud refers to a set of shared information technology (IT) services, remotely delivered over the internet, characterised by on-demand supply and pay-per-use pricing. It is essentially a business to business (B2B) market. Similar to several other digital markets, characteristics of the cloud market include high fixed costs (even though cloud providers normally rent data centres to their constructors), and economies of scale and scope.
Different types of market players can be identified by the following terms:
- hyperscalers, or well-established digital players which have expanded their activities to the cloud;
- pure-players, IT companies mainly known for their software and IT solutions for businesses;
- other cloud providers who stand out for their ability to offer certified, highly secure services, currently focusing their offering on sectors requiring these specific features; and
- major players in adjacent markets, such as the provision of data centre services and the integration of cloud solutions at customer premises. The latter market is largely dominated by Digital Services Companies.
The cloud has become a key industry sector, and its expansion was particularly accelerated by the increase of remote working during the covid-19 pandemic. An annual market growth of 17% by 2025 in France and of 25% in Europe is anticipated. Cloud already has farreaching implications across all industries, as customers come from all sectors of the economy, and this impact will only continue to expand with further digitalisation.
The opinion forms part of a bigger picture of cloud work undertaken by the authority, which has been concurrently asked by the French Deputy Minister in charge of the digital transition and telecommunications to look at provisions of the new draft law to secure and regulate the digital space. In a (separate) opinion released on 20 April 2023, the authority set out specific proposals relating to future French legal provisions in this area, whilst underlining the need to work collaboratively with Europe. Whilst two distinct projects, one has informed the other and vice versa.
The opinion is a cumulation of an intense period of work for the authority, coming a year and a half after it started proceedings "on its own initiative"2 and a year after opening its public consultation.3 During that time, the authority held numerous interviews with private players (suppliers or customers) and other regulatory authorities. It also sent out requests for information and conducted hearings with several suppliers. Furthermore, for the first time in the authority's decision-making practice, the project involved data scientists, which is both in line with actions taken by other national competition authorities and logical given the complex and technical nature of the sector which involves challenges (ie, cyber and data protection alongside competition issues).
Relevant market definition
One of the main points of added value of the French opinion compared to previously published market studies (see below) is the proposal of a methodological framework which can be used to define relevant markets in the cloud sector. Faced with unclear decisionpractice and case-law in that regard, the authority offers an innovative way of considering the cloud market, based on user needs defined by customers workloads. This framework can subsequently be used for more formal examinations or investigations that may ultimately lead to penalties.
Theories of harm
During its inquiry, the authority identified a few different theories of harm based on market dominance and divided them into transversal and specific risks.
Transversal competitive hazards include:
- risks related to imbalances in contracts and negotiations between cloud suppliers and customers. Indeed, cloud customers often have no choice but to accept standard contracts with no negotiation. Only very large companies can negotiate certain clauses and benefit from customised pricing;
- free cloud credits granted by the cloud provider to a potential customer. These are granted for a certain time and amount of money to allow the potential customer to discover the cloud provider services and start building its IT infrastructure around those services. This practice runs the risk of locking a customer into the "cloud ecosystem" of its initial supplier, especially if credits are combined with free coaching and training programs at universities and start-ups to accustom the youngest developers to the services of a single provider; and
- egress fees charged when a cloud customer switches its data from one cloud provider to another. Their unforeseeable costs can discourage customers from using services offered by several cloud providers simultaneously or from switching to an alternative provider. It may therefore constitute a significant barrier to multi-homing (using several suppliers for a single workload) and entails a high risk of locking customers into the services of a single provider.
Specific competitive risks were identified on the basis of distinct time scenarios:
The authority found that cloud customers could face different difficulties, depending on whether they are switching to cloud computing for the first time, or whether they wish to change their cloud provider.
The authority also emphasized the barriers to expansion that hyperscalers' competitors could face. Scenarios such as the hyperscalers restricting access to their cloud services, or their advantage in collecting extensive and highly accurate customer data to offer highperformance services were considered. By way of illustration, older, more established software suppliers, who today equip the vast majority of B2B customers, have the opportunity to leverage their position on the software market segment to force their current customer to adopt their cloud services.
Notwithstanding the theories of harm and competition law risks identified, the authority concluded that France is well equipped to tackle the issues flagged in the opinion with its existing competition law tools, especially:
- the prohibition of abuse of a dominant position and merger control (both enforced by the authority). Notably, under thresholds mergers could be reviewed by the authority or referred to the Commission;
- consumer, contract and unfair commercial practices laws (enforced by the Directorate General for Competition Policy, Consumer Affairs and Fraud Control); and
- the French government's bill aiming at securing and regulating the digital space, which foresees regulation of exit fees and cloud credits as well as strengthening interoperability between cloud services.
Furthermore, EU regulations, either already partially in force, such as the Digital Markets Act and the Digital Services Act, or currently under discussion, such as the European Data Act which aims to encourage switching by ensuring functional equivalence between standard services, provide a useful regulatory framework to ensure healthy competition in the cloud markets going forward.
Globally, national competition authorities agree on the main competitive concerns raised by the cloud sector. It nevertheless appears that with its recent opinion and other work in the cloud sector, the French authority goes a little further than others have to date in proposing a framework for competitive analysis in terms of market definition and risks scenarios. This might suggest that it is laying the groundwork for more formal enforcement style measures in the near future. Indeed, the authority notes in the opinion that "the General Rapporteur announces that his competition units will carry out a preliminary examination of the elements gathered in order to estimate whether it is necessary to open one (or more) litigation investigation(s)". As such, businesses active in this area must be prepared for future investigations in this space and would be well advised to start planning their response.
2. See the Authority's press release, 27 January 2022, "The Autorité de la concurrence starts proceedings ex officio to analyse competition conditions in the cloud computing sector."
3. See the Authority's press release, 13 July 2022, "The Autorité de la concurrence opens a public consultation until 19 September 2022 as part of its cloud sector inquiry", with linked documents.
Co-authored by Camille Hoogterp, Paralegal
This article was originally published by International Law Office
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