UK watchdog will not push Microsoft or AWS to shed assets

The Competition and Markets Authority (CMA) on Thursday published the latest update to its ongoing investigation into the supply of public cloud infrastructure services in the UK, launched at the back end of last year on the recommendation of Ofcom. Included in the update is a document in which the watchdog outlines potential market remedies that could help level the playing field should it be required – spoiler alert: it's looking likely – but structural and operational separation remedies appear to be off the table.

These could have included the divestment of assets, such as requiring a provider to divest its entire cloud operations or parts thereof; the IaaS or PaaS elements of a business, for example, or a part of both, the upshot being to encourage a new full stack provider into the market. Operational separation, or the requirement for a company to operate certain business units completely independent from others, was also mulled but essentially discarded. In both cases, the CMA identified disadvantages that seem to have outweighed the benefits.

"Given that we have identified alternative potential remedies...we are not currently minded to prioritise further consideration of structural or operational separation remedies," the CMA wrote, in its report.

The alternatives it could lean on, should the need arise, are what it terms behavioural remedies. There's not a lot to go on at this stage; the CMA says it expects its opinion on remedies to evolve alongside its understanding of the market. But these remedies would likely be focused on lowering barriers to switching provider and/or to the use of a multi-cloud approach, which is unsurprising, given that this was a key area of concern when the investigation began.

The watchdog is also looking at various ways to increase standardisation and improve the interoperability of cloud services as part of any remedy package, as a way of addressing technical barriers to competition. And it is also mulling price control and transparency remedies to deal with the anti-competitive effect of high egress fees levied by the hyperscalers. Customers pay egress fees to move their data out of a cloud, hence steep rates are a barrier to the use of multiple clouds and to switching provider.

All of the above depends on the outcome of the investigation, which is currently set to run until April next year. The CMA will only impose remedies on the hyperscalers if it finds evidence of an adverse effect on competition (AEC) in its probe.

Early indications suggest that it will.

Last month the CMA published another handful of documents linked to the investigation, one of which was a competitive landscape working paper. And it made it very clear why the CMA is looking at AWS and Microsoft in particular.

"The overall cloud services sector is concentrated, and concentration is increasing over time. Google is much smaller than AWS or Microsoft and growing at a slower rate. The combined shares of all other smaller cloud providers and ISVs [independent software vendors] are also, in aggregate, falling year on year," the CMA wrote.

AWS is the largest provider in the IaaS and PaaS markets combined, with a 30%-40% share as of 2022 – the data the CMA is using – which is stable compared with three years earlier. Microsoft comes in second also with a 30%-40% share, but in its case the figure has grown by around 10 percentage points. Google comes in third at 5%-10%, while IBM and Oracle each claim up to 5%.

"The analysis also shows that concentration in IaaS and PaaS is increasing, with the combined share of AWS and Microsoft increasing over time from [60-70]% in 2019 to [70-80]% in 2022," the CMA said. "Conversely, the combined share of the other smaller cloud providers and ISVs has fallen from [20-30]% in 2020 to [10-20]% in 2022, which is further evidence that the markets are concentrating."

The regulator also looked at margins and return on investment – AWS and Microsoft are again performing at a much higher level than their rivals – and myriad other data points in its report; it can be downloaded here.

"Many large customers do not see any suitable alternatives to AWS and Microsoft as their main cloud provider. They do not perceive other smaller providers to have comparable offerings to AWS and Microsoft, albeit Google is perceived as being closer than Oracle and IBM and other smaller providers," the CMA said.

"Based on the evidence we have seen to date, our emerging view is that there are indicators of significant market power being held by the largest two providers, AWS and Microsoft," it said. Aside from their high market shares while collectively the other providers are losing ground, the regulator points to significant barriers to entry for potential rivals, including high capex and economies of scale. "Whilst assessing current market outcomes is complex given the current stage of market development, our profitability assessment indicates that AWS and Microsoft have both been generating returns above their cost of capital," it said.

It's pretty clear who is calling the shots in this market. It's hard to see the CMA investigation concluding with anything other than a recommendation for competition remedies, but it has the best part of a year left to keep digging.