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The Yesterday, Today and Tomorrow of Cloud in China

Historic development and future of the cloud computing market in China

· cloud computing

{{{Dilan (Kristen) Yang }}}

Source: Internet

In less than two decades, cloud has emerged from a concept in university papers to a technology that is widely used by corporates and governments. The dividend of growth is just at its beginning. Industrial upgrade with IoT, increased connectivity through 5G, AI’s growth with its dependency on large-scale data – all these prevalent trends will be levers of growth for cloud service industry.

As grimy as year 2020 is overall, September was definitely a thrilling month for the stock market. A number of good IPOs went out this month – Logic, Unity, JFrog, Sumo, but the most explosive debut came from Snowflake. The stock price for the cloud computing software company, which was originally set at $120 as it went public, rocketed up to $300 in its first day of trading, sending its market cap close to $75 billion. This marks the largest IPO for a software company in the history and once again draws the attention to the cloud computing space.

Indeed, the integration of cloud computing in the next phase of industrial transformation is one of the most prominent trends at present, both globally and in China. Since its commercial inauguration in the early 2000s, cloud computing has since developed both in the maturing of the technology and the business model. The growth momentum is reflected in the market size – the global cloud computing industry is expected to grow at around 15% from 2020 to 2027. In China, the cloud computing industry has been growing at over 30% every year from 2015 to 2019 and the trend will likely continue into the near future.

Cloud computing services provide customers flexible computer processing resources – especially data storage and computing power – based on the need of the customers. This creates great value for customers as it reduces the cost of establishing in-house technological infrastructure and increases the computing power and storage accessible by the customers.

This article discusses the stimulating factors for the success of cloud, looks back at the development of the industry, and analyses the industry trends in China.

Cloud computing’s business model

The huge demand from businesses is driven by the high commercial desirability of cloud computing services in reducing the high fix costs of tech infrastructure for enterprises. Prior to the advent of cloud computing, enterprises own the computing infrastructure and data centre. Cloud computing with the pay-as-you-go or subscription business model enables firms to avoid the high upfront costs of building or establishing the infrastructure. Moreover, cloud services enabled higher flexibility in scaling up or shrinking down the computing power and data stream and avoided unutilised idle resources. The increase in service quality accompanied with decrease in cost provides large economic benefits for firms to switch to cloud services.

From the supply side, aggregating cloud service demand across enterprises through a centralised cloud service provider enables large efficiency gains through economics of scale. This enables cloud services to be provided to enterprises with lower costs.

In the past decade, technology advancement nurtured the technical and engineering capabilities that are essential to back the wide commercialisation of clouding services – leveraging the establishment of large data centres, better connectivity to the cloud, establishment of virtual private-public network, serverless computing, etc. This led to the proliferation of cloud offerings – from the traditional Software as a Service (SaaS), to Platform as a Service (PaaS), Infrastructure as a Service (IaaS), Backup as a Service (BaaS) and Disaster Recovery as a Service (DRaaS). Specifically, IaaS, PaaS and DaaS are the most important services.

Infrastructure-as-a-Service providers – which offers computing and storage servers in the cloud for enterprises to rent – diversified their offerings into different product types by differentiating customers that are more computation driven or memory driven. There are many paying options including monthly subscription options, pay-as-you-go or spot instances payment to allow for more customisation based on customers’ requirements.

Platform-as-a-Service – a development and deployment environment in the cloud that allows users to develop and deliver applications. It provides better integration with IaaS infrastructure and produce standardised components that can be fitted in various application software structures.

Database-as-a-Service providers – which allows users to setup, operate and scale databases with the cloud service provider implementing common primitives such as backup and cluster resizing – allowed for customers to access different databases including MongoDB, Oracle or MySQL with the same API and UI features. Since its took off in 2009 with AWS introduced Relationship Database Services, it had grown rapidly and is projected to have a market of $320 billion by 2025.

A brief walk into the history of cloud and its evolvement in China

The successful establishment of business models for cloud computing propelled the growth of the sector. We will next trace through the history of growth of the cloud computing industry to see how the market landscape of the industry has evolved to the present state.

