Alibaba’s cloud services business grew slower than ever in the quarter that ended in March. The company said it was due solely to the loss of a single “top-class customer in the internet industry.”
It didn’t name the customer, but news reports relying on anonymous sources close to the matter said the customer was TikTok owner ByteDance. Both The Wall Street Journal and the Chinese news service Caixin named ByteDance as the customer.
ByteDance, a fast-growing competitive threat to Alibaba and other Chinese internet giants in digital advertising and e-commerce, has decided to stop using Alibaba Cloud services outside of mainland China, according to the reports.
Alibaba Cloud reported about $2.61 billion in revenue for the quarter, representing 37 percent growth year over year – its slowest reported quarterly growth to date. Cloud revenue in the preceding quarter grew 50 percent year on year. The last two quarters were Alibaba Cloud’s first profitable ones.
The company’s CFO, Maggie Wu, attributed the slowdown to a “change in our relationship” with the customer.
“They have decided to terminate their relationship with us with respect to their international business due to non-product-related requirements,” Wu said on the company’s earnings call.
Companies that do business on the internet – even cloud-native ones – sometimes decide to run their own infrastructure once they reach certain scale. They do it for a variety of reasons, but the biggest one is usually the high cost of renting infrastructure from hyperscale cloud platforms.
ByteDance's Data Center Strategy
Alibaba specified that it lost its customer’s international business, but ByteDance doesn’t appear to use much of the cloud provider’s mainland-China capacity. It is the largest tenant of the Chinese data center provider Chindata, a wholesale data center developer that leases more than 80 percent of its total capacity to the internet company. Large internet businesses usually lease data center facilities from such developers and operate them on their own.
ByteDance last year took a similar approach to infrastructure in the US, where it was one of the year’s top three biggest renters of data center capacity from wholesale developers, according to North American Data Centers. (The other two were Microsoft and Facebook.)
As common among large-scale internet platforms, ByteDance uses a mix of self-operated data centers and cloud services, relying on the latter for wider geographic reach and platform-specific software tools they provide. One source with knowledge of the company’s move away from Alibaba Cloud told Caixin that it would replace the Chinese provider’s services with those by Amazon and Oracle.
A source also told Caixin that ByteDance had been using Alibaba Cloud in Singapore to back up its US operation.
The company came under pressure from the US government last year, when president Donald Trump’s administration threatened to ban TikTok in the US if ByteDance didn’t divest the app’s operations. The government cited unspecified national-security concerns connected to ByteDance’s origin in China.
The divestiture didn’t happen, and a US federal judge later blocked an attempt by the administration to ban TikTok. The current presidential administration of Joe Biden has yet to signal where it stands on the issue.