As a result of strategic hesitation and repeated organizational adjustments, Alibaba Cloud missed the opportunity to lead the large model race. This is reflected in its financial performance, with quarter-on-quarter revenue growth rates of 11.5%, 5.5%, and 3% from the second to the fourth quarter of calendar year 2023.

Content/Liu Ping

Editor/Yong'e

Proofreader/Mangfu

This year's third quarter marks the one-year anniversary of Alibaba Cloud's strategic adjustment, and this performance largely validates the correctness of its strategy.

Within the Alibaba Group, e-commerce and cloud are the most critical businesses. The Group has high hopes for AI-driven growth. However, financial reports show that in the third quarter of 2024, the revenue of the Cloud Intelligence Group was 29.61 billion yuan, a year-on-year increase of 7%, failing to demonstrate the expected performance as the Group's second growth curve. During the same period, Google Cloud, boosted by AI, achieved a business growth rate of 35%, far exceeding market expectations.

Whether it's organizational adjustments or strategic shifts, the Group has always hoped that Alibaba Cloud can return to a high-growth trajectory to offset the downturn in other business segments. Unfortunately, Alibaba Cloud is still feeling the aftershocks of the Group's "rectification" efforts.

Part.1

Difficult to Return to High Growth

The financial report explains that Alibaba Cloud's revenue growth is attributed to double-digit growth in public cloud and triple-digit year-on-year growth in AI-related product revenue for five consecutive quarters. The profit increase is due to the transformation of the product mix towards higher-margin public cloud products and improved operational efficiency.

In recent years, Alibaba Cloud's revenue growth rate has declined year by year. From fiscal years 2019 to 2022, Alibaba Cloud's revenue growth rates were 84%, 62%, 50%, and 29%, respectively, showing a downward trend. In fiscal year 2023, considered the inaugural year of domestic AI large models, Alibaba Cloud's revenue growth rate plummeted to 3%.

Alibaba Cloud's performance trends reflect the significant changes faced by Chinese cloud vendors. During this period, the consumer internet gradually transitioned to the industrial internet, especially from 2020 to 2022, when almost all industries underwent digital transformation and cloud migration, either voluntarily or involuntarily. As the pie grew, so did the number of players competing for a slice, increasing pressure on Alibaba Cloud.

Alibaba Cloud's business is deeply influenced by the Group's e-commerce roots, with a customer base dominated by e-commerce and retail industries. Earlier, the rapid growth of Alibaba Cloud was primarily supported by customers from the internet industry. Reliance on internet customers is a double-edged sword for Alibaba Cloud.

In 2021, due to tightening overseas regulation, Alibaba Cloud lost a significant customer, ByteDance, which terminated its contract for overseas business and switched to Amazon AWS, resulting in a year-on-year revenue growth rate of 37% in the third quarter of fiscal year 2021, down from 50% in the previous quarter, and dragging down Alibaba Cloud's performance for an extended period.

Subsequently, Alibaba Cloud accelerated its efforts to diversify its customer base, but due to economic factors, many enterprises and institutions postponed cloud service procurement to save costs. This forced cloud vendors to shift from "revenue generation" to "profitability," contracting their operations. While industry revenue weakened, profitability gradually improved. For example, in fiscal year 2022, Alibaba Cloud achieved its first annual profit of 1.146 billion yuan.

In addition to multiple organizational adjustments and market acquisition through spending, the most significant incremental growth for Alibaba Cloud has come from the internet industry, helping it gradually recover.

From 2023 to the present, the "Hundred Models War" in the AI field has brought many orders to Alibaba Cloud. It was revealed at the Cloud Town Conference that 80% of China's technology companies and half of the large model companies are currently running on Alibaba Cloud. Additionally, due to investment considerations, "one of the Big Five Models," Dark Side of the Moon, switched from Volcano Engine to Alibaba Cloud this year, contributing significantly to Alibaba Cloud's revenue growth through both business cooperation and advertising.

