Microsoft and Amazon are hurting cloud competition, UK regulator finds

The UK's Competition and Markets Authority (CMA) has expressed concerns over Microsoft and Amazon's market dominance in cloud computing, noting their individual 30-40% share of the Infrastructure-as-a-Service (IaaS) market and practices such as egress fees and restrictive licensing that create customer "lock-in." The CMA recommends a formal investigation under the new Digital Markets, Competition and Consumers (DMCC) Act to determine if they possess "strategic market status," which could lead to targeted regulatory interventions aimed at fostering competition.

Analysis

The UK's Competition and Markets Authority (CMA) has escalated its scrutiny of the cloud computing sector, citing significant anti-competitive concerns regarding Microsoft and Amazon. The regulator's findings indicate that the two companies collectively control a dominant 60% to 80% share of the UK's infrastructure-as-a-service (IaaS) market, enabling them to exert 'significant unilateral market power.' The CMA specifically highlights practices such as egress fees and restrictive licensing terms that create high switching costs and customer 'lock-in,' thereby stifling competition. Microsoft's licensing practices for Windows Server are singled out for making its Azure platform more cost-effective than rival services, further limiting choice. The recommendation for a formal investigation under the new Digital Markets, Competition and Consumers (DMCC) Act is a material development, as a 'strategic market status' designation could subject both firms to legally binding interventions aimed at altering their business models and pricing power in the UK, mirroring the regulatory approach of the EU's Digital Markets Act.

Key Decisions for Investors

• Investors in Microsoft and Amazon should price in heightened regulatory risk, as a formal investigation and potential 'strategic market status' designation in the UK could lead to mandated changes in business practices, impacting cloud revenue and margin growth.
• The specific focus on egress fees and licensing suggests any remedies could directly target these profit centers, warranting a review of long-term margin assumptions for AWS and Azure in valuation models.
• This regulatory action may present a relative advantage for Google Cloud, the third-largest provider, as any measures that reduce customer lock-in with its main competitors could create an opportunity for it to gain market share.
• Consider this a part of a broader, international trend of increased antitrust enforcement against Big Tech, suggesting that similar challenges could arise in other jurisdictions, creating a persistent headwind for the sector.