After a large-scale price reduction in cloud services last year, on February 29, Alibaba Cloud once again launched its "largest price cut in history". Immediately afterwards, JD Cloud followed suit by releasing a price reduction message overnight, choosing to closely align itself with Alibaba Cloud's move. Its slogan of "slash prices freely, compete to the end" has a confrontational tone, directly sounding the horn for a new round of cloud computing price wars.

In fact, as early as May 2023, Alibaba Cloud had already experienced a "largest price cut in history", followed by Tencent Cloud, JD Cloud, and China Mobile Cloud, all of which pushed the price war to a climax. Going back further, after Alibaba Cloud's first price reduction in 2013, it continued to cut prices six times in 2014. In 2015-2016, it even reduced prices 17 times consecutively, with the price reduction of core cloud products exceeding 50% at one point. At that time, facing Alibaba Cloud's lead in price reductions, other major players, almost without exception, were all drawn into the fray in an effort to capture market share.

Abandoning the old and seeking the new has become inevitable.

At the critical juncture of the accelerating arrival of the AI era, many cloud giants suddenly realized that the directions they had stubbornly clung to in the past now seemed to have reasons for letting go. Clearly, the cloud has a greater mission in the new era. As the industry leader, Alibaba Cloud has clearly seen this point and once again taken the lead in the industry.

On one hand, Alibaba Cloud has carried out drastic rectification and optimization of hybrid clouds, further enhancing its overall standardization. As early as January 2024, there were media reports that Alibaba Cloud had made adjustments at the core sales business level, renaming its original hybrid cloud business unit as the Government and Enterprise Business Unit. The report also stated that the sales and service teams for dedicated clouds were merged into the Government and Enterprise Business Unit, becoming a first-tier department, with the aim of improving the standardization and service capabilities of dedicated cloud product solutions for better integration by partners.

However, when the new Public Cloud, Hybrid Cloud, and International Business Unit was established at the end of November last year, the dedicated cloud-related business lines had already been incorporated into Hybrid Cloud. Therefore, Alibaba Cloud has further elevated the priority of dedicated cloud standardized services. In practice, government and enterprise customers have a high overlap ratio with hybrid cloud customers. Therefore, Alibaba's adjustment aims to integrate different private clouds, public clouds, and internal IT resources into the hybrid cloud architecture that customers ultimately desire, while Alibaba Cloud does not want to be too involved.

In fact, there were early signs of this business-oriented adjustment. For example, Cai Yinghua's departure can be seen as a crucial turning point, effectively marking the failure of Alibaba's strategy of targeting large B enterprises for growth. In fact, for Alibaba Cloud, Cai Yinghua's departure was not a bad thing. After all, Alibaba initially hired him to systematically learn from Huawei Cloud's systematic approach to government and enterprise customers. However, Huawei's meticulous and highly customized approach was clearly not suitable for Alibaba Cloud, and Alibaba Cloud did not build an advantage from it. Therefore, such optimization and adjustment were only a matter of time.

On the other hand, with the explosion of ChatGPT, the third wave of cloud computing may have already arrived. In the past, Wang Jian, the founder of Alibaba Cloud, made a prediction about the cloud and proposed a theory of three waves of industrial trends. The first wave was the cloud-native transformation of internet companies, and the second wave was the adoption of cloud computing by traditional enterprises. Now, it seems that the first wave of cloud-native transformation did indeed drive explosive growth in the cloud computing industry, but the progress of the second wave was significantly disappointing.

However, with the explosion of ChatGPT, the third wave of general artificial intelligence is sweeping the cloud services industry, representing progress in general AI. General AI means broader applicability in the future and relatively less customization, which is precisely the target market desired by cloud vendors.

A strategic choice that must be made

From the current perspective, as the industry competition environment becomes increasingly fierce, Alibaba Cloud's price reduction measures are not surprising.

According to IDC's third-quarter 2023 data, while Alibaba Cloud still holds a firm first place in the public cloud market, its share fell by 5.8 percentage points year-on-year. Meanwhile, the shares of Huawei Cloud, China Telecom Cloud, and China Mobile Cloud, which rank second, third, and fourth respectively, have increased. Clearly, the public cloud market remains fiercely competitive for Alibaba Cloud.

As Liu Weiguang, President of Alibaba Cloud Intelligence Group's Public Cloud Business Unit, said, "Alibaba Cloud's price reduction is not a short-term market competition behavior, but a long-term strategic choice." This firm statement is a stark contrast to Alibaba Cloud's earlier wavering. As mentioned earlier, facing the considerable growth rate of the private cloud market, Alibaba Cloud also intended to compete with Huawei Cloud, operator clouds, and others for non-public cloud market share. However, the reality is that Alibaba Cloud has not been able to establish an advantage here.

Now, with the further intensification of competition in the domestic public cloud market, returning to the "advantageous battlefield" of public clouds has almost become a necessary decision for Alibaba Cloud.

