Hyperscalers in crosshairs for anti-competitive pricing and lock-in

Ofcom, the UK’s communications regulator, is concerned the market for public cloud infrastructure services is concentrated in the hands of just three providers, limiting competition and making it difficult for enterprises to switch or use multiple suppliers. Those three providers—AWS, Microsoft, and Google—argue the contrary.

The two sides, and their supporters, are currently battling it out, filing detailed reports and counter-reports to sway a decision on whether corrective action should be taken. But the devil is in the details, and the outcome of this dispute could have a major effect on the price of cloud services.

In September 2022, Ofcom announced plans to study cloud service providers’ business methods, particularly as they relate to the provision of infrastructure as a service (which it defines as raw computing, storage, and networking resources) and platform as a service (tools to develop, test, run, and manage applications). Ofcom is less concerned with the market for software as a service, except to the extent that dominance in this market enables providers to exert power in the other two.

Ofcom published an interim report on its findings in April 2023. Its research uncovered that the big three providers of cloud infrastructure services, known as the hyperscalers, together controlled between 65% and 80% of the UK market in 2021. Amazon Web Services (AWS) and Microsoft together had a 60 to 70% share while Google, a late entrant, had 5 to 10%. Ofcom estimated Oracle’s and IBM’s market share at less than 5% each; it didn’t publish exact figures for confidentiality reasons.

While there are plenty of other, smaller providers contributing to product innovation and price competition, Ofcom is concerned that three market features are making it harder for enterprises to switch providers or to implement multi-cloud strategies: egress fees, technical restrictions on interoperability, and discounts for committed spend.

The regulator followed up its interim report by giving notice that it was minded to ask the Competition and Markets Authority, the UK’s anti-monopoly regulator, to conduct a full market investigation, a move that could lead the CMA to impose remedies on the major cloud service providers regarding adverse effects on competition.

Ofcom invited interested parties to comment on the interim report and the proposal to refer the matter to the CMA, and in July 2023 published the responses it received from the big three cloud service providers and smaller competitors; industry bodies in the UK, US and Europe; academics; and the Information Commissioner’s Office, the UK’s privacy watchdog.

Predictably, the hyperscalers reacted strongly to these proposals—especially the threat of regulatory intervention—saying Ofcom has misunderstood the market, and the features it’s concerned about enhance customer choice rather than diminish it. Other reactions were more diverse.

Egress fees—deterrent, or just the cost of doing business?

The first concern Ofcom expressed was that hyperscalers’ egress fees—the charges enterprises pay to transfer data out of their cloud—are five to 10 times higher than those of other service providers, increasing the cost of switching or passing data between applications hosted with different providers.

Ofcom proposed three possible remedies: capping egress fees at cost or at the same price as data transfers within the same cloud, both of which would be difficult to regulate, or preventing cloud providers from charging for data egress at all.

AWS began its defense claiming “AWS does not charge ‘egress fees’”—before going on to explain it does, in fact, charge enterprises to transfer data out of its cloud, but that this isn’t an egress fee because the charge is the same whether enterprises are transferring the data to provide a service directly to their customers, to send data to another cloud provider for processing, or to move their entire business to another cloud provider.

The hyperscalers point to the corresponding absence of ingress fees, saying they have to charge somewhere in order to cover their networking costs, and it’s simpler to just charge for traffic on the way out.

Google, in its response, said that egress fees represent a fraction of what customers spend on its cloud services. “The proportion of total spend which egress fees relating to switching/exit would represent is therefore even smaller,” it added.

AWS quantified that for its customers, saying, “Data transfer out fees incurred by switching customers represent less than 1% of their annual spend on AWS. This relatively low one-time cost is unlikely to deter customers from switching.”

By and large, users commenting on the study didn’t address the issue of egress fees at all, suggesting they consider it an insignificant barrier to switching compared to, say, interoperability.

Other industry bodies warned against eliminating egress fees altogether, as this could lead to imbalances in cloud provider cost structures. For instance, the Sustainable Digital Infrastructure Alliance, an association of European cloud users and providers, wants enterprises to consume cloud services more rationally, and suggested setting cost-based price caps. And if Ofcom were to follow through on its proposal to eliminate egress fees, academics in the Centre for Competition Policy at the University of East Anglia (UEA) said, “We recommend Ofcom ensures ‘egress fees’ are clearly defined to exclusively capture fees incurred by customers as part of the ‘one-off’ switching process.”

Technical restrictions on interoperability: intentional or inevitable?

A lack of interoperability between cloud service providers makes it difficult to combine services or to switch, Ofcom said in its interim report, noting that while some complexity is inevitable, it has seen evidence that technical barriers are more significant than they need to be, and that AWS and Microsoft may limit interoperability of some services by not sharing important technical information.

