Will the big price reduction bring the expected economies of scale?
Text |Nan Hui Hui.
Edit |Cao Yan.
On February 29, Alibaba Cloud announced the largest price reduction in history with "the largest number of participating products, the widest user base, and the first reduction of new and old users" at the 2024 strategy conference.
Specifically, the official website of cloud products with more than 100 price reductions and more than 500 specifications has dropped by 20%, and most of them are core products that are frequently used by cloud users. Elastic Compute Service (ECS), Object Storage Service (OSS) and RDS Service (RDS) are reduced by up to 36%, Object Storage Service (OSS) is reduced by up to 40%.
Liu Weiguang, President of Alibaba Cloud's Public Cloud Business, said at the strategy conference: "Price reduction is not a short-term market competition behavior, but a long-term strategic choice to target the remaining 72%. ”
According to a set of data mentioned by Liu Weiguang, the stock of servers in China is 20 million, and the size of the server stock in the United States is about 21 million, but the computing power provided in the form of public cloud in the United States accounts for 60%, while that of China is only 28%, and the penetration rate of public cloud is significantly lower than that of mature markets in Europe and the United States.
That being said, there is no doubt that the price reduction will have a substantial knock-on effect.
The first thing is the resurgence of the cloud market war.
After Alibaba Cloud announced the price reduction, JD Cloud released the price reduction news overnight on the same day, increased the price comparison activities of the whole network, promised that the public cloud products of all lines would be discounted by 10% on the basis of the lowest transaction price of products with similar specifications, and shouted "drop at will, compare to the end", which is quite confrontational.
Price reduction to expand the market fundamentals
This is not the first time Alibaba Cloud has cut prices on a large scale.
In fact, it has been less than a year since Alibaba Cloud's last "unprecedented" price cut.
In April 2023, Alibaba Cloud announced the largest price reduction in history at the 2023 Alibaba Cloud Partner Conference, with core products** being reduced by 15% to 50% across the board, and launching a free trial plan to provide up to three months of free trial for 50 cloud products.
This has set off the first battle in the cloud market in 2023.
On May 16 of the same year, Tencent Cloud followed up on the "Cloud ** War" and announced that it would reduce the prices of a number of core products, with some product lines reducing by up to 40%; On May 23, JD Cloud announced that it would compare the prices of products with Alibaba Cloud, Tencent Cloud and Huawei Cloud, promising to "pay if you buy expensive", and the actual transaction price would be 10% lower than the lowest price of these three companies.
Whether it is the "cloud war" in 2023 or this price cut, Alibaba Cloud's purpose is to scale.
In the third quarter of 2023 financial report** meeting, Alibaba management clarified that Alibaba Cloud's strategic positioning is "AI-driven, public cloud first", and around this strategy, Alibaba Cloud adjusted its organizational structure on November 23 of that year, and formed three parallel business divisions at the commercialization level: public cloud division, hybrid cloud division, and international division.
Public cloud (public cloud) has always had two translation methods in the Chinese market: public cloud and public cloud. There is no substantial difference between the two expressions) that multiple customers share cloud services provided by a service provider. Based on this, the business model of the public cloud has a scale effect, and the more customers use it, the more the cost of chain procurement, the average cost of R&D and the cost of resource idleness can be continuously reduced.
This means that the logic of "public cloud first" is to expand the scale of business to form a scale effect, and then dilute procurement costs and R&D costs, and establish a positive cycle. Therefore, it can be seen that the public cloud business division, which is one of the main bearers of Alibaba Cloud's above-mentioned strategic positioning, has shifted from emphasizing high-quality growth and profitability to pursuing scale growth and expanding market share as the goal.
However, in terms of the overall market, the growth rate of the public cloud market has slowed down significantly in the current macro environment.
According to the "China Public Cloud Service Market Tracker" report released by the International Data Corporation (IDC), the market size of China's public cloud (IaaS + PaaS) market increased by 15% year-on-year in the first half of 20239%, a new low year-on-year growth rate in the past three years; In the third quarter of 2023, the year-on-year growth rate of China's public cloud (IaaS + PaaS) market is only 156%。
At the same time, there is no significant difference in the services provided by current cloud vendors at the technical level.
Taking Laas, the main market segment of domestic cloud computing as an example, the homogenization of upstream hardware resources determines the homogenization of IaaS product functions, and compared with the IaaS products of cloud vendors such as Alibaba, Tencent, and JD.com, it can be found that the product functions provided by IaaS services are similar, mainly in computing, storage, network and other products, and the performance difference is small.
