Wangsu Technology Alert:The pain continues-AliCloud announces 35%price reduction

AliCloud announces up to 35% CDN price reduction

    AliCloud announced the CDN price reduction at its Yunqi conference in ShenZhen today with the unit price at the cheapest tier to reduce from 0.26/GB to 0.17/GB. The move comes as AliCloud consolidates the CDN and network resources previously deployed by YouKou and it now claims that it has a network scale comparable to Akamai with 1000 points of presence and 40T of bandwidth globally. Furthermore it has launched new video related CDN products covering finance, e-commerce, health and education fields.

    Short term pain to continue for Wangsu

    The move by AliCloud seems to be targeted at further boosting its video streaming and broadcasting capabilities. With the bandwidth costs paid by CDN providers falling at the rate of 20% p.a. the move by AliCloud is likely to further dampen the profitability for all players involved. For Wangsu, the video business makes up ~40% of its total revenue and while it now only makes a slim margin on this and may not follow on the price reductions for all customers, the margin decline for this business is likely to continue. With its 1Q guidance having significantly missed investor expectations, pressures are likely to remain in the near term given the difficult comp in 2Q and 3Q.

    Continue to see a long term future in Wangsu, retain HOLD

    Despite the short term pressures, we retain HOLD on Wangsu as we believe it has a great opportunity to become the number 2 global player in CDN, particularly with the CDNetworks acquisition which was approved by shareholders yesterday. Its core application acceleration business (the other 50%+ of its revenue) is unlikely to be challenged by the cloud providers and once the market gyration completes, we should see growth come through.