Weather warning: CMA identifies competition issues in cloud services market

The CMA has provisionally found that competition may not be working effectively in the UK’s £9 billion cloud services market. Cloud services provide vital infrastructure for promoting economic growth and innovation, allowing customers to have remote, on-demand access to technology resources over a network. They underpin a large part of UK business activity.

On 28 January 2025, the CMA published its provisional decision in its cloud services market investigation. The provisional decision comes some 15 months after UK communications regulator Ofcom referred the cloud services market to the CMA for further investigation. The CMA is concerned that competition issues in cloud services markets could be leading to higher costs, less choice and less innovation. 

The 500+ page report makes the following provisional findings:

• Amazon Web Services (AWS) and Microsoft have significant market power in ‘infrastructure as a service’ (IaaS) and ‘platform as a service’ (PaaS) markets.  According to the CMA, both AWS and Microsoft have market shares in the 30-50% range and have been making returns substantially above their cost of capital for several years. 
• The significant capital investment and economies of scale required for cloud infrastructure make it harder for alternative cloud suppliers to enter and expand in these markets, resulting in limited choice for customers. 
• Both technical barriers and commercial barriers (in the form of high egress fees) make it more costly for customers to switch cloud service providers or to ‘multi-cloud’.
• Microsoft is using its strength in software to make it more difficult for AWS and Google to compete effectively for customers who wish to use Microsoft software on the cloud. 

Further SMS investigations in the pipeline?

The CMA’s provisional view is that the factors set out above give rise to an adverse effect  on competition (AEC). While the final decision in the market investigation is due in August 2025, the independent inquiry group has provisionally recommended that the CMA Board consider commencing ‘strategic market status’ (SMS) investigations into AWS’ and Microsoft’s cloud services activities under the DMCC regime (see here). Following the CMA’s announcement of its first SMS investigations in January, the next SMS investigations are likely to be announced in the second half of this year. The Digital Market Unit’s workload appears to be piling up quickly. 

Cloud services and AI – an evolving landscape

The CMA report also considers whether the growth of AI is affecting competition in cloud services, since cloud services are a vital input into developing and using Foundation Models (FMs) at scale. The report states that this area of cloud services has been developing quickly and that current evidence on the impact of AI on competition in cloud services is ‘mixed’. In particular, the CMA’s provisional view is that while AWS, Microsoft and Google each has a strong position in the supply of IaaS based on accelerated compute, this does not currently have a significant direct impact on competition in cloud services. 

The CMA’s expected update on its AI Foundation Models work, which was due to be published at the end of 2024, may provide further clarity on the authority’s approach to issues at the intersection of cloud services and AI.