Alibaba Set to Become a Major Player in Cloud Services

Alibaba Set to Become a Major Player in Cloud Services

Badr Berrada 28/02/2017

When you think of the biggest cloud players in the world, one company you might not consider is Alibaba, the Chinese e-commerce giant that held a record $25 billion U.S. IPO in 2014. Alibaba entered the cloud computing business in 2009, just three years after Amazon launched its cloud division, AWS — and Alibaba’s cloud computing efforts are among the ambitious projects that the Chinese e-commerce giant is pursuing aggressively. 

Alibaba provoked an Amazon-style ripple of interest from investors when it reported its quarterly numbers: revenues at AliCloud, its 8 year old cloud services business, rose 115% year on year to $254m. It’s impossible not to note the similarities between the two companies.

Alibaba to Follow in The Footsteps of Amazon 

The utter dominance of both is proven on paper: While Alibaba is the premier e-commerce company in China, Amazon is the biggest in the U.S. The Chinese ecommerce giant sees AliCloud revenues grow 115% in the past quarter. NASDAQ-listed Amazon’s market cap exceeds $400 billion, while Alibaba is valued at $250 billion according to its NYSE share price. When it comes to the cloud, the nature of their core businesses and the size of their computing requirements both necessitate computing on a massive scale. Both believe they can parlay that knowledge and experience into a significant business offering cloud services to others. 

The amount may be tiny, at just 3 per cent of the Chinese ecommerce group’s $7.7bn quarterly revenues, but for analysts, the parallel was clear. Amazon Web Services (AWS), launched in 2006, went from zero to three-quarters of the US ecommerce group’s operating profit over the next decade. AWS, with $11bn of sales last year, is the world’s biggest cloud business. Underlining the role of, and money in, cloud services in the US is Snap. The owner of messaging app Snapchat will spend $2bn with Google Cloud over the next five years and is reliant on the search giant’s infrastructure for the vast majority of its computing, storage, bandwidth and other services.  China is trailing, but growing rapidly: total spending on public cloud services is forecast to rise from $11.2bn in 2016 to $14.2bn this year, according to Gartner, the research firm — a tenth of the $141bn expected to be spent in the US in 2017.  

An Exciting Rivalry in Cloud's Sales 

Alibaba's main goal is to overtake Amazon in four years after announcing 54% record revenue increases, whether that’s in customers, technology, or worldwide scale. The firm's potential for cloud services is the same as AWS. Both of them will focus on scale and technology: The bigger you are, the less costs you pass on to the customer, hence destroying competition. According to Ms Leung, Hong Kong's Chief Executive, AWS has cut the prices it charges a total of 52 times since its launch, and its rates are now half those charged by smaller competitors, leaving it and Microsoft dominance in the field of IT storage and services. Likewise, Alibaba halved its core product prices in October. In the latest quarter, it lost $5 for every $100 of revenues generated. However, exponential growth does not last forever — Amazon’s AWS sales growth decelerated, to 47% in its latest quarter. That does little to damp bullish spirits. 

Cloud is a huge deal,” says Marin Ivezic, partner at PwC in Hong Kong, pointing to the interdependency between “big data” and cloud computing.  As more data are generated outside the office or home — from sensors, for example, or the internet of things — so the demand for cloud hosting will grow, Mr Ivezic adds. “The value is in the ability to analyse data generated by devices.” 

However, the earlier incarnations of the cloud as one big global repository are morphing into more localised centres, partly to meet regulatory requirements and partly because of different demands. Ethan Sicheng Yu, general manager of Alibaba Cloud’s overseas business, explains that the firm's goal within 5 years is to establish a noticeable market share and to learn local market requirements, because it firmly believes that globalisation does not mean standardising products everywhere. 

An Exponential Growth in Cloud Computing

Alibaba’s cloud unit has been growing at a brisk pace with triple digit year-over-year growth for its last seven quarters, including 115% in its most recent report in December. Based on that growth, Alibaba Cloud is probably one or two quarters from reaching break even or profit, but it has already surpassed the $1 billion run rate mark courtesy of $254 million in revenue in its most recent quarter. Not bad, but not close to AWS, which grew at a more modest 47% rate for a total income of $3.53 billion for the quarter or a run rate over $14 billion. That’s a stark difference and it shows just how far Alibaba has to go into the cloud business to catch AWS. However, Alibaba might be doing better than you think. According to Synergy Research Group, Alibaba is sixth in the world behind AWS, Microsoft, Google, IBM and Salesforce in infrastructure, platform and hosted private cloud services. It is noteworthy to state the economy is transforming rapidly in China and companies need to maintain their advantage in better management and efficiency, hence the exponential growth of cloud computing. 

Robert Xu, chairman at Kingdee in Shenzhen, an early adopter of cloud technology and now provider of cloud-based services to hundreds of millions of small and medium sized enterprises, claims that big data provide SME efficient targeted marketing and financial data to secure loans more rapidly. Alibaba Cloud began with smaller customers, but as it sets its sights higher in the market, it wants to lure enterprise customers to the platform. The company says that it has proven it can handle the workload from larger customers based on its abilities to handle its own massive e-commerce and financial services businesses.

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Badr Berrada

Founder & CEO

Badr Berrada is a tech entrepreneur & international best-selling author. As a Founder & CEO of BBN Times, he manages a team of more than 150 renowned industry experts. He has been featured in renowned publications such as Forbes Magazine, Business InsiderYahoo! News, Thrive GlobalIrish Tech News, Khaleej TimesHerald-Tribune, Pulse Ghana, le360 and IdeaMensch. Badr Berrada is also the CEO of Tech BSB, a consulting platform that provides services in artificial intelligence, cybersecurity, data analytics, cloud computing and sustainability. He co-authored The Growth Hacking Book: Most Guarded Growth Marketing Secrets The Silicon Valley Giants Don’t Want You To Know and The Growth Hacking Book 2 : 100 Proven Hacks for Business and Startup Success in the New Decade. Badr holds a master's degree in Economy, Risk and Society from the London School of Economics and a bachelor degree in Finance from Cass Business School.

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