Cheaper and Losing: A Layered Model of Cloud Dependence and the Limits of Subsidy¶

Stefane Fermigier (Abilian) · sf@abilian.com

Draft working paper v0.8, 2026-09-23. Theory with a sourced empirical base; every proposition comes with a proof, a numeric cross-check, and a Monte-Carlo robustness report. The record is consistent with the model and is not a test of it against rival explanations.

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Abstract¶

European cloud providers are several times cheaper than US hyperscalers for raw compute on list prices; the leading low-cost one tops an independent price-performance benchmark. Yet their share of their own cloud-infrastructure market (IaaS, PaaS, and hosted private cloud) fell from 29% in 2017 to about 15% in 2022 and has held there since, while the three US firms hold about 70%. The two facts sit on different perimeters, the price edge on a sub-segment of IaaS and the share on the whole infrastructure market. The model turns on that divergence.

In it, each buyer has an altitude, the fraction of its needs that are differentiated (platform and AI services), the remainder being commodity infrastructure. Europe is cheaper and present in the commodity basement. In the differentiated layer, where value is migrating, the components of a European offer exist at prices near parity, while the integrated breadth of a hyperscaler has no European counterpart. The model puts a price on that assembly gap in $\pi_D$ and $\gamma$. Buyers sort by altitude, and because firms drift up-stack over their lifecycle the share of a cohort on US providers rises as it ages. With terminal altitudes bounded for part of the population the sorting converges to a floor. With a steady inflow of young firms the share settles at a stationary level even without that bound. The observed plateau is consistent with either reading; the composition of the European base tells them apart.

We show that subsidy is a weak lever at either layer. At a bimodal distribution of firm types a commodity subsidy saturates, with a marginal effect that falls as it grows (only a subsidy scaling with the entire commodity base could restructure the market). Europe's actual subsidies, which target the differentiated layer, meet a network constraint that capability funding alone does not clear. Interoperability's payoff is un-bundling the stack, with outright switching a separate lever. A two-cost model, a one-time rewrite cost on the core and a per-unit coupling cost on the split, makes the levers' targets a proposition: the coupling cost moves the periphery, the rewrite cost opens a hysteresis band on the core, and a commodity subsidy repatriates no firm until it exceeds the rewrite cost over the firm's commodity fraction. Once cross-provider coupling costs are modelled, the realistic European position is a loosely-coupled secondary beachhead, valued for sovereign reversibility and the preservation of a supplier the demand-side screen presupposes. The mathematics is the binary-choice model with social interactions, indexed by altitude; every result is proved, cross-checked numerically, and stress-tested by Monte-Carlo.

Keywords: cloud computing, network externalities, switching costs, digital sovereignty, industrial policy, coordination.

JEL: L86, L13, D85, H57, L52.

The price edge falls up the stack (measured): European low-cost leaders are about six times cheaper on compute and 2.4 times on storage and GPUs, at parity on managed databases, and slightly dearer on AI inference.

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Cite this paper¶

Fermigier, S. (2026). Cheaper and Losing: A Layered Model of Cloud Dependence and the Limits of Subsidy.
Draft working paper v0.8, Abilian Econ Lab.
https://econ.lab.abilian.com/papers/cheaper-and-losing/