Should Cloud Giants Buy Retail Chains (and Telcos) to Get Control of the Network Edge?

On June 20 (2017), Amazon sent seismic waves across the U.S. fresh food retail market when the Internet giant announced its US$13.7 billion-deal to acquire Whole Foods. Although it is not finished revolutionizing online retail, warehouse robotics, and cloud computing, Amazon has been disrupting even more industries, spanning from smart home, to land, and to sea logistics. Now, the fresh food market is next on the chopping block.

The acquisition of Whole Foods is a sound strategy for Amazon for two reasons: firstly, the fresh food market is a non-cyclical market with relatively inelastic demand. Secondly, Whole Foods’ nationwide coverage gives Amazon real estate to deploy distributed mini data centers, creating virtual edge computing, storage, and networking capabilities at residential areas. The amount of Big Data that can be generated through purchasing behavior will only give Amazon more edge in terms of its machine learning and artificial intelligence capabilities.

Across the Pacific, Alibaba, Amazon’s counterpart in China, has also been actively engaging in multiple verticals. After finding early success in its retail platform, Alibaba adheres to its “platform-first” strategy, bolstering its capability in payment, financial, logistics, over-the-top video platforms, and cloud computing. On the same day Amazon announced its Whole Foods acquisition, Jack Ma, Alibaba’s chairman, was hosting a conference in Detroit called Gateway 17. Chairman Ma specifically  stated that instead of becoming an e-commerce company like Amazon, Alibaba prefers to remain as a platform provider to “empower small and medium businesses.”

Therefore, if Alibaba wishes to continue to maintain its competitive edge as a platform provider, ABI Research argues that Alibaba should look into a potential acquisition of one of the three major Chinese telcos. As mentioned earlier, cloud computing giants draw their strength from Big Data analytics and edge computing capabilities. China Mobile, China Unicom, and China Telecom have been aggressive in their deployment of fiber networks for broadband coverage and backhaul, as well as points-of-presence (PoPs) for content delivery networks. These are extremely valuable assets for Alibaba. In addition, all three telcos have significant enterprise customers, which will generate huge synergy with Alicloud offerings.

The maturation of network function virtualization (NFV) has placed cloud vendors like Alibaba in excellent footing. Alibaba is no stranger to the telco market, as Alibaba is currently operating a MVNO in China (Ali Telecom)and entered into strategic partnerships with all three major telcos. In recent years, telcos are trying to optimize their cost and reduce their proprietary hardware by running network functions on virtual machines hosted on generic x86 hardware. This lowers the barrier to entry into the telco market. Alibaba’s expertise in cloud computing, especially with its deployment of microservices, allows it to have an edge in future NFV trials and deployments. There is little doubt that a spectrum license fee, cell-site, and fiber network deployment remains expensive, but at least the fiber deployment can be covered by a telco acquisition. 

Obviously, there are multiple hurdles to this proposal. A regulatory environment in China can be a challenge. As compared to cloud services, telcos are subjected to much stricter regulations and quality of service benchmarks. This explains why telcos are slower in their telco cloud deployments, as they are seeking carrier-grade service quality and 99.999% reliability. The telco industry as a whole is facing declining average revenue per users (APRU), as competition between telcos intensifies due to market saturation.

At the same time, yearly revenues of telcos are multiple times larger than that of Alibaba, despite facing negative outlooks. In 2016, China Mobile reported an annual revenue of US$102 billion (CNY 708.42 billion), while China Telecom and China Unicom each reported US$51 billion (CNY 352.29 billion) and US$40.15 billion (CNY 274.2 billion) respectively. In comparison, Alibaba’s total earnings for 2016 was US$14.8 billion (CNY 101.14 billion), with a net cash position of US$8 billion, though having market capitalization larger than all three telcos. A telco acquisition will, therefore, require Alibaba to take on significant amount of debts, which is bound to hurt the company’s credit rating.

As such, ABI Research believes that Alibaba should wait for better opportunities. The telco market is ready for disruption; many Asian markets with three major telcos have issued fourth telco licenses (Australia, the Philippines, and Singapore) to encourage innovations and competitions. Acquiring a telco too early will be too much of a hassle and could dilute Alibaba’s current advantage as a low-cost, large-scale cloud computing player. Therefore, Alibaba should continue to invest in virtualization technology and venture into the telco market when the right timing appears.