kingsoftlogoKingsoft, founded in 1988 as one of the first software development companies in China, announced yesterday that it would invest more than US$1 billion in its cloud business in the next three to five years.

The company has jointly invested in 21Vianet, a Chinese network-neutral data center service provider, together with Xiaomi, whose CEO Lei Jun is also the chairman of Kingsoft. Kingsoft has acquired 11.6% of 21Vianet for US$172 million.

Mr. Lei convinced Kingsoft board of directors to invest the US$1 billion they had sitting in the bank into cloud technology, saying this area is the future and now is a good time to invest, according to Xiaomi. He bets Kingsoft will be one of the top five Cloud service providers.

Kingsoft began offering cloud storage service two years ago. The lions share of its audience today are Xiaomi phone and mobile service users, since Kingsoft is the default option on Xiaomi devices. Around 68 million Xiaomi users have utilised its services to store photos, videos and other personal files.

Kingsoft Cloud service expanded into the gaming sector this year, where it has had some 200 clients according to the company. It’s easy to understand why it began with gaming, as it remains the top-grossing internet service category in China, where game developers can afford and are motivated to pay for better services. UCloud, a cloud service founded by former Tencent execs, is currently focused on gaming.

A wave of cloud service providers has emerged in China in recent years. Some are from the major internet companies such as Alibaba, Tencent and Baidu, and there is also a handful individual players, such as Upyun, Qiniu and aforementioned UCloud. Aliyun with Alibaba seems to be one of the most popular amongst Chinese developers.

Amazon AWS announced it would enter the Chinese market in December 2013, with a number of Chinese internet companies with operations overseas signing up given that it’s a global service.

Kingsoft had to invest in the cloud business if it wanted to survive, Lei Jun said at yesterday’s press conference. Kingsoft started in late 1980s with WPS Office, PC office software, and a Chinese character card (a chipset for translating the English operating environment for personal computers into Chinese). WPS was one of the first office software products in China but few Chinese users would adopt it when better-developed, pirated (and therefore essentially free) Microsoft Office suites were widely available. It is believed that only Chinese government organizations, out of security concerns, are using WPS.

After WPS, the company would develop more software products, in categories such as anti-virus and language translation. All, including WPS, were at a fee, but now all are for free. This has to do with the fact that software has no marginal cost so prices can keep declining. Also it’s because of competition in the Chinese market. Kingsoft’s anti-virus product was forced to stop charging when Qihoo 360 began offering their security product for free. After gaining a huge user base through the free product, Qihoo has managed to monetize it. The rest anti-virus products, including Kingsofts, were almost put of business.

In 1996 Kingsoft began developing games which would become its long-term major revenue stream. China’s gaming market now is both highly competitive and fragmented. Chinese developers began to see meaningful revenues from mobile gaming in 2013. So far there aren’t definite market leaders. Xiaomi invested US$20 million in Kingsoft’s gaming business in early this year for mobile game development. It is believed Xiaomi users will be the major audience of Kingsoft mobile games.

Xiaomi’s leading co-founder and CEO Lei Jun joined Kingsoft in 1992. He was appointed CEO and president in 2001 but resigned in 2007. In 2011, Zhang Hongjiang, former CTO for Microsoft Asia-Pacific Research and Development Group and managing director of the Microsoft Advanced Technology Center was introduced as CEO, after Qiu Bojun, founding lead and then CEO and chairman of Kingsoft retired. That’s when Kingsoft named Lei Jun chairman of the board.

 

Editing by Mike Cormavk (@bucketoftongues)