Egress fees, technical issues and committed spend discounts by hyperscalers have been identified as the three major barriers to effective competition
Ofcom has until 5 October to wrap-up its review: On 10 May 2023, Ofcom hosted a webinar on its cloud market study, which sought to provide further detail on the regulator’s initial findings, as well as to hear feedback and field questions from interested parties. Lindsey Fussell (Group Director, Networks and Communications) opened the event, outlining cloud as a priority market for Ofcom, with these potentially transformative services acting as a “core, underpinning infrastructure” for many UK businesses, including those in the telecoms and media industries. In early April, at the midpoint of its review, Ofcom proposed to refer the cloud market to the CMA for further investigation – and it now has until 5 October to finalise that recommendation. The CMA would likely take up to 18 months undertaking a more detailed assessment of any market distortions. In its interim findings, Ofcom identified barriers to switching and multi-cloud, which reduce the bargaining power of customers, causing both ‘current harm’ and 'dynamic harm’ (the latter increases over time as the market matures).
The cost of data transfer is a major barrier to switching and multi-cloud: In coming to its provisional conclusions, Ofcom considered the potential problems that could stem from a range of issues, including skills lock-in, transparency, billing and Microsoft’s licensing practices. However, it has zoned in on three main features that may be limiting competition in cloud computing: egress fees; technical barriers; and committed spend discounts. Egress fees are charges customers pay for transferring data out of a cloud provider’s infrastructure. The incremental cost of data transfer is largely driven by the cost of data transit – something that has been falling over time; however, the ‘big three’ providers (AWS, Google and Microsoft) charge egress fees that are significantly above incremental cost and that are often higher than competitors on a £/GB basis. Ofcom therefore considers there may be scope to introduce a price cap or to remove egress fees completely. Despite concerns that this may have a ‘waterbed effect’ (whereby lowering egress fees could result in ingress fees rising), the regulator is currently unconvinced this is an inevitability as there are multiple ways cloud firms can recover data transfer costs.
Technical barriers and discounts may be hampering competition: Ofcom is also concerned about technical barriers to interoperability and portability. While public clouds exhibit a degree of technical differentiation (which may be good for innovation), the regulator has received submissions that hyperscalers – especially AWS and Microsoft – may be exacerbating said barriers by developing cloud services on open-source software and open standards with subtle differences that lower compatibility. Ofcom’s third major worry relates to committed spend discounts (CSDs) that are commonly used by hyperscalers, especially in negotiations with larger customers. Discounts can benefit competition and customers – and can also allow cloud providers to forecast future capacity, which supports investment planning. Nevertheless, CSDs can also encourage large customers to use a single hyperscaler (i.e. to go ‘single-source’), limiting the ability of smaller providers to compete for new workloads and gain scale even if their offering is superior. For Ofcom, this is a clear case of dynamic harm, which only helps to make the market more concentrated.
