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Briefing Jul 24, 2020 04:06 am EqualOcean

Tencent Cloud Ranks Top 3 in China's Public Cloud Market

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Aug 16, 2020 02:18 pm ·

Too Big to Fail 3.0: The Sky Is Clear for Tencent Cloud

'Too big to fail' describes organizations whose failure can trigger significant economic problems due to their magnitude and degree of integration into the local social ecosystems. Global corporate history has seen three generations of such entities. First to appear were gargantuan industrial trusts that practically owned the lives of countless blue-collar workers, as well as their families. Huge financial institutions made up the second wave, storing and managing the world's assets. Now, we have a new breed of too-big-to-fail companies – technology corporations ruling the digital universe. This article is a part of EqualOcean's 'Too Big to Fail 3.0' series. Here, we discuss the challenges facing Tencent Cloud and the strategies it tailored to overcome them. At a glance ► A maverick in the cloud space, Tencent's arm is taking on its larger counterparts. ► It has a flexible business structure and a knack for client development. Yet insignificant revenue – but excellent prospects An Infrastructure as a Service (IaaS) provider, Tencent Cloud, like many large cloud service providers, offers a broad service menu, including standard elastic computing, storage and database. Even Tencent offers similar products to those of other players in the space, it has lately been growing at the fastest pace among its peers. Industry statistics and the Shenzhen corporation's official reports show that its cloud division's revenue grew by over 86.81% year-on-year in 2019, reaching CNY 17 billion. However, the cloud business' weight is still apparently small – it accounted for only around 4.5% of the total revenue in the same year. But the growth rate appears to be staggering. Recently, Gartner ranked Tencent Cloud as the fifth player in the global IaaS public cloud market based on market share. The researcher also believes that the market will keep expanding fast because of modern companies' need for more flexible, high-capacity infrastructure. Besides, China's market is still at an early stage. Significant cloud demand is unreleased. For example, some horizontal applications like enterprise resource planning (ERP), Customer relationship management (CRM), Collaboration and so on are still in their infancy. In the future, it is practical that some Chinese enterprises like Salesforce (CRM:NYSE) offer various cloud solutions for many sectors. As the demand generated more from Platform as a Service (PaaS) and Software as a Service (SaaS), we expect more orders from the Chinese corporate sector, with Tencent Cloud's growth rate bouncing even higher. Tencent Cloud might end Alibaba's dominance A maverick in the cloud space, Tencent's Cloud arm is taking on its larger counterparts. We can expect the future story of China's cloud market to be similar to what happened with the digital payment industry, when Tencent fell behind Alipay at first, then used their strength on WeChat to snatch clients. By the 1Q 2019, WeChat Pay had amassed approximately 40% of China's market, growing from around 23% in 2016. In the meantime, Alipay was losing its clout. Check out our analysis of risks facing Alibaba Cloud in the Chinese market. Compared to China's cloud leader Alibaba Cloud, Tencent's (00700:HK) drop back because it used to overlook the value of the cloud. In 2010, Tencent's founder Pony Ma called the cloud "just an illusion that needs hundreds of years to deploy." Nonetheless, when assessed the value of the cloud, Tencent swiftly launched its cloud project for business use in 2013. From 2013-2019, many criticized it as lacking customer support, internal supports and user-unfriendly on 2B business. To solve these problems, Tencent adjusted in 2018, reorganizing the corporate structure, starting to develop the cloud business in the 2B segment and assigned more resources on cloud business, which underpinned the fast growth afterward. More attractive prices, better security Tencent and Alibaba (BABA:NYSE, 09988:HK) provide similar cloud products and services. Still, Alibaba Cloud is performing better in many technical aspects. As for Tencent, they choose to lower prices, which share similar rates but offer more powerful computing. Besides, security is another area of Tencent Cloud's strength and is becoming more critical in the data-booming world. Tencent was famous for its cybersecurity competition with 360 security technology and employed many professionals in the area. Currently, Tencent owns a security team of around 3,600 professionals holding hundreds of patents – it is expanding the security business. By comparison, Baidu (BIDU:NASDAQ) and Alibaba are less active in the field. A knack for acquiring and serving customers Differentiation is the key to the development of cloud business. Strategically, Alibaba Cloud is trying to empower small to middle companies. Instead, Tencent Cloud lowers its stance, positioned as a business supporter. Both of them are trying to find solutions on how to serve entities. In terms of acquiring customers, Tencent Cloud may perform better due to its abundant experience. Currently, Tencent's ecosystem includes social media, gaming, video or streaming and other sectors with several popular applications serving over 1 billion consumers. Nevertheless, Alibaba's strength on e-commence but substitute products like Pinduoduo (PDD:NASDAQ) and JD.com (JD:NASDAQ, 9618:HK) are available to consumers. Individuals can live without Alibaba's service instead of Tencent's. On the contrary, Tencent's ecosystem is more comprehensive from e-commence to pan-entertainment. It is likely that Tencent's strategy of combining cloud with other businesses would accelerate omnipresent growth. In addition, China's cloud market will not be a the-winner-takes-all story. We believe that Tencent Cloud's penetration in its pan-entertainment map has a lot of rising opportunities. Follow EqualOcean's updates for more insights into the Chinese cloud computing market.

