What happened
Shares of Amazon.com (AMZN 1.21%) slid 3% through 12:30 p.m. ET on Tuesday after Reuters -- in an exclusive report -- warned that British regulators may launch an antimonopoly investigation into the company's dominance of the cloud computing marketplacej.
NASDAQ: AMZN
Key Data Points
Microsoft (MSFT 0.04%) -- also reported to be part of the probe -- saw its shares slide a similar 2.5%.
NASDAQ: MSFT
Key Data Points
So what
As Reuters reports, the British media regulator "Ofcom" (short for the Office of Communications) has actually been looking into Amazon's and Microsoft's dominance in cloud computing since April -- but is now preparing to issue an official report on Thursday.
Combined, Amazon's AWS division and Microsoft's Azure control about 60% to 70% of the U.K. market for cloud services, while Alphabet's (GOOG 1.49%) (GOOGL 1.57%) Google owns only a 10% share. (Not yet a subject of the probe, Alphabet shares are down only about 1% today). Worse, the companies apparently impose technical restraints on their customers, making it difficult for a single customer to patronize more than one provider for its cloud services.
With so little competition in what has become essentially a duopoly market, Ofcom says it's "concerned that constraints on customers' ability to use more than one provider could make it harder for smaller cloud providers to win business and compete with the market leaders."
Now what
Reuters deserves credit for highlighting this emerging threat to Amazon and Microsoft for investors -- and it's a big threat. According to data from S&P Global Market Intelligence, Amazon's AWS cloud computing division generates operating profit margins of 28.5% for the company, while Microsoft's Azure business boasts margins in excess of 43%. Still, it's worth emphasizing that Ofcom has not yet issued its official decision. If Ofcom does decide that an investigation is warranted, its next step will be to refer its concerns to Britain's Competition and Markets Authority, the "CMA."
We only find out if that will happen on Thursday, the deadline for Ofcom to make its decision.
Thus, the actual investigation would be headed by CMA. If opened, such an investigation could last for 24 or even 32 weeks, according to a CMA guidebook. So while the threat of Amazon and Microsoft facing enforcement measures that would hinder their businesses isn't necessarily imminent -- it also might not go away for some months to come.
Investors in these companies should prepare themselves for months of worry.
