5 October 2023

Time for regulators to end Amazon and Microsoft’s party in the Cloud

By Nicky Stewart

This week could be one of the most important moments for the UK Cloud infrastructure market to date, as Ofcom has asked the Competition and Markets Authority to investigate supposedly unfair practices in the market. While the Cloud might not attract the vibrant and wild science fiction comparisons and the accompanying calls for urgent regulatory action often ascribed to Artificial Intelligence, its marketplace has the potential to generate just as much money and economic growth in the years to come, if not more. The next few days could be the moment when we start to take greater notice of that.

For the uninitiated, Cloud computing is the on-demand delivery of computer services, such as servers, storage and analytics, over the internet, as opposed to using local servers or a personal computer.

Having so far escaped the focus of the regulators, this ballooning market has become an exclusive party in the clouds for two giant companies, Microsoft and Amazon, not just in Britain but worldwide. For them, this could be the week that the music stops and they fall back down to earth.

When it comes to Microsoft, there’s ample evidence to show that it has achieved its market dominance through some unreasonable and unfair tactics. This was the conclusion reached by Ofcom in the interim findings of its Cloud Market Study, published in May. Among its 220 pages was a whole chapter detailing the ways in which Microsoft’s software licensing practices act to both lock-in customers, while crowding out smaller players in the market.

If it made for bleak reading for some, for others, including smaller Cloud providers, it served as a vindication for years of suffering in silence at the hands of two of the biggest tech behemoths. Many of them have become trapped in hyperscale ecosystems, forced to re-sell hyperscale products in order to stay in business, all the while losing what meagre market share they’d fought so hard to hold on to.

We take Cloud for granted, just like any other commodity. Water, electricity and gas are part of our Critical National Infrastructure and, as such, they are regulated. We need our commodities to work for us, we expect the commodities’ markets to be fair, and we expect consumer choice.

Cloud isn’t like other commodities. Despite being fundamental to the UK’s digital infrastructure, it still isn’t regulated. We rely on the Cloud as much as we rely on being able to heat our homes, see our way in the dark, or switch commodity providers if we don’t like the price or the service.

We know too well these days what dysfunctional utility markets look like. For example, the invasion of Ukraine threw the extent of Europe’s dependency on Russian energy resources into stark focus, and similarly, few people now believe that our water companies, nor the market they operate in, are working properly for customers. Both are a reminder of what can happen in unhealthy markets. Ofcom’s interim report suggests that the UK Cloud computing market is unhealthy. Others might argue that it’s completely broken.

Ofcom has already rightly identified Microsoft’s software licensing practices as one of the most critical problems. It artificially inflates the prices of competitors’ Cloud services by hiking the costs of its software on other providers’ platforms. As Microsoft software is ubiquitous, this has a huge impact on the market, creating the monoculture conditions that regulators normally want to address.

Microsoft is acting as both provider and gatekeeper. This harms the competition, large and small, through higher costs and punitive restrictions on how its competitors can do business in the Cloud. It harms us as consumers and taxpayers, and it harms the UK by perpetuating a risky coalescence on too few providers. It undermines the resilience of our digital infrastructure. It’s up there with data egress fees, technical and commercial lock-ins as another distortion that straightjackets thousands of businesses across Britain.

Ofcom now has shown that it understands the breadth and gravity of these issues, and has begun to put things right. It is now for the Competition and Markets Authority to be bold, show leadership and not feel cowed by its bruising exchanges with Microsoft over Activision Blizzard. It’s time to finish the job properly and do the right thing for British computing.

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Nicky Stewart is the former head of ICT Strategy Delivery at the Cabinet Office

Columns are the author's own opinion and do not necessarily reflect the views of CapX.