Addressing the Real Barrier to Competition in the UK Cloud Market - Competition Disruptive Project

Addressing the Real Barrier to Competition in the UK Cloud Market – Competition Disruptive Project

Cloud computing is driving business transformation across the UK, enabling businesses of all sizes and government organizations to innovate, diversify and adapt. Therefore, cloud technologies are increasingly supporting the UK economy and society.

This sector is a thriving and dynamic segment of the IT industry, making it a relatively recent focal point for regulators and policy makers. And for good reason: 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 results were published in April this year.

One concern Ofcom highlights in its interim report is the restrictive software licensing practices of some legacy vendors of common business tools, such as productivity software and databases. How does it work in practice? Imagine you have business or productivity software that you use on-premises and want to migrate to the cloud. When choosing a cloud service provider, note that if you choose a cloud service provider other than your existing productivity or business software vendor, you end up paying up to five times as much as you would pay if you brought your existing on-premises software to your software vendor’s cloud. The UK regulator rightly highlights 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 other cloud providers’ tools. Due to this potential harm, Ofcom concluded that it would evaluate these practices and consider further action to address these problematic behaviours.

This is good news for anyone who advocates fair and open competition. Ofcom’s concerns over restrictive software licensing closely echo the findings of a recent report commissioned by Cloud Infrastructure Service Providers in Europe (CISPE) and authored by renowned economist Professor Frdric Jenny (Bad software licensing practices: quantifying the cost for cloud customers). In his report, Prof. Jenny quantifies the economic impact of software licensing restrictions imposed by legacy software vendors at over 1.3 billion (1.5 billion) in Europe. This, according to Prof. Jenny, is a in fact tax that has the effect of locking users up and curbing the potential of cloud computing in general. More recently, the FCA in France released its cloud market study report in which it also found that software licensing restrictions imposed by a number of legacy software vendors are problematic for competition in cloud services across Europe. To ensure competition in the cloud works well and to the benefit of businesses and consumers, these practices require further review by 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 must be able to adopt the cloud strategy that best meets their IT needs, and it is imperative that customers retain the freedom to choose the technology they want to ensure interoperability of IT services.

The primary challenges for interoperability and multi-cloud adoption lie in the restrictive licensing practices of legacy software vendors as described above, and regulatory intervention should be targeted to address these.

On the other hand, committed spend rebates are a common business practice that creates value for customers, and regulatory intervention should be cautious to avoid unwanted financial repercussions for customers. Regarding Ofcom’s focus on outbound pricing, it should be recognized that facilitating the export of complex and extensive workloads across different IT environments, including on-premises, entails operational costs for any cloud provider.

A 2023 UK survey by research firm Public First found that:

  1. Cloud customers value discounts on engaged spending rather than feeling trapped by them: 78% of Public First survey respondents believe such discounts are a good business practice for customers
  2. 71% of cloud infrastructure customers said they use more than one cloud infrastructure provider, underscoring the fact that many UK businesses are actively adopting a multi-cloud strategy.
  3. Around half of UK businesses (51%) think it is likely they will switch one of their cloud infrastructure providers in the next few years, and a similar proportion (56%) think it is likely they will add another provider.

As demand for cloud services continues to grow globally and consumers and businesses are presented with a variety of near-custom cloud solutions, it is important to ensure that any competitive barriers in the cloud market are addressed so that cloud services can continue to thrive to the benefit of UK customers. Today, restrictive software licensing is a persistent anti-competitive practice that should be addressed head-on by UK regulators for the benefit of consumers and industry.

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Image Source : www.project-disco.org

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