The international market

While the concept of cloud can be traced way back into the mid-20th century at the time of mainframe computing, the modern cloud computing service is generally considered to have started in the early 2000s following the emergence of Amazon Web Services in the US. 2006-2008 was the period when a swarm of industry players strategically started to enter the playfield – Amazon launched Elastic Compute Cloud in 2006, providing virtual computer rental services to companies and individuals; Microsoft released the Azure Services Platform that runs in Microsoft’s network of datacentres in 2008; also in 2008, Google coincidentally released the preview of Google App Engine that allows developers to host web-based applications on Google’s infrastructure. In 2007, Netflix launched its video streaming services that uses AWS cloud to stream movies onto the computers of its subscribers worldwide. The entry of tech giants and the successful commercialisation use cases opened the stage of the cloud computing era.

Subsequently, cloud computing rapidly developed across different areas with maturing business models and diversified services offerings.

On the current cloud provider landscape, AWS still has an adamant leading position, with Microsoft Azure and other companies following behind. According to Gartner, in July 2020 the largest cloud providers globally were AWS with 31% of market share, Microsoft Azure with 20%, Google Cloud at 5%, Alibaba Cloud at 5% and other clouds with 37%. The breakdown varies in the different areas of cloud. In Infrastructure-as-a-Service sector for example, Gartner’s 2018 data shows that Amazon takes up almost half of the global market share, followed by Microsoft (16%), Alibaba (8%), Google (4%), IBM (2%) and others.

The Chinese market

From 2010, Chinese tech companies started to become heavily engaged in the cloud computing space. In the early time when cloud service did not have a clear business model, the Chinese market was occupied with voices of opposition towards cloud, with Baidu CEO Li Yanhong famously claimed that “cloud computing is just old wine in a new bottle” and Tencent CEO Ma Huateng stated that “cloud computing will only come in the era of Avatar”. Despite this, Alibaba, one of the earliest proponents of cloud service, strategized cloud as the priority of development for the next ten years. Alibaba Cloud officially debuted in 2011, opening largescale cloud computing services to the public. In 2013, Alibaba internally substituted all IBM server, Oracle Database or EMC saving equipment with Alibaba Cloud. The first-mover advantage enabled Alibaba Cloud to successfully compete with its competitors when competition intensified in 2014.

Due to the early skepticism from the management level, Tencent and Baidu only started investing in cloud R&D from around 2010, around two years later than Alibaba. Despite this, the cloud market eventually enjoyed an explosion starting from around 2013. Tencent Cloud was subsequently opened to public in 2013 – three months after Alibaba Cloud announced its successful 5K testing. Backed by its enormous customer database, Baidu Personal Cloud also reached 100 million users in 2013. On the other hand, this period also saw a proliferation of independent cloud service providers, including UCloud, QingCloud, QiniuYun, etc. In the late 2014, Xiaomi also decided to vigorously develop its cloud service branch, Kingsoft Cloud. In the same year, Huawei’s Devcloud was also pushed to the public in 2014.

As competition intensifies with tech giants as well as independent cloud solution services competing in the market, constant price war began to occupy the market from 2015-2018. The year 2015 and 2016 are remembered with the virtual war between Alibaba Cloud and Tencent Cloud. The two giants began a turf war in acquiring large corporate customers and large strategic investment in building internal cloud computing capacity. In July 2015, Alibaba Cloud gained 6TN RMB investment from Alibaba and announced direct competition with AWS. Just two months after, Tencent publicly announced that it would invest 10TN RMB into Tencent Cloud in the next five years.

Such competition between the two giants had two effects on the industry. Firstly, the war pushed the big players to move at an increasingly rapid speed in the attempt to outpace the competitor.

Secondly, the war required the two giants to take on a high-profile approach on PR, fully using developer conferences, media conferences, collaboration with events and festivals with high media exposure (e.g. the Black Friday sale, the “I’m a Singer” competition), etc. to deepen the brand recognition and signal the giant’s strategy determination to the market. This arose a wave of hype in cloud computing in China both among the financial market and the downstream corporations. Subsequently, more than 20 large cloud computing service providers acquired funding in 2017.

Market size and YOY growth rate of public cloud market in China (2015-2021e)

Source: IDC China, 2018

One trend that prevailed in the cloud computing industry in China is the Matthew effect – the characteristic that large corporations becoming larger and small enterprises becoming smaller as industry develops. This gradually came into play in the cloud computing market after the fierce market competition pacified, due to the large amount of investment required to develop technological edge and compete with the strong financial backed tech giants, as well as the economies of scale effect as the marginal costs of cloud service extension are very low compared with the fixed cost investment. Gradually, Alibaba Cloud grabbed the large proportion of market share owing to its early strategic visioning, occupying 46.4% of total market share by March 2020. The other players that ranked beneath Alibaba Cloud are Tencent Cloud and Baidu AI Cloud. The three largest giants combined took up 73.2% of total market share in Q4 2019.

