The CMA’s provisional decision on the UK cloud market has been greeted by cautious approval from most market participants and a furious diatribe from Microsoft, by far the longest and most aggressive response to the CMA.
In January, the UK CMA published its provisional views on the state of competition in the UK cloud market, finding that this was a highly concentrated market; that there are two dominant hyperscalers, Amazon and Microsoft; and that the growth of this market favours the existing dominant players. It identified certain practices, such as egress fees and technical barriers to interoperability, that discourage customers from switching to an alternative cloud provider. However, it specifically singled out restrictive software licensing practices by Microsoft that were harmful to competition in the market and partially foreclosed the market to competition.
Microsoft’s response argues that the CMA’s approach is fundamentally flawed by not considering the developing nature of the cloud computing market and the impact of AI on cloud computing in future. One of its core arguments is that the CMA should focus on the future – that the uptake of cloud and the investment in AI will lift all cloud providers, old and new. In short, the CMA should not interfere at all because future developments will sort out any competition problems in cloud computing markets in the UK.
Expanding cloud market does not dilute existing market power
First, Microsoft’s arguments that any interference in the cloud market will stifle growth and investment in AI are specious. The argument that the cloud market is expanding does not mean that it is a competitive market or that the UK customer has more choice on product, quality or price. It belies the fact that the cloud computing market is dominated by a handful of hyperscalers, and that this situation will only continue if customers cannot switch between cloud computing providers. This customer lock-in and licensing practices that lead to competitor foreclosure are practices that the CMA are proposing to address to ensure that the market is more competitive. An expanding cloud market does not dilute existing market power, and practices that discourage customers from switching or foreclose competitors, will continue even if the market is expanding unless there is regulatory intervention.
Discriminatory software licensing practices foreclose competition
Second, the leverage effect between the software and cloud markets – for example, Microsoft’s Windows, Windows Server, and its productivity suites, was identified by the CMA as particularly harmful to competition in the cloud market. The anti-competitive licensing practices identified by the CMA involve discriminatory treatment by Microsoft towards both Amazon and Google. This is dismissed by Microsoft on the basis that these are large companies and that other cloud competitors in the UK are not targeted. This is not a justification for targeted anti-competitive discriminatory licensing. It is the equivalent of saying that police should not investigate a bank robbery because the bank has enough money already. The ability to discriminate and impose restrictive software licensing conditions, including discriminatory pricing, to any potential competitive threat in the cloud computing market is a serious danger to competition. Anti-competitive discrimination by a firm that is dominant in software markets cannot be justified because this discrimination is only practised against large companies. What is to stop Microsoft targeting other small competitors as soon as they grow or develop? It sends a signal to any potential rivals on the cloud computing market that they could face similar treatment if they disturb the competitive balance. It is both a threat and has a chilling effect against current and future cloud competitors. This ability to leverage its market power in adjacent software markets against cloud competitors is a weapon that can be turned against anyone who challenges Microsoft.
A concentrated cloud market with locked-in customers could restrict AI competition
Third, AI is an adjacent market to cloud computing and was not the subject of the CMA cloud probe. However, perhaps most importantly, lack of competition in the cloud market has the potential to restrict competition in the emerging market for AI. Microsoft’s argument that the CMA should leave the cloud market alone because AI technology will drive the competitive dynamic in the cloud market is improbable and potentially self-serving. In the absence of a competitive cloud market, the customer’s first buying decision in choosing its cloud computing provider could irrevocably lock them in and exclude future choices for aftermarkets, such as AI. Competition in the cloud computing market will heavily influence how AI is used in the cloud. The problems of market foreclosure and customer lock-in in the cloud market could be harmful to emerging competition on the AI market. The market could become even more concentrated with locked in customers only able to use proprietary AI of their hyperscalers’ ecosystems. Cloud computing is the underlying infrastructure of AI and robust enforcement of competition law in the cloud market is needed to support the emergence of a range of competitors.
The CMA is not the only regulatory authority with the same concerns
The UK CMA is not alone in expressing concerns about the cloud market, as many other jurisdictions and competition authorities – EU, France and United States – identify a similar competitive landscape: a concentrated market, dominated by digital hyperscalers, where there is little switching between providers. Leaving it all to be sorted out by the expanding nature of the cloud market is likely to reinforce existing dominance, foreclosure, and lock-in. Action is needed to ensure that this is a thriving and competitive market for UK customers and potential cloud providers and new entrants on cloud market and in future AI markets.
Niamh Gleeson
Niamh Christina Gleeson is a data privacy and data technology lawyer with over 20 years of experience specialising in the IT and communications sectors.
