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What will a UK cloud probe mean for Amazon and Microsoft shares?

Big tech giants, including Amazon, Apple and Microsoft, continue to wield sizable influence in multiple industries, including the cloud. The UK and Germany are among countries set to hold big tech firms to account, with the former concerned that “high barriers to switching” are damaging competitiveness in the market.

 - Amazon and Microsoft’s cloud dominance in the UK could face an Ofcom watchdog probe.

- Germany’s anti-trust authority, the Bundeskartellamt, considers curbs for Apple.

- The Global X Cloud Computing ETF is up 9.5% year-to-date.

Tech giants Amazon [AMZN] and Microsoft [MSFT] have caught the eye of Ofcom, the UK communications regulator, which is moving to probe their respective cloud services, AWS and Azure. 

One of the criticisms levelled at Amazon and Microsoft is that high fees for transferring data make it harder to switch providers, thus preventing smaller providers from securing new customers.

“High barriers to switching are already harming competition in what is a fast-growing market. We think more in-depth scrutiny is needed to make sure it’s working well for people and businesses who rely on these services,” Fergal Farragher, the Ofcom director responsible for the market study, said in a press release.

The Amazon share price is up 21.6% year-to-date through 6 April and 10.5% in the past month. The Microsoft share price is up 21% and up 14% in the respective periods.

Cloud price rise

Between them, Amazon and Microsoft control between 60% and 70% of the UK’s cloud market. To put this into context, in 2021, Alphabet [GOOGL] had the third-largest share, between 5% and 10%.  

 Cloud revenue is increasingly important to the tech giants as ecommerce sales slow and the economy weakens. Amazon’s UK net sales for 2022 were $30.1bn, down from $31.9bn in 2021, although above $26.5bn in 2020.  

To combat inflation, Microsoft announced in January that prices would be rising by 9% to 15% in the UK and Europe.  

Despite a statement from Microsoft saying that its cloud offering “continues to be priced competitively”, trade body Cloud Infrastructure Services Providers in Europe (CISPE) believes the price rises are “symptomatic of abusive practices of a dominant player”.

“These, alongside increasingly frequent changes to licences, erode margins and make it almost impossible for vendors to compete on a level playing field with the software giant,” CISPE wrote in a press release last week.

 An Ofcom probe into Amazon and Microsoft is unlikely to deter investors for now but may do so in the future if their respective market shares are curtailed.

Germany considers ChatGPT and targets Apple

Another of the UK’s watchdogs, the Information Commissioners Office (ICO), which regulates data use, has fired warning shots about generative AI following Italy’s ban on ChatGPT.

In a blog post last week, Stephen Almond, executive director of regulatory risk at the ICO, set out a series of questions AI developers should be asking themselves, citing an open letter which called for “giant AI experiments” to be put on hold. The open letter was signed by hundreds of researchers and experts, including Tesla [TSLA] CEO Elon Musk and Apple [AAPL] co-founder Steve Wozniak.

“[W]hile the technology is novel, the principles of data protection law remain the sameand there is a clear roadmap for organisations to innovate in a way that respects people’s privacy,” wrote Almond.

Germany is the latest country to reportedly be considering a ban on ChatGPT. Its anti-trust authority, the Bundeskartellamt, also announced last Wednesday that Apple could be subject to curbs in light of its “economic position of power across markets”.

Funds in focus: Global X Cloud Computing ETF

Microsoft is the second-biggest holding in the First Trust Cloud Computing ETF [SKYY] and accounts for 4.33% of its portfolio as of 6 April; Amazon is the fifth-biggest and has been allocated 4.01%. The fund is up 12.9% year-to-date and up 7.8% in the past month.  

Microsoft and Amazon are the third- and fourth-biggest holdings in the ProShares Ultra Nasdaq Cloud Computing [SKYU], with weightings of 3.17% and 2.97%, respectively, as of 10 April. The fund is up 23.5% year-to-date and up 16.4% in the past month.

Microsoft and Amazon are also held by the Global X Cloud Computing ETF [CLOU], with weightings of 2.50% and 2.12%, respectively. The fund is up 9.5% year-to-date and up 6.3% in the past month.  

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