Battle for the fledgling cloud market#Caixin Weekly#-Sino-US


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Battle for the fledgling cloud market#Caixin Weekly#
After about a decade-long development of cloud computing in China, Alibaba Cloud has won nearly 50 percent of the cloud computing market of the Infrastructure as a Service (IaaS). 
 
Other Internet giants like Tencent Holdings Inc and Baidu Inc striving to gain a piece of the market as well. Tech giants such as Huawei Technologies and telecom operators are also joining the market, along with foreign players. 
 
Experts believe that cloud computing is upgrading from first generation to second generation, no matter what definitions they use for a “generation”. They believe that the market will see an explosive expansion.
 
In the 47th issue of 2017, Caixin Weekly, a nationally distributed financial and business weekly, ran a cover story on the cloud computing market of the country, discussing the competitors, development and regulation of the market.
 
Below is an excerpt of the article.
 
In 2017, almost all cloud computing providers are discussing the concept of Cloud Computing 2.0. 
 
Zheng Yelai, president of Huawei's cloud business unit, said that the Cloud Computing 1.0 points to start-ups using the public cloud featuring low-cost and sharing resources, and the Cloud Computing 2.0 means the traditional companies turning to hybrid cloud, integrating public cloud and private cloud.
 
Hu Xiaoming, president of Alibaba Cloud, said that Cloud Computing 1.0 sees the companies move their businesses to cloud, and Cloud Computing 2.0 will see the use of AI technologies on cloud.  
 
Yin Shiming, Baidu Cloud general manager, said that the Cloud Computing 1.0 removes borders in computing resources and Cloud Computing 2.0 will allow borderless flow of data.
 
The competition in China’s cloud computing market has entered the “second phase”: Internet giants turning their eyes from start-ups to traditional companies and governments; telecom operators securing government clouds while penetrating into traditional companies; and tech giants also entering the market with their orders threatened by cloud computing.
 
The cloud computing service has three main categories: IaaS, software as a service (SaaS) and platform as a service (PaaS). Few providers could cover all three categories.
 
When the competition is becoming increasingly fierce in China’s cloud computing market, players have started to form alliances.
 
On November 1, 73-year-old Ren Zhengfei, founder of Huawei, met with the visiting Satya Nadella, Microsoft’s CEO, at the Shenzhen headquarters. The two companies have a rapidly warming relationship in the past half year.
 
The same day, Microsoft announced that its hybrid cloud plan will cooperate with partners including Dell, Huawei and Lenovo to land in China in 2018.
 
Huawei and Microsoft became strategic cooperation partners two months before the visit. Huawei would sell more Microsoft products on its cloud.
 
Huawei has planned to be one of the five largest cloud computing providers worldwide, but cooperates with Microsoft, currently the second-largest, in China’s market.
 
The cooperation between Huawei and Microsoft will provide Huawei the opportunity of combining its IaaS and PaaS with Microsoft’s SaaS in an attempt to catch up with the leaders.
 
The major competitors for Huawei and Microsoft are the Internet giants represented by Alibaba Cloud in China’s cloud computing market. In the past eight years, Alibaba Cloud has gained 50 percent of the IaaS market while Tencent and Baidu are using their Internet ecology to gain market share. 
 
Alibaba Cloud, mainly providing public cloud, started cooperating with telecom operators to provide the hybrid cloud plan since the governments and traditional companies might not abandon their private clouds in a short period.
 
Industry players have reached a consensus that in the coming age of intelligence, cloud computing will be an important carrier of the output of new technologies such as AI, block chain, quantum computing and so on.
 
After years of development, China’s cloud computing market has seen participants getting into different positions based on their advantages, but the size of the market is small and new players still have a development window.
 
“A window period has started, and the structure has not been settled,” Yang Juzheng, general manager of the marketing department with China Telecom’s cloud business, said.
 
According to a research report from Deutsche Bank in August, 84 percent of chief information officers (CIOs) interviewed said their companies would heavily use the cloud computing services in 2019. In 2016, it was only 4 percent.
 
