Alibaba made a major restructuring move this week, announcing as part of the changes plans to spin off its Cloud Intelligence business unit. But why make such a move, and moreover, will it matter for Alibaba’s market position?
Speaking on an earnings call, Alibaba Group CEO Daniel Zhang said the company expects to complete the transaction and its public listing as an independent company “in the next 12 months.” The standalone cloud company will be led by Zhang.
According to Zhang, there were two main considerations that factored into Alibaba’s decision to make the move. First, he noted the cloud business is relatively independent already compared to Alibaba’s other units. And second, he said the company wanted to seize the opportunity to change its structure to enable the cloud unit to bring onboard strategic investors who can help grow the business.
“Going forward, we would be happy to see and indeed would expect to see Alibaba Cloud as an independent company growing to be as big as and perhaps even bigger than the Alibaba Group is today,” Zhang said.
The comments came as Alibaba reported Q1 2023 earnings in which its cloud revenue fell 2% year on year to $2.7 billion. The unit accounted for about 9% of Alibaba’s $30.3 billion in consolidated revenue. Alibaba attributed the decline to delayed delivery of hybrid cloud projects caused by the resurgence of Covid-19 in China in January and a normalization of CDN revenue. It also felt the impact of a top customer phasing out use of its overseas cloud services due to “non-product related reasons.”
A closer look
Gartner VP Sid Nag and Synergy Research Group Research Director John Dinsdale told Silverlinings Alibaba is the fourth largest cloud infrastructure provider globally and the leading cloud provider in China. Nag added that while Alibaba has a minor presence in Latin America and Southeast Asia, its business is dominated by the Chinese market.
Dinsdale noted that for the past two years, Chinese internet companies like Alibaba, Tencent and Baidu have struggled to grow even as their telco counterparts grew their cloud operations. This has sparked a price war among the cloud players, with Alibaba cutting the cost of core products by as much as 50% in a bid to gain market share. Tencent and China Mobile responded with price cuts of their own.
Nag said he doesn’t think the spin off will have much of an impact on Alibaba’s cloud market share on the global stage. But he said he is interested to see whether increased independence will finally allow it to extend its reach further beyond China.
Similarly, Agatha Poon, Senior Research Analyst at S&P Global Market Intelligence, said “it is unlikely that the new organizational structure will have a major impact on its position in markets where it has a solid installed base – Greater China in particular and a number of markets in South-East Asia and the Middle East.”
But, she added, the spin off could give the cloud team more leeway to “pursue strategies such as geographic expansion that it had not previously been able to develop given its association with the Group.”
Indeed, IDC's VP for Cloud, Datacenter, and Future of Digital Infrastructure Franco Chiam told Silverlinings the move will help make the cloud unit more "nimble and focused" and "creates the opportunity for a clearer strategy roadmap and solidify plans with adjacent products/solutions."
Playing politics
Both Dinsdale and Nag indicated there’s something else driving the spin off than a desire for market share gains or geographic expansion.
“The spin-off of Alibaba cloud is more about politics rather than economics or strategy,” Dinsdale said.
Nag agreed. He noted the Chinese government has been on a mission to achieve and maintain a leadership position on artificial general intelligence. And, given the amount of compute and storage that is needed to train artificial intelligence models, the spin off will allow Alibaba’s cloud unit to focus on developments in that realm.
“Those real time returns have to be predicated on a very highly scalable and fast compute engine. The cloud is perfect for that,” Nag said. “They’re obviously recognizing that and creating a nexus of these technologies under one umbrella.”
Chiam noted IDC has predicted AI-driven features will be embedded across business technology categories in the coming years, with an estimated 65% of organizations expected to use such features to drive better outcomes.
5/19/2023 2:17 pm ET - Updated with comments from Franco Chiam from IDC.