On February 29, Alibaba Cloud held a strategic press conference, announcing that more than 100 cloud products were reduced in price across the board, with an average price reduction of more than 20% and a maximum price reduction of 55%, effective immediately.
Due to the large price reduction, this price reduction was crowned by some developers as the "Crazy Thursday" event in the cloud computing industry, and some developers called it "true fragrance", "conscience cloud", "not that the data center can't afford it, but Alibaba Cloud is more cost-effective".
After the announcement of the price cut, Alibaba's stock price showed a rapid increase of about 2 points in intraday trading of Hong Kong stocks. The reason, of course, is that investors are worried that Alibaba Cloud's price reduction by such a large margin may once again delay the time to profitability.
For the vast majority of investors who don't understand the cloud computing industry, this concern stems from a naïve business instinct, after all, an average decline of more than 20% means that the overall gross profit margin will drop significantly.
But this is not the case.
In the past ten years, Amazon AWS has cut prices 12 times a year for 3 consecutive years, and there will be continuous price reductions, but the profits generated by Amazon's AWS business are getting higher and higher year by year, becoming the largest profit of Amazon.
Over the past decade, Alibaba Cloud has also seen countless price cuts, and almost every time it has triggered price cuts for the entire industry. However, Alibaba Cloud's overall gross profit margin is actually still on a rising trend. According to the financial report released in February this year, Alibaba Cloud's adjusted EBITA for the fourth quarter of 2023 was 236.4 billion yuan (about 3..)$3.3 billion), up from $12.3 billion in the year-ago quarter6.9 billion yuan, an increase of 86%.
What can be clearly told is that if the public cloud is destined to become a public infrastructure, then it should be the norm for leading cloud vendors to cut prices. After all, only when it is low enough and easy to obtain, like running water and electricity, can it really be called infrastructure.
Many people may wonder, how do cloud vendors continue to reduce prices on the one hand, and maintain reasonable gross profit margins and profit growth on the other hand?
Let's get to the bottom of this question today. Of course, the cloud mentioned below is not the concept of private cloud or hybrid cloud, but refers specifically to public cloud.
The first point: scale effect.
Cloud computing is a business model with network effect and 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.
In the highly competitive cloud computing market, it is impossible to achieve pricing that is too high above the market if it is not a differentiated product unique to a cloud vendor. However, the procurement cost of the same chips, memory, storage, servers, broadband, and other technology products that form the foundation of the public cloud varies greatly under different scales. Generally speaking, the larger the purchase, the greater the discount.
Of course, the land and energy of large-scale data centers can also be negotiated to be lower. This can lead to cost advantages.
As the Asia-Pacific No. 1.
1. China's No. 1 cloud computing manufacturer, Alibaba Cloud operates and maintains millions of servers around the world, and if the depreciation rate is 20% -25%, the servers replaced each year will be as high as hundreds of thousands. The cost is low, and the confidence to reduce the price will be sufficient.
By continuously reducing prices, we can attract more developers and customers, which in turn will further promote the expansion of business scale, which in turn can drive down costs. It's like a snowball, getting bigger and bigger.
After the scale is large, in addition to the procurement cost can be greatly reduced, the evenly shared R & D cost, operation and maintenance cost will also be greatly reduced. Under the public cloud model, the cost of operating hundreds of thousands of servers is not much different from that of operating and operating 1 million.
Therefore, the more customers who use Alibaba Cloud, the larger the scale, the cheaper the cloud will be, and price reductions will be the norm.
The second point: technical dividends.
Cloud computing is actually an industry with very high technical barriers, and technology is the key to truly building the competitiveness of cloud vendors. Through product and technology innovation, cloud vendors can greatly improve the utilization efficiency of software and hardware resources in data centers and reduce data center energy consumption. These bonuses can also be passed on to customers in the form of ** drops.
Many people may have heard of this concept of technology dividends, but they don't feel so deeply.
Let's give you a concrete example. The computing products of the public cloud can be simply regarded as the cloud vendor buys a server with strong performance, and then divides the server into several parts through virtualization technology, and then sells it to customers. However, how many parts of the same server can be divided into a great test of the technical ability of cloud vendors. On the premise of ensuring performance, the more you share, the more you can serve, the more customers you can serve, which in turn provides room for price reduction.
On the public cloud platform, different customers can flexibly call computing resources at different time periods, which can stagger peak and fill valleys, reduce the cost of idle resources, and greatly improve the efficiency of unit computing power. Such real-time scheduling requires an ultra-large-scale resource pool and customer base, as well as ultra-high requirements for the operating system that controls global resources.
Alibaba Cloud's self-developed Feitian cloud computing operating system can achieve real-time resource scheduling at the level of millions of servers. This also gives Alibaba Cloud a lot of room for price reduction.
