Alibaba's determination to break from its "one-size-fits-all" approach is stronger than outsiders may have imagined.
Since announcing its "Split Six" initiative in March, Alibaba Cloud has emerged as the most significant spin-off in Alibaba Group's second entrepreneurial wave. Subsequently, rumors about other companies under Alibaba, like Cainiao and Hema, planning their IPOs have surfaced. Now, DingTalk, which has operated in tandem with Alibaba Cloud for over three years under the "Cloud-Ding integration" strategy, is unexpectedly setting out on its own.
On August 15, sources informed Wall Street Journal that DingTalk will no longer be under Alibaba Cloud's management, but will operate autonomously as an independent business within Alibaba Group. Furthermore, DingTalk's COO and key account manager, Ku Wei, will be reassigned within Alibaba Cloud. Consequently, DingTalk now falls under Alibaba's "1+6+N" organizational structure.
It's worth noting, as insiders revealed, that DingTalk has always been a fully owned subsidiary of Alibaba Group and operated independently, overseen by Alibaba Cloud's Intelligent Business Group before the recent organizational restructuring.
However, with Alibaba Cloud nearing its IPO, DingTalk's move to become independent undoubtedly stirs speculation within the industry.
Both entities might have chosen independence due to their diverging development trajectories.
As the largest revenue-generating domestic cloud provider, and currently the only profitable one, Alibaba Cloud holds great promise within the group. For fiscal year 2023, Alibaba Cloud reported revenues of 77.2 billion yuan, accounting for about 9% of Alibaba Group's total revenue, second only to Taobao. By the 2020 fiscal year, Alibaba Cloud had already become profitable. The latest financial reports show that as of June this year, Alibaba Cloud's adjusted EBIT was 387 million yuan, marking a year-on-year growth of 106%.
On the other hand, DingTalk, despite being overseen by Alibaba, has yet to turn a profit. This June, DingTalk's President, Ye Jun, set a goal to break even within the next three years.
Post the "1+6+N" organizational change, every department within Alibaba has to bear its profit and loss responsibilities and thrive independently. For Alibaba Cloud, which is on the fast track to IPO, profitability is of paramount importance. Letting DingTalk "fly solo" could significantly boost Alibaba Cloud's profitability and valuation.
Alibaba insiders shared that post-independence, collaborations and financial settlements between the two entities will proceed as usual.
This implies that once independent, DingTalk will become a customer of Alibaba Cloud, purchasing its services and resources. This move will transition the cloud resources once consumed by DingTalk from an operational cost for Alibaba Cloud to a source of revenue and profit. As a result, the Alibaba Cloud "ship" is expected to sail even faster.
Meanwhile, for DingTalk, breaking ties with Alibaba Cloud might unleash greater growth potential.
Previously, under the integrated strategy, DingTalk seemed limited to cloud functions, appearing more as a supporting role.
However, after six to seven years of growth and user accumulation, DingTalk has become a dominant player in China's collaborative office software market, necessitating its monetization.
Office software is a market with enormous potential. The 2021 China SaaS Survey Report indicates that in 2021, the paid user rate for office software in China was below 15%, while it exceeded 70% in Western markets.
The vast gap is primarily due to the relatively low acceptance of SaaS among Chinese users. DingTalk, having accumulated a significant number of SME users, often finds them less willing to pay. Last September, Ye Jun noted that "businesses primarily use DingTalk for free, with maybe less than 1% truly paying."
To enhance monetization efforts, DingTalk, at its Ding Summit last September, clarified its approach, emphasizing its "large customer strategy" targeting organizations of 1-10,000 employees. Alibaba insiders shared that over the past two years, DingTalk's approach towards major clients has been notably effective, systematically building its organizational and product capabilities.
Some industry experts believe that China's cloud office industry is pivoting towards serving larger governmental and enterprise clients, who tend to rely more on state-owned cloud service providers. Hence, DingTalk, as an independent entity, could explore opportunities with other cloud providers without being tied to Alibaba Cloud.
Ye Jun has disclosed that though DingTalk's current absolute revenue might appear modest, its core product revenue has seen triple-digit growth. Moreover, DingTalk's gross margin surpasses the software industry's average.
Importantly, with DingTalk's independent valuation, it becomes an attractive billion-dollar proposition.
For reference, two years ago, cloud computing giant Salesforce acquired office application Slack for $27.7 billion. Currently, overseas collaborative software company Zoom is valued at over $200 billion.
With more than 600 million users, an independent DingTalk, in terms of business growth, external financing, or a potential IPO, holds expansive possibilities.
DingTalk is already a hot topic in the capital markets. The Wall Street Journal has learned from multiple reliable sources that numerous external investors have expressed interest in investing in DingTalk. Whether they will seek or accept outside capital depends on their internal strategies moving forward.
From joining forces with Alibaba Cloud to flying solo, both Alibaba Cloud and DingTalk have always sought mutual success. Now as independent entities, while Alibaba Cloud aims to be the first domestic cloud operator to go public, DingTalk is shifting its focus from a consumer app to the B2B space, amplifying its potential.
From one Alibaba to a collective of Alibabas - that's the vision for both Alibaba Cloud and DingTalk's future.
