"In 2024, Alibaba will actively invest in its core business. The group's top priority is to reignite the growth momentum of its two core businesses, e-commerce and cloud computing." More than half a month ago, after the release of the third quarter of Alibaba's 2024 fiscal year, Alibaba Group CEO Wu Yongming said.
Cloud computing and the e-commerce business that contributes the most revenue to Alibaba are both core businesses, and the importance of Alibaba Cloud is self-evident. After ceasing the spin off listing, Wu Yongming found a growth strategy for Alibaba Cloud that is "AI driven, public cloud priority". Whether Alibaba Cloud can find a path to establish and maintain its advantages in the AI and public cloud markets in 2024 is crucial for both Alibaba Cloud and Alibaba.
On February 29th, Alibaba Cloud held its 2024 strategic press conference, sounding the horn of attack in the battle for the public cloud market. "Comprehensively reducing prices by 20%" has become its simplest and most brutal way of ammunition delivery in 2024.
With Alibaba Cloud's "largest ever" price reduction, another price war in the cloud computing market seems to be rising. Behind the increasingly fierce price competition, the scale anxiety of cloud vendors is also deepening.
Another round of "largest ever" price reduction
On February 29th, almost at the same time as the strategic press conference announced the price reduction, Alibaba Cloud's official website comprehensively lowered the price of cloud products. It is reported that this round of price reduction involves over 100 products and more than 500 product specifications, covering all core products such as computing, storage, and databases. The average price reduction exceeds 20%, with the highest reduction reaching 55%. Zhang Qi, Vice President and General Manager of the Public Communication Department of Alibaba Cloud, revealed in a media interview that this round of price reduction will directly cover Alibaba Cloud's enterprise customer base, which is in the millions. Only Alibaba Cloud's existing customers can receive a 20% discount on new renewals, which will have a huge impact on Alibaba Cloud's operations.
It is worth noting that this is the first time Alibaba Cloud has offered to customers the outstanding portion of existing orders. Although Alibaba Cloud also announced the "largest price reduction in history" in April last year, with core product prices lowered by 15% -50% across the board, Liu Weiguang, Senior Vice President and President of the Public Cloud Business Unit of Alibaba Cloud, said, "The product coverage is the widest, shared by old customers, and the price reduction is the largest difference between this price reduction and the past."
"Alibaba Cloud's price reduction is constantly giving back technological dividends to the market," said Liu Weiguang. In his view, the confidence of Alibaba Cloud's price reduction comes from the improvement of technological strength. The Feitian operating system and CIPU architecture can bring stronger performance under the same specifications of resources, while achieving extreme flexibility and greatly improving resource efficiency. Alibaba Cloud's self-developed Pangu storage system can improve the utilization rate of storage resources.
"Alibaba Cloud has placed great emphasis on the integration of software and hardware in the past, which has improved resource utilization. The efficiency of the entire business system running on the cloud, the deployment ability of the entire business in terms of applications, middleware capabilities, etc. are the key factors for Alibaba Cloud to improve performance and efficiency." Liu Weiguang said, which has also become Alibaba Cloud's core competitiveness in price competition. He emphasized that the scale effect and technological advancements brought by Alibaba Cloud are sufficient to support this magnitude of price reduction.
However, price reduction is not Alibaba Cloud's exclusive weapon. In 2023, after Alibaba Cloud launched a price reduction, other vendors also followed suit. Tencent Cloud's partial product lines saw a maximum decrease of 40%, while Mobile Cloud's entire product line saw a maximum direct decrease of 60%. Tianyi Cloud's partial product discounts were as low as 10% off, and JD Cloud also shouted the slogan of "the lowest price in the entire network". While Alibaba Cloud has launched another wave of price reductions, the preservation of its price advantage remains to be seen. It is worth paying attention to whether other cloud vendors will follow suit.
The shouting of price reductions will obviously pose a challenge to the net profit and revenue of cloud vendors.
The latest quarterly performance released by Alibaba Cloud on February 7th showed that Alibaba Cloud's revenue increased by 3% to 28.066 billion yuan, and adjusted EBITA profit increased by 86% to 2.364 billion yuan, setting a new high for the fiscal year. With large-scale price reductions, Alibaba Cloud's profit growth may face pressure.
