Alibaba Group Holding Ltd is doubling down on its cloud strategy with a US$28bil (RM122.78bil) increase in spending over the next three years. Ignore for a moment that huge number, and turn instead to what this says about the e-commerce company’s priorities.
China’s largest technology company is essentially admitting that the consumer story may have run its course, and the future is in business services. That’s a savvy move.
Even if investors don’t take seriously the impact of the Covid-19 outbreak, they do need to remember that the salad days of exponential consumer growth are over. Well before this pandemic crippled spending and sent the Chinese economy into its first contraction in 28 years, Alibaba’s growth was already weakening. It’s not alone. The entire Internet sector is facing a new reality of slowing revenue and the possibility of thinner margins.
Competition still persists, however. Pinduoduo Inc and JD.com Inc continue to challenge Alibaba’s e-commerce dominance, while Meituan Dianping is wreaking havoc against its on-demand business, ele.me. These battles may die down, but will probably never go away because consumers aren’t locked in to one app.
Cloud is not exactly a growth driver at Alibaba. While outpacing the rest of the business, it still accounted for just 6.6% of revenue in the December quarter. It’s certainly not a money maker and continues to post losses.
Support from the cloud, however, is quite different from Alibaba’s consumer divisions. First, the client base is generally small to medium enterprises that need the functionality and productivity that comes with putting their business on someone else’s server. The question is merely which provider clients choose.
Which brings up the more important point: Cloud services are much more sticky.
Amazon.com Inc is a great example. Few would argue that Amazon Web Services is the outright best cloud offering, yet it’s been aggressive in onboarding new companies, especially startups and app developers, which then find it time-consuming and troublesome to switch even if something better comes along.
Alibaba’s renewed focus on cloud comes 18 months after rival Tencent Holdings Ltd announced a reorganisation aimed at putting enterprise clients at the forefront of the coming decade.
At the time, Tencent introduced a new cloud and smart industries group that includes health care, education, security and location-based services. For a company built on social networking and games, this sounded like an about-face. In fact, it was more of a pivot from consumer to industrial Internet, and a recognition that the real money is made on servers, not in a user’s smartphone app.
Alibaba has known this for a while, too, but hasn’t managed to truly leverage its back-end technology in the same way that Amazon has. Hence, the announced 200bil yuan (RM123.91bil) to be spent over three years. That’s roughly double the pace of capital expenditure the Hangzhou-based company dished out in the last financial year.
Ostensibly, that money will go toward expanding its already large infrastructure of datacentres and networks. Technology development is also on the agenda, including semiconductors and software. I’d wager that a fair bit of the largesse will be thrown at incentives and marketing to get clients onboard, and to keep them there.
With the race now on to land enterprise customers, Alibaba is signaling that it has the money and is willing to use it. – Bloomberg
(Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.)
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