Microsoft, Amazon face cloud competition probe as UK regulator raises alarm
Ofcom said it received evidence showing Microsoft makes it less attractive for customers to run its Office productivity apps on cloud infrastructure other than Microsoft Azure.
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Microsoft and Amazon were accused by U.K. regulators Wednesday of unfairly restricting competition in the cloud services market, in a significant development that could ultimately lead to an antitrust investigation into their business practices.
Ofcom, the British media watchdog, published the initial findings of a market study examining the massive cloud services market. Ofcom opened a review into the sector in September, seeking to find whether firms offering public cloud infrastructure pose any barriers to competition.
“Our provisional view is that competition is being limited by market features that make it more difficult for customers to switch and use multiple suppliers (known as ‘multi-cloud’),” Ofcom said. Those market features include:
- “Egress fees” cloud vendors charge companies to transfer data out of a cloud — Ofcom said so-called “hyperscalers” like Microsoft and Amazon set their egress fees “significantly higher” than most other providers.
- Technical restrictions on “interoperability” from leading cloud firms that prevent some of their services working effectively with those of other providers.
- Committed spend discounts structured in such a way they can incentivize customers to use a single hyperscaler for all or most of their cloud needs.
The regulator proposed referring the case for further investigation by the Competition and Markets Authority, the U.K. regulator tasked with ensuring markets are healthily competitive.
“We received provisional findings from Ofcom today in relation to its Cloud market study and are in the process of reviewing these,” a CMA spokesperson told CNBC via email.
“We stand ready to carry out a market investigation into this area, should Ofcom determine it is required following the completion of its consultation process.”
Microsoft, Amazon and Google, sometimes referred to as “hyperscalers” due to their ability to provide computing and storage at enterprise scale, are the largest players in the massive cloud infrastructure market, which was estimated to be worth £4.5 billion ($5.6 billion) to £5.0 billion in 2021, according to Ofcom.
Microsoft and Amazon’s Amazon Web Services unit command a 60% to 70% share of the market, according to the regulator, with Google accounting for 5% to 10% of total market share.
Ofcom said it was concerned by allegations surrounding licensing conditions set by cloud vendors, singling out Microsoft in particular as an example of companies allegedly “using their strong position in software products to distort competition in cloud infrastructure.”
The regulator said it received evidence showing Microsoft makes it harder for customers of its Office productivity apps to run them on cloud infrastructure other than Microsoft Azure.
Microsoft, in a statement, said: “We look forward to continuing our engagement with Ofcom on their cloud services market study. We remain committed to ensuring the U.K. cloud industry stays highly competitive, and to supporting the transformative potential of cloud technologies to help accelerate growth across the U.K. economy.”
An Amazon Web Services spokesperson told CNBC: “These are interim findings and AWS will continue to work with Ofcom ahead of the publication of its final report.”
“At AWS, we design our cloud services to give customers the freedom to build the solution that is right for them, with the technology of their choice,” they added. “This has driven increased competition across a range of sectors in the UK economy by broadening access to innovative, highly secure, and scalable IT services.”
Last month, Microsoft reportedly offered further changes to its cloud computing practices to avoid facing an EU antitrust investigation, according to Reuters. It comes after Microsoft last year announced a number of changes to its cloud contract terms, effectively making it easier for customers to use competing cloud services.
The EU has been looking into competition concerns surrounding the company’s cloud business following complaints from France’s OVHcloud and other smaller cloud vendors.
Francisco Mingorance, secretary general of the Cloud Services Providers in Europe, said Ofcom’s findings regarding Microsoft’s licensing practices show that regulators are “waking up to the ways in which Microsoft continues to distort fair competition in the cloud” and recommended national and EU antitrust authorities open formal investigations into the matter.
The provisional findings from Ofcom represent a blow to Amazon and Microsoft, two titans of the technology world. These companies did well out of the Covid-19 pandemic as people were forced into their homes, driving up demand for more digital means of staying connected and doing business.
However, more recently, they’ve faced struggles as pandemic restrictions have been lifted and higher interest rates dented the outlook on technology stocks. Amazon, Microsoft and Alphabet all reported deceleration in their respective cloud units in the fourth quarter of 2022.
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Industrial and infrastructure stocks may soon share the spotlight with the artificial intelligence trade.
According to ETF Action’s Mike Atkins, there’s a bullish setup taking shape due to both policy and consumer trends. His prediction comes during a volatile month for Big Tech and AI stocks.
“You’re seeing kind of the old-school infrastructure, industrial products that have not done as well over the years,” the firm’s founding partner told CNBC’s “ETF Edge” this week. “But there’s a big drive… kind of away from globalization into this reshoring concept, and I think that has legs.”
Global X CEO Ryan O’Connor is also optimistic because the groups support the AI boom. His firm runs the Global X U.S. Infrastructure Development ETF (PAVE), which tracks companies involved in construction and industrial projects.
“Infrastructure is something that’s near and dear to our heart based off of PAVE, which is our largest ETF in the market,” said O’Connor in the same interview. “We think some of these reshoring efforts that you can get through some of these infrastructure places are an interesting one.”
The Global X’s infrastructure exchange-traded fund is up 16% so far this year, while the VanEck Semiconductor ETF (SMH), which includes AI bellwethers Nvidia, Taiwan Semiconductor and Broadcom, is up 42%, as of Friday’s close.
Both ETFs are lower so far this month — but Global X’s infrastructure ETF is performing better. Its top holdings, according to the firm’s website, are Howmet Aerospace, Quanta Services and Parker Hannifin.
Supporting the AI boom
He also sees electrification as a positive driver.
“All of the things that are going to be required for us to continue to support this AI boom, the electrification of the U.S. economy, is certainly one of them,” he said, noting the firm’s U.S. Electrification ETF (ZAP) gives investors exposure to them. The ETF is up almost 24% so far this year.
The Global X U.S. Electrification ETF is also performing a few percentage points better than the VanEck Semiconductor ETF for the month.
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