The UK’s Competition and Markets Authority (CMA) has issued its provisional findings from an investigation into the cloud services market, identifying several factors contributing to adverse effects on competition (AEC). The CMA’s report focuses on major cloud service providers like Amazon Web Services (AWS) and Microsoft, who dominate the sector with their substantial market shares.
AWS and Microsoft’s Dominance
Amazon Web Services and Microsoft are found to consistently generate returns above their cost of capital in the cloud market. This persistent dominance raises concerns that their vast market power might discourage competition. The CMA highlights that smaller cloud providers face significant challenges, particularly due to the immense capital investments required for infrastructure, which often become sunk costs.
Market Entry Barriers and Economies of Scale
The CMA report outlines that the economies of scale enjoyed by major cloud providers further hinder competition. These larger players benefit from lower ongoing costs, allowing them to reinvest in expanding their services. While this expansion could benefit customers, it may simultaneously stifle market entry for potential rivals who lack similar resources. The CMA warns that such dynamics could reduce the diversity and innovation needed for a competitive marketplace.
Customer Concerns: Egress Fees and Multi-Cloud Incentives
From a customer perspective, egress fees are highlighted as a major concern. These fees limit customers’ ability and incentives to switch between cloud providers or adopt a multi-cloud strategy. The CMA concludes that this pricing structure discourages competitive behavior, ultimately reducing the overall competitiveness of the cloud market.
Microsoft’s Software Licensing Practices Under Scrutiny
Another key area of focus in the CMA’s report is Microsoft’s software licensing practices. The company’s dominance in software products such as Windows Server, SQL Server, and Visual Studio is seen as a critical factor in its competitive advantage. The CMA suggests that Microsoft’s licensing arrangements may harm rivals, particularly when customers use Microsoft products within cloud services.
The investigation points out that Microsoft’s prices for software products can be higher when used on other cloud providers, like AWS or Google, compared to when they are used on Microsoft’s own cloud platform. This pricing disparity may give Microsoft an unfair advantage, affecting competition across the cloud services sector.
Impact on Cloud Rivals: AWS and Google
Both AWS and Microsoft face scrutiny in the CMA’s investigation, with recommendations for further inquiry under the Digital Markets, Competition, and Consumers Act (DMCCA). If designated with “strategic market status” (SMS), these companies could be subject to additional regulations and conduct requirements.
AWS, while critical of Microsoft’s pricing tactics, maintains that the cloud computing market remains competitive. The company argues that the industry offers extensive benefits such as lower costs, product variety, and innovation, all of which foster healthy competition.
Google’s Position in the Market
Though Google Cloud is part of the “big three” in the cloud market, the CMA’s provisional findings largely exclude the company from direct criticism. Google’s smaller market share, in comparison to AWS and Microsoft, appears to mitigate the level of scrutiny it faces. However, the CMA does acknowledge the impact of Microsoft’s licensing practices on Google’s cloud offering, with Google calling for a more open and competitive market environment.
SMS Investigation: Potential Outcomes for AWS and Microsoft
As the investigation moves forward, both AWS and Microsoft could face deeper scrutiny under SMS provisions. This could result in stricter regulatory oversight, which may include reporting requirements and additional conduct regulations. The ongoing investigation, which started in October 2023, is expected to conclude by August 4, 2025, and could reshape how major cloud service providers operate within the UK market.
FAQ Section
What is the UK’s CMA investigation into the cloud market?
The CMA is investigating whether major cloud service providers like AWS and Microsoft are engaging in practices that negatively affect competition, focusing on issues like pricing, market dominance, and barriers to entry for smaller providers.
Why are AWS and Microsoft being scrutinized by the CMA?
AWS and Microsoft dominate the cloud services market and have been found to generate returns above their cost of capital. The CMA’s concerns center on their market power, economies of scale, and practices that may hinder competition.
What are egress fees, and why are they a concern?
Egress fees are charges imposed by cloud providers when customers transfer data out of their service. The CMA suggests that these fees limit customers’ ability to switch providers or adopt a multi-cloud strategy, reducing competition in the market.
How do Microsoft’s software licensing practices affect competition?
The CMA has found that Microsoft’s software licensing prices are higher for customers using rival cloud services, such as AWS or Google Cloud. This pricing disparity is seen as an anti-competitive practice that harms competition.
What could happen if AWS and Microsoft are designated with SMS status?
If AWS and Microsoft are designated with “strategic market status” under the DMCCA, they could face further investigations and regulatory measures, such as conduct requirements and mandatory reporting.
