(Washington, DC). The American Antitrust Institute has released a new report: The Cloud Technology Market: Storm of Innovation or Rainy Days for Competition? The rise of cloud technology has been meteoric. Within a relatively short period of time, spanning the early 2000s to mid-2010s, major providers of cloud technology built out massive capabilities. This cloud buildout occurred largely through acquisitions of smaller rivals and startups, but organic growth also played a role. Today’s cloud market features two fundamentally different types of participants. One is the large “digital ecosystem.” Cloud technology is one of three fundamental components of the digital ecosystem that also includes a platform and constellation of applications. These players include Amazon’s Web Services (AWS), Microsoft Azure, and Google Cloud. But there are also other players in the cloud market that are not digital ecosystems that specialize in cloud technology, including IBM, Oracle, Salesforce, and Tencent.
The evolution of the broader cloud market is marked by distinctive features. First, three providers—all digital ecosystems—collectively account for 65% of the market. A small fringe of other providers account for the remainder. Despite a trajectory of rapid acquisition and expansion of cloud capability, the positioning of the top three firms, AWS, Microsoft Azure, and Google Cloud, has not materially changed over time. Nor is it evident that the smaller fringe players have gained enough market share to even come close to displacing the market leaders. Whether the economic downturn, which has slowed cloud growth, shifts these dynamics remains uncertain, especially since cloud adoption is still at an early stage.
Second, as previous AAI research reveals, the digital sector—in which the cloud market is situated—is home to extraordinarily weak merger enforcement. This record of enforcement has actually deteriorated over time, with the rate of merger challenges in the digital sector falling increasingly below the average across all sectors. This enforcement record is highly relevant to the explosive and rapid trajectory of cloud acquisitions by many of the top cloud providers, which account for 45% of their total acquisitions over the last two and a half decades.
The features of the cloud market raise pressing questions about the nature of competition in cloud and the role of antitrust enforcement and competition policy in promoting it. Structural “stagnation” in the cloud market, coupled with ongoing weak merger enforcement, is seemingly at odds with the technological dynamism and potential for continued innovation in the sector. As cloud providers undoubtedly turn their attention to strategic competition to protect market positions, enforcers should do the same. However, this report explains why it is crucial to continue to focus on consolidation, rising concentration, and the emergence of dominant firms. As revealed time and again, non-competitive market structures potentially beget anticompetitive incentives, conduct designed to limit competition, and poor market performance.
The report unpacks the structure of the cloud market and its implications for competition. It examines the top players and their business models, areas of cloud where acquisition and investment are particularly focused, and markets shares and concentration. This provides an important reference point for understanding the strategic incentives facing cloud providers. These include how firms make decisions about expanding—organically through internal innovation and growth, or through acquisition; maintaining or extending their market positions; bundling and pricing cloud services; promoting customer switching; and competing on quality (i.e., security); and innovation.
The report lays the groundwork for assessing the competitive evolution of the cloud market. It tees up fundamental questions. For example, do the structural characteristics of the cloud market raise concerns about the trajectory of competition and how much weight should be given to the role of technological dynamism and innovation to ensure that critical cloud services are delivered competitively? How aggressively should enforcers monitor consolidation and the structure of the cloud market? At the same time, how can they get ahead of the ball on strategic firm conduct that could be designed to limit competition? Major takeaways from the analysis include:
• The cloud market has grown exponentially, with cloud-related acquisitions accounting for 45% of total acquisitions by the top cloud providers. Market structure is stagnant across the largest providers and smaller fringe players, despite the underlying dynamism inherent in cloud technology. Incentives to defend market positions could shape entry moving forward and foster practices designed to entrench market power and limit competition.
• Expansion of cloud capability by the top cloud providers occurs, acquisition, investment, and organic growth. How firms deploy these strategies is becoming clearer. The roles of economic control of cloud assets and the competitive incentives resulting from different types of firm integration are important for how firms position themselves to grow and the types of competitive strategies they employ.
• The buildout of cloud technology that occurred from the early 2000s to mid-2010s appears to be maturing. It bears little resemblance to broader M&A cycles. This is likely a function of explosive growth in the digital sector and the drive to catch up with rivals that rely more on organic, versus acquisitive, growth. The dynamics of growth are likely to continue to affect how firms compete in the cloud market.
• The cloud market contains a mix of dominant, digital ecosystem cloud providers and non-digital ecosystem fringe players. Different business models and degrees of integration will affect how firms compete in selling cloud services. These include the digital ecosystems’ strategies for maintaining their positions in platform and applications markets. Other types of cloud players may not have these same incentives, which will complicate analysis of merger and monopolization cases.
• Weak merger control remains a serious competition concern for the digital sector. Without more scrutiny of cloud consolidation, including acquisitions of smaller and nascent rivals, any competition enforcement program will increasingly lag behind. The first line of defense to anticompetitive conduct resulting from higher concentration and dominant firms is strong merger enforcement.