China's two tech giants, Alibaba Group Holding Limited (NYSE: BABA) and Tencent Holdings Limited (SEHK: 700) have fought in many different fields, from online food delivery to mobile payments to internet advertising. So it's perhaps unsurprising, and inevitable, that the two would take each other on in one of the most lucrative fields of all; the cloud.

The cloud is a global network of servers that provides services or shared resources over the Internet. It's a big business globally. According to research firm Gartner, the worldwide public cloud service market amounted to US$182.4 billion in 2018. In 2022, that number is expected to reach as much as US$331.2 billion.

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It's also big business in China. According to the China Academy of Information and Communications Technology, the total cloud market in China soared to RMB 96.28 billion (US$13.97 billion) in 2018, up almost 40% from 2017. Of the total cloud market, China's public cloud accounted for RMB 43.7 billion (US$6.34 billion) with private cloud accounting for the rest.

Alibaba leading but Tencent hot on its heels

Both Alibaba and Tencent have high hopes for the cloud. It's so important to Alibaba that the company's CEO Daniel Zhang once said that the cloud could be Alibaba's main business in the future. Meanwhile, Tencent has invested millions of dollars into various businesses with the implicit understanding that those businesses will use Tencent Cloud and help recruit other companies to its cloud service.

In terms of their market position, though, Alibaba is the leader. As of March 31, the company had more than half the market in China. In 2018, in the Infrastructure as a Service (IaaS) segment of the cloud, Alibaba Cloud had 43% market share while Tencent had an 11.5% market share in 2018. Although that's not much, Tencent has grown its market share considerably as it only had 7.4% of the IaaS market in 2016.

Although Alibaba has a "first mover" advantage that gives it enormous scale, Tencent has a competitive advantage in some fields such as video streaming and gaming cloud applications. Because Tencent is a gaming company itself, it has convinced 75% of its fellow gaming peers to use Tencent cloud. Tencent has also tried to cross-sell cloud security services and analytics to its WeChat customers to gain market share.

Alibaba Cloud's financials

In terms of financials, Alibaba Cloud's revenue rose 76% year-on-year to reach RMB 7.73 billion (US$1.15 billion) for the first three months ended 31 March 2019. Net loss for the cloud computing segment was RMB 1.036 billion (US$155 million) for that quarter as Alibaba invested as much as it needed to scale and capture market share.