In 2022, Ofcom, a UK regulator, began its market study into the cloud industry to investigate the dominance that hyperscalers, especially AWS and Microsoft, hold over the industry and the limits this creates for customers. This investigation follows concerns surrounding customers feeling “locked in” to a single provider, potentially leading to inflated prices in the market¹.
From this, Ofcom has decided to refer the public cloud infrastructure services market to the Competition and Markets Authority (CMA) for further investigation². I applaud this bold action from Ofcom. A referral to the CMA is an unprecedented opportunity to make the cloud market a truly competitive space. This means empowering any company to develop and grow cutting-edge cloud services, and ensuring customers can readily move around to find the best solution to match their needs.
A referral to the CMA is not just a procedural step; it signifies a potential shift in the dynamics of the cloud market. The primary objective behind this move is to foster a more competitive environment within the industry. By doing so, it paves the way for emerging cloud providers, such as Civo, to challenge the dominance of established hyperscalers.
However, the CMA’s intervention is not without its challenges. The authority will have to strike a delicate balance in its actions, especially when addressing issues like exorbitant data transfer fees, which have been a point of contention for many. The hope is that the outcome of the CMA's review will usher in an era of greater pricing transparency. Such a move will not only benefit the industry players but also have a positive ripple effect on the UK economy, given the heavy reliance of numerous companies on cloud services.
The importance of multi-cloud
The CMA’s broad enforcement opens the door to wide-ranging remedies. Within their report, Ofcom confirmed that “the use of multiple public clouds can benefit customers by allowing them to access their preferred services, gain commercial bargaining power against their cloud providers, and build for resilience.” So, I think it is essential that we continue to investigate this through the CMA to ensure open standards across the cloud industry.
When speaking to potential customers at Civo, we continue to hear about the lack of freedom given to users looking to move elsewhere. So again, this investigation can only be a good thing for cloud computing in general. It can only bring more competition, support reducing costs, simplifying things, and providing greater transparency for the cloud space in general.
What are the barriers to multi-cloud and switching?
Utilising a multi-cloud strategy allows customers to tap into various cloud service providers based on their requirements. While some cloud providers prioritise performance, others emphasise cost-effectiveness, security, or data sovereignty. By integrating services from multiple providers, users can optimise performance, ensure cost predictability, and safeguard their data and information.
Despite this, Ofcom reported how there are ongoing barriers to switching providers, which may weaken effective competition and adversely affect market outcomes. The four barriers listed throughout this report include technical barriers, egress fees, committed spend discounts, and predicting cloud spend.
‘Technical barriers’ refer to the customer needing to put “additional effort into reconfiguring their data and applications to work on different clouds”. From this, the Ofcom research found that around 65% of customers cited at least one of the following technical challenges as a barrier to using multi-cloud: interoperability challenges, technological challenges, and lack of skills.
Hyperscalers such as AWS and Microsoft appear to heighten technical challenges by not clearly disclosing how well their cloud infrastructure services align with rival ISVs' or open-source offerings. Consequently, users of these services might not fully realise the potential adjustments required in their code if they decide to adopt a multi-cloud approach or transition to another provider.
Going forward, it's crucial for cloud providers to release detailed documentation regarding the compatibility of their cloud infrastructure services. This means that cloud providers, especially those who adopt or replicate third-party open-source software, should clarify how well their services align with such software.
Hyperscalers charge high egress fees for moving data out of their cloud, making it expensive for customers to use multiple cloud providers or to switch. This often results in customers settling for potentially inferior services. This means that further action will need to be a balancing act, as it will be particularly important to tackle egress fees, either through significant price controls or the most ambitious choice: abolishing them entirely. The price point charged on egress by hyperscalers is out of control and creates huge practical and financial obstacles for customers to move to another cloud provider.
Ofcom found that 55 percent of respondents felt that the egress charges were a major concern for them and were really stopping them from moving and switching providers, particularly if they were unhappy.
Committed spend discounts
Over time, hyperscalers have adopted a strategy that encourages customers to rely solely on their services. They lure customers with enticing discounts, often so significant that they seem almost too good to be true. The catch? These discounts are tied to extended commitments, effectively locking customers in for the long haul. While undeniably effective and profitable for the providers themselves, I question their benefit for consumers and businesses.
A hyperscale business model often begins by offering substantial free credits to potential customers. This strategy might seem generous, especially since smaller providers can't afford such offers. Lured by these credits, companies start building their infrastructures. However, as they grow and scale, their expenses surge. Once the free credits are exhausted, these companies face hefty monthly bills.
Moreover, the standard pricing of hyperscale providers is far from budget-friendly. The only way to avail discounted rates is by committing to extended contracts with these providers. This not only locks businesses into a particular provider but also ties them to proprietary technologies that may not integrate well with other cloud services, likely by design.
Predicting cloud spend
Last year, we conducted a study to uncover the complexities of cloud costs for businesses and alternatives beyond the hyperscalers. Through this cost of cloud white paper³, we saw 1,000 cloud developers surveyed about the management of their cloud services, and the degree of costs associated with it.
74 percent of those businesses said that they had seen their cloud costs increase over the last 12 months, which correlates to the results from the Ofcom report, which found similar results with 80% of their respondents. Whilst some of this might be increased usage, we also know that many of the cloud providers, especially the hyperscaler, have increased their prices.
There’s a whole industry that's being created of software to help you understand and reduce your bill, which is crazy. Why can’t we be in a world where things are just simple, easy to understand, and a lot of the charges are included as part of the package, not all these hidden extras that are added on left, right, and center.
Time and time again, we see complex billing structures, making it hard to understand a lot of bills coming from hyperscalers. Our research showed that 37 percent of people who responded to our research had been stung with an unexpected cost that they were not expecting at all. Plus, 34 percent of respondents to our survey said that it's pretty much impossible to calculate their cloud bills each month.
The next steps for the cloud industry
This is only the beginning of an 18 month journey before we know the decision made by the CMA. In the meantime, this investigation can also be a spur for immediate action from the industry. Emerging cloud providers are rapidly stepping up to offer an alternative way forward to the hyperscalers. This vision is founded on putting the needs of the user back at the heart of cloud computing: transparent, predictable pricing; a streamlined experience; and super-fast, reliable services across the board.
Such initiatives are exerting pressure on the hyperscale providers, compelling them to re-evaluate and possibly revamp their pricing strategies. Moreover, the recent Ofcom review serves as a testament to the changing winds in the industry. Even if the review's immediate impact is limited to raising awareness, it undeniably puts the onus on hyperscalers to adapt and evolve.
The future of the cloud industry hinges on a collaborative effort between regulatory bodies and industry players. With the right interventions and a commitment to transparency and fairness, the cloud space can truly realise its potential, benefiting businesses and consumers alike.