Winter in Alibaba Cloud

Winter in Alibaba Cloud came a little earlier.

Performance growth stalled and executives continued to be turbulent, making Aliyun, the most worthy technology support for Aliyun in Alibaba's main business, somewhat premature aging.

Not long ago, Alibaba's financial report for the third fiscal quarter of fiscal 2023 announced that Alibaba cloud business revenue was 20.179 billion yuan, a year-on-year increase of only 3%. In the last quarter, Alibaba Cloud's revenue increased by 4% year-on-year, and in the previous quarter, this growth rate was 10%. In Q3 of fiscal year 2021, two years ago, Alibaba Cloud's revenue increased by as much as 50%. This is not the highest growth rate of Alibaba Cloud's revenue.

In addition to the stall of performance growth, in December last year, Alibaba Cloud's Hong Kong computer room experienced a serious downtime accident. Soon after, Alibaba Cloud executives quickly made personnel adjustments, and Zhang Jianfeng, the former CEO of Alibaba Cloud, stepped down and Daniel Zhang personally took over as CEO of Alibaba Cloud.

This shows that Alibaba's dissatisfaction with Alibaba Cloud has risen to the top.

Daniel Zhang explained the dramatic change in executives by saying, "The decision was made precisely because cloud computing is one of Alibaba's core strategies for the future." Innovation and other new technologies have a key impact not only on Alibaba Cloud, but also on the future of Alibaba Group. At the same time, Alibaba Cloud is also the basic support for Alibaba to fully root the real economy and integrate services with data and reality. ”

As for the stall of performance growth, Alibaba said in its earnings report that Alibaba Cloud's revenue growth was mainly driven by healthy revenue growth in public cloud, partially offset by a decline in hybrid cloud revenue, which was due to Alibaba Cloud's continued promotion of high-quality and recurring revenue growth.

The reasons are good, but they are also realistic. Alibaba Cloud is important to Alibaba, but didn't do it well before? Revenue growth is not high, is the previous revenue structure quality not high?

In short, Alibaba Cloud was not good enough before, and the organization needed to be replaced, and the business structure needed to be adjusted. These have allowed Alibaba Cloud's sunrise business, which was once growing at a high speed and thriving, to enter the winter before it became profitable.

Behind this, what has Alibaba Cloud experienced, what is the current situation of Alibaba Cloud, and is Alibaba Cloud expected to regain growth in the future?

Waterloo, Hong Kong in December

A failure in mid-December 2022 caused Alibaba Cloud's entire business to suffer soul torture.

According to Interface News, on December 18, 2022, Alibaba Cloud's data center in Hong Kong experienced downtime due to a cooling failure. This was also the longest large-scale failure in Alibaba Cloud's more than a decade, causing many services to be unavailable and affecting many large customers.

According to an Alibaba Cloud employee, after the above-mentioned all-employee letter was sent, Alibaba Cloud employees also received an internal letter from the Daniel Zhang of about 800 words. The letter emphasized the importance of customers more than 20 times and was harshly worded, "We must treat the trust of our customers as life." "Any failure is a 1 in 10,000 or 1 in a million probability for Alibaba, but it is 100 percent if it happens to the customer." "The customer is not the decoration hanging high on the wall of the company."

Such fierce criticism shows that Daniel Zhang's dissatisfaction with Alibaba Cloud has exploded in this downtime.

On December 29, 2022, on the eve of the New Year, Daniel Zhang announced the organizational structure adjustment of Alibaba Cloud in an all-staff email: Zhang Jianfeng will no longer serve as the president of Alibaba Cloud Intelligence, but will continue to serve as the president of DAMO Academy, and Daniel Zhang will concurrently serve as the president of Alibaba Cloud Intelligence.

The security of cloud services has always been a top concern for industry customers. Before the Hong Kong shutdown, Alibaba Cloud had already taken a big lead in security.

On December 23, 2021, Alibaba Cloud posted that it had discovered the log4j2 high-risk vulnerability, but did not report the vulnerability information in a timely manner.