On one hand, price reductions can directly expand Alibaba Cloud's customer base, drive more customers to adopt cloud services, and increase Alibaba Cloud's market share and influence. Globally, China's cloud computing has been developing for more than a decade, but the public cloud penetration rate is still significantly lower than mature markets in Europe and the United States. Alibaba Cloud's latest round of price reductions is clearly aimed at further increasing the domestic public cloud market penetration rate. Additionally, price reductions can also expand the scale of small and medium-sized enterprises adopting cloud services, compensating for the revenue losses caused by price reductions.

However, Alibaba Cloud's current actions are not simply trading price for volume. According to relevant media reports, Alibaba Cloud's price reductions mainly target new iterations of older servers. Due to the limitations of their useful life, the hardware depreciates from the moment they leave the factory. At the same time, some high-frequency, low-margin discounted products also drive sales of low-frequency, high-margin products, which is a win-win situation for Alibaba Cloud.

On the other hand, as Alibaba Cloud gradually strategically abandons private clouds, its expectations for revenue growth from public clouds are more urgent. Therefore, price reductions have naturally become a necessary decision. In Alibaba Cloud's 2024 Q3 earnings report released earlier, its adjusted EBITA achieved a year-on-year growth of 86%. Alibaba Cloud explained this by stating that it was due to our focus on public clouds, resulting in improved product mix and operational efficiency.

With the expectation of high gross margins, Alibaba Cloud has a lot of room for its current across-the-board price reductions, and the integration of more public cloud customers can dilute costs. For Alibaba Cloud at the moment, relatively increasing gross margins, accelerating revenue growth, and expanding scale are clearly more urgent.

Price wars are not the only means

From the perspective of the entire market, pure price wars are not the only means of competition, especially as there are considerable security risks behind price wars. Especially as data becomes increasingly concentrated in the cloud, cloud security is becoming increasingly important.

First, while pure price wars conform to industry trends, if they ignore service quality issues related to cloud security, it will affect the reputation of cloud service providers. According to publicly available statistics, top cloud service providers have experienced outages ranging from dozens to even more. Among them, AWS, as the industry leader, has experienced outages of varying degrees more than 20 times, ranging from 40 seconds to two days.

For example, in August 2011, Amazon's EC2 (Elastic Compute Cloud) service in northern Virginia experienced a network outage, temporarily disrupting many websites and services that used Amazon Web Services' cloud computing infrastructure. This data center was Amazon's only data storage location in Europe, meaning that EC2 cloud computing platform customers had no other data centers to temporarily use during the outage. This outage caused multiple websites using Amazon's EC2 cloud services to be down for two days.

From the current status of cloud practices, "low-cost public cloud services are not as cheap as imagined, and losses caused by failures will indirectly increase costs." In the long run, if prices are reduced without improving cloud security quality, it will inevitably lead to a series of contractual legal risks, which is very unfavorable for the long-term development of cloud service providers.

On the other hand, in addition to expanding users, the core purpose of price reductions is to drive cloud customers to increase their use of AI, which is the real core behind cloud vendors' price reductions. As industry insiders put it, public clouds are the best partner for AI. Cloud computing not only provides computing power support for large models but also includes upgrades and iterations of network storage and supporting technical architectures. Many enterprises need the capabilities of large models, but they do not need to do inference training themselves. However, by using public cloud resources, AI capabilities are readily available.

However, from the perspective of the customer market, many current customers only use the cloud as server resources and do not utilize many data capabilities and AI capabilities on the cloud. They also fail to make the cloud a technological weapon to help their businesses transform and upgrade. The idea behind price reductions can be summarized as "the more people use it, the higher the utilization rate of cloud network resources, and the lower the idle costs." Lower idle costs are more conducive to cloud service providers reducing prices, which will continue to increase scale, forming a virtuous cycle.

Therefore, the core of price wars lies in improving cloud resource utilization and increasing user consumption frequency. If this purpose cannot be achieved, simply reducing prices is clearly unwise and unreasonable.

In Conclusion

Regarding Alibaba's price reductions, some in the industry refer to them as a "table-flipping" move, believing that it will inevitably disrupt the rhythm of its competitors in 2024. However, others argue that while Alibaba's price reductions seem aggressive and belligerent, with a strong combative atmosphere, the form actually outweighs the substance. If competitors blindly follow suit, they may instead disrupt their own strategies.

On one hand, Alibaba's price reductions are indeed severe, but their impact on large customers is relatively limited as they typically enjoy greater discount bargaining power. Although Alibaba emphasizes that it will offer customers the lower of the two prices if the discount for large customers is lower than the promotional offer, this situation rarely occurs in reality. On the other hand, due to the different situations of different customers, the customers who may benefit from this price reduction may also be limited. Specifically, cloud service enterprises often purchase annual packages for fixed business and purchase elastic business on-demand or choose monthly packages. Alibaba's current price reduction only applies to annual packages, but the list price (equivalent to the monthly price) has not been reduced, so its actual impact is far less significant.

Additionally, to further promote the implementation of its price reduction strategy, Alibaba Cloud is also internally promoting the integration of elastic computing and storage, driving the integration of storage and computing. In the long run, price wars are a pressure externally but a driving force internally, urging the entire company to initiate internal reforms to adapt to changes in the market environment. This situation applies not only to Alibaba Cloud but also to other competitors.