What To Do About the Extreme Monopoly Implications of Hyperscale Public Cloud Providers

Executive Summary

• Hyperscale public cloud providers are tremendously efficient, but they are natural monopolies.
• Why the issue of public cloud monopolies needs to be discussed and regulated.

Introduction

It is only possible to name a few public cloud hyperscale providers. This is because the hyperscale providers have enormous economies of scale in their facilities and how they enable their services to be easily consumed, among other factors. Even prominent vendors such as Oracle and SAP have been unable to provide a competitive offering to the hyperscale providers. (One might argue they could have put up more of a fight but lack the appetite for such long-term investment; Oracle, for example, prefers to spend money on stock buybacks).

Our References for This Article

If you want to see our references for this article and related Brightwork articles, see this link.

How Monopolistic Are the Cloud Service Providers?

There is little doubt that these providers are monopolistic.

• GCP’s parent company, Google, has taken control of most of the online advertising.
• AWS has a specific business model to eliminate competition from the markets in which it competes. Monopoly expert Matt Stoller describes AWS’s seemingly unlimited funding as a type of counterfeit capitalism. It has many copycats in software and outside of software (see the links and quotes at the bottom of this article).
• Azure’s parent company, Microsoft, is well Microsoft.

Curiously, one of Azure’s arguments to customers is that AWS is such a monopolist that they use the data they gather from providing cloud services to compete against their customers, at least in some circumstances, as the following quote explains.

Microsoft has been telling potential clients that if they use its Azure service, they won’t need to worry that they are placing valuable customer data or product information with a rival who can use the data to compete with them. According to the Journal, Julia White, corporate vice president of Microsoft Azure, said in an October interview that unlike with AWS, Azure is “not about using customer data and competing with them.” – Forbes

This is an amazing development, with one of the most prominent monopoly vendors in the enterprise software space making the monopoly argument against a competitor.

While this is all known, the far less frequently discussed topic is what to do about it.

Non Hyperscale Providers Losing Market Share

Data centers and colocation operators are steadily losing market share to hyperscale providers. So much so that as we cover in the article How Gartner and IDC Help Vendors Co-Opt Things, They Are Unrelated To, even huge companies like Equinix have found it necessary to change the narrative. They have turned to IT analysts like Gartner and IDC and paid them most likely a substantial fee to discourage companies from viewing Equinix’s “nonpublic cloud” offering as relevant and as valuable as the public cloud. As we cover in the article, Equinix’s arguments, repeated through Gartner and IDC, make little sense.

The Role of Regulation and Natural Monopolies

The answer to this is the same as any natural monopoly, namely regulation.

The definition of a natural monopoly is as follows.

A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors. This frequently occurs in industries where capital costs predominate, creating economies of scale that are large in relation to the size of the market; examples include public utilities such as water services and electricity.^[1] Natural monopolies were recognized as potential sources of market failure early as the 19th century; John Stuart Mill advocated government regulation to make them serve the public good. – Wikipedia

The understanding of monopolies, much less natural monopolies in even the business general public, is relatively weak. We accept highly regulated natural monopolies in areas ranging from railroads and waterworks to power generation without considering it.

The prices for our monthly power bill are not set by the “market” and are from multiple options. For example, each city in the US has one power provider- a regulated utility. Most of the world works in the same way.

A dam, which produces power and is a natural monopoly, does not work under a competitive model. First, dams are costly to build and have large ecological implications. How does a “free market” work for dams? Should a second dam be allowed a few miles from this dam? That won’t work, as a dam creates a lake behind it. 

Large infrastructure items like dams, railroads, power generation, waterworks, and hyperscale providers do not fit within the construct of open competition.

The outside of a Google data center. 

The inside of a Google data center.

The Failure of the Low Regulated Mobile Phone Services Market

In cases where natural monopolies have been fragmented, such as in the US with mobile phone services, the costs have become much higher than necessary. And there has been a duplication of infrastructure and a corresponding increase in expenditures on sales and marketing. A discussion with any Canadian quickly illuminates how Canada kept their cellular service a regulated monopoly to many Canadians’ satisfaction. In contrast, the US followed a “free market” model of trying to have multiple cellular service providers for a natural monopoly.

Why There Is No Other Historical Solution than Regulation

There is no other answer to natural monopolies but regulation. Without regulation, natural monopolies coerce excess returns from their customers. This has been found to occur in virtually every case where a monopoly exists.

Hyperscale providers like AWS, GCP, and Azure currently provide low prices (with only AWS and GCP being public prices). Still, history shows that these prices will not stay low as these providers continue to drive out competition. Low prices are the early stage of monopolies (often used to justify the monopoly); mid and later-stage monopolies use their market power to raise prices. Consumers lack alternatives to the monopoly, and once most of the competitors are run from the market, it is difficult for new entrants to bring back competition. Monopolies are also intertwined with government lobbying and protected by governments. With the rise of hyper-cloud public cloud providers and several giant technology companies (including Facebook and Apple), these companies’ size and influence make them nearly unregulatable.

Such political power is also suffused into policy unrelated to regulation, making it even more challenging to compete with the monopoly. For example, Apple barely pays taxes due to its tax haven in Ireland. General Electric (an older monopoly) has many years to receive a billion-dollar or more reverse tax from the US government. That is, it not only pays no tax but is paid to exist by the US government.

International Concern Over the Concentration of Hypescale Public Service Providers

While AWS, GCP, and Microsoft/Azure are multinationals with offices worldwide, they are all US-based. As concentration continues, each non-US country will have to come to terms with higher and higher percentages of government and private industry data being kept on US servers. Beyond the privacy concerns within each vendor, the US government has come up with various excuses to obtain access to this data, as explained in the following quotation.