At that time, Alibaba Cloud did not report the vulnerability in time after discovering it, and only reported it to the software development company Apache Software Fund by email according to the custom, resulting in China not learning about the vulnerability from public channels until a month later.

This security accident directly led to the suspension of Alibaba Cloud for 6 months by the Ministry of Industry and Information Technology in December 2021.

The continuous major security incidents have undoubtedly made Alibaba executives lose confidence and patience with Alibaba Cloud's executives. In the Daniel Zhang's letter to all group employees, it is mentioned that "stability and security are the most basic responsibilities of customers." We must always uphold the awe and live up to the trust and support of customers. ”

The same dissatisfaction and disappointment is also reflected in the continuous slowdown of Alibaba Cloud's growth rate, which has not almost stalled its business.

Alibaba Cloud stalls

Once upon a time, Alibaba Cloud was the pioneer of cloud computing in China.

As early as 2010, at the "Direct to IT Leadership Summit", Robin Li, Huateng Ma and Jack Ma had very different views on cloud computing. At that time, Jack Ma was full of hope for the future of cloud computing.

Since then, with the outbreak of cloud computing business of several overseas Internet giants, Alibaba Cloud, established in 2009, has also ushered in explosive growth.

From 2015 to 2019, Alibaba Cloud's annual revenue rose rapidly from 3 billion yuan to 40 billion yuan.

At that time, Alibaba Cloud internally evaluated itself, "There are two clouds in China, one is Alibaba Cloud, and the other is called other clouds" and "the market share is the sum of the 2nd-9th places".

In 2018, Alibaba Cloud's revenue growth reached an astonishing rate of more than 80% under the scale of huge volume and absolute first domestic market share.

Since 2020, Alibaba Cloud's growth rate has begun to fall off a cliff.

Starting in 2022, many commentators believe that the winter of the overall cloud service industry is coming. Is this really the case?

Judging from the performance of cloud service business in 2022 announced by major global cloud service companies, cloud services are far from winter in the world.

In 2022, the total revenue of Microsoft Cloud Azure will be $101.2 billion, a year-on-year increase of 26.5%, and the gross margin will be 72%, an improvement of 1.7% from 70.3% in 2021;

Amazon AWS had total revenue of $80.1 billion in 2022, up 29.4% year-over-year, operating profit of $22.8 billion, and operating margin of 28.7%;

In 2022, Google Cloud's total revenue was $26.3 billion, a year-on-year increase of 37.3%. Operating profit was -$3.0 billion, operating margin was -11.3%, an improvement of 5.2% from -16.5% in 2021.

From the overall performance of several overseas cloud service giants, each revenue still maintained a medium and high growth rate, the growth rate is about 30%, of which Microsoft Azure and Amazon AWS have achieved high profits, Microsoft Azure operating profit is as high as 35 billion US dollars, Amazon AWS profit is 22.8 billion US dollars.

Turning back to China, the cloud service market has not shown signs of winter, but has maintained a good overall growth trend in the context of the overall weakness of the economy.

According to IDC's latest report, the overall size of China's public cloud service market (IaaS/PaaS/SaaS) reached US$16.58 billion in the first half of 2022, although the growth rate has slowed down, but it still remained at 30.7%. By 2024, the global share of China's public cloud market will increase from 6.5% in 2020 to more than 10.5%.

CITIC Securities Research Report believes that traditional enterprises and government and enterprise fields will become the main driving force for market growth, compared with the homogeneous low-level competition in the past, cloud service vendors have begun to transform into vertical deep integration industries.

Obviously, not all cloud service vendors in the cloud service industry, which is still developing rapidly, enjoy the same market dividends, and Alibaba Cloud's growth stall is unique.

Three major diseases

Reality and data show that Alibaba Cloud's growth stall is not a common phenomenon in the industry entering the winter, so it may be more of its own unique problem.

In our view, Alibaba Cloud's main problem is its failure to adapt to the overall development and transformation of the cloud service industry, and put its "protagonist halo" before the times and industry development.

