AWS, Microsoft and Google Cloud have all invested billions of dollars in cloud infrastructure, demonstrating that big business can run over the internet. But by most metrics, AWS is by far considered the leader when it comes to selling that infrastructure as a service, controlling as much as 45% of that market according to some estimates.
The ins and outs of business-to-business tech markets such as the cloud industry aren’t immediately accessible to most legislators, who are still trying (with varying degrees of success) to wrap their heads around consumer tech markets. But as the stakes grow larger, it’s hard to overlook the competitive dynamics at play in the market for enterprise software, which runs the world.
“Short answer is: If it is a platform, then it has antitrust issues,” Donald Polden, dean emeritus and professor of law at Santa Clara University, told Protocol.
Last October, the House Judiciary Committee included cloud computing in a report entitled ” Investigation of Competition in Digital Markets.” While that report focused much more on advertising and AWS’ corporate parent than it did the cloud, it also echoed a number of concerns about AWS that have been sweeping through the market for years: the treasure trove of data inside its network that’s both difficult and expensive to move elsewhere, the rate at which some AWS customers found the company competing with them and more of the usual self-serving grumbling from enterprise companies built around open-source projects that somebody else is also using the same permissively-licensed code to make money.
Any actual antitrust case against AWS would require much more of a smoking gun than was produced by the Committee’s report, according to antitrust experts. That means legislators and regulators looking to build such a case will be looking for evidence around three main issues: contract pricing, self-preferencing and the degree to which lock-in is a necessary evil of enterprise software.
A highly concentrated market
At the end of 2020, AWS controlled about 34% of the cloud infrastructure service market, according to Synergy Research group. Other estimates suggest its dominance in cloud infrastructure could be even greater. Gartner’s research, which doesn’t involve what Synergy calls “hosted private cloud,” put AWS’s market share closer to 45%. (There are many other ways to measure the concentration of power in cloud infrastructure, but for the purposes of this discussion, market share is what we’ll focus on.)
Even 45% is not a dominant share of the market. But the cloud infrastructure market is considered a “highly concentrated market,” according to Polden, in that only a small number of companies currently participate and that number is unlikely to change given the exorbitant cost of operating a global cloud service.
“Because the barriers to entry here are so high, I don’t think we can assume that a new entrant is going to come in and make things more competitive,” said Charlotte Slaiman, competition policy director at Public Knowledge. “So it does sort of up the stakes of everything that’s going on in this market.”
AWS earned this market share organically, moving much faster than Microsoft and Google to establish a market for enterprise cloud services as traditional enterprise tech companies such as IBM, Oracle, Dell Technologies and HPE failed to translate their leadership position from the first 15 years of the internet to the modern day. But it started small, encouraging developers to whip out their credit cards and pay for a modest level of services as they experimented with the new technology.
These days, AWS likes to sign three-year to five-year deals with big enterprise companies, and this is where pricing details can start to get tricky. AWS and its partners usually agree to certain levels of spending per year of the contract in exchange for pricing concessions compared to the per-unit pricing on the rate card. (Here’s an example from 2017 that spells out how a typical contract works.)
Intel got into antitrust trouble in a more “highly concentrated market” years ago for tying certain amounts of spending — such as, 100% of a customer’s needs — on Intel chips to pricing discounts. Dell refused to entertain the notion of adopting a more-superior chip from AMD in its servers during those years in part because its gross margins depended on Intel’s pricing concessions.
If AWS were to require customers to buy all or most of their cloud computing needs from it in exchange for steep discounts, that would be likely to get a court’s attention. There are companies that have decided to go all-in on AWS for their cloud needs, but at least publicly there are a variety of benign reasons why companies make that decision.
Competing with customers
Enterprise software companies — even Microsoft — have no choice but to offer their services on AWS, thanks to its market power, and they’re not shy about complaining about it. In some ways, this is similar to online advertisers: No major brand can afford to overlook Google and Facebook as advertising vehicles, because that’s where the people are.
