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Out-Law Analysis 2 min. read

Cloud customers should consider options following Ofcom report

Data centre

Cloud customers will want to consider their options following the recent publication by Ofcom of its interim report into the cloud infrastructure services market.

The 220-page report published in accordance with Ofcom’s market study powers under the Enterprise Act 2002 highlighted practices which the regulator considers potentially hinder and restrict competition; in particular a customer’s ability to switch provider and adopt a multi-cloud architecture. It is proposing to refer the market for an in-depth investigation by the Competition and Markets Authority (CMA).

Ofcom’s concerns focus on three practices:

  • data egress fees, which are fees which suppliers charge customers to transfer data out of the cloud to another provider and, in some cases, move services within their own cloud environment;
  • technical restrictions which hinder interoperability and portability; and
  • committed spend discounts to encourage customers to switch to the cloud initially and to continue to move further services to the cloud.

The report finds that these practices in combination are particularly influencing larger customers to concentrate all of their cloud infrastructure services in the hands of one cloud provider. Ofcom is also concerned that if the UK market continues on its current trajectory, competition, choice and barriers to entry for smaller suppliers will be further restricted.

Ofcom’s interim report does not consider in any detail the standard cloud terms and contracting practices which cloud suppliers use. The suppliers’ argument is that for utility, standardised and scalable products and services, customers need to sign up to their standard terms and accept their amended terms with little or no negotiation. Suppliers maintain this further reduces the costs of operation. However, given the strategic importance of these platforms to the UK government and business and some regulatory intervention in the financial services sector, these arguments are beginning to look unrealistic. The Ofcom report implicitly supports this position.

Having published the interim report on 5 April, Ofcom is entering a further consultation period to 17 May 2023 before publishing its final report on 5 October 2023. UK regulators will be braced for some robust dialogue over the coming months with Microsoft and AWS who between them hold between a 60% and 70% share of the market and whose practices Ofcom has particularly scrutinised. Interestingly, the report references collaboration with competition regulators in France, the Netherlands and Japan; and increasing US Federal Trade Commission interest.

Both Microsoft and AWS will point to the many customers who are delighted with the technology, the flexibility, the cost savings and security and resilience which their products offer – many customers trust the brand and both companies are highly regarded for the products and services they deliver. Microsoft and AWS will also point to their commitment to open competition and partnership with the cloud ecosystem. Some of the steps they are taking to maintain a competitive environment are mentioned in the report.

In a world where all businesses are suffering from substantially increased energy, production and operational costs, current and prospective cloud customers will be looking at the reports both strategically and tactically to understand the options and opportunities which the report provides for them, for their customers and consumers generally.

The first consideration should be whether to respond to the Ofcom interim report and consultation on the market investigation reference by the deadline of 17 May 2023, and whether this might help them achieve better deals and commercial terms, particularly around exit and service transition. There is a list of questions at the back of the report and simple directions on how to participate. If Ofcom confirms its interim findings in October 2023, customers are likely to have a further opportunity to consult as part of the CMA investigation.

Finally, the report sets out some of the CMA interventions which are potentially possible, and this also forms part of the further input which Ofcom is seeking from the market over the coming weeks.

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