However, those using third-party cloud solutions are relinquishing some of their control over their business data. For example, the U.S. Cloud Act (Clarifying Lawful Overseas Use of Data) gives U.S. authorities access to data stored in the cloud – even if local laws in the data storage location prohibit it. Enterprises will increasingly use their data to create value – increasingly in real time, for example, in the production environment, ”said Dr. Karl-Ulrich Köhler, CEO of Rittal International. “Data sovereignty will be an important success factor for international competitiveness,” adds André Hiddink, product manager IT Infrastructure. – Data Center Works

The primary regulatory body internationally that has been able to fine and otherwise punish US companies has been the EU.

The US and Europe have had good relations for many decades. Still, it isn’t easy to see the US government accepting the current and predicted future situation if the roles were reversed.

This leads to the following quotation.

In the EU there is a move towards regulation to counter the dominance of the USA Tech giants which will hurt AWS, Google etc and leaves the door open for Tier 2 cloud providers (some using OCP hardware) that want to use colocation centers. This may or may not hurt Equinix if the EU include Equinix in with the other USA based companies.

I have been advised by a small colocation provider in the UK that provides an On Ramp services.

One of the main CSPs (mobile network provider) in the UK used them recently to connect to Google Cloud, and it was the only way they could do it apparently. And only networking gear was installed in their colocation center, that is no servers were installed. – Mark Dansie

And the following quotation also.

The European major digital project Gaia-X, an initiative of the German Ministry of Economic Cooperation and Energy (BMWi), is to start in 2020. The project aims to build a European cloud for the secure digitization and linking of industry and forms the basis for the use of new AI applications (artificial intelligence). In this context, the Fraunhofer-institute the initiative ‘International Data Spaces’. This virtual data room allows companies to exchange data securely. Compatibility of a proprietary solution with existing (cloud) platforms – interoperability – also exists. This means: geographically dispersed smaller data centers with open cloud stacks can create a new class of industrial applications that perform the first data analysis directly at the source of the data and use the cloud for later analyzes. – Data Center Works

Conclusion

The US has done very little to enforce its antitrust regulation in the past few decades. Without a national security concern (as all of the hyperscale providers are based in the US), the EU is the likely regulatory entity that would do something to regulate the market. The EU has a significant weapon in the fight: the EU market.

If forced to do so, the hyperscale providers would have to accommodate the EU regulations. The hyperscale providers are pretty new, especially at their current scale. This issue is creeping up on regulators, which becomes more critical as they grow and pull market share from public cloud providers.

Quotes on Counterfeit Capitalism

These quotes are from a landmark article on capitalism titled WeWork and Counterfeit Capitalism, where the competition is primarily based upon access to capital.

Today I’m going to continue on this theme, and discuss the increasingly common tendency of capital markets to finance loss-making companies, which is an important trend I call “Counterfeit Capitalism.” The most hilarious example is WeWork, because it’s just such an obvious example of self-dealing couched in New Age management consulting speak. Its CEO, Adam Neumann, was just forced to step down. Both Neumann’s rise, and his fall, have important lessons if we want to correct serious errors in our political economy philosophy as a society.

This is of course Amazon’s model, which underpriced competitors in retail and eventually came to control the whole market. And Amazon has spawned a host of imitators, including WeWork. It has also reshaped venture investing. The goal of Son, and increasingly most large financiers in private equity and venture capital, is to find big markets and then dump capital into one player in such a market who can underprice until he becomes the dominant remaining actor.(emphasis added)

In this manner, financiers can help kill all competition, with the idea of profiting later on via the surviving monopoly. – Matt Stoller

AWS is profitable. However, it hasn’t been for long. And in fact, most of Amazon’s profits come from AWS, not from its more enormous retail revenues.

There are few companies that the capital markets would have allowed to make the investments AWS did into its infrastructure. This is an extra barrier to entry. The capital markets allow some companies to go years without profits or only rarely profitable quarters while requiring profits from other companies. Tesla is another company that the capital markets to make enormous promises and to come to raise enormous sums of money, even when they repeatedly say they won’t.

Matt Stoller continues…

What predatory pricing does is to enable competition purely based on access to capital. Someone like Neumann, and Son’s entire model with his Vision Fund, is to take inputs, combine them into products worth less than their cost, and plug up the deficit through the capital markets in hopes of acquiring market power later or of just self-dealing so the losses are placed onto someone else. This model has spread. Bird, the scooter company, is not making money. Uber and Lyft are similarly and systemically unprofitable. This model is catastrophic not just for individual companies, but for their competitors who have to *make* money. I’ve written about this problem before. Amazon has created a much less competitive and brittle retail sector. Netflix’s money-losing business is ruining Hollywood.

Then Stoller goes on to explain the impact of this on society generally.

This kind of counterfeit capitalism is terrible for society as a whole. At first, with companies like Walmart and Amazon, predatory pricing can seem smart. The entire retail sector might be decimated and communities across America might be harmed, but two day shipping is convenient and Walmart and Amazon do have positive cash flow. But increasingly with cheap capital and a narrow slice of financiers who want to copy the winners, there is a second or third generation of companies asking Wall Street to just ‘trust me.’

As euphoria in capital markets takes hold, predatory pricing scheme come to entirely wastes capital on money losing enterprises, and eventually these companies become Soviet-style generators of white elephants and self-dealing. The men and women who run them have to be charlatans, because they are storytellers justifying losses.

One of the results was the establishment of the Securities and Exchange Commission, which was designed to stop monopolization and fraud enabled by stock manipulation. As it turned out, it worked quite well. And as corrupt as the SEC has become, these principles even work now, in 2019, under the Donald Trump administration. Pure disclosure and public markets managed to stop Jamie Dimon, Masayoshi Son, and Adam Neumann.