The market research organization Gartner said the expenditures on cloud computing services was only 5.4 percent of the whole IT expenditures in 2016, and it is expected to be 12.2 percent in 2020 when the structure of providers will be settled.
 
Interviewees told Caixin Weekly that in a public cloud computing market pursuing scale effects, there will be only about three platforms left, and many players might be bought or die out. 
 
The three-year widow period for development will pass quickly. What will the players do, and what will the regulators do?
 
Internet giant Tencent
 
Early this year, Tencent signed a 0.01-yuan ($0.0015) contract with Xiamen government on cloud computing services, which has aroused speculation among industry experts that Tencent would resort to price war to expand business.
 
An employee of Huawei said that Tencent has become a disrupter in the government cloud computing services market used to be dominated by telecom operators and tech companies.
 
Compared with Alibaba Cloud found in 2009, Tencent only started its cloud computing business based on its social networking QQ in 2013, expecting to provide public cloud for application developers.
 
In an IT leaders’ meeting in 2010, Tencent CEO Pony Ma and Baidu Chairman Robin Li almost had the same opinion toward cloud computing: not so important at present. Jack Ma, founder and chairman of Alibaba, detected its importance.
 
On October 30, Pony Ma said in a letter to partners that the importance of cloud for the digital age is the same as importance of electricity to the industrial age. The extent of “cloudization” showed the integration depth of Internet and various industries.
 
However, Alibaba Cloud is leading the market now. According to data from market research firm IDC, Alibaba Cloud occupied 47.6 percent of the public cloud market, and second-placed Tencent Cloud, only had 9.6 percent.
 
Tencent implements its strategies to attract clients: winning the companies which have conflict of interest with Alibaba, such as SF Express, and using its products and investment to win consumers such as Mobike, the bike-sharing company Tencent has invested in.
 
Many of the users of its social media platform WeChat, QQ and Tencent Games also use Tencent Cloud. In the Xiamen case, the city signed the contract with Tencent because it could help provide public services on WeChat.
 
Tencent also seeks cooperation with foreign companies such as the US database company Oracle. Tencent will help operate the public cloud of Oracle in China.
 
According to the researcher report from Deutsche Bank, in the market of IaaS and PaaS by 2020, Alibaba will have 40 percent, Tencent will have 27 percent and Huawei 19 percent. But in 2016, Tencent only had 10 percent and Huawei 5 percent.
 
Tech giant Huawei
 
From November 2016 to March 2017, Ren Zhengfei has visited eight provinces of Guizhou, Jiangsu, Sichuan, Shaanxi, Shanxi, Guangdong, Zhejiang and Hubei to sign strategic cooperation agreements on cloud computing, big data and smart cities.
 
Guo Ping, Huawei’s rotating CEO, has said in September that the companies having their own IT systems will also connect with the cloud in next 20 years. The cloud platform is bound to be centralized because of the investment size and new technologies such as AI.
 
Guo said that Huawei would forge its cloud through continuous investment into technologies and more suitable services to government and companies, to make it one of the top 5 clouds worldwide.
 
“Huawei has ambition and takes quick actions in the cloud computing market, and its current performance in the market is due to its swaying strategy in past years,” an industry insider said.
 
Huawei’s cloud computing strategy in 2010 still focused on servers, network and storage equipment. Its public cloud business was secondary to the hardware and technological services. 
 
In 2015, Huawei pushed the enterprise cloud systems in the finance sector, industrial parks and software development, hoping to compete with with Alibaba Cloud.
 
By the end of 2016, Huawei changed its attitude toward cloud computing development, starting to enlarge its cloud computing team and searching for cooperation with other cloud computing providers.
 
In March this year, rotating CEO Xu Zhijun announced the establishment of Cloud Business Unit (Cloud BU), to enlarge its team to 2,000 employees.
 
Learning from Microsoft in pursuing Amazon, Huawei expected to use hybrid cloud to challenge the public clouds operated by Internet giants, seeking consumers from among its clients that have private clouds.
 
