Alibaba Cuts Cloud Prices to Spur Growth Before Possible IPO

(Bloomberg) — Alibaba Group Holding Ltd. is cutting the cost of its cloud services by as much as half, a move that could win users from rivals such as Tencent Holdings Ltd. at a time it's considering spinning off the fast-growing Aliyun business.

Alibaba and Tencent are vying to provide the raw computing power needed to train generative artificial intelligence models such as OpenAI's ChatGPT, which has ignited a global race. Core products of the Aliyun subsidiary will see 15% to 50% cuts from May 7, an Alibaba spokesperson said on Wednesday. The company has said it's committed to expanding its cloud business, now led by group Chief Executive Officer Daniel Zhang, which it sees as a potential driver of exponential growth.

Alibaba's Tongyi Qianwen AI model, announced earlier this month, is already in demand by Chinese businesses. The Hangzhou-based company has received more than 200,000 requests from businesses to join its beta testing program, from industries as varied as fintech, electronics, transport, fashion and dairy farming. It sees the hand-in-hand provision of AI and cloud infrastructure services as a winning formula for wooing a large swath of the domestic market.

“We are fully committed to working closely with our partners to develop customized, specialized AI models,” Zhang said in a statement.

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What Bloomberg Intelligence Says

Alibaba's price cuts of up to 50% for its cloud services raise a risk that the unit's adjusted Ebita in fiscal 2024 ending March will trail consensus expectations, even after a more than 5% decline in estimates over the past two weeks. The cuts raise the likelihood that Alibaba will cede 2024 cloud profit gains to spur revenue growth and fend off increased cloud and generative-AI rivalry from peers such as Tencent and Baidu this year.

— Catherine Lim and Trini Tan, BI analysts

Founded in 2009, Alibaba Cloud provides data processing and storage services to thousands of businesses, developers and government organizations in more than 200 countries and regions. It holds the largest market share in China and across Asia, according to the division's website. It typically contributes about 9% of revenue.

As one of its early AI integrations, Tongyi Qianwen is currently being tested in Alibaba's operating system for cars, AliOS. IM Motors, an electric vehicle venture backed by Alibaba and SAIC Motor Corp., has signed up to be the first auto brand to implement Tongyi Qianwen-powered AliOS when it's ready.

Alibaba has to fight off cloud rivals, such as state-linked services that have been growing their share, and juice growth as it considers spinning off parts of its $214 billion empire. The cloud division is one of the company's fastest-growing and is considered a prime candidate for a future initial public offering.

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The surge in excitement among investors after Alibaba's announcement of the ChatGPT-like Tongyi Qianwen did not last. The company's shares gave up much of the initial gain in recent days, and it now has to prove that it can realize the growth spike it expects to see. Concern about potential geopolitical risk from a worsening rift between Washington and Beijing has weighed on Chinese stocks, led in particular by big tech names.

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