The UK’s Competition and Markets Authority (CMA) has recently released provisional findings from its investigation into the cloud services market, initiated to determine if any aspects of cloud service providers’ operations were adversely affecting competition within the market. These preliminary findings suggest that there are, indeed, several factors contributing to an anti-competitive environment. As AWS and Microsoft continue to dominate the cloud computing sector, new and smaller cloud service providers face significant hurdles that hinder their ability to compete effectively. This dominance not only impacts market dynamics but also has far-reaching implications for customer choice and innovation.
Dominance of AWS and Microsoft
Amazon Web Services (AWS) and Microsoft have established an overwhelming presence in the cloud computing industry, generating returns significantly higher than their cost of capital for several consecutive years. This dominance by AWS and Microsoft presents substantial hurdles for new and smaller cloud service providers. Therefore, entrants face the challenge of the massive capital investments required for data centers, networks, and servers, which are primarily sunk costs. Additionally, larger cloud providers benefit from economies of scale, meaning their ongoing costs are lower relative to smaller competitors.
These large investments by the major players, while potentially beneficial for cloud customers in terms of service expansion, also have the effect of deterring market entry or growth by potential rivals. As the CMA’s findings highlight, the market power of AWS and Microsoft creates barriers that are difficult for smaller companies to overcome. This sustained dominance creates a scenario where new entrants struggle to compete due to the high costs and substantial resources needed to establish a foothold in the market.
Customer Challenges and Egress Fees
From a customer’s perspective, the CMA identified that egress fees — charges incurred when data is transferred out of a cloud provider’s environment — further inhibit the ability and incentive of customers to switch or use multiple cloud providers. This restriction diminishes the competitive pressure on suppliers to vie for their rivals’ customers. The high cost of transferring data out of a cloud provider’s environment can lock customers into long-term contracts with a single provider, reducing their flexibility and increasing their dependency on the dominant players.
This practice not only stifles competition but also limits customer choice and innovation in the market. As customers become more reliant on a single provider, they lose the bargaining power that comes from being able to easily switch between competitors. This dependency can lead to higher prices and less innovation as cloud service providers face reduced pressure to improve their offerings to attract new customers. The impact of egress fees, therefore, extends beyond immediate costs to customers, influencing the broader competitive landscape and shaping the dynamics of the cloud computing market.
Microsoft’s Software Licensing Practices
Microsoft’s software licensing practices were another focal point of the CMA’s findings. The summary indicates that Microsoft holds significant market power with its Windows Server, SQL Server, Windows 10/11, Visual Studio, and productivity suites. The CMA’s provisional conclusion is that these products are critical inputs for cloud services, giving Microsoft the capacity to impede its rivals by leveraging these software products. There are noted disparities in both pricing and quality when customers use Microsoft’s software on Microsoft’s cloud compared to AWS and Google. The CMA discovered that the cost of certain Microsoft products for these rivals can exceed the retail price Microsoft charges its own customers, thus undercutting competition.
This practice has been criticized by various regulators and is currently being litigated in a £2 billion ($2.49 billion) case led by Dr. Maria Luisa Stasi. According to the findings, these licensing practices not only give Microsoft an unfair advantage but also inflate software licensing costs for organizations using competitors like AWS and Google. This litigation highlights the broader implications of Microsoft’s strategies on the cloud computing market, reinforcing concerns that such practices hinder competition and stifle innovation. As the case progresses, it could set a precedent for how regulatory bodies address anti-competitive behaviors in the technology sector.
Regulatory Scrutiny and Potential Interventions
The CMA did not solely focus on Microsoft. AWS also came under scrutiny, with both AWS and Microsoft being recommended for further inquiry under the Digital Markets, Competition, and Consumers Act (DMCCA). This Act, which recently came into effect, requires a “strategic market status” (SMS) investigation to assess if these companies hold a dominant position that warrants additional regulatory scrutiny. If AWS and Microsoft are designated as having SMS, they could face intensified investigations and be subject to specific conduct and reporting requirements.
AWS has disputed the necessity of this intervention, asserting that the IT services industry is highly competitive. The company claims that cloud computing has driven down costs for UK businesses through flexible on-demand services and pay-as-you-go pricing models, thereby boosting product choices and driving innovation. Despite their objections, AWS does acknowledge concerns over Microsoft’s licensing protocols, which it contends distort the market. The debate over these regulatory measures underscores the complexity of the cloud computing market and the challenges regulators face in ensuring fair competition.
Google’s Position in the Market
Interestingly, Google, another major player in the cloud services market, was less spotlighted in the CMA’s findings. This is attributed to Google’s relatively smaller market share and the adverse impact of Microsoft’s licensing deals on Google’s cloud offerings. Google, represented by Chris Lindsay, Vice President of Customer Engineering EMEA, expressed support for the CMA’s recognition of the restrictive nature of these licensing practices. Google argues that these practices hamper competition, curb economic growth, and stifle innovation within the UK cloud market.
The company’s position highlights the broader implications of the CMA’s findings and the need for regulatory interventions to promote a more competitive and innovation-driven market environment. By addressing these anti-competitive practices, regulators can create a more level playing field that encourages innovation and benefits customers. Google’s stance reflects the concerns of many smaller cloud service providers who seek a fairer, more competitive market landscape.
Ongoing Investigation and Future Implications
The UK’s Competition and Markets Authority (CMA) has recently disclosed interim findings from its inquiry into the cloud services market. This investigation aims to identify whether the practices of cloud service providers are negatively affecting competition. The provisional results indicate that certain practices do, indeed, foster an anti-competitive environment. Amazon Web Services (AWS) and Microsoft, the leading players in cloud computing, maintain a stronghold that presents substantial challenges for newer and smaller cloud service providers trying to compete. This dominance shapes not only the market landscape but also significantly influences customer choices and stifles innovation. The CMA’s research highlights these barriers, suggesting that the market power held by AWS and Microsoft may cause broader implications, particularly for consumer options and technological advancements in the cloud services sector. The investigation underscores the importance of fostering a more level playing field to promote fair competition, enhance customer choice, and drive innovation.