Addressing the Real Barrier to Competition in the UK Cloud Market
Cloud computing is driving business transformation across the United Kingdom, enabling companies of all sizes and government organizations to innovate, diversify, and adapt. As such, cloud technologies increasingly support the UK’s economy and society.
This sector is a burgeoning and dynamic segment of the IT sector, making it a relatively recent focal point for regulators and policymakers. And for good reasons: regulators are right to want to ensure a level playing field and continue to support an innovative and robust digital economy. Ofcom, the UK regulator, has already taken steps to identify potential bottlenecks in the UK cloud market, starting with a market study whose preliminary findings were published in April this year.
One of the concerns that Ofcom highlights in its interim report is the restrictive software licensing practices of certain legacy vendors of common enterprise tools, such as productivity software and databases. How does it work in practice? Imagine you have an enterprise or productivity software which you use on-premise and you wish to migrate to the cloud. When choosing a cloud provider you notice that if you choose a different cloud provider than your existing enterprise or productivity software vendor, you ultimately pay up to five times more than what you would have paid if you took your existing on-premise software to the cloud of your software vendor. The UK regulator rightfully points out such contractual restrictions and pricing policies as potentially harmful to consumers by limiting their choice of cloud infrastructure providers, as well as inflating costs for consumers using the tools of other cloud providers. Due to this potential harm, Ofcom concluded that it would evaluate these practices and consider further action to address these problematic behaviors.
This is good news for anyone who supports fair and open competition. Ofcom’s concerns with regard to restrictive software licensing very much echo the findings of a recent report commissioned by Cloud Infrastructure Services Providers in Europe (CISPE) and authored by renowned economist Professor Frédéric Jenny (‘Unfair Software Licensing Practices: A quantification of the cost for cloud customers’). In his report, Prof. Jenny quantifies the economic impact of software licensing restrictions imposed by legacy software providers at more than £1.3bn (€1.5bn) in Europe. This, according to Prof. Jenny, is “a de facto tax” that has the effect of ‘locking in’ users and putting a brake on the potential of cloud computing at large. Most recently, the FCA in France issued its cloud market study report where it also found the software licensing restrictions imposed by a number of legacy software vendors are problematic for competition in cloud services across Europe. To ensure that competition in the cloud works well and to the benefit of businesses and consumers, these practices require a further review by the regulators and urgent enforcement action, including in the UK.
In its interim report, Ofcom also outlines its future areas of focus for its market study including interoperability and committed spend discounts. Customers should be able to adopt the cloud strategy that best meets their IT needs, and it is vital that customers retain the freedom to choose the technology they want to secure interoperability of IT services.
The key challenges to interoperability and multi-cloud adoption lie with the legacy software vendors’ restrictive licensing practices as described above, and regulatory intervention should be targeted to address them.
On the other hand, committed spend discounts are a common commercial practice that creates value for customers, and regulatory intervention should be cautious to prevent unintended financial repercussions for customers. With regard to Ofcom’s focus on egress fees, it should be recognized that facilitating the export of complex and extensive workloads within different IT environments, including on-premise, involves operational costs for any cloud vendor.
A 2023 polling conducted in the UK by research company Public First found that:
- Cloud customers value committed spend discounts rather than feel trapped by them: 78% of respondents to the Public First poll believe that such discounts are a positive business practice for customers
- Seventy-one percent of cloud infrastructure customers said that they use more than one cloud infrastructure provider, underscoring the reality that many UK businesses are actively employing a multi-cloud strategy.
- Around half of UK businesses (51%) think that it is likely that they will switch one of their cloud infrastructure providers in the next few years and a similar proportion (56%) believe it is likely they will add another provider.
While the demand for cloud services keeps growing globally and consumers and businesses are presented with a variety of almost custom-made cloud solutions, it is important to ensure that any barriers to competition in the cloud market are addressed so that cloud services can continue to thrive for the benefit of UK customers. Today, restrictive software licensing stands as a persisting anticompetitive practice that should be addressed head on by the UK regulators for the benefit of consumers and industry.