SDIA’s Response to Ofcom’s UK Market Study: Why Public Cloud Services Should Be Regulated

Cloud infrastructure has changed the way organizations do business and how governments provide public services. A shift to the cloud is often seen as critical to digital transformation, but is the current prevailing model the best route to a sustainable future? And in its current, unregulated form, can it deliver new economic opportunities and support society at large to reach its sustainability goals?

The regulatory authority overseeing the sector in the UK, Ofcom, is currently looking at the Cloud Services market. In its interim report, the regulator concluded that although there were signs of competition, the market was not working well.

As a result, Ofcom recommended further investigation by the country’s Competition and Markets Authority, following a public consultation process.

The Sustainable Digital Infrastructure Alliance (SDIA) submitted an in-depth consultation response on 17 May 2023 including; comments to the report itself, its Taxonomy Guide on Digital Infrastructure, a position paper on how and why to regulate Public Cloud Providers, and its previously published whitepaper for building a European Cloud.

Can New Entrants Join the Cloud Infrastructure Market?

Cloud infrastructure services are dominated by three corporations, known as ‘hyperscale’ providers. Microsoft and Amazon have between 60-70% of the market, with Google taking a 5-10% share.

On-demand, Always On: The Current Model

“Pay-as-you-go” is now the standard model for cloud services. This has disrupted the previous system of monthly or annual agreements.  But the “pay-as-you-go” model relies on massive overprovisioning. The capacity must be there just in case customers need it. And this depends on large-scale infrastructure investment.

While data centers themselves have a relatively long shelf-life, the data storage and computing equipment they house do not. This equipment must be upgraded every two or three years. So, while data centers are seen as a good investment, it’s harder to fund the equipment inside through traditional investors and loans.

Enter vertically integrated technology companies.

These companies can use the cash-generating arms of their businesses to fund the constant technology upgrades needed to produce the digital utility they sell - data storage and processing. For Microsoft, the source is software licensing, for Amazon, e-Commerce and for Google, advertising.

And it’s well worth the investment. In Q1 2022, Amazon Web Services generated nearly all the $6.5 bn profit Amazon made.

Is This Model Limiting Competition?

As SDIA’s report submitted to Ofcom states,

“Without the vertical integration, it would be economically unfeasible to build a supercharged digital resource utility of the scale we have today.”

The current model is limiting new market entrants, expansion of the market and competition.

Is the Behavior of the Market Leaders Increasing Barriers to Switching?

This is one of the concerns raised by the Ofcom report. The report specifically identifies egress fees as a potential issue.

The SDIA also sees this as a major concern, but also takes the view that the packaging or ‘bundling’ of digital resources and software services (‘cloud services’) makes the issue worse.

High Egress Fees Stop Users Switching

Customers pay egress fees to move their data out of a cloud.

Whether a customer is transferring data into or off the platform, the cost to the cloud provider is the same. However, there’s a big difference in the charges customers pay. The cost of transporting data off the platform is much greater, acting as an ‘export tax’.

The result is to effectively stop data from being moved from one provider’s platform to another.

Service Bundling Makes the Problem Worse

Software is packaged up in a ‘bundle’ together with the provider’s cloud services. The software may be developed by an Independent Software Vendor (ISV), or it could be freely available through the open-source community.

However, once bundled with the cloud provider’s resources, the software can’t be switched to another cloud. ‘Bundling’ acts to lock customers in.

Over time, ISVs could find themselves in a marketplace like Apple’s App Store, paying high fees to a hyperscaler for an opportunity to get in front of new customers.

The Long-Term Trajectory: Locked-in, Then Taxed

The Ofcom report states,

“We are concerned that the level of competition could deteriorate further over the longer-term.”

The SDIA has a similar concern, as all three major Public Cloud Providers, offer between $20-100k credits to new customers. Once signed up, it’s not uncommon for tech startups to spend 50% of their operating costs on public cloud platforms (see this analysis by Andreessen Horowitz).

This makes them overdependent on cloud providers, who also capture the majority of the profit margin created by startups. This profit margin could be invested into further innovation or creating jobs – instead, it is paid as de facto cloud-tax to the few global players.

The risk is that,

“Based on the current unregulated model for cloud services, the most likely outcome is that virtually all private and public ICT platforms for compute, storage and processing as well as most of the software applications will end up with just one of three companies.”

So, What’s The Alternative?

In its response, SDIA recommends six actions:

1.          Forcing digital resource utility to be split from the digital platform business (e.g., from advertising, search engines or, e-commerce). Alternatively, creating a regulatory framework similar to telecommunications regulation.

2.           Creating a public market for digital resources.

3.           Restricting the ‘bundling’ of cloud services with digital resources.

4.           Eliminating or restricting the use of egress charges for data leaving a cloud platform.

5.           Restricting the use of discounting and credits.

6.          Introducing regulations for transparency of ownership, usage, and tariffs for all ICT infrastructure that is or has the potential to be “Critical Information Infrastructure”.

Ofcom plans to publish its final report by 5 October 2023.