Chinese internet giant Tencent Holdings (0700.HK) is cutting prices for cloud services by up to 40% 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 Ltd (9988.HK) said last month it would slash prices for some cloud products by up to 50%. State-owned China Mobile (0941.HK) joined Tencent on Tuesday in announcing cuts, saying prices for some services would be reduced by up to 60% 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 (9888.HK) 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% 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.