The "cake" of the market is no longer easy to grow, and the service tends to be homogeneous, and the "enclosure" through low prices has become the main strategy.
So, what is the effect of Alibaba Cloud's price reduction? Or does the price reduction increase the market size?
According to the IDC report mentioned above, in the third quarter of 2023, Alibaba Cloud won 267% of the market share ranked first, but the market share was 5% year-on-year8% and was ranked first.
The second, third, and fourth HUAWEI CLOUD, e Cloud, and Mobile Cloud are divided into eclipse.
Previously) price reductions did not meet the expected targets. In response to the reason why this large-scale price reduction was initiated, Liu Weiguang said, "I hope that through this large-scale price reduction, more enterprises can use advanced public cloud services and accelerate the popularization and development of cloud computing in all walks of life in China." ”
Challenges remain in the domestic market
At least from 2022 onwards, in the cloud computing market, China Mobile, China Unicom, and China Telecom have moved from behind the scenes to the foreground, while cloud vendors such as Alibaba Cloud have generally entered a period of strategic contraction and adjustment.
Reflected in the financial data, Alibaba Cloud's revenue growth rate has been on a downward trend in the ten quarters since the fourth quarter of 2020; In 2023, revenue growth in the first quarter will even be negative, while the second, third, and fourth quarters will basically grow in single digits.
According to Alibaba's latest financial report, in the fourth quarter of 2023, Alibaba Cloud's revenue increased by 3% to 2806.6 billion yuan, but if it is not included in Alibaba's consolidated business, Alibaba Cloud's revenue decreased year-on-year.
In this financial report, it was stated that it was mainly due to the continuous improvement of revenue quality by reducing project-based contract revenue from lower profit margins, but the revenue from public cloud products and services increased healthily year-on-year.
The quality of revenue, or rather profit margins, is indeed continuing to improve.
According to the financial report, Alibaba Cloud's operating profit margin has improved by about 15 percentage points in recent years, and the EBITA profit margin (Alibaba Cloud usually uses EBITA profit as a profit indicator, which excludes the impact of non-cash factors such as equity incentives and amortization of intangible assets, and is considered to be more reflective of real performance) has also improved by nearly 7 percentage points. In the fourth quarter of 2023, Alibaba Cloud's net profit was 236.4 billion yuan, a year-on-year increase of 86%, becoming the most profitable cloud vendor in China.
Obviously, the shift in strategic positioning has led Alibaba Cloud to choose between "scale or profit?" A shift in the answer to this question.
It's just that the market is long gone, and it is not easy for Alibaba Cloud to "scale".
As analyzed above, the public cloud continues to hit a wall in the domestic market, and the Internet industry enterprises that are most active in using the public cloud are more cautious in the formulation, expenditure and use of budgets, and the demand for cost reduction and efficiency improvement has further increased, which has hindered the growth of the public cloud market to a certain extent. However, government and enterprise industries (scientific research, universities, government affairs, finance, etc.) account for the majority of IT spending, but prefer hybrid cloud and dedicated cloud.
AI models or visible incremental markets.
In its 2022 estimates, IDC lowered the average growth rate of China's cloud computing industry to 20% over the next five years, emphasizing that this growth rate is quite impressive given macroeconomic conditions. However, the emergence of ChatGPT has rewritten the growth trend of China's cloud computing market - large models need to be carried by the cloud, which is also the main service model of cloud computing.
Alibaba Group Chairman Joe Tsai pointed out at the Apsara Conference in October 2023 that 80% of China's technology companies and half of the large model companies are running on Alibaba Cloud, and Alibaba Cloud hopes to become the most open cloud in the AI era, allowing everyone to develop AI through the cloud.
Of course, Alibaba Cloud has also invested more support in this, such as open-sourcing the 72 billion parameters of the Tongyi large model in November 2023.
As the largest cloud vendor in China, Alibaba Cloud has the opportunity to become a major large-scale model service provider in China in terms of computing power, algorithms, and data reserves, but Alibaba Cloud still needs to prove its ability to build generative AI models and adapt to changes in China's cloud computing market.
References: 1"China Public Cloud Service Market (First Half 2023) Tracker", IDC
1."Alibaba Cloud's New Offensive: Big Models and Big Price Cuts", Finance Magazine.
2."Alibaba Cloud Turn: AI Changing the Rules of Cloud Computing Competition in China", LatePost