Why are governments investigating cloud competitiveness?

In any market, fewer sellers or providers typically results in less choice for buyers. Where the number of sellers is very low this could, theoretically, lead to exploitation, through higher prices or lower-quality goods and services — with buyers having no choice but to accept such terms.

Three hyperscale cloud providers — Amazon Web Services, Google Cloud and Microsoft Azure — have become dominant throughout most of the world. This has triggered investigations by some governments to check that limited competition is not impacting customers.

The UK government’s Office of Communications’ (Ofcom’s) Cloud services market study is intended to investigate the role played by these “cloud provider hyperscalers” in the country’s £15 billion public cloud services market. Ofcom’s objective, specifically, is to understand the strength of competition in the market and to investigate whether the dominance of these hyperscalers is limiting growth and innovation.

Although there is a debate about the cost and strategic implications of moving core workloads to the cloud, competition among cloud provider hyperscalers, so far, seems to be good for users: recent inflation-driven increases notwithstanding, prices have generally decreased (across all providers) over the past few years. Apart from the hyperscalers, users can procure cloud services from local providers (and established brands), colocation providers and private cloud vendors. The cloud provider hyperscalers continue to develop innovative products, sold for pennies per hour through the pay-as-you-go pricing model and accessible to anyone with a credit card.

However, Ofcom is concerned. It cites research from Synergy Research Group showing that the combined market share of the hyperscalers is growing at the expense of smaller providers (at a rate of 3% per year) with the hyperscalers’ UK market share now standing at over 80%. As discussed in Uptime Institute Intelligence’s Cloud scalability and resiliency from first principles report, vendor lock-in can make it harder for users to change cloud providers to find a better deal.

The Herfindahl-Hirschman Index (HHI) is commonly used to assess market competitiveness on the basis of market share. A market with an HHI of over 2,500 suggests a limited number of companies have significant power to control market prices — a “high concentration.” The UK cloud services market is estimated to have an HHI of over 2,900. Given the global HHI of 1,600 for this sector, the UK’s high value validates the need for the Ofcom investigation.

Such a high market concentration isn’t necessarily a problem, however, if competing companies keep prices low while offering innovative products and services to a large population. A high concentration is only problematic if the cloud providers are in a stalemate (or worse, in collusion) — not cutting prices, not releasing new products, and not fighting to win each other’s customers. UK law prevents cloud providers from colluding to fix prices or restrict competition. But with so few competitors, such anti-competitive behavior might emerge accidentally (although there are few — if any — signs of such a stalemate so far).

The most intriguing part of Ofcom’s study will be its recommendations on how to make the market more competitive. Unless Ofcom can find evidence of anti-competitive behavior, there may be very little it can do to help smaller players compete, apart from limiting the hyperscalers’ ambitions, through regulation or divestiture. Outward signs are that cloud providers have come to dominate the market by providing users with the services they expect, at a price they’re willing to pay, rather than through any nefarious means.

Hyperscale cloud providers require colossal capital, substantial and cutting-edge expertise, and global-scale efficiency investments — all of which means they can cut prices, over time, while expanding into new markets and releasing new products. The hyperscalers themselves have not created the significant barrier to entry faced by smaller players in attempting to compete here: that barrier exists because of the sheer scale of operations fundamental to cloud computing’s raison d’etre.

In most countries, competition authorities — or governments generally — have limited ability to help smaller providers overcome this barrier, whether through investment or support. In the case of the UK, Ofcom’s only option is to restrict the dominance of the hyperscalers.

One option open to competition authorities would be regulating cloud prices by setting price caps, or by forcing providers to pass on cost savings. But price regulation only makes sense if prices are going up, and if users have no other alternatives. Many users of cloud services have seen prices come down: and they are, in any case, at liberty to use noncloud infrastructure if providers are not delivering good value.

Ofcom (and other regulators) could, alternatively, enforce the divestment of hyperscalers’ assets. But breaking up a cloud provider on the basis of the products and services offered would penalize those users looking for integrated services from a single source. It would also be an extremely bold and highly controversial step that the UK government would be unlikely to undertake without wider political consensus. In the US, there is a bipartisan support for an investigation into tech giant market power, which could provide that impetus.

Regulators could also legislate to force suppliers to offer greater support in migrating services between cloud providers: but this could stifle innovation, with providers unable to develop differentiated features that might not work elsewhere. Theoretically, a government could even nationalize a major cloud provider (although this is highly unlikely).

Given the high concentration of this market, Ofcom’s interest in conducting an investigation is understandable: while there is limited evidence to date, there could, be anti-competitive factors at play that are not immediately obvious to customers. Ofcom’s study may well not uncover many competitive concerns at the moment but it might, equally, focus attention on the nation’s over-reliance on a limited number of cloud providers in the years ahead.

In this Note, we have focused purely on AWS’, Google’s and Microsoft’s cloud infrastructure businesses (Amazon Web Services, Google Cloud and Microsoft Azure). But these tech giants also provide many other products and services in many markets, each of which has different levels of competitiveness.

Microsoft, for example, has recently been pressured into making changes to its software licensing terms following complaints from EU regulators and European cloud providers (including Aruba, NextCloud and OVHcloud). These regulators and cloud providers argue that Microsoft has an unfair advantage in delivering cloud services (via its Azure cloud), given it owns the underlying operating system. Microsoft, they claim, could potentially price its cloud competitors out of the market by increasing its software licensing fees.

As their market power continues to increase, these tech giants will continue to face anti-competitive regulation and lawsuits in some, or many, of these markets. In the UK, how far Ofcom will investigate the hyperscalers’ impact in particular subsectors, such as retail, mobile, operating systems and internet search is yet to be seen.