First, Alibaba Cloud's products have long served the consumer Internet and are not commonly used on the industrial Internet.

Serving Alibaba's own partners, especially Alibaba Cloud, which started as a partner in the e-commerce business, does not seem to have customized products ready for industrial Internet customers on the product side.

Alibaba Cloud's entire product started as a consumer Internet service, using servers and technology, launching standardized products, serving merchants, and continuously copying and promoting among customers, gradually realizing product evolution and upgrading. Good at creating standardized products, Alibaba Cloud does not need to have too much contact with customers, only needs to do a good job of interfaces, and can get thousands of sales to sell.

On the industrial Internet, the customers of Alibaba Cloud Service have changed from thousands of small and medium-sized businesses to government and enterprise customers, which is completely different from the logic of large-scale replication and promotion of standardized products before. Government and enterprise customers need to customize a set of solutions that are completely suitable for themselves based on their own business scenarios, business processes, information planning, pain points and needs.

Alibaba Cloud has not adapted to this shift. This has also caused Alibaba Cloud to lose many orders for cloud services and intelligent transformation from the government and central state-owned enterprises in the past few years.

Second, the company's genetic concept is incompatible with government and enterprise, and it is difficult to adapt to the positioning of changing from a cloud computing vendor to a cloud service vendor.

In the industrial Internet stage, cloud service customers have shifted from Internet companies and a group of emerging companies affected by the Internet to government and enterprise customers.

The development of the cloud service industry has also changed from a new stage of computing power to services. Cloud vendors' products are also shifting from cloud computing to cloud services.

In the government and enterprise cloud service market, many of Alibaba's ideas are invalid. Recurring information security issues represent Alibaba Cloud's long-term weak security awareness. Information security may not be a big problem in the eyes of the majority of consumer Internet customers, but in the eyes of government and enterprise customers, it is an unacceptable bottom line and red line.

Genes and concepts are incompatible, and Alibaba obviously sees the problem at this level of Alibaba Cloud. Alibaba Cloud hopes to solve this problem from the perspective of executive substitution.

In 2022, Alibaba Cloud introduced former HUAWEI CLOUD executive Cai Yinghua. Judging from Cai Yinghua's past experience, he has promoted Huawei's transformation of China's government and enterprise business, led the construction of distribution channels and partner ecosystems, and is good at building ecosystems.

Third, the assessment mechanism of Internet companies is still applicable, and it has not been converted to the Internet thinking of the service industry.

In the industrial Internet stage, the cycle of each project from project approval to implementation and payment collection is very long, and even many projects need to reach the application landing stage.

However, it is understood that the previous internal assessment mechanism of Alibaba Cloud still follows the regular quarterly assessment mechanism of Internet companies, and the performance and sales are evaluated every quarter.

This short-sighted assessment works in the consumer Internet stage, because everything is aimed at traffic and immediately visible sales results. However, in the industrial Internet stage, the assessment mechanism used by Alibaba Cloud is very easy to make the large and super long orders of many large government and enterprise customers attractive in total, but because of the assessment problem, they fall into a situation where no one is tracking.

Alibaba and Alibaba Cloud, once invincible, relied on the traffic, partners and technical advantages of their super platforms in the consumer Internet era to push Alibaba Cloud to a peak.

However, when the cloud service industry enters the market competition of the industrial Internet stage, the concepts, playing methods, product ideas, and even assessment methods that Alibaba Cloud is accustomed to are no longer applicable.

In the face of the government and enterprise market, Alibaba Cloud not only needs to directly compete with private enterprises such as HUAWEI CLOUD, which are good at government and enterprise affairs, but also directly compete with the state-owned clouds that are swarming.

If you cannot adjust your status in time and change your own problems, Alibaba Cloud's growth slowdown and business errors and omissions may continue to occur.

In 2023, Alibaba Cloud urgently needs to give answers to these questions to the outside world. And Aliyun in winter, there is not much time left for Daniel Zhang.