Context: An inquiry into the cloud services market by the UK Competition & Markets Authority (CMA) makes reference to AI (May 30, 2024 ai fray article), but as a result of lobbying by cloud market leader Amazon and fast-growing contender Google (July 30, 2024 ai fray article) prioritizes a legacy topic in the truest sense of the word: licensing terms for Windows Server and other enterprise software (June 7, 2024 ai fray article). Meanwhile, the UK government replaced the CMA’s chairman, Marcus Bokkerink, whose regulatory philosophy was considered inconducive to the country’s economic growth (January 22, 2025 Civil Service World article).
What’s new: Today the CMA handed down its provisional decision (summary (PDF)). While certain concerns, particularly over committed spend agreements, have gone away, the CMA believes “competition in the £9 [$11] billion UK cloud services markets is not working as well as it could be.” The agency’s preliminary view is that both Amazon and Microsoft have market power and benefit from “technical and commercial barriers.” And with respect to Microsoft specifically, the CMA is inclined to believe that the company “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.”
Direct impact: The preliminary views are subject to further discussion and analysis in the four months leading to the final decision. Instead of imposing remedies under traditional competition rules, the CMA’s cloud market inquiry group recommends that the agency use its greater powers under the new Digital Markets, Competition and Consumers Act (DMCC Act) (Parliament webpage) to impose remedies. An interim step there would be to hold that Amazon and Microsoft have strategic market status (SMS). It is puzzling, however, that the CMA’s inquiry group arbitrarily draws the line in such a way that Google would be let off the hook, despite its considerable market share, growth and accumulation of key resources (also in the AI context).
Wider ramifications: It appears that the UK government was concerned about the CMA’s priorities and the implications for the UK’s growth goals, which in no small part involve technology companies and their direct investment. Oddly, this cloud market inquiry is a legacy investigation of legacy topics, with a particular focus on how legacy software is licensed, while what drives growth in the cloud context is AI.
Playing favorites with Google
The CMA’s summary says the following about Google:
“The third largest provider, Google, has much lower share of supply in UK cloud services markets, and there are also other providers, including Oracle and IBM, whose share of supply is smaller and who do not supply as wide a range of cloud services as Amazon Web Services (AWS), Microsoft and Google.”
The above distinction between the top three players and all the rest (as well as a mentioning of the “broad product portfolios of AWS, Microsoft and Google in both IaaS and PaaS”) would suggest that the CMA considers the three “Big Tech” hyperscalers the key players to focus on. But no. The CMA is inclined to let Google off the hook. If Amazon and Microsoft have strategic market status, so would Google:
- Google’s revenues exceed Microsoft’s.
- Google’s market capitalization is at a level with Amazon’s.
- Google has its own AI chips, more access to the world’s data than anyone, and owns DeepMind, an AI technology maker that used to be an independent UK company until the search monopolist acquired it.
In the software licensing context (discussed further below), the CMA has concerns only about the ability of Amazon and Google to compete with Microsoft. There are reasons for that, but it is another indication of Google’s importance.
Competition in the cloud market
Based on what the CMA announced today, there is no indication of a market failure. The finding that competition could always be closer to perfection could be made in any market.
A market in which competition is dysfunction would typically be a monopoly or a two-horse race where no one tries to enter or everyone else has been driven out. The cloud services market, however, started with Amazon Web Services in 2006, and there have been various entrants since, such as Microsoft Azure, Alicloud, Baidu, Bytedance, Google Cloud Platform, Huawei, IBM Cloud, Oracle Cloud and Tencent. And numerous others.
Cloud providers employ different strategies and leverage different competitive advantages to vie for customers’ business. Some of them have their own prior customer relationships.
There is price competition. The cloud business keeps growing because of greater demands, but the prices for the commodities at issue, such as compute and bandwidth, are still going down.
Legacy software licensing
The market is increasingly interested in AI (contrary to what Google told the CMA (July 8, 2024 ai fray article), but the CMA places particular emphasis on how legacy software such as Windows Server is licensed. Traditionally, the number one web and cloud operating system has been Linux, which is another sign of customer choice and healthy competition.
Microsoft apparently provides discounts, but it offers those licenses to everyone. Without those discounts, Microsoft would be less competitive and customers would pay more, which in turn would run counter to the CMA’s plan to increase competition and to the UK govenrment’s “steer” according to which the CMA should focus on growth.
The CMA is now what the European Commission’s Directorate-General for Competition (DG COMP) was frequently accused of being many years ago: a regulator that protects competitors, not competition, and that allows itself to be used by market actors for anticompetitive purposes. In this case, Google appears to be particularly influential, and greatly inconsistent:
In a June 2024 submission to the CMA (PDF), Google said “market dynamics will continue to be driven primarily by customers migrating existing on-premises workloads to the cloud in the short and medium term.” But that was the opposite of what Alphabet (Google parent ) CEO Sundar Pichai and Google Cloud Platform (GCP) CEO Thomas Kurian told customers two months earlier at their Cloud Next event. Mr. Pichai touted “incredible momentum in [Google’s] cloud business” and attributed it to some extent to “the AI platform shift.” Mr. Kurian identified a change in demand patterns:
We do see though that customers, they’re looking increasingly at when they pick a cloud partner, they’re looking at it as not as a point in time, but they’re looking at it as, “Who’s going to help me transform my business?”, and the basis of how they thought about it in 2007, ’08, ’09 was all about “How do they help me either go faster by building apps or reduce my cost of data centers by allowing me to lift and shift workloads?”. Now, they’re thinking about it in a different way. They’re looking at it as, “Can I use AI to transform my business? Who’s got the best platform and tools to help me do that?” Once we get them to use the AI platform and tools, it does drag in many of our other services. . . . Now the basis of competition has changed and we have a very strong position, given our capability both at the top, meaning offering a platform, offering models, et cetera, and building products that have long integrated models.
DMCC: a new and powerful tool
The CMA persuaded the UK government (not this one, but previous ones) to provide a more powerful competition tool in digital markets: the above-mentioned DMCC Act. The most controversial part was to what extent the CMA’s decision could be reviewed by the country’s Competition Appeal Tribunal (CATribunal or just CAT), an antitrust-focused specialized court.
With great power comes great responsibility. If the UK government wants the CMA to focus on growth, the agency will have to use the DMCC strategically and judiciously. For example, mobile app platforms are rightly prioritized by the CMA. There is a definitive market failure there because of gatekeeper powers. UK app makers are charged excessive commissions, and indirectly those are paid by UK consumers making purchases on those platforms. Traditional competition law can address some of that, but the DMCC better enables the CMA to impose remedies that can make a positive impact. By contrast, the use of the DMCC in the cloud market would appear disproportionate and indiscriminate.
It could be that the provisional decision the CMA announced today is simply a legacy of the “old” Bokkerink CMA. When the UK government stepped in and replaced the CMA’s chair (with a former Amazon executive), the investigation was far along and the report may already have been written for the largest part.
For the new growth-focused CMA, there would be no shortage of real issues deserving of regulatory scrutiny and warranting the use of its DMCC powers.