Tencent to Cut Cloud Services Prices by Up to 40 Percent to Match Rivals

Chinese internet giant Tencent Holdings is cutting prices for cloud services by up to 40 percent from June amid similar moves from rivals that have plunged the sector into a price war.

The fierce competition comes amid soft corporate demand, with the Chinese economy in the midst of a wobbly recovery since abandoning strict COVID-19 restrictions last year.

Alibaba Group Holding said last month it would slash prices for some cloud products by up to 50 percent. State-owned China Mobile joined Tencent on Tuesday in announcing cuts, saying prices for some services would be reduced by up to 60 percent for a limited time.

Charlie Chai, an analyst at 86Research, said Chinese cloud service providers had in the past made efforts to avert a price war but “at the end of the day they still went down this path”. He noted the companies had expanded aggressively and now had too much capacity.

Wei Yunfeng, a researcher at data firm IDC, said the price cuts were triggered in part by high sales targets despite slowing growth for the market.

Chai said a more challenging cloud market would force companies to focus on product differentiation and that Baidu was well positioned as it had “unique, AI-centric products”.

“For participants that choose to join the war, the near-term margin impact can be significant,” he said, estimating it could take 4 to 7 percentage points off their cloud operating profit margins.

Alibaba’s cloud revenue accounts for about 9 percent of its total revenue. Tencent does not provide separate figures for cloud revenue.

Tencent on Wednesday marked a return to revenue growth in the first quarter as it recovered from COVID-related disruptions and a regulatory freeze on gaming licences a year earlier.

James Mitchell, Tencent’s chief strategy officer, told analysts on a call: “The impact of price cuts on Tencent as a whole is not notable.”

Mitchell said cloud services only represent “a mid single digit percentage” of Tencent’s total revenue.

Moreover, price cuts only apply to its infrastructure-as-a-service business, which represent only a portion of Tencent’s cloud services.

Alibaba reports on Thursday.

© Thomson Reuters 2023