Cloud computing could be Alibaba’s next big goal
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There are many similarities between the two companies’ business operations: Both run e-commerce websites and have streaming services. But what could pave the way for Alibaba's future is what now makes Amazon a big business - cloud computing. This is a business segment which is considered very important for the future of the Chinese company.
"I think the cloud will be Alibaba's main business in the future." - said Daniel Zhang, CEO and now chairman of Alibaba in an interview last November. Zhang has taken over as chairman of the board in September when Alibaba's founder Jack Ma left his position to retire.
Alibaba started as an e-commerce company in 1999. It has broken down into smaller businesses such as payments, traditional stores, streaming services, and food delivery. But cloud computing is still the most promising field.
Alibaba launched its cloud computing division in September 2009 and is currently the largest company in China in this area. For the second quarter, the division generated 7.79 billion yuan (US $1.13 billion) in revenue, equivalent to a growth of 66%.
"In my opinion, cloud computing will be Alibaba's next frontier. The company has basically owned the e-commerce and consumer markets in China. Now, they are facing the opportunity to attack the cloud market worth up to $100 billion in China. This is a real gold mine that Alibaba was aiming for during the last period it was driven by Jack Ma." - said Daniel Ives, head of market research firm Wedbush Securities.
Cloud computing accounted for 7% of Alibaba's revenue last quarter. In fact, this business is still unprofitable, but that loss has been narrowed and profit margin has improved (compared to previous quarters).
By comparison, Amazon Web Services, the US cloud giant, brought in $8.38 billion in revenue last quarter and had a very high operating profit. In fact, AWS accounted for over 60% of Amazon's total operating profit but only accounted for about 13% of net revenue.
"I believe that Alibaba will continue to benefit and grow for many years from the services they have copied from Amazon," said John Freeman, an analyst at CFRA Research. Freeman also believed that cloud computing will be one of Alibaba's main growth engines in the near future.
According to Freeman, at the moment, AWS accounts for only about 1/9 of Amazon's revenue but generates more than 60% of the company’s operating profit (compared to the total revenue of this segment). It is difficult to see why Alibaba would deviate and do differently from what Amazon has done.
He added that Alibaba had two advantages in China. One is that there is less competition and secondly, Chinese companies can easily migrate to the cloud because they are not constrained by the old IT infrastructure.
Alibaba currently dominates the cloud computing market in China. However, companies like Baidu and Tencent are focusing more on their cloud businesses. Therefore, besides the economic downturn in China, this is also a big challenge for Alibaba. Cloud computing is bringing many challenges and opportunities for suppliers to pursue this market.
By: Joe Cook