How does Alibaba Cloud reduce prices and still make profits?
Latest update time：2024-08-19
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Finally! China’s To B industry has started a healthy price war.
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Author | Xu Xiaofei
Editor | Zhou Lei
This year, with the overall domestic cloud computing industry in a downturn and competitors mainly on the defensive, Alibaba Cloud has expanded against the trend. With its two flagship products, public cloud products and Tongyi Model API, slashing prices in turn, Alibaba Cloud achieved a 155% surge in EBITA profits in the second quarter, which undoubtedly injected a shot in the arm for the entire industry.
Not only that, on the evening of August 15, Alibaba Group released its financial report for the first quarter of fiscal year 2025 (i.e. the second quarter of 2024), showing that this quarter, cloud intelligence revenue was 26.549 billion yuan, a year-on-year increase of more than 6%; adjusted EBITA profit reached 2.337 billion yuan; public cloud business revenue achieved double-digit growth, and AI-related product revenue achieved triple-digit growth.
This financial performance, in light of the recent price war, raises a question in the industry:
Why can Alibaba Cloud achieve “price cuts without bleeding”?
It is important to know that in the early days of domestic cloud computing development, vendors launched multiple rounds of price competition in order to expand market share. Over time, price wars were labeled as "burning money" and "losses".
However, unlike in the past, after Alibaba Cloud cut prices several times in the first half of this year, in response to market doubts, it repeatedly stated that the room for price cuts came from the scale effect of public cloud and technological innovation, which brought about a reduction in the cost of the product itself, and it was a "bloodless" price cut.
Not only that, at the earnings conference, Alibaba Group CEO Wu Yongming stated that in the future, Alibaba Cloud will continue to invest heavily in technology research and development and AI infrastructure, and maintain healthy profitability while investing heavily.
How does Alibaba Cloud make profits while investing?
01
Return to the essence of cloud computing
Due to the inherent deficiencies of the domestic digital infrastructure and the complexity of the current situation, for a long time, the domestic cloud computing industry has embarked on a "fork in the road" that was too deeply involved in project-based and customized development. However, returning to the essence, cloud services as infrastructure, its core logic lies in the scale effect of public clouds.
However, there are not many manufacturers that can take this path at present, because it requires crossing the two thresholds of "technology" and "scale".
As the largest cloud company in China with the largest market share, Alibaba Cloud has taken the lead in using scale to dilute product costs. In the first half of this year, Alibaba Cloud seized the weaknesses and fatigue of its competitors and launched a series of rapid price wars.
On February 29, Alibaba Cloud's official website took the lead in significantly reducing prices, covering more than 100 products and more than 500 product specifications, with an average price reduction of 20%. As a result, more and more small and medium-sized customers flowed into Alibaba Cloud's official website to place orders. Soon after, Alibaba Cloud launched several action plans in direct sales and telemarketing channels. For more details, please refer to Leifeng.com's previous article "
Why is Alibaba Cloud so fierce now?
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When talking about Alibaba Cloud in the first half of the year, many practitioners' first reaction was "too strong". The successive conquests have also made industry peers come back to their senses from the "special theory of the Chinese market" and re-examine the inherent logic of cloud computing as an infrastructure business:
The public cloud industry requires huge capital expenditures and R&D investment, with high technical barriers and large economies of scale. The leading companies have a larger scale, which means they have the ability to continuously reduce costs, thereby lowering prices and making concessions to attract more customers. This cycle will become a flywheel that is too fast to catch up, forming an industry structure where the strong will always be strong.
In other words, the ability to continuously lower prices is itself a criterion for testing the competitiveness of cloud service companies' products.
02
The foundation of scale is "technological innovation"
There is another key factor that needs to be addressed to accelerate the positive cycle of the cloud computing industry: technological innovation.
As we all know, the price reduction of cloud computing products will only avoid killing one thousand enemies and hurting eight hundred of your own if it is based on cost optimization brought about by product iteration, technological innovation, and scale advantages.
Among them, cost reduction brought about by technological innovation plays a key role.
From the perspective of the computing power industry, having resources does not necessarily mean that they can be used well. If there is a lack of reasonable and efficient management, computing resources will face a lot of loss and waste.
How to make efficient use of large-scale computing resources and maximize marginal effects is not something that can be achieved overnight.
Especially with the rise of big models,
computing needs have expanded dramatically, giving rise to numerous ultra-large-scale cloud computing server clusters. Cloud vendors are facing even more severe challenges in terms of how to uniformly schedule these computing nodes around the world to reduce costs and increase efficiency.
Participants around the world are accelerating their transformation and running. Chinese players represented by Alibaba Cloud are no exception.
Previously, Alibaba Cloud already had the only self-developed
cloud operating system in China, Fei Tian, which can orchestrate and schedule millions of servers, with a single cluster scheduling scale of over 100,000 servers. It can bring stronger performance with the same specification resources, and at the same time achieve extremely flexible calling of computing resources, greatly improving resource efficiency and performance.
After entering the era of big models, Alibaba Cloud chose to be the infrastructure, open source, and open platform of the AI era. It comprehensively upgraded the AI infrastructure, launched the Bailian big model platform, and initially built a full-stack cloud computing system for the AI era.
This year, Alibaba Cloud has upgraded its artificial intelligence platform PAI. The underlying HPN7.0 new generation AI cluster network architecture can efficiently coordinate and schedule various chips, support cluster scalability of up to 100,000 cards, and further enable ultra-large clusters to operate as efficiently as a single computer.
