The Rising Cost of Cloud Services and Software: A Growing Economic Challenge for Europe
Europeans Are Facing a 10% Annual Increase in Cloud and Software Expenses
According to a recent report shared by Cigref, European companies are experiencing an annual cost increase of approximately 10% for cloud computing and software services. This figure is derived from a study commissioned by the association from the consulting firm Asterès. The primary goal was to assess the economic impact of purchasing such digital services from American providers.
It’s important to note that the estimates are based on extrapolations from a limited sample. Specifically, the analysis considers interviews with six Chief Information Officers (CIOs) from major French corporations. Due to the lack of comprehensive macroeconomic data, this qualitative approach was adopted as the most feasible method.
Limitations of Data and Methodology
The study faced significant challenges in accessing detailed trade flow data. For instance:
- The World Trade Organization (WTO) does not provide detailed classifications for "cloud-software services" as referenced in the report.
- The broader "software" category, particularly the subset labeled "other than software," lacks sufficient granularity in available statistics to allow precise analysis.
- It remains impossible to determine what proportion of these flows is directed toward households versus businesses.
When services are produced domestically through local subsidiaries, it’s possible to track the financial flows, such as dividends, undistributed profits, or intra-group loans, linked to foreign direct investments (FDI) by American digital companies. However, the existing data are too fragmented to specify which sectors or countries are involved. More precisely:
- Sector breakdowns in official statistics like those from the Bureau of Economic Analysis (BEA) are insufficiently detailed.
- Data from organizations such as the OECD do not provide enough sectoral or country-specific information, with many figures missing.
- Eurostat’s data lack sector-specific granularity and do not align precisely with the study’s focus on FDI-related income.
- The IMF and World Bank also do not offer sufficiently detailed revenue data by sector.
Estimating the Value Created in the U.S. and Europe
Based on interviews with corporate CIOs, the study estimates that approximately €260 billion of value are generated annually within the United States from these digital services. The extrapolation assumed that the proportion of cloud and software spending correlates with each country’s Gross Domestic Product (GDP). Additional assumptions included that small and medium-sized enterprises (SMEs) allocate about half as much of their revenue to these services compared to large corporations.
Cross-referencing this with market size estimates for Europe and its share of the global digital market (from sources like CISPE, Statista, and KPMG), the figures appear consistent. Key findings include:
- Large companies devote roughly 2.2% of their revenue to software services, translating to €66 billion annually in France and about €400 billion across the European Union.
- Approximately 83% of these expenditures are directed toward American providers (roughly €54 billion in France and €330 billion in the EU).
- Of the value added from these services, 80% is generated in the United States. This results in around €43 billion annually in France and €264 billion in the EU, representing about 1.5% of the region’s GDP—more than one and a half times its annual research and innovation budget.
Potential Scenarios for European Purchasing Trends
Using OECD input-output tables, Asterès evaluated three scenarios to illustrate potential impacts on Europe from shifting procurement patterns:
- Current Situation: Continuing with the present expenditure levels.
- Immediate Reallocation of 5%: A swift shift where 5% of cloud and software procurement currently going to U.S. providers is redirected toward European alternatives.
- Progressive Reallocation to 10% and then 15% by 2030 and 2035: Gradual change aiming at increasing European share over time.
The analysis considered three effects:
- Direct Impact: Purchases made directly by U.S.-based providers serving European clients.
- Indirect Impact: Economic activity generated throughout the supply chain as a consequence of these purchases.
- Induced Impact: Consumer spending by employees working in these sectors.
This assessment did not account for ripple effects across the economy. It focused on:
- The number of direct jobs maintained based on revenue and productivity data.
- The contribution to value added as a function of labor productivity in the U.S. digital sector.
- Tax revenues and social contributions linked to European procurement, estimated using the proportion of compulsory levies in U.S. value added.
Projected Outcomes and Strategic Implications
Applying the same methodology to Europe, a potential immediate reorientation of about 5% of digital procurement toward European providers could significantly alter the economic landscape. Furthermore, increasing this shift to 10% by 2030 and 15% by 2035 could yield substantial benefits:
- Job Preservation and Creation: More European jobs linked to the digital economy.
- Economic Independence: Reduced reliance on U.S. providers, fostering local digital sovereignty.
- Trade Balance Improvements: With a 10% reorientation, Europe could reduce its digital imports by roughly €100 billion over the next decade.
- Balance of Payments: Such shifts would enhance Europe’s trade surplus in digital services, potentially translating into improved macroeconomic stability.
Price Impact and Broader Considerations
The projected increase in prices for cloud and software services would primarily affect volume variables—employment and economic growth—rather than immediate price levels. Yet, a persistent 10% annual price hike could lead to notable trade effects. For example, maintaining such growth rates over ten years could boost U.S. exports by around €421 billion.
Conversely, a strategic reallocation of up to 15% of European digital procurement resources toward domestic providers could cut European import bills by approximately €100 billion within the same period, boosting local industry resilience.
It’s crucial to understand that the 10% annual increase reflects a price effect rather than a quality-driven change. The inclusion of additional services is not always automatic or requested by customers, often resembling tied sales—a phenomenon known as "bundling." Given ongoing trade tensions and uncertainties surrounding the stability of U.S. openness to European markets, these projections entail significant caveats.
In summary, the upward trend in cloud and software costs poses an important strategic challenge to European digital sovereignty, with potential economic gains achievable through targeted policy shifts and industry initiatives.
Note: The rising prices are primarily attributed to cost inflation in services, not to enhanced service quality. Additional features are not systematically included and are often sold as add-ons, which can further increase expenses.
The current geopolitical climate and trade disputes generate uncertainty regarding the long-term stability of the American digital market landscape. European policymakers and industry leaders must consider these factors when devising strategies to bolster regional digital independence and mitigate potential economic vulnerabilities.
