China's public cloud infrastructure market grew 86% in 2018, according to IDC, marking an acceleration from its 72% growth in 2017. The research firm also predicts that China's infrastructure-as-a-service (IaaS) market will scale at a faster rate than the rest of the world over the next five years. That's why China's cloud platform market is now a heated battleground for top tech companies.
However, 80% of that fertile market already belongs to four companies, according to research firm Canalys: Alibaba (NYSE:BABA), Tencent (OTC:TCEHY), Amazon (NASDAQ:AMZN), and Baidu (NASDAQ:BIDU). Let's see how these "four horsemen" of China's cloud market will drive the industry's long-term growth.
Alibaba controlled 47% of China's cloud IaaS market at the beginning of the year, according to Canalys. Its total cloud revenue rose 64% annually to 9.29 billion yuan ($1.32 billion) last quarter and accounted for 8% of its top line.
During its conference call with analysts, Alibaba CEO Daniel Zhang declared that the "adoption of cloud services in China will be driven by not only the need of lower IT costs, but also by digital transformation of business models and the processes."
Zhang credited the cloud unit's growth to the development of "proprietary technology" that differentiates its platform from its competitors. This technology includes Internet of Things (IoT) and artificial intelligence (AI) services, tools for migrating data between the private and public clouds, first-party chips, and e-commerce solutions tethered to its core marketplaces.
However, Alibaba's cloud business remains deeply unprofitable due to its ongoing investments in infrastructure and talent. Its operating loss widened from 1.17 billion yuan to 1.93 billion yuan ($270 million) during the quarter, but those losses were offset by the profits from its core commerce business.
Tencent ranked second in the China cloud race with a 15% share. Its cloud revenue rose 80% annually to 4.7 billion yuan ($670 million) last quarter and accounted for about 5% of its top line. It attributed that growth to its customer expansion across the educational, financial, municipal, and retail sectors, as well as higher revenue from its existing customers.
Tencent also recently consolidated its cloud and smart industries unit (which handles security, connected devices, and smart retail services) into the new "cloud and smart industries group" (CSIG). It claims that that consolidation expanded its client base with new contracts, boosted its revenue and scale, and improved its bundling opportunities.
Like Alibaba, Tencent claims that its proprietary services -- which are integrated with its popular WeChat, WeChat Pay, QQ, and gaming ecosystems -- differentiate its platform from the competition. Tencent doesn't disclose the unit's profitability yet but admitted that its spending on cloud servers was rising.
Tencent stated that its entire "fintech and business services" unit, which includes Tencent Cloud, grew its gross margin 260 basis points annually to 27.7% last quarter. However, it mainly attributed that expansion to higher payment volumes and services on WeChat Pay, which suggests that its fintech unit is subsidizing the growth of its cloud unit.
Amazon's AWS (Amazon Web Services) ranks third in China's cloud market with a 9% share. China remains a minor market for AWS, which grew its revenue 35% annually to $9 billion last quarter, but it's ramping up its efforts across the country.
Amazon recently appointed a new head of its AWS operations in China to focus on bolstering its sales and marketing efforts, as well as strengthening its ties with various channel partners and government departments. It also shuttered its domestic marketplace in China, which faced tough competition from Alibaba and JD.com (NASDAQ:JD), to focus on the growth of AWS.
Amazon doesn't control a big tech ecosystem in China like Alibaba and Tencent, which limits AWS' reach with domestic companies. The U.S.-China trade war could also make it tough for AWS to win bids in China. Despite those challenges, AWS could remain an appealing choice for bigger Chinese companies that want to expand overseas.
AWS is consistently profitable, unlike Alibaba Cloud, and its profits subsidize the growth of its lower-margin marketplaces. AWS only generated 13% of Amazon's revenue last quarter, but its operating profits rose 9% annually to $2.3 billion and accounted for 72% of its operating income.
Baidu, which owns China's top search engine, ranks fourth in the cloud market with an 8% share. Baidu generates most of its revenue from online ads, and it doesn't disclose its cloud revenue or profits separately.
Instead, the cloud unit is listed under its "other" revenue, which includes its streaming video platform iQiyi (NASDAQ:IQ) and hardware devices. Excluding iQiyi, the remaining businesses only generated about 200 million yuan ($28 million) in revenue -- less than 1% of Baidu's top line -- last quarter.
Baidu doesn't seem to have much pricing power in this market, but it claimed that its cloud revenue grew more than 70% annually during the quarter. That growth could continue as Baidu rolls out new tools (like visual, speech processing, video, and driverless services) and integrates them with its broader search and virtual assistant ecosystems. Baidu is a distant underdog compared to Alibaba and Tencent, but the strength of its ecosystem could still keep it in the cloud platform race.