Alibaba overhaul leaves fate of prized cloud unit up in the air
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[March 31, 2023] By
Josh Horwitz
SHANGHAI (Reuters) - Alibaba's six-way breakup plan has raised questions
about the long-term shape of its profitable cloud unit, given that it
will have to tackle heavy regulatory scrutiny at a time when competition
is intensifying both in China and abroad.
While a split into a standalone unit will give investors a chance to
make focused bets on a business estimated by analysts to be worth
between $41 billion and $60 billion, the step could put Alibaba's cloud
unit even more in the cross-hairs of Chinese and overseas regulators,
likely slowing its growth.
Some analysts said external investment and separation from Alibaba's
core ecommerce business could help it grow overseas, where it is far
behind rivals such as Amazon Web Services. But others see the Chinese
state investing in the cloud unit or it even going private, given its
dominance in the domestic cloud computing industry.
Alibaba's planned Cloud Intelligence Group, which will house the cloud
business AliCloud as well as the tech giant's artificial intelligence
and semiconductor research, has a 36% market share in China's domestic
cloud computing sector.
Its servers host reams of data from companies ranging from tech peers to
retailers, the handling and sharing of which has in recent years drawn
increasing scrutiny from Beijing.
"Alibaba’s business lines have different levels and types of regulatory
sensitivity," said Gavekal Dragonomics analyst Thomas Gatley in a note
this week.
"For cloud computing, data security is paramount."
Alibaba and China's commerce ministry did not immediately respond to
queries sent on Friday.
CHANGING MARKET DYNAMICS
Receiving state investment and drawing closer to the Chinese government
could satisfy regulators in Beijing, who have rolled out new laws
regulating the handling of data in China and set up a data bureau to
underline their focus on the area.
It could also help AliCloud to compete more effectively in China, where
overall demand for cloud computing from internet companies is slowing
and growth is mainly coming from governments and state-owned enterprises
which have not migrated to the cloud as quickly.
While government entities "will not completely reject" companies like
Alibaba, Baidu, and Tencent Holdings for their projects, "they will have
a tendency to choose companies with a government funding and
backgrounds," said Zhang Yi, who tracks China's cloud computing sector
at research firm Canalys.
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The logo of Alibaba Group is seen at its
office in Beijing, China January 5, 2021. REUTERS/Thomas Peter
In the first half of last year, China's top three telcos - China
Mobile, China Unicom, and China Telecom - collectively surpassed
Alibaba's share in the domestic cloud market for the first time,
according to brokerage Jefferies, underscoring Beijing's growing
reliance on state-backed carriers for data management.
But growing closer to Beijing has a downside, said Michael Tan, a
Shanghai-based partner of law firm Taylor Wessing.
"It could backfire at the international level, as it might then face
even more attention from the U.S.," he said.
In January, Reuters reported that the Biden administration is
reviewing Alibaba's cloud business to determine whether it poses a
risk to U.S. national security.
OTHER PROBLEMS
The cloud unit has its own domestic problems to fix.
In 2021, China's Ministry of Industry and Information Technology
suspended an information-sharing partnership with AliCloud on the
grounds that Alibaba did not report a security vulnerability related
to the open-source logging framework Apache Log4j2.
And in December 2022, Alibaba Cloud experienced what it called its
"longest major-scale failure" for more than a decade after its Hong
Kong and Macau servers suffered a serious outage that affected many
services in the region including ones belonging to crypto exchange
OKX.
Weeks after the outage, Alibaba group Chairman and CEO Daniel Zhang
took over as head of the cloud unit, a role he will continue to hold
concurrently even after the split-up.
Another risk from the planned split of the cloud unit, which had
sales of around $11.5 billion last year, is that previously captive
in-house Alibaba clients start courting rivals, hurting its revenue.
But splitting the cloud unit away could also be a positive for the
other Alibaba businesses, some analysts said.
"When all data was put in one basket at Alibaba, there could always
be concern about misuse of data within the company to maximise
profit," said Tan at Taylor Wessing.
"The restructuring will help avoid this."
($1 = 6.8902 Chinese yuan renminbi)
(Reporting by Josh Horwitz; Editing by Brenda Goh and Muralikumar
Anantharaman)
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