Alibaba sets its cloud free

The news: Alibaba, China’s biggest ecommerce and technology company, is spinning out its $12 billion cloud business as part of a wider restructuring plan. 

CEO Daniel Zhang surprised the market last week by detailing Alibaba’s groundbreaking six-way shakeup announcement. He said the standalone cloud platform could grow to someday even surpass Alibaba in size if it attracted the right external financing.

A sudden shift: The move to divest a once highly profitable cloud computing business and vital cog to its online retail and fulfillment business—not unlike Amazon’s Amazon Web Services (AWS)—comes months after Alibaba committed $1 billion toward global expansion. 

• Alibaba’s decision is confounding, especially because it has spent tens billions of dollars over a decade to expand the position of a service some business analysts are valuing at upward of $30 billion. 
• Alibaba Cloud came in as the third-largest cloud provider in the world behind Amazon Web Services (AWS) and Microsoft in 2021, according to Garnter, per TechCrunch. 
• Regulatory scrutiny by Beijing in 2020—as well government blowback from a software flaw resulting in China’s largest cybersecurity data leak—could have dampened longer-term interest in the service.

Possible reasons for giving up cloud aspirations: Zhang said the cloud spinoff was intended to simplify the structure and respond to market needs. 

• Pressure from Beijing could have played a role in Alibaba’s decision to abandon cloud. Splitting Big Tech giants into smaller businesses and selling off contentious properties makes them less susceptible to regulatory scrutiny. 
• Divesting and selling individual business units will also be easier and require less regulatory oversight.

Our take: It seems Alibaba has to choose which aspects of its business to focus on, and as integral as cloud has been, it could be seen as a problematic business going forward. 

While the spinoff benefits shareholders, it also raises concerns about Alibaba's future valuation and potential government influence.