One salient point referenced in the Judiciary Committee’s report was the AWS Marketplace, home to lots of third-party software that will run on the platform. This marketplace has allowed countless software companies to take advantage of AWS’ platform to sell cloud software they couldn’t afford to host on their own: But there’s a catch.
The AWS Marketplace is not the first thing you see when you log into AWS. Instead, the AWS Management Console is the home page for the cloud platform, and the overwhelming majority of options listed in the console are first-party AWS services.
There are some companies that have cut commercial deals to list their services inside the AWS Console, which also makes the billing process easier for the end user. But companies have to strike those deals with AWS on their own, and companies like Google have been much more aggressive in striking those deals in recent years.
Competing with your customers is a tricky balance, and experts watching this aspect of the company’s operations will be looking for self-preferencing tendencies, a common area of concern for modern antitrust regulators looking at tech companies.
Self-preferencing can take on several forms. Data is one: AWS has an enormous amount of data on how its customers are using both its own and third-party cloud services on its platform, and critics have charged that it can use that data to launch competing services.
This is unavoidable to some extent, as knowing that AWS customers are using, for instance, a lot of Snowflake’s data services allows it to provide better services to both Snowflake and those customers, namely by assigning significant amounts of computing resources to the machines running those services. But there’s also an information imbalance here, and there’s no question that companies that do well on AWS — including MongoDB and Elastic — have seen it launch competitive services.
Another form of self-preferencing is more direct. If AWS required customers of EC2 or S3 — the flagship compute and storage products in its arsenal — to use higher-level AWS data services as opposed to, say, a third-party product like Snowflake’s data warehousing tool, it could also run into trouble, Slaiman said.
“The simple version is [if] you can’t get X product at any price unless you are also buying Y product,” she said. AWS could also promise better performance for Product X if customers agree to use Product Y, preventing outside competitors from competing directly against Product Y.
“If in order to compete in some particular enterprise software market Amazon is able to make it so difficult that you have to also enter the incredibly expensive infrastructure market, I think that would be really concerning,” Slaiman said.
Experts believe AWS has been careful enough at this stage of cloud-computing’s development to avoid making that kind of high-profile mistake. But as the growth rate of the market slows, deals for cloud services are only expected to get more competitive over the next decade, which could increase the chances of a sales misstep.
Check-out any time you like
Hewlett Packard Enterprise CEO Antonio Neri articulated the third major concern about AWS rather well in an interview with Protocol last year.
“When you check in to the public cloud, it is like checking in to Hotel California: You check in and never check out, because that cost is ginormous,” he said. AWS makes it extremely easy to get application and user data into its cloud; it will even send a semi-truck to your data center to upload the data to rugged hard drives and actually drive that data back to its own facilities.
Getting that data out is much harder. Once it lands somewhere, data tends to stay put, which is one of the reasons that large multinational corporations that have been operating IT for decades have been so slow to move to the cloud. AWS (and all cloud providers, for that matter) also charge egress fees for that data, which can be quite prohibitive at scale.
This data is also a concern that regulators have about AWS as the most profitable arm of Amazon the retailer: that Amazon is using AWS data to inform its business strategy. That’s a concern that might grow even stronger when AWS CEO Andy Jassy takes over as Amazon CEO later this year.
“So it may have a stronger position, not only armed with the data, but also in terms of self-preferencing,” Polden said. “Armed with information gained from AWS, Amazon might be able to be an even stronger competitor.”
Given that so far most cloud customers have been happy to move their data into the new services provided by the Big Three, complaints about egress fees mainly come from companies that want to use more than one cloud provider. A growing number of companies have expressed interest in tools that help them manage applications across multiple clouds, and after years of resistance AWS finally introduced a service that allows just that in December at its annual re:Invent conference.
