IP Law Daily, TECHOLOGY/INTERNET NEWS: CMA inquiry group urges consideration of SMS status for AWS and Microsoft’s cloud service activities, (Jan 29, 2025)

By Peter Reap, J.D., LL.M.

The inquiry group found high levels of market concentration and barriers to entry and expansion allowed them to hold significant unilateral market power in these markets.

The UK’s Competition and Markets Authority’s (CMA) announced the results of an independent inquiry group’s provisional findings after an in-depth assessment into cloud services. The group recommends that the CMA use its new digital markets powers to prioritize commencing strategic market status (SMS) investigations to consider designating the two largest cloud service providers, Amazon Web Services (AWS) and Microsoft, with strategic market status (SMS) in relation to their respective digital activities in cloud services. The group provisionally found that competition in the cloud services market is not working as well as it could be, which is likely to be leading to higher costs, less choice, less innovation and lower quality of service for businesses and organizations across the UK economy.

CMA’s new competition regime. In early January 2025, the CMA announced its initial plans for a new competition regime regarding digital markets beginning in 2025. The Digital Markets, Competition and Consumers Act (DMCC), which received Royal Assent in May 2024, imposes new responsibilities on the CMA. The key feature of the scheme is the CMA's designating very large entities as having Strategic Market Status (SMS) regarding a particular digital activity. A separate guidance document published by the CMA sets out in detail how the new regime enables the CMA to promote competition in fast-moving digital markets, while protecting UK consumers and businesses from unfair or harmful practices by the very largest technology firms.

Cloud services markets. Cloud services allow customers to have remote access to technology resources, on demand over a network. Cloud services are a vital input to businesses and organizations across the UK economy, with £9 billion spent on them in 2023. This spend has been growing by over 30% a year. Cloud services underpin UK businesses and organizations’ main activities: for example, they enable banking technology, track courier deliveries and help retailers manage their stock.

The group defined cloud services as infrastructure as a service (IaaS) and platform as a service (PaaS). IaaS includes services such as compute, networking and storage. PaaS includes platforms based on this infrastructure which enable customers to develop and run applications in the cloud. The purpose of the group’s investigation was to decide whether any feature or combination of features of the cloud services markets in the UK prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the UK or a part of the UK (an “adverse effect on competition” or AEC).

Provisional findings. A summary of the inquiry group’s provisional decision detailed the findings that cloud services markets in the UK are highly concentrated and each of the two largest providers, AWS and Microsoft, has a high share of supply, particularly in IaaS where they had shares of [40-50]% and [30-40]% respectively in 2023. The third largest provider, Google, has much lower share of supply in UK cloud services markets, and there are also other, smaller providers.

AWS and Microsoft have been generating sustained returns from their cloud services substantially above their cost of capital in cloud services for a number of years. There are significant barriers to entry and expansion in cloud services, particularly in IaaS as this requires significant capital investment in fixed assets such as data centers, networks and servers and components which become largely a sunk cost. There are also economies of scale, whereby larger cloud providers have lower ongoing costs. The broad product portfolios of AWS, Microsoft and Google in both IaaS and PaaS are also likely to contribute to barriers to entry and expansion.

The group investigated whether Microsoft's software licensing practices may partially foreclose its rivals in cloud services. It provisionally found that Microsoft has the ability and incentive to partially foreclose AWS and Google using the relevant Microsoft software products and that its conduct is harming competition in cloud services.

Provisional decision on competition. The group provisionally found high levels of market concentration and barriers to entry and expansion have enabled each of the two largest providers, AWS and Microsoft, to hold significant unilateral market power in these markets. This harms competition in cloud services in the UK because it is harder for alternative cloud suppliers to enter and grow in these markets and customers face a limited choice of suppliers. This harm is exacerbated by the features we have found arising from technical and commercial barriers. Also, there are technical barriers and commercial barriers in the form of egress fees to switching and multi-cloud that harm competition in cloud services in the UK by locking customers into their initial choice of provider which may not reflect their evolving needs and limiting their ability to exercise choice of cloud provider. Finally, Microsoft’s licensing practices are partially foreclosing AWS and Google which is having an impact on their competitive positions, and this harms competition in cloud services in the UK.

Provisional recommendation. The CMA Board should use its new digital markets powers to prioritize commencing SMS investigations to consider designating the two largest providers AWS and Microsoft with SMS in relation to their respective digital activities in cloud services, the group recommended. These powers have been specifically designed to be effective in digital markets, in recognition of the fact that some digital markets share a combination of characteristics that can cause them to tip in favor of one, or a few firms. The new regime will allow the CMA, if it designates one or both of AWS and Microsoft with SMS, to take a targeted and iterative approach to address these concerns.

Next steps. The group is now consulting on these provisional findings and will consider further evidence and submissions received before reaching their final decisions by the statutory deadline of August 4, 2025.

Companies: Amazon Web Services, Inc.; Microsoft Corp.; Google LLC

News: TechnologyInternet