Hyperscalers in crosshairs for anti-competitive pricing and lock-in
Technical restrictions on interoperability: intentional or inevitable?
A lack of interoperability between cloud service providers makes it difficult to combine services or to switch, Ofcom said in its interim report, noting that while some complexity is inevitable, it has seen evidence that technical barriers are more significant than they need to be, and that AWS and Microsoft may limit interoperability of some services by not sharing important technical information.
“This means they can only be used in their respective clouds, which prevents customers from using them in combination with products from rival providers,” it said.
Ofcom pointed to Amazon SageMaker, a platform for training and deploying machine learning models, which it said can only import data from other AWS services. That’s not true, AWS said, pointing to a blog post in which it provided instructions on importing data from third-party sources.
Even with documentation, though, the complexity of cloud services and differences in capabilities between cloud providers mean that switching would take a significant amount of time and resource.
So said Guardian Media Group, a major consumer of cloud services, in its comment on the Ofcom study.
“We estimate that a process of extricating from existing integrations to integrating with a new provider would take many months to complete and be extremely costly,” it said. “This creates a huge disincentive to switching once cloud services have been procured.”
One way Ofcom considered to ensure interoperability (and largely shied away from) is mandating standardization. The UEA academics concurred, but warned their market models show this is unlikely to favor competition. “We find the imposition of mandatory interoperability standards would inherently favor incumbents, impede existing competition by differentiation, and limit the parameters for future innovation,” they said.
Microsoft, too, noted that requiring strict compliance to standards can chill innovation, limiting new functionality. “While simpler and more open architectures are possible, they’ll be inherently limited compared to more complex, tightly integrated services,” it said.
Software licensing can be a brake on interoperability, too.
Without mentioning it by name, Google managed to slight Microsoft in its response, saying, “Unfair licensing practices and commercial strategies deployed by certain legacy on-premises IT providers are causing significant harm to the cloud sector and UK customers at this critical inflection point by creating commercial lock-ins.”
That’s a reference to the formal complaint filed with the European Commission’s Directorate-General for Competition by an association of European cloud providers in November 2022, saying, “Microsoft uses its dominance in productivity software to direct European customers to its own Azure cloud infrastructure to the detriment of European cloud infrastructure providers and users of IT services.”
Discounts for committed spend: It’s not just about the volume
Discounts are Ofcom’s third major area of concern, specifically committed-spend discounts.
“Discounts are generally a positive feature of markets, leading to lower prices and promoting competition between providers,” it said, but warned that committed-spend discounts, which require customers to promise in advance to spend a certain amount on services regardless of their actual needs, can lead them to concentrate all or most of their spending with a single provider, even when there are no technical barriers to using multiple providers. “This has the potential to dampen competition for customers’ new workloads,” it said.
AWS, however, deliberately conflated the volume-based discounts Ofcom approves of, and the committed-spend discounts it has doubts about, to suggest the regulator is against all forms of discount.
But AWS, like Microsoft, also made the argument that committed-spend discounts—because of the commitment part—help service providers forecast demand and plan their investments accordingly. This, in turn, enables providers to offer services at lower cost, AWS said.
TechUK, an association of technology providers and users, described the discounts as “positive for customers and an effective means to lower the cost of a single-vendor cloud strategy,” posing a dilemma for Ofcom by confirming its competition concerns, but at the same time, highlighting the harm that would result from removing them.
The case for inaction
Ofcom estimated that 20% of customers—a figure it characterized as low—have switched providers, whether between public clouds, within a cloud, or between on-premises, private cloud, or public cloud. “It’s uncommon for customers to switch away from a provider completely due to the time and cost required,” it said.
Microsoft disagreed with that assessment, asking, in effect, “Low compared to what?” and noting that customers may be staying put because they’re happy.
“Even if switching levels can robustly be characterized as (comparatively) low, this finding is wholly inconclusive: Low switching is perfectly consistent with a competitive market in which existing customers are not exploited relative to new customers but instead derive essentially the same competitive benefits,” Microsoft said.
The other big difference of opinions boils down to Ofcom saying that switching is harder for enterprises than it could be, while the hyperscalers say it’s easier than it used to be in the days of on-premises software. Both are right.
So making switching easier may not be necessary—but is it even possible without hurting enterprises in other ways?
Microsoft doubts that. “The possible remedies identified in the Interim Report are difficult to design, monitor and enforce,” it said. “Any intervention could very well be net negative and leave UK enterprises and public sector customers worse off—if, for example, UK customers were deprived of discounts, or of innovation through interoperability requirements, which favor portability considerations over innovation and differentiated value add services.”
The company recommends a wait and see approach, or, as it puts it, “allowing dynamic market evolution to play out before commissioning any detailed assessment with a view to intervention.”
Guardian Media Group, too, casts doubt on the feasibility of mandating interoperability.
Instead, it concluded, there are other ways to avoid the long-term financial harms of potential lock-in, such as putting “a limit on the extent to which a cloud service provider can unilaterally increase fees within their contract term (for example, RPI or CPI plus X%),” it said.
Ofcom is still studying the responses it received, but will soon have to decide whether to make the referral to the CMA, which will then have to conduct its own investigation. It’s going to be a while yet before regulation changes anything.
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