But companies that want to implement multicloud strategies also suffer from the fact that each cloud provider has a slightly different way of doing things, and there can be quite a learning curve when an AWS shop tries to get up and running on Microsoft Azure, and vice versa.
Interoperability requirements are under consideration as possible remedies for social media companies, Slaiman said.
“Social media companies just sort of came up in a way that was not interoperable with one another. But we now see that there would be major competitive benefits in this really important industry, where we don’t have sufficient competition, to imposing interoperability requirements,” she said.
Imposing such requirements on cloud computing could have the potential to do more harm than good for market participants and end users, especially in a growing market where Microsoft and Google are gaining share at AWS’ expense through differentiated strategies and services. But some regulators, comfortable with their hammers, aren’t inclined to look for other tools, and resulting remedies may not necessarily be what customers actually want.
“This is still a pretty fluid market,” Polden said. “Who’s to say that AWS has demonstrable market power because the method that they have for their customers is designed to exclude their competitors from getting access to their customers? It’s a different approach, it’s a different way of doing this.”
And there’s one wild card that could change everything with respect to how AWS, its customers and its partners interoperate: the outcome of the Oracle vs. Google case, said Charles Duan, a senior fellow at R Street. The U.S. Supreme Court is considering Google’s appeal of two lower-court rulings that upheld Oracle’s position that APIs are subject to copyright, which could dramatically alter the software-development landscape.
“If that litigation goes in Oracle’s favor, Amazon potentially has a very powerful way of stopping competitors from making compatible APIs,” Duan said, referring to how several companies ( including Oracle) have reimplemented the API for the widely used S3 storage service. “I think the case just sort of exposes this longstanding question of, we’ve just sort of assumed we live in a world where we don’t have to worry about people asserting rights over all these sorts of things.”
Stuck in the Wild West
With the cloud market growing at a 34% clip year-over-year, according to Synergy Research, it’s hard to see anticompetitive behavior holding back fellow cloud providers like Microsoft and Google.
“It has taken just nine quarters for the market to double in size,” Synergy wrote in its most recent report. “While Amazon and Microsoft continue to account for over half of the worldwide market, Microsoft once again gained ground on its larger rival and hit the milestone of achieving a 20% worldwide market share [in the fourth quarter of 2020].”
That report doesn’t even consider the astonishing growth of Microsoft’s cloud tools for office productivity and business analysis over the last several years, an area in which AWS has only a nominal presence. A broader analysis of the competitive landscape in cloud might conclude that Microsoft has the biggest wallet share in enterprise tech and therefore the biggest reach, although there are decades’ worth of factors that play into where Microsoft finds itself in 2021.
For its part, Google appears to be more committed to the enterprise cloud market than ever, after years of waffling about its strategic importance to the larger Alphabet corporation. It is investing heavily in cloud-computing infrastructure to support the next several years, according to CFO Ruth Porat.
Regulators looking for disproportionate power in cloud infrastructure might have better luck examining how third-party software providers are faring against AWS. But again, there are signs that it’s very possible to build a big business on the AWS platform, as the massive growth of Snowflake — built with proprietary code that AWS can’t touch — has shown.
“One of the struggles in antitrust, and you see this in a number of U.S. Supreme Court cases dealing with Section Two of the Sherman Act, [is that] we want to encourage innovation and creation to develop the next best product and then we don’t want to turn on them,” Polden said. “Courts have been struggling in defining when it is that a firm that has lawfully acquired monopoly status suddenly becomes a pariah.”
Regulators will continue to look for evidence that AWS has crossed a bright line, relying on market participants to blow the whistle on any anticompetitive dealings. (A link to my email address is at the top of this report.)
But for now, cloud computing still appears very much entrenched in its Wild West phase, and will be so long as it continues to evolve very quickly.
“It doesn’t mean that there can’t be competitive concerns, but I do think that’s an important difference between this market and some of the other markets [like social media] where folks are really concerned and ready to make big changes,” Slaiman said.