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Sophie  Lawrance

Partner, Bristows

Quotation Marks
“The market study will form part of a broader programme of work seeking to ensure digital communications markets work well for people and businesses…”

Cloud services in the competition law spotlight

Cloud services in the competition law spotlight


Sophie Lawrance, Edwin Bond and Alex Mocanu assess the potential implications Ofcom's ongoing market study into cloud services

On 6 October 2022, the UK’s communications regulator Ofcom launched a market study into cloud services, using its powers under the Enterprise Act 2002.

The study has invited initial views from stakeholders, including cloud providers, independent software vendors and suppliers of professional services, on their experiences of the market and “any concerns they have about cloud services either now or for the future”. Working closely with the Competition and Markets Authority (CMA), Ofcom plans to consult on its interim findings and publish a final report, setting out any concerns or recommendations, within twelve months. This is the first time in a decade Ofcom has made use of its market study powers.

The market study will form part of a broader programme of work which seeks to ensure digital communications markets work well for people and businesses in the UK. Unveiling its new programme, Ofcom stated the functioning of digital markets will be “increasingly important to the outcomes consumers experience across the sectors we regulate. We need to be looking as much at how companies are using digital infrastructure and services as we do the cables, masts and satellites that we have focused on in the past”.

Cloud services market study

Cloud computing is a large and fast-growing sector, with some analysts predicting 45 per cent of businesses’ IT spending will be on public cloud services by 2026. Ofcom notes the cloud has also become “an essential part of how products are delivered to telecoms users, as well as viewers and listeners of TV, radio and audio content”.

The market study will assess the strength of competition in cloud services, focusing on the market position of the three largest providers: Amazon Web Services, Microsoft and Google. Referring to these firms as “hyperscalers,” Ofcom notes they collectively generate around 80 per cent of revenues in the UK public cloud infrastructure services market.

Ofcom will examine whether features of the cloud services market could limit competition and harm consumers through higher prices, lower-quality products or reduced innovation. It will consider two main themes:

·        Cloud infrastructure services, which include services that provide access to raw computing resources, i.e. basic compute, storage and networking (sometimes referred to as infrastructure as a service, or IaaS), as well as services used to develop, test and run applications in the cloud (platform as a service, or PaaS). Ofcom notes these are the “foundational elements of the cloud stack” on which other cloud services are built, and where there is currently the greatest concentration of supply. In particular, Ofcom will explore how the hyperscalers compete with independent software vendors (ISVs) that provide PaaS, given the dual role of hyperscalers as both suppliers and competitors of ISVs.

·        Cloud ecosystems, which Ofcom defines as the portfolios of services that hyperscalers and some other vertically integrated cloud providers supply across the cloud value chain (i.e. also including software as a service, or SaaS). These include cloud marketplaces, which offer access not just to the marketplace owners’ services but to those of other cloud providers. Ofcom will also examine how the cloud businesses of the main suppliers fit into their wider business strategies – for example, how easy is it for the major players to take advantage of their well-established position in digital markets to promote their own expansion in cloud?

Given the cloud sector is still evolving, Ofcom says it will examine how the market is currently working and its potential future developments, aiming to “identify any potential competition concerns early to prevent them becoming embedded as the market matures”.

If the regulator concludes the market is not working well, it could take various steps, including making recommendations to government for statutory reform; taking competition enforcement action; making a market investigation reference to the CMA (under which the CMA would have wide-ranging powers to impose remedies, including forcing break-up of businesses); and accepting undertakings (for example from one or more of the hyperscalers) in lieu of making a market investigation reference.

Communication and audiovisual

Over the next year, Ofcom will also start a broader programme of work examining other digital markets, including:

·        Online personal communication services. The communications regulator will consider how services such as WhatsApp, FaceTime and Zoom are affecting the role of traditional calling and messaging; how competition and innovation in these markets may evolve in the future; and any features of these markets, such as network effects and limited interoperability, that may give rise to potential concerns.

·        Devices for accessing audiovisual content. Ofcom is interested in what it calls ‘audiovisual gateways’, namely connected TVs, smart speakers and the supporting digital assistants and operating systems through which users access traditional TV and radio, as well as online content. The regulator will examine the nature and intensity of competition among such gateways, paying particular attention to the role of major players and their bargaining power with content providers. The reference to ‘gateways’ echoes the EU focus on ‘gatekeepers’ in the Digital Markets Act: Ofcom will no doubt be seeking to spot the risks of one player acquiring gatekeeper status (or ‘strategic market status’ under the UK’s Digital Markets Unit regime) in relation to the audiovisual devices it is scrutinising.

Multi-jurisdictional scrutiny

Ofcom’s new programme of work and the cloud services market study in particular is yet another example of attempts by regulators to grapple with the competition implications of ‘Big Tech’, at a point in time when the UK Digital Markets Unit is still waiting for its statutory powers. In a paper published on 22 September, Ofcom echoed concerns that have been voiced – at least in some quarters – for some time:

“The evolution of business models that deliver [digital communications services] has led to some platforms becoming essential trading partners for businesses to reach consumers. It has also resulted in the presence of strong, vertically-integrated global firms that control many of these platforms. Few digital communications and broadcasting services are delivered to end-customers without the involvement of a multinational tech company, whether in the development, distribution, or through the device in the consumer’s hand. […] In some cases the strength of these firms means others cannot compete fairly, risking holding back innovation, investment and growth, and harming the people and businesses that rely on these services.”

The cloud services market study is perhaps somewhat unusual in that there are many large players operating in this space, as Ofcom’s Call for Inputs makes clear.

Nevertheless, Ofcom is not the only regulator examining competition issues in the cloud services sector. In January 2022, the French Competition Authority, the Autorité de la concurrence, opened a public inquiry into the competitive functioning of the cloud sector; and just a month later the Korea Fair Trade Commission announced plans to carry out a similar review. On 5 September 2022, the Netherlands Authority for Consumers and Markets (ACM) published a market study highlighting the difficulties users face in switching cloud providers and combining services offered by different providers. As well as proposing changes to the forthcoming EU Data Act to make interoperability easier, the ACM plans to investigate the extent to which switching barriers cause competition problems in practice, and whether such problems can be addressed under the existing competition law framework.

Meanwhile, German software company Nextcloud has filed a complaint with the European Commission alleging Microsoft is illegally bundling its OneDrive cloud storage offering with its Windows operating system. French cloud provider OVHcloud has also filed a complaint against Microsoft with the Commission, alleging the US-based company has abused its dominant position in the cloud services market through its licensing practices. While public details are scarce, it is understood the commission is looking into issues such as whether Microsoft is making it more challenging or costly for smaller cloud companies to run programmes like Windows and Office on rival clouds.

The cloud services sector therefore seems set to remain in the competition law spotlight for some time to come.

Sophie Lawrance is a partner, Edwin Bond is a senior associate and Alex Mocanu is a trainee at Bristows LLP