“This means they can only be used in their respective clouds, which prevents customers from using them in combination with products from rival providers,” it said.

Ofcom pointed to Amazon SageMaker, a platform for training and deploying machine learning models, which it said can only import data from other AWS services. That’s not true, AWS said, pointing to a blog post in which it provided instructions on importing data from third-party sources.

Even with documentation, though, the complexity of cloud services and differences in capabilities between cloud providers mean that switching would take a significant amount of time and resource.

So said Guardian Media Group, a major consumer of cloud services, in its comment on the Ofcom study.

“We estimate that a process of extricating from existing integrations to integrating with a new provider would take many months to complete and be extremely costly,” it said. “This creates a huge disincentive to switching once cloud services have been procured.”

One way Ofcom considered to ensure interoperability (and largely shied away from) is mandating standardization. The UEA academics concurred, but warned their market models show this is unlikely to favor competition. “We find the imposition of mandatory interoperability standards would inherently favor incumbents, impede existing competition by differentiation, and limit the parameters for future innovation,” they said.

Microsoft, too, noted that requiring strict compliance to standards can chill innovation, limiting new functionality. “While simpler and more open architectures are possible, they’ll be inherently limited compared to more complex, tightly integrated services,” it said.

Software licensing can be a brake on interoperability, too.

Without mentioning it by name, Google managed to slight Microsoft in its response, saying, “Unfair licensing practices and commercial strategies deployed by certain legacy on-premises IT providers are causing significant harm to the cloud sector and UK customers at this critical inflection point by creating commercial lock-ins.”

That’s a reference to the formal complaint filed with the European Commission’s Directorate-General for Competition by an association of European cloud providers in November 2022, saying, “Microsoft uses its dominance in productivity software to direct European customers to its own Azure cloud infrastructure to the detriment of European cloud infrastructure providers and users of IT services.”

Discounts for committed spend: It’s not just about the volume

Discounts are Ofcom’s third major area of concern, specifically committed-spend discounts.

“Discounts are generally a positive feature of markets, leading to lower prices and promoting competition between providers,” it said, but warned that committed-spend discounts, which require customers to promise in advance to spend a certain amount on services regardless of their actual needs, can lead them to concentrate all or most of their spending with a single provider, even when there are no technical barriers to using multiple providers. “This has the potential to dampen competition for customers’ new workloads,” it said.

AWS, however, deliberately conflated the volume-based discounts Ofcom approves of, and the committed-spend discounts it has doubts about, to suggest the regulator is against all forms of discount.

But AWS, like Microsoft, also made the argument that committed-spend discounts—because of the commitment part—help service providers forecast demand and plan their investments accordingly. This, in turn, enables providers to offer services at lower cost, AWS said.

TechUK, an association of technology providers and users, described the discounts as “positive for customers and an effective means to lower the cost of a single-vendor cloud strategy,” posing a dilemma for Ofcom by confirming its competition concerns, but at the same time, highlighting the harm that would result from removing them.

The case for inaction

Ofcom estimated that 20% of customers—a figure it characterized as low—have switched providers, whether between public clouds, within a cloud, or between on-premises, private cloud, or public cloud. “It’s uncommon for customers to switch away from a provider completely due to the time and cost required,” it said.

Microsoft disagreed with that assessment, asking, in effect, “Low compared to what?” and noting that customers may be staying put because they’re happy.

“Even if switching levels can robustly be characterized as (comparatively) low, this finding is wholly inconclusive: Low switching is perfectly consistent with a competitive market in which existing customers are not exploited relative to new customers but instead derive essentially the same competitive benefits,” Microsoft said.

The other big difference of opinions boils down to Ofcom saying that switching is harder for enterprises than it could be, while the hyperscalers say it’s easier than it used to be in the days of on-premises software. Both are right.

So making switching easier may not be necessary—but is it even possible without hurting enterprises in other ways?

Microsoft doubts that. “The possible remedies identified in the Interim Report are difficult to design, monitor and enforce,” it said. “Any intervention could very well be net negative and leave UK enterprises and public sector customers worse off—if, for example, UK customers were deprived of discounts, or of innovation through interoperability requirements, which favor portability considerations over innovation and differentiated value add services.”

The company recommends a wait and see approach, or, as it puts it, “allowing dynamic market evolution to play out before commissioning any detailed assessment with a view to intervention.”

Guardian Media Group, too, casts doubt on the feasibility of mandating interoperability.

Instead, it concluded, there are other ways to avoid the long-term financial harms of potential lock-in, such as putting “a limit on the extent to which a cloud service provider can unilaterally increase fees within their contract term (for example, RPI or CPI plus X%),” it said.

Ofcom is still studying the responses it received, but will soon have to decide whether to make the referral to the CMA, which will then have to conduct its own investigation. It’s going to be a while yet before regulation changes anything.