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Aug 9, 2020 02:33 pm ·

China's Data Center Industry: Set to Take Off

In the past 20 years, the cloud sector saw several critical technology developments, including virtualization, container, microservice architecture and serverless architecture. These innovations, combined with final customers' demand, have been bolstering the thriving industry in the United States. By comparison, China's cloud market is still at the early stage, which is indicated by the sector’s small share in the country’s GDP. Recently, Alibaba published its three-year CNY 200 billion plan, Tencent also disclosed a five-year CNY 500 billion investment in the 'New Infrastructure.' At a glance ► Unlike the western markets that are primarily driven by the demand, the Chinese data center industry, like many other sectors here, is likely to be pushed forward first by the government-designed roadmaps and large companies' business strategies. ► The main catalysts include cloud computing, 5G and Artificial Intelligence. ► We expect that the whole industry will thrive in the future. ► Local third-party data center companies present quite a few new investment opportunities. Industry development prerequisite From 2007 to 2009, the market experienced fast growth from a small market scale. The growth rate saw a spike, fueled by the 3G adoption cycle in 2009. Since then and until 2019, 4G adoption was the catalyst for data soaring. Data centers in China Like those in the US, there are retail data centers and wholesale data centers in China. Retail data centers refer to data centers with small power (generally less than 100 kilowatts), and clients are mainly small tenants, providing electricity, cooling, internet connection and maintenance services. Wholesale data centers are usually rent by the larger customer like cloud service providers, consuming more electricity. Some wholesale data centers are hyper-scale facilities and usually provide customization. There are three types of data centers in China. China Telecom (728: HK), China Mobile (941: HK) and China Unicom (762: HK) are currently owning the most data centers in the country, leveraging their operational history in the space. Their cabinets are usually standardized, which often couldn't fit customer's various needs. Large cloud service providers are building their data centers in recent years. Some third-party colocation providers are increasing their cabinets dramatically, targeting future needs. Besides, one key difference from the US is that the traffic or data is concentrated on giants like Alibaba (BABA:NYSE; 9988:HK), Tencent (700:HK), ByteDance and Baidu (BIDU:NASDAQ). Research showed that over 70% of internet traffic is from their applications. We think this also implies data centers clients' mixture. Data centers generating more revenue from big cloud players benefited from the relation, which provides business stability, higher and faster utilization and funding access. Building data centers surround tier-1 urban areas and policy-friendly places are trending. Like other data centers in the world, facilities' locations are always closed to metropolises, which lower the key performance indicator of a data center: latency. What is more, differently, the Chinese central and local governments implement some policies on the building of data centers, 'new infrastructure' and Real Estate Investment