Is “ByteDance Cloud” A Good Idea?

When I first started writing Interconnected a little over a year ago, two of my favorite analyses that I wrote were why Facebook and Dropbox don’t offer their own cloud platforms. Given their scale and expertise in infrastructure operations, building a cloud seems an obvious avenue of growth, which was especially needed for Dropbox.

Instead of Facebook or Dropbox, the newest entrant to the crowded but still growing cloud market is ByteDance; its cloud offering is dubbed “Volcano Engine”.

I did call out this possibility of a “ByteDance Cloud” when I went on the China Tech Investor Podcast last August. But it was just one of those fun, speculative banters you have on podcasts. It was during the height of the “TikTok ban” drama, so even if a ByteDance Cloud was in the works, I would not have expected it to take shape any time soon.

So when news broke last month that Volcano Engine is indeed real and will be available this September or October, I was caught a bit off guard. But I should not have been.

Quick History

A scan of ByteDance’s history would reveal that Volcano Engine has been a question of when, not if, for at least five years.

Back in 2016, when ByteDance’s first hit app, Jinri Toutiao, reached the enviable milestone of 600 million users, Zhang Yiming (ByteDance’s now-resigned CEO) telegraphed his plan to build a cloud, because as the company grows, it will have to innovate by going lower into the infrastructure stack and work on products like “databases, cloud computing, and chips.” (For more of my thoughts on Zhang Yiming’s resignation, see this.)

Of course, tech founders proclaim outlandish ambitions all the time -- sometimes because they are genuinely ambitious and have a plan to back it up, sometimes to hire talent and motivate employees, sometimes just to sell a big dream to investors to raise another round of funding at a higher valuation.

The “ByteDance Cloud” dream became more concrete when the company acquired CaiCloud in August 2020. CaiCloud was one of the more successful independent cloud platforms not connected to an existing big tech firm, so similar to Digital Ocean’s place in the US cloud market. The acquisition absorbed CaiCloud, both the product and people, fully into the “Volcano Engine” business unit that was formed just a couple of months before the acquisition. Mind you, all this was happening when the geopolitical challenges surrounding ByteDance were at a fever pitch; the company has proved that it could walk and chew gum at the same time.

CaiCloud’s ex-CEO is now leading Volcano Engine, essentially to continue what he set out to do with CaiCloud, but under a bigger company with a global brand and a massive balance sheet.

How does Volcano Engine plan to differentiate itself and succeed in a cloud market with so many established players already?

Secret-sauce-as-a-Service

It’s common knowledge in tech that ByteDance’s success thus far is in large part due to its content recommendation engine. Its products are the poster children of the post-search era. Users don’t look for things on Google or Baidu as their first touchpoint. They just open an app, see some content, react with their preferences, and the product quickly adapts algorithmically to keep these users engaged. (Eugene Wei’s post on TikTok is a good explainer if you want to dive deeper into this dynamic.)

This recommendation engine is so powerful that the US and China were literally fighting over it last year. Now that ByteDance gets to keep its innovation, naturally, Volcano Engine’s selling point is to package ByteDance’s secret sauce as a service -- a new spin on SaaS, if you will. The hope is that what’s good enough for ByteDance is more than good enough for the next generation of ambitious tech startups.

The logic of this sales pitch isn’t exactly unique. AWS, GCP, and AliCloud more or less have the same pitch: do you want to be as big and dominant as Amazon, Google, or Alibaba one day? Then use our cloud!

However, ByteDance’s approach is unique in two ways. First, it is willing to package and open up some of its secret sauce to potential future competitors, who may become its cloud customers. This level of confidence suggests that ByteDance is comfortable with its core apps’ leading position in a Chinese digital advertising market that’s slowing down anyways. Indeed, that market’s annual growth rate has been decreasing from ~30% in 2017 to ~14% in 2020.