Looking from a global perspective, Alibaba Cloud has managed to have a seat in the battlefield of the top international cloud provider companies. As shown previously in the current global landscape of cloud service providers, while AWS still dominates a large proportion of global market share and Microsoft Azure following in the second place, Alibaba Cloud has emerged in the top-5-provider list, being the fourth place in cloud services and the third place in IaaS provision.

Source: Internet

Future trends of Chinese cloud service market

Moving forward, what are the drivers of growth and key future trends underlying the Chinese market?

Reduced foreign dependency

While China has a long-standing ambition of becoming technological independence, with the increased tension between China and US, barriers of trade in the technology sector becomes even more prominent. This is especially true in the public cloud space where consistency and stability of service offerings as well as national security concerns are more prominent. In light of this, one prevailing trend in China is the replacement of Chinese domestic cloud service providers for the international providers. The large Chinese commercial banks, for one example, had previously been using VMWare’s services and is currently going through the domestication process of infrastructure replacement.

While the de-coupling of China’s technology infrastructure in the western countries may impede the overseas expansion of the top cloud provider in China, considering the huge market either untapped by cloud or to be domesticated, the trend overall means a greater growth opportunity for Chinese cloud providers.

Vertical development of industrial application

With the maturity of the business models, cloud services will subsequently provide customisation for diverse industrial applications to satisfy different use case scenarios. These include finance services, entertainment and consumer products, social medical services and industrial services like IoT, to name just a few. Take medical services as an example. The previous medical service data and infrastructure were highly fragmented and a cloud servicing infrastructure that provide higher connectivity across different hospitals would unleash great value for data analysis and medical record management. As part of its smart city strategy, the city of Xiantao in Hubei province collaborated with Kingsoft to build its medical information platform. After the establishment of the platform, 1.6 million in registration and more than 90 percent of sign-on rates across patient families and doctors. Similarly, companies like Pepsi China, IoT, financial institutions or even Bilibili are exerting more efforts into the cloudification of their software. The cloud not only empowers enterprises through offering large-scale data management, but also allows customers to trial and scale new technology like AI without the large R&D costs.

Multicloud infrastructure

Multicloud refers to having multiple providers for public cloud solutions. A general feature of to-B services is that businesses tend to avoid vendor lock-in by reducing the reliance on one single vendor and increase value-chain bargaining power by encouraging fragmentation of the vendor industry. For cloud solutions, having a heavy reliance on one cloud solution provider increases the risks of having technical issues. It also reduces the bargaining power in price and condition negotiations. On the other hand, multicloud allows customers to take advantage of the relative price and offering advantages of different cloud offerings. In light of these, the common industry practice is to have one main cloud solution with one backup solution that the business can quickly shift to when issues occurred with the main solution.

Therefore, while the current Chinese cloud market landscape featuring Alibaba, Tencent and other players like Kingsoft and Huawei may change overtime, the future market landscape is unlikely to become a monopoly structure but rather one that keeps a certain degree of proliferation.

The demand for multicloud also leads to the development of container platforms, which offers a packaging mechanism such that users can run different applications without the need to worry about dependency issues in deploying applications. Tencent, Alibaba, Huawei and Kingsoft have all launched their cloud container applications in the market.

Looking back, the past ten years have seen cloud computing inaugurated from zero to a technology that revolutionised the tech companies. However, the future cloud computing still has huge potential to be even more fully integrated with all industry sectors. Fuelled by the power of 5G and driven by the demand of AI, cloud computing 2.0 will have an even more significant role in empowering all kinds of industries.

I had a chance to visit Kingsoft Cloud’s Beijing office in the Xiaomi Mobile Internet Park. Through the demonstration hall, we saw how cloud has the potential to tap into all facets of people’s lives through transportation and smart cities, medical system, gaming, government, finance, education, to name just a few…… It is not hard to imagine a future where people will “live their everyday lives on the cloud”. What is more important is that cloud provides a democratisation of technologies. It broke the infrastructure constraints and has the potential to empower the small-to-medium companies to have access to data, services and computing power previously unattainable. In a sense, lives on the cloud may lead to a more equitable future. In this sense, cloud is an area that brings both commercial returns and positive social impact.

All opinions expressed in this essay represent our personal views only.

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