Trusts (REITs) trial projects all set to accelerate data centers expansion. Based on BOC International’s figure, there are 2.27 million data center cabinets in China currently, 1.50 million data centers are being built or planned, although it can't cover the upcoming demand. We expect the business shifting to cloud, 5G adoption and AI will be the upcoming catalysts for a countrywide data boom. China's cloud market With the rapid growth of China's cloud market, increasing downstream demand is on the docket. China's cloud penetration rate was much lower than the US level proven by the cloud revenue divided by IT spending. The reason is the late inception of the Chinese market. CAICT expects China's public cloud market size to increase at over 30% by the end of 2023. Currently, the Chinese cloud market is still in the early stage as the services mainly on Infrastructure as a Service (IaaS). Therefore, we expect the cloud market tends to move toward what happened in the US, which more revenue generated from Platform as a Service and Software as a Service. In the meantime, IDC will benefit from this trend especially. The baton: 5G era 5G's adoption means an unpredictable upside opportunity for data centers. By the end of June 2020, according to the figure disclosed by China Mobile and China Unicom, at least 108 million users registered 5G bundles in China. Over 400,000 5G towers have been built so far and the target is to install 800,000 in 2020. With the adoption of 5G, we believe that higher resolution videos, cloud gaming, and self-driving cars can lift up the whole demand for data. Specifically, consumers started to make and watch data-consuming videos mainly in 2k or 4k: horizontal display resolution of approximately 2,000 or 4,000 pixels. In the past several years. Still, the scenario was not very popular because of the lack of relevant content, unsatisfied internet connection and power systems. It seems these significant problems are gradually being cracked with consumers who are stepping into the 5G era. Apart from videos, the development of cloud gaming is going to lift the data consumption. It will be adopted quickly as all the conditions are set out better, including low latency, stability, prices of 5G bundles and game offers. For now, cloud gaming consumes lots of data. Google's Stadia project was recently tested under the 4G/5G cellular. The test results showed the one-hour 360p game would spend 2.7 GB data. The figure jumped almost fivefold to 12.7 GB when running a 1080p game. We expect more data centers are set to be built to lower the latency. Artificial Intelligence Artificial intelligence companies will also ignite the data centers industry as they need lots of data to train their models. Theoretically, the more data trained, the model performs better. For now,  Gartner stated that 85% of AI projections will fail. The compute for AI is difficult as lacking optimized hardware. It takes days or weeks for training models. We believe that AI training tasks will keep growing fast as the improvement of related semiconductor equipment.   International Data Corporation reported the AI server shipment reached 79,000, increasing 47% year-on-year in 2019 in China. The report also revealed that the AI software market hit USD 2.89 billion. The whole market including hardware was USD 6 billion. Even the market is still in the early stage, we keep positive on its prospects.

