Alibaba and Tencent are “platforming” as cloud computing war moves into the next phase
Building more tailored services for clients has become a top priority for cloud computing behemoths like Alibaba and Tencent as competition in China’s cloud industry heats up.
The two titans’ growth has been hampered by the slowdown in consumer spending in the previous quarter, but their cloud computing operations have emerged as bright spots.
Alibaba’s total revenue increased by 9% year over year in the first quarter, a new low, while Tencent’s total revenue increased by just 0.1 percent year over year.
Meanwhile, the e-commerce giant’s cloud business, which comprises Alibaba Cloud and workplace collaboration tool DingTalk, increased 23% year over year to more than 74.5 billion yuan. Tencent’s fintech and cloud segment is now the company’s leading revenue generator, recording a quarterly revenue increase of 10% to 42.8 billion yuan.
A portion of the growth can be attributed to the fact that the two titans are more focused on improving user value than blindly pursuing expansion.
After more than a decade of rapid expansion, the market shares of cloud service providers in the infrastructure as a service (IaaS) category have finally stabilized. Boosting profitability has thus become a common goal for all participants. According to Canalys, in 2021, Alibaba Cloud ranked first in China’s IaaS market with a 37% share, followed by Huawei Cloud with 18%, Tencent Cloud with 16%, and Baidu AI Cloud with 9%.
IaaS has long been renowned for its relatively low profit margins, so by devoting more resources to PaaS to introduce more bespoke software services, whether third-party or self-developed, cloud providers can realize more profits.
Simply put, IaaS generally pertains to cloud-based pay-as-you-go services such as storage, networking, and virtualization, and it is the initial stage of cloud migration, as it focuses primarily on hardware and operating system services.
PaaS represents a higher level of cloud migration as it encompasses a variety of middleware and operating environments, providing users with a platform to develop, run, and manage internet-based applications. For cloud providers, higher PaaS revenue as a proportion of overall revenue indicates higher adoption of their offerings.
In an ever-changing/evolving market, businesses must be able to act more quickly and effectively to acquire first-mover advantages. To support agile business operations, PaaS would be an excellent choice since it enables rapid development as well as faster, more frequent functionality delivery.
By leveraging its extensive expertise in real-time communication, Tencent is building a platform that provides customers with low-latency real-time video interaction solutions. On Tencent’s most recent earnings call, the company stated that clients are increasingly upgrading their basic content delivery networks to more advanced real-time video communications solutions, and ultimately to integrated communications PaaS solutions.
“And as they (clients) migrate, the competitive barriers to entry become higher and the margins correspondingly become healthier,” James Mitchell, Tencent’s Chief Strategy Officer (CSO), said.
Over the past year, Tencent has integrated its own teleconferencing tool, workplace messaging tool, and document service into a single platform, in an effort to provide users with more self-developed and third-party software offerings.
In addition, in order to expand Tencent Cloud’s camp, the Qianfan plan was launched in 2019. More than 300 partners have enrolled so far, with their services encompassing numerous industries, including banking, retail, manufacturing, and real estate, among others.
A comprehensive and easy-to-use PaaS ecosystem, which includes solutions for databases, audio and video, artificial intelligence, cloud native, and more, has been built by Tencent. Approximately fifty percent of Tencent Cloud’s current revenue comes from infrastructure, with the remaining fifty percent coming from platform software and industrial solutions. “We aspire to grow both, but particularly the latter,” the CSO said.
Tencent Cloud was ranked No.1 by Gartner for communication PaaS revenues in China in 2021 among all suppliers.
As for Alibaba, DingTalk, the workplace collaboration tool, has become a cornerstone of the company’s PaaS ecosystem. At a press conference held in March, DingTalkPresident Ye Jun said that DingTalk will become more of a platform, allowing developers and third-party providers to expand on it.
For this productivity tool with 500 million users, it is impossible to meet the needs of all industries and all roles through a standardized product/uniform solution, however, if more partners are recruited in to provide more specialized services, user needs may be better met. This is precisely what Alibaba is doing: it enables third-party developers to build and deploy software services on Alibaba Cloud, which consumers can then access via DingTalk
“DingTalk positions itself as a PaaS that makes it easier for developers to make software and get in touch with customers,” said Ye. Currently, DingTalk claims to solely focus on fundamental productivity products, such as documents and teleconferencing, leaving more customized solutions for specific industries such as finance, healthcare, and education to third parties.
By shifting more to PaaS, DingTalk is able to provide more open and compatible underlying technology and support to third-party developers, as well as foster a more prosperous ecosystem. As of December 2021, DingTalk has collaborated with 4,000 software service firms, and hosts over 1.9 million developers and over 2.4 million low-code apps in its portfolios.
Alibaba’s IaaS and PaaS offerings were recognized with the third-highest overall solution score of 81% among all evaluated international vendors in this market, according to Gartner’s report in 2021. “In the future, we will strengthen our core IaaS+PaaS features and step up the rollout of new services and features to provide the best cloud experience to our customers worldwide,” said Jeff Zhang, president of Alibaba Cloud Intelligence.
Increased investment in PaaS, notably the recruitment of additional third-party developers, would aid Tencent and Alibaba in expanding the moats surrounding their cloud services, enhancing the ecosystem as a whole, and preserving their long-term competitive advantage.
“In the coming years, enterprises’ ability to govern a growing portfolio of cloud services will be the foundation for introducing greater automation into business and IT processes while also becoming more digitally resilient,” said Rick Villars, group vice president, Worldwide Research at IDC. As a result, cloud service providers are rapidly expanding their portfolios of infrastructure and platform services, allowing them to assist businesses in navigating the future while simultaneously constructing their own cloud fortresses.
IDC anticipates that spending on core cloud services, namely IaaS and PaaS, will continue to increase at a faster rate than the entire cloud market, as resilience, flexibility, and agility continue to influence IT platform selections.