Compared with other cloud computing providers, Huawei needed time to accumulate the experience in technologies, products and operation. Zheng Yelai said that Huawei Cloud “might not be the best, but it will make progress quickly.”
 
Telecom operators
 
Among the three telecom giants, China Telecom has been the first to launch cloud computing business in 2009. In 2012, it set up its independent cloud company.
 
China Unicom invested 520 million yuan to set up its cloud company in June 2013, and China Mobile followed suit in 2014.
 
Generally, the three telecom operators have similar strategies in the cloud computing business, depending on the existing network, Internet data centers and channel resources to provide services, and gain consumers from among their clients.
 
Yang Juzheng said that after about six years of development, China Telecom had developed capabilities to research and develop cloud products, and its cloud computing platform has a full coverage of computing, storage and content delivery network.
 
Yang said that his company has paid an unprecedented attention to the cloud business in 2017, a year expected to see a reshuffle in the cloud computing market. “All provincial branches are expected to expand cloud business this year.”
 
China Telecom has the advantage of having cooperated with the governments and state-owned companies for many years, and they have similar enterprise culture, Yang said.
 
“Telecom operators have a network covering the whole country from provinces to counties, and the Internet giants could not compare in this field,” an employee from a branch of a telecom operator said. 
 
However, regardless of the cost of gaining market shares, the Internet giants have brought great pressure to telecom operators which could not compete in the price war when Alibaba Cloud endures hundreds of millions of yuan in losses in a quarter.
 
According to IDC data, China Telecom’s share in the IaaS reduced from 8.51 percent in 2016 to 6 percent in the first half of 2017. Tencent and Kingsoft have exceeded it. 
 
Foreign clouds
 
In China, cloud computing is considered as a telecom business to be supervised, and foreign companies need to cooperate with a local company that has license to carry out the services. Foreign companies have become the major promoter of alliances.
 
The public cloud leader Amazon Web Services (AWS) has made attempts to cooperate with 21Vianet Group, but because AWS did not want to drop the operation, their cooperation ended. 
 
To help its Beijing partner Sinnet to get a license for cloud computing services at the end of this year, AWS sold its assets including servers valued at 2 billion yuan to Sinnet.
 
In 2015, IBM started to search for Chinese partners to carry out public cloud business in China. In Beijing, it cooperated with data infrastructure provider 21Vianet Group that will operate IBM’s PaaS in China.
 
IBM established a set of standards to select the partner in terms of technology, financial ability and the understanding of cloud. The evaluation system labeled with different colors on standards is given the code name “Project Rainbow.”
 
Former general manager of IBM’s cloud computing business in Greater China, Hu Shizhong, said in June that IBM had advantages in PaaS that has the largest potential because of its applications in the healthcare, finance and education.
 
To compete for SaaS, IBM sought a partner with same ambition in public cloud, and they finally found Wanda Group that is turning its focus on services. But Wanda’s tight financial situation has made the cooperation gloomy.
 
Regulation 
 
The explosive expansion in the country’s cloud computing market has brought challenges for the regulators. 
 
Zhang Jianhua, an official from the Ministry of Industry and Information Technology, said that following the growth in the cloud computing market, more companies entered, and some had no license to carry out the business. 
 
According to the country’s law, cloud computing providers must have licenses. In the beginning of 2017, the ministry’s notice on regulating the Internet access service market, stated that from 2018, unlicensed companies could not continue operations.
 
About 40 companies have gained the licenses, and a majority were going through the application process.
 
Li Wei, an engineer from the China Academy of Information and Communications Technology, said that from the beginning of this year, companies providing IaaS and PaaS services must get licenses, and some SaaS services did not need licenses.
 
On September 21, a self-discipline committee was set up under the leadership of the academy, and is making self-discipline rules. Companies including three telecom giants and Internet giants are involved in making the rules.
 
Xu Enqing, director of the self-discipline committee office, said that existing problems include some small companies not applying for licenses, some unqualified companies trying to use shell companies to carry out businesses in China, and the low-price bidding, which is suspected of unfair competition.

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