"From the data, there is no doubt that it will have an impact, and there is no need to avoid it. Why is today called a strategic press conference? This is a strategic choice, and we must firmly believe that through such price reductions to benefit customers, we can bring about an increase in customer value, and through price reductions to bring more small and medium-sized enterprises to the cloud, we can make up for the income damage caused by price reductions. This is our strategic choice." Liu Weiguang said in an interview. In the face of long-term growth prospects, it seems that Alibaba Cloud has chosen to face short-term revenue pressure.
The scale logic behind price reduction
Behind the painful price reduction, cloud vendors are looking at market size.
Previously, Tang Daosheng, Senior Executive Vice President of Tencent Group and CEO of the Cloud and Smart Industry Business Group, talked about a "price war" in a media interview. He said that the essence of price wars has not changed, it is a "roll". However, the current market is more mature, with fewer players and more rational customers. They will not choose solely based on price, but rather value the ability to provide high-quality service. "Playing a price war is the lowest level of competition," said Tang Daosheng.
Despite this, cloud vendors still struggle to escape the quagmire of price wars. According to a research report by Huatai Securities, traditional IaaS products have become homogeneous, and competition among cloud vendors has gradually shifted to price competition. Under the traditional IaaS model, the homogenization of hardware resources determines the homogenization of IaaS products, and major cloud service providers can only provide common resources such as computing, storage, and networking. The competition among cloud service providers is gradually shifting towards price competition, aiming to gain market size at low prices. Before increasing in scale, the profitability of cloud service providers was greatly limited. Taking AWS, an overseas cloud computing company, as an example, it lowered prices more than 10 times a year three times in a row from 2011 to 2013 to gain market share. Later, as the competitive landscape gradually stabilized, the frequency of price reductions decreased.
At present, what cloud vendors clearly need more is the market size brought about by "low prices", which is the foundation of their revenue and profits. Sun Qi, CTO of Wanbo Zhiyun, analyzed to First Financial reporters that the Alibaba Cloud price reduction products this time mainly belong to the infrastructure layer products, with a particular emphasis on SMB (Small and Midsize Business). This customer group is different from the artificial intelligence customer group.
On the one hand, Sun Qi stated that from the overall perspective, the demand for cloud computing has not shown a significant expansion trend in the current macro environment, mainly entering the stage of stock competition. At the technical level, there is currently no significant technological difference in the services provided by cloud vendors, so the main competition is price differences. Secondly, regarding the computing power demand brought about by artificial intelligence and Generative AI (Generative AI), it mainly focuses on the semiconductor level, especially related to the chip computing power provided by Nvidia. As for the association between AI and cloud computing services, it is currently focused on the scenario side and the level of private deployment and construction. Therefore, the recent price reduction by Alibaba Cloud is not directly related to AI, but rather to the overall trend.
Overall, Sun Qi believes that from the perspective of the entire cloud computing architecture, the lower the service level, the lower the profit. The higher up - involving cloud databases, function computing services, cloud native, BI services, etc. - profits also increase, and manufacturers earn more. But the premise of this logic is that more customers purchase and use cloud computing services, which is also the reason for the current price trend in the entire cloud computing industry. Another cloud computing industry insider told reporters that the current trend of price reduction in the cloud computing industry is overall, but the pace between them is different.
"Alibaba Cloud's price reduction is not a short-term market competition behavior, but a long-term strategic choice, which is determined by the business model of public cloud." Liu Weiguang said that cloud computing is a business model with network and scale effects. He believes that cloud computing is a large-scale enterprise, and the expansion of scale will force the improvement of supply chain technology and continuously release the marginal effects of the cloud. The more customers we use, the lower the supply chain procurement costs, evenly distributed R&D costs, and idle resource costs can be.
"Based on our market analysis, many Chinese enterprises today do not have cloud computing, do not use public clouds, or do not enjoy the true value brought by public clouds," Alibaba Cloud said at a press conference. Data shows that the penetration rate of public clouds in China is still significantly lower than that of mature markets in Europe and America. Currently, the server stock in the Chinese market is 20 million units, while the server stock in the United States is about 21 million units. However, the computing power provided by public clouds in the United States accounts for 60%, while in China it is only 28%.
"People may ask if Alibaba Cloud is engaged in a price war today, really not. We are targeting 28% and the remaining 72%," Zhang Qi said.