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Aug 2, 2020 02:15 pm ·

Four Strategic Risks Facing Alibaba Cloud in the Chinese Market

China’s cloud market is burgeoning. According to International Data Corporation (IDC), the size of its public segment reached USD 3.92 billion in the first quarter of 2020. Breaking down these figures, the Infrastructure as a Service (IaaS) market has increased by 57.6% compared to a year ago, while the figure for Platform as a Service (PaaS) is 64.4%. Alibaba Cloud has been dominating the Chinese public cloud market for a few years. In the first quarter of 2019, it owned 43.2% of the market, which was gained through leveraging its elastic computing, database and cloud security services. However, its main challengers – cloud units of Tencent (00700:HK), Huawei and Baidu (BIDU:NASDAQ)  are growing fast as well. Even as China's first and the world's third-biggest cloud service provider, Alibaba Cloud may face a number of risks in the middle term, as the pandemic rewards the technology industry. Giants’ game From a user side, based on some clients’ feedback, among these three companies, Alibaba Cloud performs better on the stability and security of the cloud. Instead, Tencent Cloud got better comments in terms of prices and functionality. The intensifying competition is supported by the fact that Alibaba Cloud's three new data centers started to operate. It is also planning to build the largest data center cluster in China by building ten hyper-scale units. Tencent also started (link in Chinese) to run its new hyper-scale data center this year in Qingyuan, Guangdong. It is also reported that Tencent Cloud adopted an aggressive strategy to win big order by equity contribution to its clients. We expect that one possible scenario for China's cloud market similar to the history of the United States’ cloud market is price war (AWS lowered rates over 70 times in the past decades to kick off players like Rackspace in public cloud business from 2009 to 2019). Cloud business is a game of the giants. Groups like Alibaba, Tencent and Huawei have plenty of cash to burn to acquire market shares. It is thereby hard to predict which company will win the war, whether Alibaba cloud can keep growing fast and how the cloud market will be shaped in the future. Apart from above, other trends like 5G, autonomous cars and Artificial Intelligence pose uncertainty on cloud business. It is prevalent in China that different groups have their own portfolio companies: individual companies tend to choose their shareholder's services. Tencent played a dominant position in categories such as social media, gaming and streaming. The major problem 5G is facing is lacking applications to monetize. Tencent may first roll out popular 5G services to create more demand for its cloud service. Instead, Huawei is likely to leverage its strength in 5G to create synergy with other cloud services. Macroeconomic pressure As the global economy is hammered by the coronavirus, many companies have started to cut their IT spending. This leads to delays in plans to shift IT infrastructure to the cloud, which may slow down the growth rate of the segment. On the other hand, demand for remote work has pushed some companies to transit traditional internal-deployed Infrastructure to the cloud. It is hard to debate the influence of macroeconomy erosion. Slow recovery? Factors benefiting Cloud business may fade amid the recovery process. On the first-quarter earnings call of 2020, Alibaba Cloud explained the rapid growth in the cloud business was due to the increased demand from video consumption, remote working and learning. The pandemic has almost been contained in China, while over 20 companies have been developing vaccines. It is reasonable to expect a COVID-19 vaccine to emerge by the end of this year and mass production of vaccines will happen after. Accompanied by the positive vaccine news, having been locked down for half-year, we expect people would do more outdoor activities such as 'revenge traveling' (people splashing money on extra trips to compensate for COVID restrictions) in the next few months. Meanwhile, people may spend less time on smartphones or screens. The traction from watching short videos, remote working and learning may slump. The geopolitical risks As the base of cloud computing, data centers in China face issues from simmering Sino-American tensions. One major problem is the hardware supply, which was cut off twice before. American companies like Intel provide essential components to assembly data center servers such as CPU, GPU and storage equipment. This gear maybe once again imposed sanctions by the US government. This pressure may shift to its downside business cloud service by delaying the building of data centers. To be specific, Inspur and Huawei built the majority of servers for data centers in China, they are both on the US sanction list. As the heart of a server, Intel’s Xeon chip accounts for 37.53% of the Inspur's annual purchasing amount. In 2015, the Obama government put restrictions on Intel from selling Xeon products to China. After, the Trump administration blocked Xeon processor shipments to Inspur this year, followed by Intel's resuming of shipments via adjusting the supply chain. The two events shared similar reasons as the processor might be used for military programs in China. Security concerns are not dismissed yet. As the tension escalated between Washington and Beijing, the pentagon may put more caps on hardware exports to China. The tail risk of cybersecurity Data storage can be another risk for Alibaba. It and peer companies both had a history of data breaching. For example, Alibaba turned off servers after a trove of data leaked in 2019. Other arms of Alibaba, including Ant Group breached use privacy, scolding by the cyber watchdog of China. Cainiao, the delivery body of Alibaba also leaked data once. Even it didn’t make a huge impact on company operation and stock price. But it reflects risks placed on its internet infrastructure with there are more and more internet attacks. Last year, Jack Ma said that Alibaba Group deals with over 300 million hack attempts per day.

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