How Competitive is Cloud Computing?

Cloud computing is no longer the wave of the future — it’s the reality upon which many IT infrastructures are built. However, that doesn’t mean there isn’t room for more growth. Gartner research found that end-user spending on public cloud services is forecast to reach $597.3 billion in 2023. That’s a significant increase from 2022 — 21.7% to be exact.

While some of this growth is being driven by, as Gartner puts it, the pursuit of “disruption through emerging technologies like generative artificial intelligence (AI), Web3 and the metaverse,” the fact is that “Infrastructure-as-a-service (IaaS) is forecast to experience the highest end-user spending growth in 2023 at 30.9%, followed by platform-as-a-service (PaaS) at 24.1%.”

Healthy growth, but ...

Even as this diverse and vast sector continues to experience healthy growth, some governments have their eye on the industry, looking for signs of a potential monopoly. In this article, we'll explore the current cloud computing landscape and determine whether the industry leaders are benefiting from monopolistic practices or are simply the best at what they do.

Massive market shares

The leading providers of cloud services are familiar names at home as well as in the office. According to the study “Competition in Cloud Computing” by researchers at the University of Pennsylvania, cloud computing is dominated by one player: Amazon.

With approximately 48% of the market share, Amazon’s cloud services have all but cornered the market. Additionally, U.K. market watchdog Ofcom found that Amazon and Microsoft “have a combined market share of 60-70%. Google is their closest competitor with a share of 5-10%.”

Signs of a monopoly in cloud computing

These hyper-scaled companies have regulators worried, as some observers see signs of anti-competitive behavior. Among the alarm bells noted by Ofcom are the concerns expressed by some customers about the ability to switch or use multiple providers. The constraints on customers’ ability to move freely between providers — or use a combination of providers — “could make it harder for smaller cloud providers to win business and compete with the market leaders,” says Ofcom.

Hard to change

The obstacles to switching provider had not been foreseen by the Penn study : “The basic infrastructure products offered by cloud providers—computing power and data storage—are essentially commodities, suggesting a highly competitive environment with low switching costs.” The reality, however, has turned out differently.

Halfway through a probe into cloud services in the U.K., Ofcom proposed to refer the market to the Competition and Markets Authority for further investigation. The watchdog group had a similar experience to the Penn researchers, seeing some good signs for customers — at least on the surface — but they also found clear signs of monopolistic behavior.

Locking customers in

When providers are competing to attract new customers, the customers win “in the form of innovative products and discounts” finds Ofcom; however, “other features of the market give cause for concern.”

Specifically, Ofcom identified three key red flags:

• Egress fees. Customers pay to transfer their data out of a cloud and the hyperscalers set them at significantly higher rates than other providers. This discourages customers from switching providers.
• Technical restrictions on interoperability. Providers disincentivize users from contracting with other platforms by requiring them to put additional effort into reconfiguring their data and applications to work across different clouds.
• Committed spend discounts. While discounts may sound good for customers, because of how these are structured, the discounts incentivize customers to use a single company for all or most of their cloud needs.

These three things have attracted the attention of regulators. Based on Ofcom’s recommendation, the U.K. is launching a probe. The results could mean new regulations are put in place.

Is regulation the answer?

Regulating an industry that covers such a wide array of services will be complicated, but as the Financial Times’ (FT) Richard Waters said, “Doing nothing, however, isn’t an option.”

U.K. regulators have alluded to possibly “making some technical standards mandatory or even requiring rival companies to build direct communication links between their data centers so customer data can move more freely,” according to the FT. At the same time, however, the regulators have suggested their efforts may be better spent on “detailed areas where a lack of interoperability seems to lack clear justification.”

What anti-trust legislation might look like is still to be determined, but given recent moves from the European Union to regulate other parts of the tech industry, it seems almost inevitable that the cloud computing sector will soon see a shake-up.