How UK cloud contract negotiations could be influenced by the CMA’s investigation

Earlier this month, the Competition and Markets Authority (CMA) opened an in-depth market investigation to determine whether competition is working well in the UK public cloud infrastructure services market following a separate study of the market and subsequent referral of it to the CMA by sister regulator Ofcom.

The CMA has subsequently issued a statement to inform evidence-gathering during the initial phase of its investigation (14-page / 236KB PDF). In the process, it has detailed the issues it envisages will be relevant to its probe – some of which relate to cloud contracting.

What the CMA will look at in its investigation

The CMA has set out four theories of harm that it will explore:

• technical barriers make switching and a multi-cloud strategy harder to pursue and limit competition between cloud service providers, beyond the initial move into the cloud;
• so-called ‘egress fees’ connected with the transferring of data outside of a cloud provider’s infrastructure harms competition by creating barriers to switching and multi-cloud leading to cloud service providers entrenching their position in the market;
• discounts offered by some cloud providers which are conditional on customers committing to a certain level of spend with them – so-called ‘committed spend discounts’ – raise barriers to entry and expansion for smaller cloud service providers by incentivising customers to concentrate their business with one provider;
• software licensing practices by cloud service providers restrict customer choice and prevent effective competition.

The CMA said it will further undertake analysis of cloud service providers’ profitability in order to assess whether prices of cloud services may be above those that would be found in a competitive market.

Potential remedies

If, following the conclusion of its market investigation, the CMA finds that practices in the cloud infrastructure services market have an adverse effect on competition, there are a range of options open to it to address that position. Some potential remedies are set out in its issues statement.

Among other things, it said it could require cloud providers to:

• make their services easier to interoperate with other third-party cloud services;
• increase the degree of standardisation;
• be more transparent about the interoperability of their cloud services;
• increase interconnectivity, for example, by connecting their data centres to other cloud providers’ data centres;
• provide improved training to their customers’ technical staff.

Those measures could, it said, be implemented to address any “technical barriers” to interoperability and portability, which Ofcom considered present a barrier to multi-cloud use and switching.

More specific measures were also trailed by the CMA as options for addressing any concerns it finds with egress fees, committed spend discounting, and software licensing practices. They include:

• caps or other price controls could also be placed on egress fees, potentially preventing cloud providers charging them at all;
• general or specific bans being imposed in respect of the use of discount structures;
• a ban on the bundling of cloud services in with a package offer that also includes other software;
• new rights for cloud customers to port existing software licences to any cloud provider, without incurring any additional charges or fees.

The CMA also cited “crosscutting remedies” it said it could seek to impose in the market. These would be less targeted than the other potential remedies and could include:

• requiring cloud providers to divest assets;
• imposing price caps or service level agreements;
• better price transparency and pricing disaggregation to allow customers to understand what element of a larger bundle of services, relates to the cloud services;
• requiring cloud providers to open up access to their infrastructure to share the benefits from economies of scale.

The CMA also has the power to make recommendations to the government or other regulators if it sees that concerns it has identified cannot be remedied without their additional intervention, and it further alluded to the potential to call upon new powers it will obtain should the proposed new Digital Markets, Competition and Consumers Bill become law.

What this all means for cloud contracting

The CMA’s issues statement is based on the evidence gathered by Ofcom. It does not, to use the CMA’s own words, reflect the authority’s emerging or provisional views. However, it is possible for stakeholders in the UK’s cloud infrastructure service market to glean from the theories of harm the CMA is working to, and the potential remedies it has set out, a sense of what might emerge from the investigation and consider how that could impact on their negotiation of cloud contracts.

Should the CMA’s theories of harm be borne out by the evidence, cloud customers could, for example, find their hand is strengthened in negotiating stronger contractual rights to transfer data to other cloud providers at lower cost, or in avoiding having to commit to significant expenditure to benefit from discount prices.

Currently, there is a disparity in the respective bargaining positions of Microsoft and AWS – the dominant providers in the UK cloud infrastructure services market currently – and even large businesses that are its customers. Ofcom received comments to this effect during its market study.

In its final report, Ofcom noted that “…some customers told us that there is often very little room for negotiation with the hyperscalers, if at all.  [X] suggested that even large companies like itself do not have a strong negotiating position (e.g. over contract terms and price increases) because of their increasing dependence on single cloud providers… And while [X] has some specific agreements in place, these are not bespoke, and when it attempted to amend terms beyond the specific agreement terms available, such approaches have been resisted or rejected out of hand.”

From a cloud customer’s perspective, the CMA’s investigation is particularly timely given the growing importance of artificial intelligence (AI) systems. Being able to access data and move between different software systems in the cloud is an imperative as businesses explore the myriad of opportunities presented by generative AI. It is among the reasons why cloud customers should engage with the CMA’s issues statement and take the opportunity to input where it considers their experiences in the market would help inform the authority’s understanding of market practices.

For cloud providers, engagement with the CMA’s market investigation will also be important. The CMA has acknowledged, for example, that it will not force through remedies that are impractical or disproportionate to implement, so it is in cloud providers’ interest to articulate to the CMA where they envisage such issues arising.

However, while the CMA’s market investigation is at an early stage and its findings are not anticipated until 2025, it seems likely, on the strength and comprehensive nature of the evidence Ofcom has uncovered, that changes to the cloud infrastructure services market will follow and that a recalibration of the respective bargaining power of cloud providers and their customers could result.