Microsoft and Amazon were accused by U.K. regulators Wednesday of unfairly restricting competition in the cloud services market, in a significant development that could ultimately lead to an antitrust investigation into their business practices.

Ofcom, the British media watchdog, published the initial findings of a market study examining the massive cloud services market. Ofcom opened a review into the sector in September, seeking to find whether firms offering public cloud infrastructure pose any barriers to competition.

“Our provisional view is that competition is being limited by market features that make it more difficult for customers to switch and use multiple suppliers (known as ‘multi-cloud’),” Ofcom said. Those market features include:

• “Egress fees” cloud vendors charge companies to transfer data out of a cloud — Ofcom said so-called “hyperscalers” like Microsoft and Amazon set their egress fees “significantly higher” than most other providers.
• Technical restrictions on “interoperability” from leading cloud firms that prevent some of their services working effectively with those of other providers.
• Committed spend discounts structured in such a way they can incentivize customers to use a single hyperscaler for all or most of their cloud needs.

The regulator proposed referring the case for further investigation by the Competition and Markets Authority, the U.K. regulator tasked with ensuring markets are healthily competitive.

“We received provisional findings from Ofcom today in relation to its Cloud market study and are in the process of reviewing these,” a CMA spokesperson told CNBC via email.

“We stand ready to carry out a market investigation into this area, should Ofcom determine it is required following the completion of its consultation process.”

Microsoft, Amazon and Google, sometimes referred to as “hyperscalers” due to their ability to provide computing and storage at enterprise scale, are the largest players in the massive cloud infrastructure market, which was estimated to be worth £4.5 billion ($5.6 billion) to £5.0 billion in 2021, according to Ofcom.

Microsoft and Amazon’s Amazon Web Services unit command a 60% to 70% share of the market, according to the regulator, with Google accounting for 5% to 10% of total market share.

Ofcom said it was concerned by allegations surrounding licensing conditions set by cloud vendors, singling out Microsoft in particular as an example of companies allegedly “using their strong position in software products to distort competition in cloud infrastructure.”

The regulator said it received evidence showing Microsoft makes it harder for customers of its Office productivity apps to run them on cloud infrastructure other than Microsoft Azure.

Microsoft, in a statement, said: “We look forward to continuing our engagement with Ofcom on their cloud services market study. We remain committed to ensuring the U.K. cloud industry stays highly competitive, and to supporting the transformative potential of cloud technologies to help accelerate growth across the U.K. economy.”

An Amazon Web Services spokesperson told CNBC: “These are interim findings and AWS will continue to work with Ofcom ahead of the publication of its final report.”

“At AWS, we design our cloud services to give customers the freedom to build the solution that is right for them, with the technology of their choice,” they added. “This has driven increased competition across a range of sectors in the UK economy by broadening access to innovative, highly secure, and scalable IT services.”

Last month, Microsoft reportedly offered further changes to its cloud computing practices to avoid facing an EU antitrust investigation, according to Reuters. It comes after Microsoft last year announced a number of changes to its cloud contract terms, effectively making it easier for customers to use competing cloud services.

The EU has been looking into competition concerns surrounding the company’s cloud business following complaints from France’s OVHcloud and other smaller cloud vendors.

Francisco Mingorance, secretary general of the Cloud Services Providers in Europe, said Ofcom’s findings regarding Microsoft’s licensing practices show that regulators are “waking up to the ways in which Microsoft continues to distort fair competition in the cloud” and recommended national and EU antitrust authorities open formal investigations into the matter.

The provisional findings from Ofcom represent a blow to Amazon and Microsoft, two titans of the technology world. These companies did well out of the Covid-19 pandemic as people were forced into their homes, driving up demand for more digital means of staying connected and doing business.

However, more recently, they’ve faced struggles as pandemic restrictions have been lifted and higher interest rates dented the outlook on technology stocks. Amazon, Microsoft and Alphabet all reported deceleration in their respective cloud units in the fourth quarter of 2022.

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