The Chinese netizen population was merely 20 million at the end of 2000, which was less than 2% of the total population during the same period. According to the 47th China Statistical Report on Internet Development, as of December 2020 over 989 million Chinese were Internet users. The change was in no small part founded on the Chinese Cloud computing industry, which played a critical role in the digitization process by supporting Internet activity for almost a billion people.
It is widely accepted that the establishment of Alibaba Cloud in 2009 marked the starting point of Chinese Cloud computing development. With the Chinese government's favorable policies and subsequent expansions of Internet and ICT giants, the Chinese Cloud market has sustained high growth over the past decade. According to Gartner, the global Cloud market size is projected to reach USD 360 billion by 2023. Estimated by China Academy of Information and Communications Technology (CAICT), Chinese Cloud market size may expand to CNY 538 billion, around 20% of the global market share.
Speaking of the overall Cloud market, the IaaS market accounts for the most in Chinese Cloud market while the SaaS market has the largest presence in the world market. Cloud infrastructures have received high attention from worldwide institutes, along with favorable policies like New Infrastructure Project in China. Thus, IaaS's faster growth is mainly contributed by companies' strategies in expanding the online ecosystem in China's Internet realm.
Specifically, Alibaba Cloud, Tencent Cloud, Huawei Cloud, Tianyi Cloud and Kingsoft Cloud are at the frontier of the Chinese public Cloud market.
● Alibaba and Tencent are the two largest Internet giants in China.
● Huawei is one of the biggest global ICT equipment and solutions providers.
● Tianyi Cloud is managed by the telecom carrier, China Telecom.
● Kingsoft Cloud originates from Kingsoft, one of the biggest domestic independent software vendors (ISV).
Similarly, Alibaba Cloud and AWS are spun from e-commerce enterprises, while Kingsoft Cloud and Azure are incubated by ISV companies. Unlike Azure tying with AWS in the global market, Kingsoft Cloud has a weaker presence than Alibaba Cloud. But positively speaking, in an emerging market, all companies have the chance to scale and expand without going head-to-head with competitors, which exists in a mature market only.
As the rapid expansion continues, IaaS providers in China are yet to make profits, considering the heavy initial investments, especially for the IDC construction. The company filed for another round of financing four months after its Nasdaq IPO.
In the latest prospectus, the expenses on IDC scaled from 2017's CNY 1,033.2 million to 2019's CNY 2,856.6 million. In the first half of 2020, the IDC cost CNY 1,898.7 million. The costs on IDC comprised over 70%-80% of the revenue costs. The expenditure reflects that the business expansion drives the infrastructure to scale at the same pace for other IaaS vendors in China.
In terms of revenue and retention, Kingsoft Cloud kept a high yearly growth rate for three consecutive years – the revenue increased by 79.5% in 2017 - 2018 and by a further 78.4% in 2019 - 2020. Based on the first three quarters' performance in 2020, the annual revenue is estimated at CNY 6,621 million, driven by the strong growth of public Cloud services and especially the enterprise Cloud services.
As a spinoff of Kingsoft Group with over 30 years of experience in the software industry, it has wide brand recognition and a large loyal customer base. Kingsoft Cloud focuses on providing services to big enterprises, helping different enterprises to increase market presence efficiently. The key accounts subscribing to Kingsoft Cloud services were 113 in 2017. By the end of the first half of 2020, the number climbed to 243, which generated over 98% of the total revenue in the first half of 2020. For instance, the net dollar retention rates in 2018 and 2019 were 161% and 155%, respectively.
In 2017, 2018, 2019 and the first half of 2020, the total revenues generated from Premium Customers accounted for 93.7%, 95.3%, 97.4% and 98.3% of the total revenue, respectively. Kingsoft Cloud, a member of the Kingsoft family and one of the Lei Jun-controlled companies, is benefiting from the ecosystem facilitated by Xiaomi and Kingsoft.
Kingsoft kicked off with a good start through the cooperation with Xiaomi and Kingsoft-affiliated companies in the beginning phase. Also, the company's standalone development has achieved outstanding performances as well. From 2017 to 1H2020, revenues from Xiaomi dropped from 27% to 10%. Being one of the largest IaaS providers in China, Kingsoft Cloud has a group of high-profile clients, including ByteDance, iQIYI, Bilibili, NetEase and so on. From this aspect, these client companies also operate Cloud services in their business operations. Therefore, it is apparent that these client companies are in competition with Alibaba and Tencent, who own the Alibaba Cloud and Tencent Cloud respectively.
In the Internet competition, BAT (Baidu, Alibaba, Tencent) and TMD (Toutiao, Meituan, DiDi) are competing with each other in many fields. Kingsoft is out of this league, as it is a software-focused company. The 'bystander' identity yields benefit for Kingsoft Cloud as it can acquire clients that are not collaborating with Alibaba or Tencent. However, these two companies still occupy most of the IaaS market share in China.
As a member of the Xiaomi ecosystem, Kingsoft Cloud is closer to Xiaomi partners than other IaaS companies. Xiaomi now owns the largest IoT ecosystem in China and cooperates with thousands of IoT companies.
The tie between Kingsoft Cloud and Xiaomi generates synergies for both companies, but the risk is also obvious – one's business variance may easily affect the other's performance. Kingsoft Cloud investors must look over the whole ecosystem's steadiness and understand how the bond between Xiaomi and Kingsoft may affect the latter's performance.