At present, the average resource utilization rate of a large number of self-built IDCs in China is often less than 5%, while the resource utilization rate of data centers based on self-developed cloud computing operating systems such as Amazon AWS, Google Cloud, and Alibaba Cloud can reach 30% to 40%.
In addition to the extreme squeezing the performance of standard products, Amazon AWS, Google Cloud, Alibaba Cloud and other vendors are actually conducting independent technology research and development on core software and hardware to continue to release technological dividends.
Taking computing as an example, Alibaba Cloud has greatly improved resource efficiency and performance through its self-developed Feitian operating system and CIPU architecture. Through the continuous optimization of self-developed chips such as Yitian 710, the cost performance of databases, big data, AI, high-performance computing, and high-performance computing and codecs will be increased by more than 80%.
In addition, the use of new technologies such as artificial intelligence large models and serverless in products, solutions, and O&M scenarios can also greatly improve O&M efficiency, reduce customers' cloud resource consumption, and enhance the competitiveness of products or solutions.
Data shows that in the past decade, Alibaba Cloud has reduced computing costs by 80% and storage costs by nearly 90%.
The third point: new product innovation
Cloud computing is a new form of technology, in addition to the basic computing, storage, network and other IaaS services, database, middleware, security and many other PaaS products are reshaped based on the cloud, and there are also new technologies such as artificial intelligence models born on the cloud, and these new products and services have also become an important part of the differentiation strategy of cloud vendors.
As these new services bring in more revenue, cloud vendors also have the flexibility to reduce older services** to compete in the market. The new services are also attracting more customers and workloads to the cloud, further driving economies of scale for cloud vendors.
Take databases, for example. As a software product, database is used in almost all applications, has strong business stickiness, and has a gross profit margin of more than 70% or even higher.
Alibaba Cloud is currently the largest cloud database service provider in China, serving a wide range of industries such as finance, public services, retail, games, and automobiles through a number of core self-developed products such as PolarDB, AnalyticDB, and Lindorm.
In this round of price reductions, many of Alibaba Cloud's database products have also been significantly reduced, but this PaaS product with strong business stickiness and high gross profit will definitely bring stable profits to Alibaba Cloud in the long run.
Number 4: Customer loyalty
Continuous price reduction will improve the customer stickiness of the cloud platform. Among the groups that use the cloud, a large number of groups, such as individual developers or small and medium-sized enterprises, are actually very cost-sensitive. Constant price reductions allow them to stay on top of the cloud platform and reduce the probability of migrating to other cloud platforms.
Philip Kotler, the father of marketing, found that the cost of acquiring new customers is five times that of retaining existing customers, reducing customer churn by 5% and increasing profits by more than 25%. The importance of customer retention is recognized and recognized by all enterprises, and cloud vendors are no exception.
Therefore, we can also see that in order to ensure the stability of customers, cloud vendors are willing to give customers a huge discount in exchange for signing a cloud consumption contract for several years.
By continuously reducing prices and increasing the loyalty of existing customers, Alibaba Cloud's profit margins can remain stable even when the best is declining. Therefore, this time Alibaba Cloud's price reduction covers old customers for the first time, and there should also be considerations to improve customer loyalty.
The price reduction is just beginning
Alibaba Cloud has taken advantage of significant price reductions to fire the first shot in the competition in the cloud service market in 2024.
Although this price reduction is a little later than I expected, it is still beyond expectations in terms of strength, scope and coverage of old users.
In February, Alibaba Group CEO Yongming Wu said on the day of the earnings release, "We had a solid quarter with our strategic focus. The Group's top priority is to rekindle the growth momentum of its two core businesses, e-commerce and cloud computing. ”
Under such a group strategy, it is logical for Alibaba Cloud to come up with a business strategy of significantly reducing prices. Since cloud computing is the core business, sustained high growth rate is definitely the minimum requirement.
Of course, this may also mean that Alibaba Cloud has given up on the requirement for profitability in stages. At present, the hungry wolves vying for share in the domestic cloud market are waiting, and the pursuit of profit actually makes Alibaba Cloud unable to let go of its hands.
However, it is only a matter of time before Alibaba Cloud continues to expand its public cloud business and converges on contract projects, making financial gains.
For Alibaba Cloud today, this is definitely the right thing to do. If you go in the right direction, you won't be afraid of a long way.
Some people may say that B-end enterprise customers will not be as willing to migrate as C-end customers, but the long-term customers locked in by other cloud vendors through discounts are likely to have to make calculations. After all, in this environment, any boss is sensitive to the drop in costs.
Alibaba Cloud will definitely keep itself at a relatively competitive price point for a long time through means such as scale effect and technology dividends, and the price reduction behavior is expected to be normalized to ensure the gradual expansion of market share, rather than shrinking.
After Alibaba Cloud's sharp price cuts, many small and medium-sized cloud vendors will obviously follow up with the price cuts, but how long they can follow up is actually a big question mark.