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Alibaba's cloud computing services business under spotlight again, following service outage in December, as revenue growth slows

Alibaba Group Holding's cloud computing services subsidiary, which is considered a major growth driver for the e-commerce giant, is under the spotlight again after the business reported its slowest quarterly revenue gain in the past 12 months.

Alibaba Cloud posted a 3 per cent year-on-year revenue increase to 20.18 billion yuan (US$2.92 billion) in the three months ended December 31 to mark its slowest growth last year, when sales reached as high as 12 per cent in the March quarter and 10 per cent in the June quarter.

In the same December quarter, cloud industry leader Amazon Web Services reported record-low revenue growth of 20 per cent, down from a 40 per cent gain a year earlier, as overall spending in the global market slowed.

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Alibaba chairman and chief executive Daniel Zhang Yong, who took over control of Alibaba Cloud last December after a major service outage, said in a conference call on Thursday that he remained confident about the business, which includes enterprise collaboration platform DingTalk.

Racks of servers are seen at a data centre run by Alibaba Cloud, e-commerce giant Alibaba Group Holding's cloud computing services subsidiary. Photo: Handout alt=Racks of servers are seen at a data centre run by Alibaba Cloud, e-commerce giant Alibaba Group Holding's cloud computing services subsidiary. Photo: Handout>

Zhang said the cloud business is "an opportunity of extreme strategic importance to Alibaba", which owns the South China Morning Post.

That optimism stems from the profit performance of Alibaba Cloud. The business posted 356 million yuan in adjusted earnings before interest, taxes and amortisation - a measure of a company's profitability to investors - in the December quarter, nearly triple the amount from a year ago, according to the group's latest financial results.

In Hong Kong, Alibaba's shares closed down 5.36 per cent to HK$90.05 at the end of trading on Friday.

While Alibaba reported that cloud revenue from internet industry customers declined last quarter, analysts indicated that the local market has also been affected by China's rigid Covid-19 control measures and regulatory scrutiny.

"Just like other [tech industry] segments, it was hard to achieve high revenue growth last year because of the pandemic [control measures]," said Shawn Yang, managing director at boutique investment bank Blue Lotus Capital. "Profits were better because costs were being controlled."

Still, Yang expected tech companies to "try to push for more revenue growth this year and focus less on profit".

"If you don't grab market share this year, others will come to take yours," he said.

He added that Alibaba Cloud will need to compete with state-owned telecommunications network operators like China Mobile and China Telecom, particularly for "government-background clients".

Cloud computing services enable companies to buy, sell, lease or distribute a range of software and other digital resources as an on-demand service over the internet, just like electricity from a power grid. These resources are managed inside data centres.

The annual growth rate for cloud infrastructure services slowed for three consecutive quarters for the first time last year, falling below 10 per cent, according to a report by research firm Canalys in December.

Cloud infrastructure services expenditure in mainland China grew 8 per cent year on year in the third quarter last year to US$7.8 billion, accounting for 12 per cent of overall global cloud services spending, according to Canalys.

Alibaba's Zhang last December took over as head of Alibaba Cloud, replacing Jeff Zhang Jianfeng, after the subsidiary suffered "the longest major-scale failure" at its Hong Kong and Macau operations for more than a decade.

That incident on December 18 resulted in a lengthy service outage that stretched for more than 24 hours at some customer sites. It suspended withdrawals at major cryptocurrency exchange OKX and disabled the website of the Monetary Authority of Macau.

On a potential return to higher growth for cloud services providers, some analysts see no immediate jump in sales.

"I don't expect a significant [growth] recovery [of the cloud market] in the short term," said Zhang Xiaorong, director of research institute Shendu Technology.

Echoing the suggestion of Blue Lotus' Yang, Zhang said state-controlled cloud services providers have a big impact on the market, especially in signing up government clients. "Privately owned cloud providers that have advanced technology like Alibaba Cloud don't have a significant advantage in this market," he said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.