chinese internet giant Tencent Holdings has been slashing the prices of cloud services by up to 40 percent since June, while similar moves by rivals have plunged the sector into a price war.
The fierce competition comes amid soft corporate demand, with the Chinese economy in the midst of a faltering recovery since easing strict COVID-19 restrictions last year.
ali baba The group holding said last month that it would slash the prices of some cloud products by up to 50 percent. State-owned China Mobile joined Tencent in announcing the cuts on Tuesday, saying that for a limited time the prices of some services would be slashed by up to 60 percent.
Charlie Chai, an analyst at 86Research, said Chinese cloud service providers had made efforts to stop the price war in the past but “at the end of the day they still went down this path”. He said the companies have expanded aggressively and now have a lot of capacity.
Wei Yunfeng, a researcher at data firm IDC, said the price cuts were due to higher sales targets despite slowing growth for the market.
Chai said a more challenging cloud market will force companies to focus on product differentiation baidu was in good condition because it had “unique, oh-focused product”.
“For those participants who choose to engage in battle, the near-term margin impact could be significant,” he said, estimating that it could take 4 to 7 percentage points off their cloud operating profit margins.
Alibaba’s cloud revenue accounts for about 9 percent of its total revenue. Tencent does not provide a separate figure for cloud revenue.
Tencent on Wednesday returned to first-quarter revenue growth as it recovered from COVID-related disruptions a year ago and a regulatory freeze on gaming licenses.
James Mitchell, Tencent’s chief strategy officer, told analysts on a call: “The impact of the price cut on Tencent is not significant.”
Mitchell said cloud services only represent a “mid single digit percentage” of Tencent’s total revenue.
Furthermore, the price cuts only apply to its infrastructure-as-a-service business, which represents only a portion of Tencent’s cloud services.
Alibaba reported on Thursday.
© Thomson Reuters 2023