Alibaba to invest $1 billion in cloud computing: Can it beat Amazon?

Alibaba says its new cloud computing unit could overtake Amazon in a few years. 

Chinese e-commerce giant Alibaba says it plans to catch up with its American competitor Amazon with a robust foray into the cloud computing business.

On Wednesday, the company’s chief executive officer Daniel Zhang announced that Alibaba would inject an extra $1 billion into its cloud computing unit Aliyun. The announcement has left many observers speculating whether Alibaba could overtake Amazon in the near future.  

“Aliyun competes directly with Amazon Web Services, which is also intent on global growth,” wrote Catherine Shu for Tech Crunch. "Its backing from Alibaba, however, means that Aliyun has the ability to experiment with technology like low-power server processors, which might help it save a lot of money on electricity bills as it deploys new infrastructure and give it an edge over AWS."

Alibaba’s latest investment is set to expand its data centers into the Middle East, Japan, Singapore, and Europe. Currently, the company boasts of data centers in China, Hong Kong, and Silicon Valley, where it opened a center in March.  

“We see that Amazon took 10 years to get to where it is today,” Aliyum president Simon Hu said recently. “Aliyun is just past its sixth year and we hope to match or outperform Amazon within three or four years.”

But Amazon will be a difficult competitor to beat. The American e-commerce mammoth is on the road to booking more than $7 billion in 2015 from its Amazon Web Services business, more than Salesforce, Microsoft, IBM, and Google combined.  

The second-quarter sales for Amazon’s Web Services totaled $1.82 billion this year, an 81 percent increase from the previous year. Its operating profit, at $391 million, was five times higher than in 2014.

By March, Alibaba’s cloud computing revenue had also increased by more than 80 percent compared to the previous year, but to a sum of just $63 million. Cloud computing still contributes just a small portion of Alibaba’s revenue.  

Still, the company seems poised to take on the challenge. Also on Wednesday, Alibaba announced a new strategic partnership with Yonyou software, which claims to be China’s biggest software vender.

“Cloud computing will become fundamental infrastructure for new economic development,” Mr. Hu said in a statement. "Aliyun, together with Yonyou, will bring comprehensive cloud computing solutions to empower more enterprises, drive the development of supply chains, enable cloud consumer marketing, and bring disruptive transformation to the industry."

The joint venture could allow Aliyun to access more customers across Asia, observers say. The decision to collaborate with Yonyou also comes on the heels of other partnership announcements with companies such as Intel and the data center company Equinix.

Analysts have long been comparing the roles of Amazon and Alibaba in their respective marketplaces.

Writing for Forbes in September 2014, Mohanbir Sawhney and Sanjay Khosla noted that: 

“Both Amazon and Alibaba have built e-commerce platforms uniquely suited to their home markets. Alibaba has a deep understanding of Chinese consumers and of nuances in terms of tone, approach, and product variety. The company has mastered the intricacies of Chinese regulations and how to work with state and national governments.”

“Conversely, Amazon is a master of logistics and supply chain management, and it is the world leader in cloud infrastructure services,” they added at the time.

Now, it remains to be seen whether Alibaba has the capability to encroach on some of Amazon’s turf, and to expand its cloud into wider regions.