Second, by providing its secret-sauce-as-a-service, ByteDance’s point of entry begins from the middleware layer of the stack, not from the top or bottom, unlike other competitors in this space. A full-fledged cloud platform is generally broken down into three layers:

• Infrastructure-as-a-service (IaaS, aka CPUs, storage space, and networking bandwidth for rent)
• Platform-as-a-service (PaaS, aka database, app development, big data analytics engine, AI/ML frameworks for rent)
• Software-as-a-service (SaaS, aka user-facing applications like email, workplace messaging, document-sharing for rent)

AWS and AliCloud both began from the IaaS layer and moved up. Microsoft Azure and Tencent Cloud started on the SaaS, Office Suite and WeChat Enterprise respectively, and moved down. Arguably, Google’s GCP started in the middle PaaS layer with App Engine as its first service, but there’s nothing terribly unique about App Engine as it relates to Google’s “secret sauce”. Thus, leading Volcano Engine’s product offering from the PaaS layer with what makes ByteDance uniquely ByteDance is a unique, if not the only, go-to-market path for this “newest cloud on the block” to stand out.

There are many ways to differentiate one cloud from another. Some of the differentiators are technical: hardware, software, and the location and architecture of data centers, which I’ve written deep dives on regarding all the major cloud vendors. Other elements are more human: existing commercial relationships, quality of service and support, and industry reputation. As a newcomer, ByteDance has none of the human elements in its favor, so it must enter with its best technology.

Is this a good idea? Will it work?

How Long Can This Volcano Burst?

As crowded as the cloud industry may be, the entire market is still growing at a healthy clip worldwide, especially in emerging markets in APAC and Latin America. For the cloud, the sky really is the limit (pun intended). Thus, I’ve always thought that there should still be room for at least one more big tech company to enter, and had suspected it would be a firm like Facebook or Netflix, but it’s ByteDance.

Volcano Engine’s current ambition is to be the “fourth cloud” in China, after AliCloud, Tencent Cloud, and Huawei Cloud. Its data center expansion plan is all inside China for now -- Shanghai, Shenzhen, Zhangjiakou (in the Hebei province). Thus, companies in the US and EU won’t see Volcano Engine for quite some time, if ever, especially if the Western cloud markets become saturated in the next few years. But, as I’ve argued before, there’s plenty of room to expand in Southeast Asia, Latin America, the Middle East, and China itself.

So from the perspective of business opportunity and growth potential, yes, I do think a “ByteDance Cloud” is a good idea, especially because it’s offering truly differentiated technology.

Will it work, however, is a completely different question.

Anyone who has worked in an operational role in the cloud business (or any enterprise technology business) would tell you that it takes years of grind, patience, and trust-building to succeed. The dynamic is materially different from operating and succeeding in a consumer-facing technology company.

What may work against ByteDance, ironically, is its own history and expectation of success as a consumer-facing, social media juggernaut. The same recommendation engine that propelled the company to a meteoric rise may incidentally set the bar too high, when being sold as a cloud service. I can see a scenario where this cloud unit gets under-invested or even shut down prematurely in a few years, when it isn’t the “hit product” that ByteDance is used to having. For the executives running Volcano Engine, it’s worth keeping in mind that it took both AWS and AliCloud more than 10 years to turn a modest profit. We don’t yet know if Azure is profitable or not. Other industry peers like GCP and Tencent Cloud will most definitely be losing money for a couple of more years.

Winning the cloud game is a long, difficult haul, though the reward is sweet and worthwhile.

Volcano Engine got its name because, according to the unit’s own announcement, volcanoes build energy and momentum for a long time before erupting, and then can sustain bursts of energy for a long time. The learning from ByteDance’s massive growth and scale in the last nine years is the “energy and momentum” that Volcano Engine hopes to unleash for the world (to rent as cloud services).

According to the Smithsonian, the median length of time for a volcano eruption is actually only seven weeks. However, the Kīlauea Volcano in Hawaii has been bursting for 38 years.

The only way for Volcano Engine to succeed is if it bursts like Kīlauea.

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