Firm in the clouds: Supplier market power and technology adoption in the cloud computing industry

Abstract

I study the impact of supplier concentration on downstream technology adoption and firm productivity in the rapidly expanding French cloud computing services industry. Supplier concentration can reduce adoption and raise costs on adopting firms, slowing productivity growth. In addition, market power allows suppliers to levy egress fees on data moved off-platform or introduce additional complementarity between their cloud platforms and on-premise software, foreclosing rivals. Estimating a dynamic model of firm production and supplier pricing to study how downstream firms make technology bundling choices, I analyze the effects of competition policies on adoption and welfare. I find that adopting cloud computing increases firm productivity by 0.2% to 1.6%, with heterogeneous effects across sectors and a larger impact for firms that purchase services from multiple cloud providers. Entry costs are rapidly falling, while switching costs are around € 3/GB of data stored. Simulating the impacts of a new entrant at the lowest quality level, I find welfare rises by 2.82% annually (€ 8.4 billion), while a merger of Google’s and Microsoft’s cloud platforms lowers welfare by 0.29% (€ 905 million). Simulating the effects of a ban on data egress fees from the EU Data Act and an increase in software interoperability between Microsoft server software and rival cloud platforms, I find these policies produce annual welfare gains of 0.06% (€ 193 million) and 0.16% (€ 517 million).