Alibaba, China’s e-commerce giant, has set aside $28.26 billion for investment in cloud computing infrastructure and technology over the next three years in a bid to close the gap on Amazon and Microsoft, especially in foreign countries where competition between these players is most intense. This accelerated project will also dovetail with Alibaba’s expanded activities in mobile applications following the formation in February 2020 of its dedicated 5G Alibaba XG Lab.
The objective of the XG Lab is to expedite development and deployment of applications often hosted in the cloud that exploit emerging 5G networks, both in China and beyond.
Like other vendors, Alibaba tried to put a Covid-19 shine on the cloud announcement, portraying it as a response to the heightened global demand for cloud-based services delivered over fixed or mobile broadband networks, but this does not really wash. The company hardly cobbled this together over the last few weeks and indeed its CEO Daniel Zhang suggested that cloud might become its main business in future, even though it only accounts for 7% of its revenue today. Therefore, the cloud investment is a logical extension of a strategy that has been fermenting for several years.
Alibaba is often described as China’s Amazon and the comparison is apt enough because both companies share similar growth trajectories and revenue breakdowns between sectors. But Amazon is far larger both in cloud and ecommerce, in fact about by almost exactly five times with $280.5 billion revenues for 2019, compared with $56.1 billion for Alibaba. The latter can point to faster growth, with 2019 revenues up by 41% over the 2018 total against 20% for Amazon, but then that might be expected from a lower base.
Revenues for cloud services alone are harder to count accurately because the protagonists vary in how they measure these and Microsoft does not separate these out. But roughly, Amazon accounts for 48% of the global market with AWS. Microsoft is second on 15% through its Azure platform and Alibaba third on 7%.
It is Microsoft then, rather than Amazon, that Alibaba will have its immediate sights on, with competition likely to be most intense in regions that might be considered neutral ground or even favorable to China, such as Latin America, Africa and parts of Asia-Pacific. In Europe and North America there may be geopolitical kickback against China and of course there are direct sanctions on trade with the US. At present, it is impossible to predict how fall out from Covid-19 would impact Alibaba’s cloud strategy around the world and it may increase investment in some regions.
Latin America is one region where Alibaba will cherish high hopes of cloud gains on the back of substantial Chinese investment and sponsorship in key countries there. Alibaba will have noted that Amazon, in February 2020, announced its own investment of $236.18 million in the Brazilian state of Sao Paulo over the next two years to reinforce its cloud infrastructure across the whole of South America. Both Alibaba and Amazon will meet stiff resistance from local ecommerce players in Latin America, but the cloud field will be left to the titans to slug out, and that is where the two will be making the strongest investment.
In China itself, Alibaba reigns supreme and Amazon has struggled to gain a foothold in ecommerce there. In fact, the US firm has almost thrown in the towel, having closed down its Chinese domestic ecommerce business in July 2019, since when Amazon.cn has no longer been open to third party sellers.
On the cloud front, Amazon has been more successful in China, although largely with multinational companies that have adopted AWS on a global basis. Amazon has been forced by regulatory requirements to work through local partners holding relevant telecommunications licenses for delivery of cloud services.
We should not forget that Alibaba will have difficulty catching Microsoft in the cloud market, never mind Amazon. It is through cloud that Microsoft has enjoyed a renaissance after years of gradual decline from its previous peak in the 1990s, providing the conduit for its Windows based collaboration and office productivity tools.
Although the Covid-19 crisis has exposed Microsoft’s failure to position Skype as the leading consumer-friendly videoconferencing system, allowing others (especially Zoom) to fill that gap, the company has actually been realigning its cloud-based collaboration strategy around its Teams product. That has been a roaring success during the Covid-19 crisis, with number of active users jumping by 12 million in a week early in March. Corporate users concerned over security are more likely to favor Teams over Zoom.
Microsoft has in fact been gaining on Amazon and scored a big hit in October 2019 when, contrary to indications, it won the $10 billion, 10-year contract to build the US military’s war cloud, which AWS had been expected to win.