According to financial report data, from FY2024Q2 (Q2 2023) to FY2025Q2 (Q3 2024), Alibaba Cloud's revenue has continued to grow, with rates of 2%, 3%, 3%, 6%, and 7%, respectively. Adjusted profit increased from 1.432 billion yuan to 2.661 billion yuan, nearly doubling, reflecting the effectiveness of Alibaba Cloud's strategy of "focusing on public cloud and increasing investment in AI infrastructure."

Positive signs are emerging, but Alibaba Cloud may still have "disappointed" the Group's high expectations. Previously, Alibaba management stated that "cloud business growth will return to double digits in the second half of 2024."

Part.2

Hesitation and Turmoil in Internal Reform

On November 29, 2022, Jack Ma made a rare public statement, saying, "The era of AI e-commerce has just begun, presenting opportunities and challenges for everyone," in response to Pinduoduo's market value briefly surpassing Alibaba that evening.

This statement indirectly underscores the importance of Alibaba Cloud's position. At that time, Alibaba Cloud had largely ended months of turmoil, and its organizational structure tended to stabilize.

In March 2023, then-Chairman and CEO Daniel Zhang suddenly proposed splitting the company into a "1+6+N" structure, comprising one group company, six business subsidiaries, and N innovative projects, with Alibaba Cloud being part of the "6." Daniel Zhang personally took charge, concurrently serving as Chairman and CEO of Alibaba Cloud Intelligence Group.

Before the market could fully comprehend this move, in June of that year, Daniel Zhang announced his resignation as Chairman and CEO of Alibaba Group three months later, retaining only his positions as Chairman and CEO of Alibaba Cloud Intelligence Group.

Unexpectedly, in September, when Daniel Zhang transferred power to the new Chairman Joseph Tsai and CEO Simon Wu, he also unexpectedly announced his resignation as Chairman and CEO of Alibaba Cloud Intelligence Group, with Simon Wu taking over.

The plot continued to unfold. On November 17, when Alibaba released its FY2024Q2 (Q3 2023) financial report, Simon Wu announced the suspension of the spin-off of the Cloud Intelligence Group and pledged to "increase investment."

Experiencing two distinct leaders in just six months, the turmoil in Alibaba Cloud's management points to a vague and wavering strategy.

Daniel Zhang attached great importance to Alibaba Cloud, clearly positioning it as a "cloud computing product company." In terms of equity and corporate governance, he hoped that Alibaba Cloud could fully separate from the Alibaba Group, bravely face the future with a second startup, and grow into a world-class technology company. However, given his financial background, he was not considered the best candidate to lead Alibaba Group into the era of intelligence.

In contrast, Simon Wu, with a technical background, wanted to keep Alibaba Cloud, a high-quality asset, within the group system and established three new strategies: "a technology-driven internet platform business, an AI-driven technology business, and a global commercial network."

As a result of strategic hesitation and repeated adjustments, Alibaba Cloud missed the opportunity to lead in large models. In April 2023, Alibaba launched the Tongyi large model, a month after Baidu's ERNIE Bot. In the competition for large model parameters, Baidu was the first to reach the trillion-parameter mark, with Alibaba trailing behind.

Despite its rising internal status, Alibaba Cloud has experienced technical incidents that are "beneath its dignity." Within November last year, Alibaba Cloud experienced two downtime incidents, raising questions about its technical capabilities.

The first incident lasted about three and a half hours on November 12. The second incident, on November 27, affected database management products in Beijing, Shanghai, Hangzhou, Shenzhen, Qingdao, Hong Kong, as well as the eastern and western regions of the United States, just four days after Alibaba Cloud's new round of organizational adjustments.

On November 23, 2023, Alibaba Cloud established three new business units and set up a technical committee. The three business units are the Public Cloud Business Unit, Hybrid Cloud Business Unit, and Overseas Business Unit.

Among them, the most critical Public Cloud Business Unit is headed by Liu Weiguang, Vice President of the Alibaba Group and General Manager of Alibaba Cloud Intelligence's New Finance & Internet Business Unit. The Hybrid Cloud Business Unit is led by Li Jin, and the Overseas Business Unit by Yuan Qian, all reporting to Simon Wu.

