Britain's anti-competition regulators have been tasked with investigating and 's dominance of the cloud computing market.
Media watchdog Ofcom on Thursday referred its inquiry for further investigation to the Competition and Markets Authority, kickstarting the process.
Ofcom said that it had identified features which make it more difficult for U.K. businesses to switch cloud providers, or use multiple cloud services, and that it is "particularly concerned" about the position of market leaders Amazon and Microsoft.
"Some UK businesses have told us they're concerned about it being too difficult to switch or mix and match cloud provider, and it's not clear that competition is working well," Fergal Farragher, Ofcom's director responsible for the market study, said in a statement Thursday.
"So, we're referring the market to the CMA for further scrutiny, to make sure business customers continue to benefit from cloud services."
Ofcom is concerned that so-called "hyperscalers" like Amazon Web Services and Microsoft Azure are limiting competition in the cloud computing market. These are companies that allow businesses of all stripes to carry out critical computing tasks — like storage and management of data, delivery of content, analytics and intelligence — over the internet, rather than through servers stored on site, or "on premise."
An Amazon spokesperson said in a Thursday statement that the company disagrees with the Ofcom finding. Microsoft said it plans to engage "constructively" with the CMA to address the regulator's concerns.
AWS and Microsoft Azure are the biggest players in the market. AWS' cloud solution is primarily targeted at startups, while Microsoft prioritizes big enterprises. AWS and Microsoft Azure account for roughly 60% to 70% of cloud spend, according to an Ofcom estimate. Combined, Amazon, Microsoft and Google generate roughly 81% of revenues in the U.K.'s cloud infrastructure services market, according to Ofcom, which estimates the market to be worth £15 billion ($18.2 billion).
The CMA probe comes amid the fast adoption of AI — cloud services, which are enabled by vast data centers, underpin many of the power-intensive generative AI models, such as OpenAI's ChatGPT, Microsoft's Bing Chat and Google's Bard.
The Competition and Markets Authority said in a statement that it welcomes the Ofcom probe referral, adding that the cloud space "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," Sarah Cardell, CEO of the CMA, said in a statement Thursday.
"Strong competition ensures a level playing field so that market power doesn't end up in the hands of a few players – unlocking the full potential of these rapidly evolving digital markets so that people, businesses, and the UK economy can get the maximum benefits."
The CMA's independent inquiry group will now examine the market and identify what, if any, action should be taken. The CMA will conclude its investigation by April 2025.
Amazon said in a statement that it believes the Ofcom findings are "based on a fundamental misconception of how the IT sector functions, and the services and discounts on offer."
Amazon Web Services (AWS), the e-commerce giant's cloud computing division, designs services "to give customers the freedom to choose technology that best suits their needs," a spokesperson for the company said.
"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."
Microsoft said it was "committed to ensuring the UK cloud industry remains innovative, highly competitive and an accelerator for growth across the economy."
"We will engage constructively with the CMA as they conduct their Cloud Services Market Investigation," a spokesperson for the firm told CNBC via email.
Ofcom, the agency responsible regulating technology, broadcast and telecom operations in the U.K., said that it identified a number of practices in the cloud industry that were of particular concern.
The regulator said that so-called "egress fees" charged by cloud vendors like Amazon and Microsoft make it tougher for businesses to move their data between providers, or to "multi-cloud" by using multiple cloud providers. Egress fees are charges for cloud companies to remove the data of firms from a cloud environment.
An AWS spokesperson said it "does not charge separate fees for switching data" to another cloud provider. The spokesperson added that over 90% of its customers pay nothing for data transfers, as they are given a monthly 100 gigabytes for free.
Ofcom also said that cloud companies have introduced "technical barriers" to interoperability — the ability of different cloud platforms and services to work together and exchange data without any barriers or disruptions. The authority said that this "makes it more difficult [for firms] to combine different services across cloud providers or to change provider."
Lastly, Ofcom raised alarm bells over committed spend discounts, or incentives to give customers a discount if they spend a certain amount of money. While this can reduce customer costs, it also encourages companies to use a single cloud provider for all or most of their cloud needs, even when a cheaper alternative is available.
Competing cloud firms including Google, as well as regulators, have flagged concerns with Microsoft Azure, in particular — namely, allegedly unfair licensing terms that serve to "lock in clients," keeping them attached to only Microsoft's technology and making it harder to switch to other providers.
"I think what we'd like to see is a fair playing field for competition in the market, and I think that's all about making sure that the business customers who rely on the cloud can switch and use multiple providers easily," Farragher told CNBC's "Squawk Box Europe" on Thursday.
"That will allow those rival providers to really challenge Amazon and Microsoft, [to] grow their business in the U.K. and actually have a much wider product set portfolio that looks attractive to businesses who use the cloud."
Farragher added that, as part of its investigation, Ofcom looked at solutions that included the egress fees being limited or removed.
Microsoft's cloud licensing terms are the subject of a separate European Union inquiry. The EU isn't formally investigating Microsoft's Azure cloud computing platform, but it has been assessing complaints from companies including France's OVHCloud about Microsoft's licensing terms.
