In Defense of Egress Fees

Switching Costs in the Cloud

If online chatter is any indication, egress fees are the boogeyman of compute, the bane of competition. These fees have come under scrutiny from regulators the world over, not least of which because there’s often a charge to move data to a competitor or back into your own on-premises IT infrastructure. While providers vary in their data transfer pricing, egress occurs any time data is sent around the world, transferred to different parts of the cloud, pulled to an external location, or summoned by an external IP address. Egress fees, to the lament of regulators, are multiples more expensive among the largest three cloud service providers (CSP), the hyperscalers of AWS, Microsoft Azure, and Google Cloud Platform.

But the panic makes a mountain out of a molehill. Egress fees distract from more earnest and harder to resolve industry issues, like interoperability, hyperscalers’ cross-market advantages, and inflated license fees for SaaS offerings on other providers’ platforms. Here, we outline a reproach of common regulatory proposals against egress fees, particularly those offered by the EU Data Act and the various European market studies that informed it.

Not All Egress Fees Are Made Equal: The Case Against the Outright Ban

Though invisible, data is heavy, at least when pushing massive amounts of it around. Egress fees are a way to make the businesses that take up the most bandwidth internalize the cost to the overall system. Should egress fees be outright banned, that cost would be redistributed among all customers, including small businesses whose infrequent data transferring is covered under hyperscalers’ “free tier.” In fact, over 90% of AWS customers pay nothing in egress fees. Yes, the egress bill of a video streaming company is expensive and confusing, but that’s the tradeoff for quality scalability.

Egress fees are also a way for some CSPs to signal that their comparative advantage lies in compute and storage rather than data transfer. In fact, one might reasonably argue that they advance competition by allowing smaller competitors and adjacent industries to capitalize on more efficient, less energy-intensive ways to move data. If an enterprise does not like its egress costs, it can use companies like Alluxio or Snowflake to compress files or cache the most commonly used data locally, drastically reducing egress costs while expanding the cloud industry ecosystem. Or an enterprise can choose to bypass the internet when transferring data, thereby taking advantage of the public cloud without draining shared resources by constantly retrieving data stored on the internet. In either case, egress fees encourage the biggest cloud customers to better steward their data in a way that keeps cost lower for the majority.

The Practical Difficulties of Exempting Fees When Switching to a Competitor

But what if an enterprise wants to leave its current provider by returning to on-premises or by opting for a smaller CSP that displaces egress costs elsewhere in its pricing structure? Making the bandwidth hogs internalize costs is one thing, but holding companies’ data hostage when they try to exit your service is practically the definition of anti-competitive. While this line of thinking produces more targeted regulation, it’s misguided. A study prepared for the European Commission found that the egress costs for fictitious customers to transfer out of all their data over the public internet amounted to less than half a percent of their annual cloud services cost. Even if eliminating egress fees did lower total switching costs, there remains the difficulty of distinguishing when a customer is switching to a competitor rather than transferring data as a normal course of business.

To comply with the EU Data Act, the hyperscalers now allow customers to apply for fee waivers on one-time data transfers to other providers or on-premises systems, so long as the customer removes all data and workloads. Google also suggests European customers “may be eligible” for free transfers to proven multi-cloud partners.

The 60 (Google and Microsoft) to 90 day (AWS) complete removal required for the waiver is not only a tight turnaround that could compromise security during migration, but is also completely out of touch with the market. Eighty to ninety percent of public cloud users operate on two or more providers. Assuming Google sets a standard in discerning when data transfers are phased exits from Google’s service and when they are egress typical of multi-cloud architecture, this still distracts from a larger concern.

The more scrupulous CSPs are in determining which data transfers qualify, the more valueless these fee waivers are and the more complaints regulators will get that they’ve not gone far enough in preventing vendor lock-in. The more generous CSPs are in granting waivers, the more these exemptions resemble an outright elimination of egress fees, with all the market inefficiencies and harm to smaller cloud customers that brings.

Offering Data Transfer at Cost Hurts Innovation

The EU Data Act mandates egress charges associated with multi-cloud use not exceed the cost incurred by CSPs. It further stipulates one-time data transfers be offered at cost for the next three years as a transition before eliminating all provider-switching related egress fees. Insofar as this attempts to appear more measured than a full ban, it is all the more nonsensical. The average company saves over 200% by using Infrastructure as a Service from cloud providers. This savings is closer to 270% for start ups and smaller companies, who have long been noted as the primary beneficiaries of the cloud’s offerings. The cloud is not without downsides, but its services greatly benefit customers. Free market societies encourage innovation by allowing service providers to compete and to profit from that competition. We eliminate all incentive for providers to differentiate products and improve services when we prevent profit. There is only an arbitrary difference in making CSPs offer data transfer at cost and asking them to offer compute or storage at cost. In fact, if the aim is to improve consumer welfare, there is no point in stopping at egress fees when, for even the most data-intensive cloud customers, they constitute just 6% of total cloud spending.

What’s more, AWS has passed on over 100% of the drop in egress costs over the last several years, meaning it has lowered prices slightly more than the cost of transferring data has decreased. Sure, it up-charges egress costs more than its competitors, but it is, after all, a business. Businesses that overcharge lose market share, which AWS has, albeit slowly, over the last few years.

Sticky But Not Stuck

The inconvenient truth for regulators is that even in an idealized, highly competitive cloud market, cloud provision is sticky, meaning that the very nature of the service being offered makes customers unlikely to switch often. Cloud providers are more like landlords than they are like cereal brands. You’ll probably swap Rice Krispies for Cheerios if the price of the former shoots up, but you may choose not to move even if your rent rises. It’s just too darn annoying. As one economic study found, 90% of cloud customers did not adopt a cheaper, exact replica product offered by the same provider even though it would have saved customers 22% of their total cloud spending. If customers refuse to switch to perfect substitutes offered by the same provider, where interoperability and data portability are nonissues, this tells us the market is simply inelastic. Before regulating allegedly anti-competitive practices, we need to consider how the nature of the market shapes customer preferences. Granted, a demand-inelastic market does naturally allow for greater abuse on the part of cloud providers. Luckily, the cloud is a commercial product, not a public service.

Public Cloud, Not Public Service

Cloud service providers are profit-maximizing companies whose main customers are other profit-maximizing companies. Everyday consumers interact with the cloud either through their workplace or indirectly when, say, watching a Netflix show or ordering GrubHub, without realizing their systems run on AWS. You may have many subscription services, but renting compute and storage is likely not one of them. This makes the cloud different from other digital services coming under scrutiny, like Apple’s walled garden or Google’s advertising empire, in that neither individual consumers nor small businesses are adversely affected by the practices of digital service giants. Anti-competitive practices don’t have to target the little guy in order to be sub-optimal, but don’t let regulators tug at your heartstrings on this one: in this arena, there is no David, only Goliaths.