Following the UK Office of Communications’ (Ofcom’s) report on the supply of cloud services in the United Kingdom, in which it identified a concern that certain market features may negatively impact competition, Ofcom referred the market to the Competition and Markets Authority (CMA) for investigation. The CMA has now appointed an inquiry group to carry out the investigation, with a deadline for the agency’s final decision of April 4, 2025.

Ofcom published its report on cloud services in the United Kingdom on October 5, 2023. In its report, it defined “cloud computing” as the provision of remote access to computing resources both on demand and over a network (be it over public internet or private connection) as opposed to over a personal device or local network.

FOCUS OF THE OFCOM REPORT

Cloud computing was described as a “critical input” for digital services across myriad sectors spanning telecoms, broadcasting, artificial intelligence, and the public sector. Ofcom focused its review on “cloud infrastructure services,” which consist of services built on both physical servers and virtual machines that are hosted on global data centers. Relevant products on this market include Platforms as a Service (PaaS), Infrastructure as a Service (IaaS), and Software as a Service (SaaS).

Ofcom determined that the market is dominated by two large platforms, which it referred to as “hyperscalers,” through which about 70% to 80% of customers currently gain access to cloud services.

Ofcom recognized the broader impact of cloud infrastructure services and consulted with a number of UK agencies, including the CMA, the Information Commissioner’s Office, the Prudential Regulation Authority, and the Financial Conduct Authority, owing to their ongoing interest and work relating to this market.

OFCOM CONCERNS WITH CLOUD INFRASTRUCTURE SERVICES MARKET

Ofcom identified the following features of the market as raising potential concerns:

• Egress Fees: Egress fees are charges paid by a customer to transfer their data out of a given cloud service. Ofcom said that so-called hyperscalers set these fees higher than other providers, which may potentially discourage customers from switching providers or engaging in multi-cloud use.[1]
• Technical Barriers: Ofcom stated that technical barriers regarding interoperability and data portability may potentially raise issues for customers who may have to put in “additional effort” in reconfiguring their data and applications to facilitate their use on different clouds. Ofcom said this may impact customers’ ability to switch to other providers or to multi-cloud, and said that levels of switching were at a low level in light of this market feature.
• Committed Spend Discounts: While committed spend discounts benefit consumers by reducing their costs, Ofcom said that they can impact multi-cloud use and the ability to switch if such costs incentivize customers to use a hyperscaler’s services.

In Ofcom’s view, these market features could impact competition negatively as smaller competitors could be prevented from “gaining scale” and challenging the market dominance of so-called hyperscalers. It said that this is compounded by the existence of limited competition for “workload,” or narrower components of consumers’ needs, and noted that ultimately these market features could impact an already limited ability to switch should competitive entry and growth become stunted.

Ofcom also said that competition could be negatively impacted if customers cannot credibly threaten to switch cloud service providers and thereby constrain the provider. Ofcom also considered licensing practices on the cloud infrastructure market as a number of customers commented that such practices deter them from using licensed software products on the cloud infrastructure of other providers.

Ofcom said that determination as to whether these practices harm competition is a matter for the CMA.

REFERENCE TO THE CMA

Further to its findings, Ofcom referred the UK public cloud infrastructure services market to the CMA to conduct an in-depth market investigation. In doing so, Ofcom was clear that it is of the view that there are remedies available to address its concerns, although a decision as to the need and extent of any such remedies lies with the CMA.

That said, Ofcom cited the reduction of barriers to multi-cloud and switching through addressing egress fees (be it equalizing, some form of price control, or removing such fees), improving technical interoperability and portability, and intervention into committed spend discounts as three key considerations to protect and improve competition.

The CMA commenced a consultation following the reference and on October 17, 2023 released an issues statement concerning the investigation’s scope. The CMA signaled that its review is largely focused on the issues raised by the Ofcom market study and report, namely the impact of technical barriers, egress fees, and discounts on switching and multi-cloud use, in addition to the nature of software licensing practices of relevant cloud providers.

The CMA invited comments by November 9, 2023, and it will now proceed with its investigation via information requests, site visits, further submissions from stakeholders, and hearings, which will take place until May 2024.

The CMA is then expecting to publish working papers and/or make disclosures to stakeholders in June 2024, inviting further responses/submissions from parties by July 2024, before releasing its provisional decision in September/October 2024. The CMA’s final decision, following provisional decision response hearings, is currently set for between February and April 2025.

The CMA’s final decision could potentially see the authority imposing recommendations and remedies on market participants. As it set out in its recent issues statement, the CMA is actively considering imposing remedies as a means to target specific market harms as well as crosscutting remedies to address any adverse effects on competition as a whole.

KEY TAKEAWAYS

With a market value of approximately £7.5 billion (approximately $9.2 billion) in 2022, the ongoing interest by UK authorities into the UK cloud infrastructure services market will undoubtedly continue. The establishment of the Digital Markets Unit within the CMA means the CMA has at its disposal additional resources to investigate and regulate competition within the digital markets. As the CMA set out in its 2023-2024 annual plan, ensuring effective digital market competition is one of the agency’s priorities.

As is sometimes the case following a market study, there is also the possibility that the CMA may open an investigation into practices in this or a related market as a result of the information gathered for the purposes of its market study, under either the Chapter I prohibition of the Competition Act 1998 against anti-competitive agreements or the Chapter II prohibition against abuse of dominance.

Businesses operating in this space should be aware of the possibility of increased regulatory scrutiny going forward should the CMA determine that the operation of the market raises competition law concerns.

[1] “Multi-cloud” use refers to instances where customers or users deploy services from more than one public cloud provider at the same time.

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