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By Josh Horwitz
SHANGHAI (Reuters) - Alibaba's six-way breakup plan has raised questions about the long-term shape of its profitable cloud unit, given that it will have to tackle heavy regulatory scrutiny at a time when competition is intensifying both in China and abroad.
While a split into a standalone unit will give investors a chance to make focused bets on a business estimated by analysts to be worth between $41 billion and $60 billion, the step could put Alibaba's cloud unit even more in the cross-hairs of Chinese and overseas regulators, likely slowing its growth.
Some analysts said external investment and separation from Alibaba's core ecommerce business could help it grow overseas, where it is far behind rivals such as Amazon Web Services. But others see the Chinese state investing in the cloud unit or it even going private, given its dominance in the domestic cloud computing industry.
Alibaba's planned Cloud Intelligence Group, which will house the cloud business AliCloud as well as the tech giant's artificial intelligence and semiconductor research, has a 36% market share in China's domestic cloud computing sector.
Its servers host reams of data from companies ranging from tech peers to retailers, the handling and sharing of which has in recent years drawn increasing scrutiny from Beijing.
"Alibaba’s business lines have different levels and types of regulatory sensitivity," said Gavekal Dragonomics analyst Thomas Gatley in a note this week.
"For cloud computing, data security is paramount."
Alibaba and China's commerce ministry did not immediately respond to queries sent on Friday.
CHANGING MARKET DYNAMICS
Receiving state investment and drawing closer to the Chinese government could satisfy regulators in Beijing, who have rolled out new laws regulating the handling of data in China and set up a data bureau to underline their focus on the area.
It could also help AliCloud to compete more effectively in China, where overall demand for cloud computing from internet companies is slowing and growth is mainly coming from governments and state-owned enterprises which have not migrated to the cloud as quickly.
While government entities "will not completely reject" companies like Alibaba, Baidu, and Tencent Holdings for their projects, "they will have a tendency to choose companies with a government funding and backgrounds," said Zhang Yi, who tracks China's cloud computing sector at research firm Canalys.
In the first half of last year, China's top three telcos - China Mobile, China Unicom, and China Telecom - collectively surpassed Alibaba's share in the domestic cloud market for the first time, according to brokerage Jefferies, underscoring Beijing's growing reliance on state-backed carriers for data management.