This week Alibaba Group CEO Daniel Zhang told CNBC that its cloud computing arm, also known as AliCloud, will be its “main business” in the future.
“We strongly believe that every business in the future will be powered by cloud. We are very happy to build this cloud infrastructure in a new digital era and support all business,” Zhang told the news organization.
Currently, Alibaba’s growth is largely led by the growth of its core commerce segment. However, its cloud compute business is quickly catching up. The company reported that total revenue grew 54 percent from the previous quarter in its second quarter earnings call with investors this week.
According to the Seeking Alpha transcript of the call, Alibaba CFO Maggie Wei Wu said this was primarily driven by “the robust revenue growth of our China commerce retail business,” which grew 56 percent from the previous quarter, as well as the consolidation of its Ele.me and Cainiao Network segments, and “strong revenue growth of Alibaba Cloud.”
And while retail still leads Alibaba’s revenue, Alibaba Cloud is set to surpass retail if its revenue continues to grow at a rapid pace. In the second quarter it grew 90 percent year over year to about $820 million. This is only slightly less from its first quarter growth in which it increased 93 percent year over year.
While Alibaba Cloud faces fierce competition in the cloud market — primarily from Amazon Web Services (AWS), Google Cloud, and Microsoft — many analysts have noticed AliCloud closing the gap. GlobalData said that as Alibaba Cloud expands outside of China, it is becoming “a force to be reckoned with” in the Asia Pacific region.
A number of other research firms have noted the importance of winning the Asia Pacific cloud market, and Alibaba’s prominence in it, to the global cloud and infrastructure-as-a-service (IaaS) market. Synergy Research Group Chief Analyst John Dinsdale told SDxCentral that “There is no doubt that cloud providers who do well in China will automatically improve their standing in the Asia-Pac market and also the worldwide market, though AWS is still a long way ahead of its nearest rival.”
Alibaba is leveraging its cloud computing business to grow out of its commerce business, similar to what Amazon began years ago. While Amazon began in e-commerce, today, AWS’ operating income has surpassed Amazon’s retail business. AWS cloud revenue grew 46 percent in its last quarter.
One thing that threatens Alibaba’s cloud growth as it expands out of China is growing regulatory pressure and political hostility between the U.S. and China. In September, reports surfaced that the company would scale down its growth in the U.S. market amid political hostility between the two countries.
Just this week Alibaba stock dropped — alongside a number of Chinese internet firms — after the U.S. National Security Agency found that China has been violated a 2015 cyber agreement. This agreement prohibits the electronic theft of intellectual property. This is not the first time this year China has been accused of hacking by the U.S.
Zhang spoke to these tensions in its last earnings call saying they “create increased risk of instability.” He continued that “This is the third time in Alibaba’s 19-year history that we have encountered a setback in the global economy. Where it gets difficult to do business, it is precisely the time to fulfill our mission to make it easy to do business anywhere.”
GlobalData Analyst Slow Meng Soh, however, does not think that this will slow its growth. “There are still lots of opportunities for Alibaba outside of China including Asia and Europe,” Soh said. “The U.S. will be a tough market since there are many entrenched players with better infrastructure. Alibaba’s success will depend on the partners it can win.”
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