Clouds gathering for the 'hypescalers'? Ofcom launches first market study in a decade into cloud services

The UK’s telecoms regulator, Ofcom, has announced that it will launch a Market Study to examine the position of Amazon, Microsoft and Google in offering public cloud services, and whether competition is operating well. The Market Study is just one part of Ofcom’s new programme of work to ensure that UK digital communications markets are working well for UK businesses and consumers. 

Ofcom's broad and bold programme of work, which will cover digital content gateways and personal communications services like WhatsApp and Zoom, sees it lining up alongside the CMA to closely scrutinise the digital sector. 

The cloud infrastructure services market

It is no surprise that cloud services are receiving attention – the CMA’s Digital Taskforce recommended in late 2020 that cloud computing should be one of the key focus areas for the new regulatory regime it proposed for the UK, which was intended to regulate businesses with “Strategic Market Status”. Big Tech are the big names in cloud services: Amazon (with Amazon Web Services), Microsoft (with Azure) and Google (with Google Cloud Platform) generate c.81% of revenues in the cloud infrastructure market which Occom estimates to be worth £15 billion. 

The Market Study will examine what factors have led to Big Tech gaining and maintaining such a leading position. Ofcom will no doubt already have theories for market concentration, but on top the economies of scale available to the “hyperscalers”, they might be interested in whether the technical knowledge and skills necessary to use these cloud services are easily transferrable between providers, particularly smaller players, and/or the practical challenges in switching providers. Customer distrust of smaller players due to solvency and security concerns could also factor - the old tech adage being "nobody ever got fired for buying IBM".

If Ofcom finds that competition in cloud services is not working well, there could be real consequences. This could include Ofcom extracting binding commitments from Amazon, Microsoft and/or Google, making recommendations to government for statutory reform, or a market investigation reference to the CMA, under which the CMA would have incredibly broad ranging powers to impose remedies including forcing break up of businesses. Given that Ofcom appears to be concerned about market entry, measures they could consider include limiting any exclusivity arrangements used by the "hyperscalers" or requiring interoperability with new players. 

The broader regulatory storm and cooperation between regulators 

Cloud services are already under scrutiny at the European Commission, which is reviewing a complaint against Microsoft, and there are also live procedures relating to cloud markets in France, the Netherlands and Korea. There are express competition remedies on cloud switching in the EU Data Act (read more) and to a lesser extent the DMA to the extent cloud providers constitute "gatekeepers". 

Back in the UK, despite the Digital Markets Unit officially opening its doors last April, it still has no statutory powers. The legislation that would give it powers was delayed by the Johnson government and it is yet to be seen whether and if so when the Truss government will prioritise it. In the wake of this delay we’ve already seen a very aggressive approach from the CMA, which has opened six investigations into Big Tech since its now former CEO said he was no longer willing to wait for new powers last February. 

The fact this Market Study is sitting with Ofcom and not the CMA reflects enhanced cooperation amongst the UK’s regulatory authorities through the Digital Regulation Cooperation Forum (which includes the CMA, ICO, Ofcom and the FCA). Although Ofcom has been one of the most active of the sector regulators in using its concurrent competition powers, it has mainly used them to bring enforcement cases. Its power to open Market Studies has been used much more sparingly – this is the first time in a decade. The CMA is expected to provide active support to Ofcom in its new programme of work.

Ofcom's announcement is further confirmation that the regulators making up the DRCF intend to use their existing powers to the fullest extent possible. This is no doubt intended as stopgap, but with the new UK government thought to be anti-regulation, it remains to be seen whether initiatives like those announced by Ofcom last week, coordinated through the DRCF, could prove to be the endgame.