The domination of the UK cloud services market by Microsoft and Amazon has stifled competition and inflated prices, Britain’s Competition and Markets Authority (CMA) watchdog has concluded in a long-awaited judgement.
According to the CMA, in a £10.5 billion ($14 billion) UK market, the two companies now control an estimated 30%-40% of the UK Infrastructure-as-a-Service (IaaS) sector, with the equivalent shares for Platform-as-a-Service (PaaS) being 20%-30% for Microsoft and 10%-20% for Amazon.
With the exception of Google, which enjoys a slowly growing market share of around 5%-10% in both sectors, cloud services rivals such as Oracle and IBM barely registered.
Although the CMA admitted that customers had said that the sector provided “both quality and innovation to them, as well as advantages over on-premises IT,” the CMA was unimpressed.
“We consider that a more competitive market would show better market outcomes, including more consistently competitive prices, as well as further improvements in quality and innovation,” the CMA said in its final Cloud Services Market Investigation judgement.
Microsoft singled out
Microsoft in particular was heavily criticized by the CMA, which accused it of inflating prices to make its office software less appealing when run on rival cloud platforms. It also used restrictive licensing to make some products unavailable to customers on other platforms, while stopping them from taking their existing Microsoft licenses to AWS or Google.
“Microsoft’s licensing practices are adversely impacting the competitiveness of AWS and Google in the supply of cloud services, particularly in competing for customers that purchase cloud services which use the relevant Microsoft software as an input,” said the CMA.
Such market power in the hands of Microsoft amounted to vendor lock and a barrier to entry for new rivals, termed “adverse effects on competition (AECs)” in CMA jargon.
“These licensing practices are a feature that, in combination with the other features we have identified, including Microsoft’s large and increasing market share in these markets, further restricts the already limited choice and attractiveness of alternative products and suppliers,” said the CMA.
AI Monopoly
The CMA also pointed out a structural problem with the development of cloud services in the UK and beyond, best summed up as first mover advantage.
Microsoft cornered the OS market in the 1990s through Windows, using this to promote its domination of office applications. A US Department of Justice investigation concluded as much in the early 2000s, mulling over and then rejecting the idea of breaking Microsoft up.
The internet could have challenged this dominance, except that the company was able to plot a cloud path for its application monopoly by migrating its Active Directory platform to the cloud in the form of Azure/Entra ID.
The CMA said that challenging Microsoft and other large cloud providers was never going to be easy, given the large technical investments needed. In effect, this meant that Microsoft and a handful of others were able to use the profits from the on-premises era to finance what succeeded it. It now appears that AI will only reinforce the current dominance, again due to the high amount of investment needed, as well as current providers’ vertical integration, said the CMA.
“These capabilities are likely to become more important to customers over time and so AI could impact competition in cloud services to a greater degree in the future,” it observed.
Unclear recommendations
The CMA recommends invoking the UK’s Digital Markets, Competition and Consumers Act (DMCCA) to designate Microsoft and Amazon with “strategic market status (SMS).” This gives the CMA power to force the companies to agree to new rules governing commercial behavior, provide additional transparency, and to improve licensing and data interoperability between providers.
However, specific actions remain unclear. The CMA said it planned to keep the companies under scrutiny, presumably to see whether their market behavior changes. “While we recognise that there is some uncertainty around the implementation of our recommendations, we believe they are the only effective remedy capable of comprehensively addressing the AECs we have found in this investigation,” it said.
Little of the above will come as a surprise to Microsoft or its rivals, who were forewarned that the CMA was likely to take a dim view of their activities by a preliminary report published in January. In 2023, UK communications regulator Ofcom expressed similar concerns.
A Microsoft spokesperson responded to a request for comment about the ruling in an email, saying, “The CMA Panel’s most recent publication misses the mark again, ignoring that the cloud market has never been so dynamic and competitive, with record investment, and rapid, AI-driven changes. Its recommendations fail to cover Google, one of the fastest-growing cloud market participants. Microsoft looks forward to working with the Digital Markets Unit toward an outcome that more accurately reflects the current competition in cloud that benefits UK customers.”
Meanwhile, the Coalition for Fair Software Licensing was supportive of the CMA judgment, while pointing out that action was needed sooner rather than later.
It said in an emailed statement, “we applaud the CMA for its decision to take action against Microsoft’s restrictive licensing practices, but believe more needs to be done to protect customers. We urge the CMA to use the powers at its disposal now to address these harms, rather than embark upon a new investigation that may not give customers relief for years to come. If history is any indicator, Microsoft will offer a few empty concessions to delay accountability but continue to restrict customer choice in the cloud and in security and AI.”
Source:: Network World