Ofcom refers UK cloud market to CMA for investigation: potential implications for UK HealthTech
Exec Summary
Ofcom has referred the public cloud infrastructure services market to the CMA for an independent market investigation.
Ofcom is concerned about a number of features in the supply of cloud services that make it more difficult for customers to switch and use multiple cloud suppliers, including:
Egress fees: charges that cloud customers must pay to move their data out of the cloud
Discounts: which may incentivise customers to use only one cloud provider
Technical barriers to switching: which may prevent customers from being able to switch between different clouds or use more than one provider
Ofcom believes that these features may be harming competition in the market and leading to higher prices for customers. The CMA's investigation will look into these concerns in more detail and consider whether any interventions are needed to improve the market for UK customers.
Cloud services are a vital part of the UK economy
Cloud services allow businesses to access computing resources on demand, without having to invest in their own hardware and software. This can help businesses to save money and be more agile. Cloud services are also used to deliver many digital services to consumers, such as online shopping and streaming video.
Ofcom estimates that the market for cloud services in the UK was worth up to £7.5 billion in 2022.
The UK is one of the largest markets for cloud services in the world. The market is growing rapidly, as more and more businesses and consumers adopt cloud services.
The CMA's investigation is important for UK businesses and consumers
The CMA's investigation will help to ensure that the UK cloud services market is competitive and that customers are getting a good deal. If the CMA finds that there are competition concerns, it can take a range of actions to address them, such as requiring cloud providers to change their practices or divesting assets.
Sarah Cardell, CEO of the CMA, said:
We welcome Ofcom’s referral of public cloud infrastructure services to us for in-depth scrutiny. This is a £7.5bn market that underpins a whole host of online services – from social media to AI foundation models. Many businesses now completely rely on cloud services, making effective competition in this market essential.
The potential implications of Ofcom's referral of the UK cloud market to the CMA for investigation for UK HealthTech are significant.
HealthTech companies rely heavily on cloud services to store and process sensitive patient data, deliver healthcare services remotely, and develop and bring new products to market. A competitive and well-functioning cloud market is essential for the growth and innovation of the UK HealthTech sector.
If the CMA finds that there are competition concerns in the UK cloud market, it could take a range of actions to address them, such as requiring cloud providers to change their practices or divesting assets. This could lead to lower prices, improved services, and greater choice for UK HealthTech companies.
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AWS and Microsoft are the clear leaders in cloud infrastructure
'The supply of cloud infrastructure in the UK is concentrated, especially at the infrastructure as a service (IaaS) layer, where Amazon Web Service (AWS) and Microsoft are the clear market leaders. AWS and Microsoft account for 70% to 80% of UK IaaS and platform as a service (PaaS) revenues. AWS was first to launch cloud services in 2006 and has been able to maintain a significant share as other providers have entered the market. Our analysis indicates that AWS’s profitability has been consistently high, with returns significantly above our estimate of the weighted average cost of capital (WACC) since at least 2014.
Microsoft is the closest competitor and has grown its share significantly since it entered the market in 2010. We estimate that Microsoft’s public cloud division, Azure, is becoming increasingly profitable and that its returns are also above our estimate of the WACC.
Google is the main challenger to AWS and Microsoft. Google entered the market in 2011 and while its share has grown in recent years, Google remains significantly smaller than the two market leaders, with a 5% to 10% UK share across IaaS and PaaS combined. Google’s cloud division recently made a profit for the first time, although this was relatively low compared to the profits of AWS and Microsoft.
The hyperscalers offer a broad range of complementary services across the different layers of the cloud stack. In addition to selling their own products, they also host PaaS and software as a service (SaaS) products developed by independent software vendors (ISVs) and act as channels for customers to purchase these services, including through marketplaces. These developments suggest that AWS, Microsoft and Google are each building their own ‘ecosystems’, that provide customers with access to a broad portfolio of their own and others’ products in a single place that work together seamlessly.
Beyond the hyperscalers, there is a range of relatively smaller cloud providers present in the UK, including some who also operate across all parts of the cloud stack. These include large technology companies such as Oracle and IBM, who both have considerably smaller market shares at around 0% to 5% of UK IaaS and PaaS revenues. These providers are more distant competitors to the hyperscalers, partly because of the difficulty of building a rival ecosystem of products delivered over a global network of data centres.
A wide range of ISVs compete mainly in PaaS and tend to specialise in a particular area, such as databases or analytics, rather than across several different product categories. Collectively they account for a significant share of 30% to 40% of UK PaaS revenues, but our analysis suggests no single ISV has a share greater than 5%.'