Named after the Infrastructure Business Unit, the Technical Committee is positioned as "building a future-oriented, integrated hardware and software infrastructure" and is led by CTO Zhou Jingren. Outsiders believe that the establishment of this technical committee is closely related to the widespread failures encountered by Alibaba Cloud after Double 11, though no one expected the second downtime incident to occur so soon.

The instability within Alibaba Cloud has also caused confusion among its employees. This is reflected in its financial performance, with quarter-on-quarter revenue growth rates of 11.5%, 5.5%, and 3% from the second to the fourth quarter of calendar year 2023.

Part.3

Aiming for Miracles Through Bold Moves?

Compared to the many changes in internal reforms, Alibaba Cloud's external strategy has primarily revolved around price reductions.

Price reductions are a common tactic in cloud market competition. Foreign players like AWS, Microsoft Azure, and Google Cloud have all benefited significantly from numerous price cuts, and Alibaba Cloud, by "copying their homework," has also seen benefits. However, as cloud vendor competition intensifies, the ripples caused by Alibaba Cloud's price reductions are becoming smaller.

In its 15-year history, it has become difficult to count the number of price reductions Alibaba Cloud has made, which has helped it solidify its position as the market leader in domestic cloud share. From October 2015 to October 2016 alone, Alibaba Cloud reduced prices 17 consecutive times, with core cloud products seeing price reductions of over 50% at one point.

In recent years, the price wars initiated and participated in by Alibaba Cloud have become increasingly fierce. In April 2023, Alibaba Cloud announced two price reductions within a month, affecting core products, with maximum reductions of up to 50% for computing, storage, networking, database, and security products, such as a maximum 40% reduction for RDS Yitian Edition and a 50% reduction for OSS Deep Archive.

Entering 2024, Alibaba Cloud intensified its price wars. In February, it announced price reductions for over 100 products. On April 8, it reduced prices for the overseas market, covering 13 global regions including Malaysia, Indonesia, and Singapore, with maximum reductions of 59%. In May, it followed up with price reductions for large models but was criticized for "lacking sincerity," offering discounts only on some non-core products, using price reductions to drive traffic to cloud products.

There are indeed hidden catches. Qwen-Long, with a price reduction of up to 97.5%, is not Alibaba Cloud's most powerful model. Tongyi Qianwen Max, with better performance, has a price reduction of 67%, while Qwen1.5-32B and Qwen1.5-110B offer a 7-day free trial.

However, price wars are not the entirety of Alibaba Cloud's external strategy. More critically, Simon Wu has adjusted the business direction, emphasizing "AI-driven, public cloud priority," reducing project-based sales orders (i.e., private cloud orders), increasing investment in core public cloud products, and boosting technical investment in AI-related software and hardware.

In other words, Alibaba Cloud is seeking expansion through advanced investment, trading short-term revenue losses for potential growth prospects.

The financial report reflects Alibaba Cloud's investment efforts, with a near-cliff-like decrease in free cash flow. In Q1 2024, Alibaba Cloud's free cash flow was 15.361 billion yuan, a year-on-year decrease of 52%. In Q2, it fell by 56% year-on-year to 17.372 billion yuan. The latest Q3 financial report shows a free cash flow of 13.735 billion yuan, a year-on-year decrease of 70%.

The gaps created by high investment must be filled by increased revenue. Despite these efforts, Alibaba Cloud has failed to prevent its market share from being eroded by competitors, as other cloud vendors also have the financial resources to compete, making it difficult for Alibaba Cloud to establish an absolute advantage. Alibaba Cloud's management has admitted that repeated price reductions for cloud products were due to previous reductions failing to meet expected targets.

According to IDC's "China Public Cloud Service Market (H2 2023) Tracker" report, in the public cloud IaaS market, Alibaba Cloud's share fell from 32.6% to 27.1% from the second half of 2022 to the second half of 2023, while Huawei Cloud, Tianyi Cloud, and Mobile Cloud continued to grow.