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The Cloud Industry is Vibrant and Competitive – But Some Vendors are Locking Their Customers In

Cloud computing has enabled businesses of all sizes to take advantage of new technologies by lowering barriers to entry and reducing costs. By paying for cloud software “as a service”, customers can scale up or down their IT resources as needed, without the necessity of building or leasing space in a data center.

What’s also important to recognize is that cloud computing is integrally a part of the market for information technology generally. Nearly all software utilized by small businesses, large organizations and ordinary users alike is delivered by the cloud. When we discuss the “cloud market,” we are really referring tot the market for IT services delivered by cloud technologies. 

This week, NetChoice submitted its comments to the Federal Trade Commission’s request for information on cloud computing. The FTC sought discussion on the market dynamics of the cloud industry, business practices shaping competition and consumer protection.

Our comments focus on a broad, vibrant cloud market – there are dozens, if not hundreds, of different vendors offering varying cloud-focused services. In 2023, business spending on cloud services topped $60 billion, a 20 percent increase (over $10 billion) year-over-year. And cloud vendors are increasingly competing with each other to offer the most innovative, efficient and cost-effective services possible, especially new entrants to the market. Indeed, the market share of revenue earned by AWS and Google – two leading cloud providers – each decreased at the end of 2022, despite revenue growth in both companies. New entrants are enjoying larger pieces of the cloud marketplace pie, especially as it grows bigger each year.

Yet there is a threat to quality cloud competition from a select group of incumbent companies. These vendors leverage their position as dominant providers to keep their customers locked-in to their software contracts, restricting how customers can adopt new cloud technologies from competing vendors.

Microsoft, for example, changed its licensing terms for cloud products in 2019 to prevent its customers from using different vendors. Its customers now must use Microsoft’s Azure cloud to run Microsoft Office, or face a steep penalty fee. And in the case of other Microsoft products, customers may not use other cloud platforms at all. Professor Frederic Jenny, who spoke at the FTC’s May 11 panel discussion to kick off this comment period, pointed out that Microsoft’s market share growth since 2019 is not due to its strong product performance, but rather to these restrictive licensing practices. 

Oracle, too, uses anticompetitive practices to keep its customers locked-into its cloud products. Its standard contract language uses ambiguous terms to discourage customers from using alternative clouds for Oracle database management products (an industry in which Oracle has a dominant market share). It then utilizes punitive audits to seek out customers who are non-compliant with its terms, levying huge fees, and then bargaining away these fees in exchange for purchasing an Oracle cloud product on which to run the customer’s other Oracle products. Oracle faced a class action suit in 2020 for using these predatory audits to force its customers into purchasing cloud subscriptions that they “neither desired nor intended to use.”

As a result of Microsoft and Oracle’s licensing practices, customers are strongly discouraged from seeking better-performing or more cost-effective cloud service providers, despite a strong market of alternative cloud-focused vendors. A vibrant and growing industry of cloud services exists, but so many customers – from small businesses to large government agencies – cannot take advantage of it.

The FTC’s request for information on cloud competition is an important conversation to begin. Cloud technologies bolster growth for businesses of every stripe, and a vibrant, competitive cloud industry is enabling this growth. It is the protection of cloud customers that should most concern the FTC when it comes to the cloud computing marketplace: the anticompetitive practices wielded against customers should be the focus of the FTC’s scrutiny.

Read NetChoice’s full comment to the FTC below.