Statements from AWS
“We disagree with Ofcom’s findings and believe they are based on a fundamental misconception of how the IT sector functions, and the services and discounts on offer.Only a small percentage of IT spend is in the cloud, and customers can meet their IT needs from any combination of on-premises hardware and software, managed or co-location services, and cloud services. AWS designs cloud services to give customers the freedom to choose technology that best suits their needs. UK companies, and the overall economy, benefit from robust competition among IT providers, and the cloud has made switching between providers easier than ever. Any unwarranted intervention could lead to unintended harm to IT customers and competition. AWS will work constructively with the CMA.” - Attributable to an AWS spokesperson
“AWS does not charge separate fees for switching data to another IT provider. Customers make hundreds of millions of data transfers each day in the ordinary course of business, and over 90% of our customers pay nothing for data transfer because we provide them with 100 gigabytes per month for free." - Attributable to an AWS spokesperson
Potential implications for UK HealthTech
The potential implications of Ofcom's referral of the UK cloud market to the CMA for investigation for UK HealthTech are significant.
HealthTech companies rely heavily on cloud services to store and process sensitive patient data, deliver healthcare services remotely, and develop and bring new products to market. A competitive and well-functioning cloud market is essential for the growth and innovation of the UK HealthTech sector.
If the CMA finds that there are competition concerns in the UK cloud market, it could take a range of actions to address them, such as requiring cloud providers to change their practices or divesting assets. This could lead to lower prices, improved services, and greater choice for UK HealthTech companies.
The CMA's investigation could also lead to increased transparency and accountability in the cloud market. This would be beneficial for UK HealthTech companies, as it would help them to better understand the costs and risks of using cloud services.
Overall, Ofcom's referral of the UK cloud market to the CMA is a positive development for UK HealthTech. The investigation has the potential to address competition concerns in the market, leading to lower prices, improved services, and greater choice for UK HealthTech companies.
Here are some specific examples of how the CMA's investigation could benefit UK HealthTech companies:
Lower prices for cloud services would allow UK HealthTech companies to save money and invest more in research and development.
Improved cloud services would help UK HealthTech companies to deliver better healthcare services to patients.
Greater choice in cloud providers would give UK HealthTech companies more flexibility and resilience.
Increased transparency and accountability in the cloud market would help UK HealthTech companies to better manage the risks of using cloud services.
The CMA's investigation is expected to take up to 12 months to complete. It is important to note that the CMA has not yet made any findings about competition in the UK cloud market. However, the fact that Ofcom has referred the market to the CMA suggests that there are serious concerns about competition.
Final Thoughts
Overall, the potential implications of Ofcom's referral of the UK cloud market to the CMA for investigation are mixed for the UK HealthTech sector. On the one hand, a more competitive cloud market could benefit HealthTech companies. On the other hand, the CMA's investigation could lead to a period of uncertainty and disruption in the cloud market, which could have a negative impact on HealthTech companies.
It is important to note that the CMA's investigation is still at an early stage, and it is not yet clear what findings the CMA will reach or what actions it may take. However, the UK HealthTech sector should be aware of the potential implications of the investigation and should take steps to mitigate any negative impacts.
Here are some specific actions that HealthTech companies can take to mitigate the potential negative impacts of the CMA's investigation:
Review their cloud contracts: HealthTech companies should review their cloud contracts to identify any potential risks or disadvantages. They should also consider negotiating new contracts with their cloud providers to reflect the changing market landscape.
Develop a contingency plan: HealthTech companies should develop a contingency plan in case their cloud provider is divesting assets or changing its practices. The contingency plan should include a list of alternative cloud providers that the company could switch to.
Invest in data portability: HealthTech companies should invest in tools and technologies that make it easy to move their data out of the cloud. This will give them more control over their data and reduce their reliance on any one cloud provider.
Engage with the CMA: HealthTech companies should engage with the CMA to provide input into the investigation. This will help the CMA to understand the needs of the HealthTech sector and to develop recommendations that are in the best interests of HealthTech companies and their customers.
Engage with the HealthTech Community
HealthTech M&A Newsletter from Nelson Advisors - Market Insights & Analysis for Founders & Investors. Subscribe today! https://lnkd.in/e5hTp_xb
HealthTech M&A Advisory by Founders for Founders, Owners & Investors. Buy Side, Sell Side, Growth and Strategy mandates - Email lloyd@nelsonadvisors.co.uk
HealthTech Thought Leadership from Nelson Advisors - Industry Insights & Analysis for Founders, Owners & Investors. Visit https://www.healthcare.digital
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