Chinese e-commerce giant Alibaba on Wednesday announced significant price cuts on its major cloud offerings in a bid to boost demand amid a slowdown in the cloud computing space.

According to Alibaba Cloud, elastic computing services, which allow customers to scale their computing resources according to demand, will see a price drop of 15% to 20%; database products, essential for managing and storing data in the cloud, will experience a reduction of 25% to 40%; cloud storage services like deep archive will see the largest decrease in prices, by as much as 50%.

Following these price reductions, Alibaba Cloud now offers some of the most competitive prices in the market, making its services more accessible and attractive to potential customers.

Such an aggressive price adjustment is rare in Alibaba's history, as it has a long-standing strong position in the market.

However, the tech giant has had to adapt as the cloud landscape changes. According to a recent report from IDC, China's public cloud market, which mainly considers infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS), experienced a 19.0% year-on-year growth in the second half of 2022. This represents a significant deceleration compared to the 42.9% growth rate during the same period in the previous year.

In cloud computing, IaaS offers a flexible and scalable infrastructure that allows users to build and manage their own applications, while PaaS provides a more streamlined environment that abstracts away infrastructure management, enabling developers to concentrate on writing and deploying code. These two service models are among the most commonly provided by cloud vendors.

The IDC report attributes the slowdown in growth to a number of reasons, including the overall IT market being disrupted by Covid-19, increased uncertainty among enterprise customers, budget cuts, longer build cycles for cloud providers, and more.

Alibaba, despite being the largest player in terms of market share, also suffers in this scenario. In the quarter ended Dec. 31, 2022, its cloud computing division posted only a modest 3% increase in revenue compared to the same quarter a year earlier, marking its slowest quarterly growth in the last year.

When the "pie" grows at a slower rate, competition intensifies as companies recognize that they can no longer rely on market expansion to drive growth. Instead, they have to take more slices from competitors to maintain their position in the industry.

According to Canalys, Alibaba Cloud's market share fell from 43% in 2020 to 36% in the third quarter of 2022, while Huawei Cloud, Tencent Cloud, and Baidu Cloud all made gains.

It also faces competition from state-owned telecommunications network operators such as China Mobile, China Unicom, and China Telecom, especially for "government-backed customers". As confirmed by the IDC report, the market share of these operators continued to grow rapidly in the second half of last year.

Consequently, Alibaba sets off a price war in China, although its CEO Daniel Zhang publicly stated that the move is to "make computing power services more inclusive" and allow customers to enjoy the dividends brought about by technological progress.

The cloud business, which now only accounts for approximately 10% of Alibaba's total revenue, is seen as critical to the company's long-term success. Last December, Daniel Zhang took over as head of the business, replacing Jeff Zhang, after the subsidiary's Hong Kong and Macau operations experienced their longest major outage in more than a decade. In March, Alibaba undertook its largest-ever restructuring, splitting the cloud business into a standalone unit with a possible future IPO.

Other cloud providers may need to follow Alibaba's suit in lowering prices to stay competitive, a situation akin to Tesla sparking a price war in China's electric vehicle (EV) market. In that case, competitors like BYD, Nio and XPeng were forced to join the fray due to the weak consumer demand in the market.

It’s worth noting that the price reductions do not apply to graphics processing unit (GPU) resources, which are essential for managing the computational load associated with training and operating artificial intelligence models. With the growing popularity of generative AI applications such as ChatGPT, demand for high-performance GPUs has surged, and generally, cloud providers have had to limit the number of GPUs customers can rent due to supply-side constraints.

According to Bloomberg analysts, the price cut will affect the Alibaba Cloud's adjusted EBITDA in FY24.