In the second quarter, the open source model Qwen2-72B was released, and the Bailian big model platform was further upgraded, making it an important platform for Alibaba Cloud to carry cloud + AI capabilities. Currently, the platform integrates hundreds of big model APIs, and the number of paid users connected to it has increased by more than 200% month-on-month this quarter.
It can be said that the improvement of technology not only continues to reduce the cost of Alibaba Cloud, but also continuously promotes new business growth of Alibaba Cloud. The profits brought in turn further feed back to the technology, thus forming a positive cycle.
As Alibaba Group CFO Xu Hong pointed out in the earnings call, Alibaba hopes to continue to achieve sustainable profit growth in its cloud business through intensive R&D investment.
03
Launching the next growth engine
It is also worth noting that this financial report also disclosed a number - the revenue growth rate of Alibaba Cloud's external customer revenue (excluding Alibaba's affiliated companies) was 6%.
In the previous four fiscal quarters, Alibaba Cloud's revenue growth rate was relatively moderate, ranging from 2% to 3%. On the one hand, Alibaba Cloud actively optimized its revenue structure and reduced low-profit projects, which offset some of the growth; on the other hand, it was also due to the slowdown in the overall demand for digitalization of Chinese enterprises.
Today, as Alibaba Cloud continues to strategically shrink high-volume, low-profit customized projects, external customer revenue has risen again to 6%. This sends a clear signal - the strong demand for AI is being translated into actual public cloud service revenue figures.
Another set of data disclosed in the financial report confirms this point: "This quarter, public cloud revenue maintained double-digit growth, AI-related product revenue grew by triple digits, and its share in public cloud revenue continued to increase."
A survey by Silicon Valley venture capital firm a16z shows that 80%-90% of early financing for large model and generative AI startups is used to purchase computing power from cloud computing platforms; a16z estimates that when the industry matures in the future, about 10%-20% of the annual revenue of model and application companies will come to cloud computing companies.
From a strategic perspective, Alibaba Cloud is undoubtedly the most aggressive domestic company on the new front of generative AI.
Currently, Alibaba has invested in the top five generative AI unicorns in China, including Zhipu AI, Zero One Everything, Baichuan Intelligence, MiniMax, and Dark Side of the Moon. All of these companies train large models on Alibaba Cloud. Alibaba Cloud management has revealed that 80% of China's technology companies and more than half of large model companies run on Alibaba Cloud.
For Alibaba Cloud, in-depth cooperation with potential large-scale model companies will help Alibaba Cloud continue to consolidate its leading market position in China and seize the incremental growth brought by AI computing.
The financial report shows that the number of paying users on the Bailian big model platform has increased by more than 200% quarter-on-quarter. Many companies including FAW, Weibo, Kingsoft, Perfect World, CCTV.com, and Lanling Technology are customers of Alibaba Cloud Bailian.
At the same time, the scale of AI infrastructure products such as Alibaba Cloud PAI is also growing rapidly. According to the 2024 "Magic Quadrant for Data Science and Machine Learning Platforms" released by international research organization Gartner, Alibaba Cloud has jumped to the Challenger Quadrant and became the only Asia-Pacific manufacturer shortlisted in the report.
In addition to AI, going overseas is another new battlefield.
Since the beginning of this year, Alibaba Cloud has launched a fierce offensive in the international market. First, it cut prices across the board, with an average drop of 23% and a maximum drop of 59%, breaking through the global cloud service floor price. It then announced that it would invest in new data centers in five countries, including South Korea, Malaysia, the Philippines, Thailand and Mexico.
A person in charge of Alibaba Cloud's international business said: "Currently, Alibaba Cloud's cloud computing demand in Asia Pacific, the Middle East and Europe is very active. In particular, the Latin American market is becoming more and more economically active, and the local demand for cloud computing is very strong. Entering the Mexican market will be an important step in Alibaba Cloud's global expansion."
Alibaba Cloud is also making frequent efforts in attracting major international customers.
In May, foreign media reported that Alibaba Cloud won a five-year long-term contract with LVMH Group, the parent company of LV, and the services included Tongyi Qianwen and Bailian platforms.
Alibaba Cloud was the exclusive cloud service provider for the just-concluded Paris Olympics. The use of cloud broadcasting was the largest in history, surpassing satellite for the first time to become the main method of Olympic broadcasting. More than two-thirds of the Olympic TV and online live broadcast signals were distributed globally based on Alibaba Cloud, transmitted from Paris to more than 200 countries and regions around the world.
Winning super-large customers such as LVMH Group and the Olympic Games will undoubtedly help Alibaba Cloud further open up the international market.
AI and going global have brought about real and high-quality revenue growth, which is also the confidence that Alibaba Cloud can achieve "lowering prices without reducing profits."
According to the experience of overseas cloud vendors such as AWS and Microsoft Cloud, cloud vendors will enter a harvest period in about ten years if they stick to the public cloud path. For Alibaba Cloud, after more than ten years of real investment in scale and technology, the marginal cost effect has already emerged.
Several other domestic cloud vendors also see this year and next year as "critical years" to achieve a break-even point. However, in the face of evolving market demands, in order to keep up with the times, high technology investment is required on the one hand, and competition for market share on the other hand. Whether all cloud vendors can enter the harvest stage and whether China's cloud computing industry can enter the next new stage remains to be seen.
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