On 5 October 2023, Ofcom confirmed its initial concerns that the public cloud infrastructure market may have features that restrict competition and lead to poorer outcomes for UK customers. In this briefing we set out what businesses need to know, what will happen next in the procedure and how businesses can get involved in the CMA's in-depth investigation if they have a stake in shaping the debate and its outcomes.
Public cloud infrastructure market referral to the competition and markets authority for in-depth investigation - What you need to know and do
Over recent years, the use of cloud computing has become an essential part of how companies do business and services are delivered to customers. In October 2022, Ofcom opened a market study into the supply of cloud services in the UK.
On 5 October 2023, Ofcom officially referred the market study to the CMA for in-depth investigation, and the CMA has begun its work. As we predicted in our June Technol-AG publication, this decision broadly confirms Ofcom's April interim findings.
Ofcom has concluded that the public cloud infrastructure market is highly concentrated, with the two leading providers enjoying a combined market share between 70 and 80% in 2022.
While competition for new customers is relatively healthy, Ofcom has found evidence of limited competition in relation to existing customers, with significant price increases on contract renewal and high levels of profitability for the market leaders.
Against this background, Ofcom is concerned about three types of business practices:
- high charges applied when customers want to transfer data out and change platforms ("egress fees");
- technical restrictions which limit interoperability and portability; and
- committed spend discounts offered to retain/ tie in larger customers.
According to Ofcom, these practices discourage customers from switching between cloud services providers and from splitting their cloud services needs across more than one provider ("multi-clouding"). In turn this could reduce the competitive pressure felt by the main market operators and lead to negative outcomes for customers – e.g. higher prices, less innovation, fewer opportunities for competitors to enter and gain scale on the market.
Ofcom's referral to the CMA reflects both the seriousness of its concerns and the importance of cloud computing to UK businesses and consumers. Consultation responses published on Ofcom's website indicate that a majority of respondents supported Ofcom's provisional findings, including a number of smaller cloud services providers. The CMA now has the opportunity over the next 18 months to examine the characteristics of the market more closely and determine how well it is working without regulatory intervention and whether any remedies should be imposed.
Ofcom's – and now the CMA's – interest in cloud computing services is in line with UK regulators' ongoing focus on digital markets and the UK economy's resilience (see for example, our publication highlighting common trends in UK regulators' latest annual plans).
Given the introduction of the Digital Markets, Competition and Consumers Bill in Parliament, which occurred after Ofcom published its interim findings, one might have expected the CMA to attempt to rely on its future regulatory powers in digital markets as an alternative to the market investigation route (see our publication on what you need to know and do in relation to the Bill). This option was raised in response to Ofcom's consultation. However, given timings and the likelihood that the CMA's first designations of digital gatekeepers are estimated for mid to late 2025 at the earliest, a market investigation referral using current powers is understandable. The CMA might rely on its digital market powers in future to complement its action in this sphere.
The CMA may ultimately impose a broad range of remedies to facilitate customer switching and healthier competition between providers. These may include:
- requiring exit/ egress fees to reflect the cloud services provider's actual costs of transferring data to another provider;
- introducing measures to improve the interoperability of different cloud services; and
- prohibiting loyalty-inducing fee structures such as committed spend discounts.
There are several ways in which various types of stakeholders can get involved in an in-depth market investigation – this broadly depends on the risk and opportunities which the market investigation raises for the business and the extent to which the business wishes to shape the debate and outcomes.
From an engagement perspective, early action is key: providing input at the early stages (ideally in the first 3 months of the investigation) will maximise a stakeholder's chances of shaping the debate:
- Month 1 – initial fact finding and framing of the investigation: the CMA will typically issue initial information requests and welcome initial submissions from stakeholders;
- Month 2 – Issues Statement: this paper will outline the CMA's initial hypotheses on what might be affecting competition in the relevant market and potential remedies. Stakeholders are invited to comment on this CMA "direction of travel";
- Month 3 – Site visits and hearings – this is a key opportunity for parties to the investigation to show CMA decision-makers concrete evidence in support of their positions;
- Months 2 to 11 – Further opportunities to shape the debate: e.g. participation in roundtable events, legal adviser access to disclosure rooms, and provision of comments on working papers;
- Months 12 to 18 – Provisional Decision Report, consultation and responses ahead of Final Report: at these later stages, the narrative will be broadly established and opportunities to change the CMA's views are arguably more limited.
Read Ofcom's final report
Partner, Head of Competition, Co-Head of Retail & Consumer Sector
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