Stress is mounting on Alibaba’s cloud-computing division after years of breakneck growth, as competitors within the {industry} intensifies and political points harm the Chinese language firm’s means to win enterprise abroad and authorities contracts at dwelling.
Alibaba traders have banked on cloud computing to drive important development, as competitors within the firm’s predominant e-commerce enterprise heats up. In current months, nevertheless, the cloud unit has parted methods with a significant buyer, was given the chilly shoulder by some Chinese language authorities shoppers and has overhauled its organizational construction, individuals accustomed to the matter stated.
Alibaba Group Holding Ltd. BABA -2.73% reported final week that cloud computing income grew 37% within the quarter ended March 31 from the identical interval a yr earlier, the slowest quarterly development because it went public on the New York Inventory Alternate in 2014. The corporate stated the slowdown was as a result of lack of a significant Chinese language web consumer’s worldwide enterprise as a result of “non-product associated necessities.”
That consumer was ByteDance Ltd., the proprietor of the social-video app TikTok, which terminated a deal to retailer its worldwide knowledge on Alibaba Cloud, a few of the individuals stated. When ending the connection, ByteDance purchased servers from Alibaba, they stated.
The strikes mirrored Beijing-based ByteDance’s want to deal with its personal fast-expanding cloud-computing wants, the individuals stated. Rising U.S. strain on the usage of Chinese language-owned laptop companies to retailer Individuals’ knowledge accelerated the method, one of many individuals stated. In August, the Trump administration warned in opposition to the usage of Chinese language cloud-computing companies together with Alibaba’s.
Alibaba Cloud declined to touch upon its relationship with Bytedance.
Bytedance, which counts Carlyle Group Inc. and Basic Atlantic amongst its backers and is among the world’s most beneficial tech startups, is constructing an in-house cloud-computing functionality to host its companies globally. The corporate has been regularly unwinding its enterprise on the mainland with Alibaba Cloud, individuals accustomed to the matter stated. Bytedance’s operations embody the favored news-aggregator app Jinri Toutiao, Alibaba Cloud buyer.
That may deal an additional blow to Alibaba Cloud, which has plowed billions of {dollars} into the enterprise and simply turned worthwhile up to now two quarters on the premise of adjusted earnings earlier than curiosity, taxes, amortization and depreciation.
“We perceive that Alibaba Cloud nonetheless has materials publicity to Bytedance’s home cloud workload, and fear that ‘Bytedance threat’ may rear its head once more in future quarters,” Bernstein analyst Robin Zhu stated in a notice Tuesday.
Bytedance was caught up in rising U.S.-China tensions final yr, because the Trump administration tried to ban and pressure the sale of its TikTok app, citing considerations in regards to the safety of knowledge collected from its thousands and thousands of American customers. TikTok attracted greater than 81 million downloads within the U.S. final yr, knowledge from mobile-analytics agency Sensor Tower exhibits. A U.S. courtroom blocked the ban, and the sale was shelved indefinitely as President Biden reviewed his predecessor’s coverage towards the corporate.
In a U.S. federal courtroom listening to final yr, a senior ByteDance govt stated the corporate hosted TikTok’s U.S. customers’ knowledge within the U.S. on cloud companies offered by third events together with Alphabet Inc.’s Google and Microsoft Corp. The Chinese language agency had stored a backup copy of TikTok’s U.S. knowledge in knowledge facilities in Singapore, the place one of many cloud suppliers it used was Alibaba, an individual accustomed to the matter stated.
Alibaba was the primary Chinese language expertise large to make the foray into cloud computing—renting processing energy and data-storage companies to exterior shoppers—by leveraging the already monumental computing wants of its e-commerce market. Cloud introduced in $2.6 billion in gross sales within the March quarter, in contrast with $24.6 billion for Alibaba’s core commerce enterprise. It’s now the biggest supplier of cloud-infrastructure service in China and the-fourth largest on this planet after Amazon.com Inc.’s Amazon Net Companies, Microsoft’s Azure and Google Cloud, based on analysis agency Canalys.
But Huawei Applied sciences Co. has been chipping away at Alibaba Cloud’s market share at dwelling. The Chinese language telecom large virtually doubled its market share in China to 16% final yr from 2019, based on Canalys. Alibaba’s share fell to 41% from 44% over the identical interval, Canalys knowledge confirmed.
IDC, one other industry-data supplier, exhibits a smaller decline in Alibaba Cloud’s market share in China over the identical interval.
Final month, Alibaba Cloud revamped its organizational construction so as to add extra geographic managers to offer native groups throughout China extra energy and accountability for rising gross sales and retaining clients, individuals accustomed to the corporate stated. The transfer was seen by some within the firm as a direct response to Huawei’s rising market share, the individuals stated.
China’s cloud-computing {industry} is a restricted one. Regulators require abroad cloud suppliers to type joint ventures to function within the nation. That has helped Alibaba develop, however the firm faces new hurdles as Beijing cracks down on the e-commerce large, its financial-technology affiliate Ant Group Co. and founder Jack Ma.
Regulators hit Alibaba with a file $2.eight billion high quality in April for abusing its dominant place over rivals and retailers on its e-commerce platform. Late final yr, they halted Ant’s $34 billion IPO because it neared the end line; this yr they compelled the fintech large to restructure as a monetary holding firm topic to more-stringent laws.
Alibaba Cloud in current months has run into issue profitable new contracts and even securing conferences with a few of its authorities and state-owned enterprise shoppers, based on individuals accustomed to the matter, as regulators scrutinize its e-commerce enterprise and Ant Group.
The corporate was the highest cloud contractor for central-government departments within the first quarter of 2019, based on state-run Xinhua Information Company.
“As seen in current quarters, Alibaba Cloud’s revenues have been primarily pushed by the continual development from clients within the web, finance and retail industries, and the general public sector,” a spokeswoman for the unit stated.
Alibaba Cloud isn’t utterly shut out—it has landed some authorities contracts up to now few months, based on authorities procurement information and firm releases.
Nonetheless, Alibaba’s current regulatory troubles may solid a shadow on decision-making by native governments and harm the corporate’s means to win future contracts within the authorities cloud market, stated Charlie Dai, a cloud-industry analyst at analysis agency Forrester Analysis.
“The fierce competitors within the authorities market and the complexity in non-public cloud markets are a few of the main challenges towards Alibaba Cloud’s enterprise development within the home market,” Mr. Dai stated.
Write to Jing Yang at Jing.Yang@wsj.com, Liza Lin at Liza.Lin@wsj.com and Keith Zhai at keith.zhai@wsj.com
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