- Biden's administration wants to close a loophole that gives Chinese firms access to restricted tech.
- Chinese companies get the technology by using advanced US cloud services.
- Most US cloud companies won't be too hurt except perhaps Oracle, which runs TikTok.
US cloud computing companies are about to be the latest target in the discord between the Biden administration and China. And, if a new proposal by the administration passes, Oracle could be the one most hurt.
The administration wants to close a loophole that restricts US companies from exporting artificial intelligence and other advanced supercomputing technologies to Chinese companies, reports the Wall Street Journal. That loophole involves cloud computing companies. Chinese companies don't need to import AI technologies to use them. They merely have to pay for cloud computing services offered by the largest cloud providers.
The new rule would require the US to grant permission to American cloud companies to provide such services to Chinese companies to run AI models.
For the most part, this rule won't have a material impact on the biggest cloud computing providers like Amazon Web Services, Google, or Microsoft, Bernstein analyst Mark Moerdler points out in a research note about the situation. Most of the time, cloud customers rent from data centers located in the country or region where they serve customers. And American companies are fairly squeezed out of offering such services to Chinese companies.
Microsoft, for instance, has a separate business entity called 21Vianet to offer services in China. This network is not only physically separated from the rest of its massive Azure cloud infrastructure, but it is mostly attractive to non-Chinese companies wanting access to China's market. Chinese companies have plenty of local cloud providers to use for their cloud computing needs, like Tencent and Alibaba Cloud.
The one cloud provider that could be most caught in the uncomfortable crosshairs is Oracle. Oracle is the cloud provider for TikTok's US operations, and when it won TikTok's US cloud business in 2020, it announced that it had also taken a minority ownership stake in TikTok Global. TikTok's majority owner is Chinese parent company ByteDance.
Moerdler believes that the worst case scenario is TikTok could be pressured into using a non-US cloud provider's cloud, should it need advanced AI and supercomputer tech, and the government refuses.
Even if that unlikely circumstance would come to pass, it could be a shoulder shrug for Oracle at this point in its transformation into a cloud competitor.
Oracle doesn't disclose how much of its cloud business revenue is generated from TikTok, but Moerdler isn't worried that it will be material. Oracle just reached an all-time record of nearly $50 billion in revenue for its fiscal year 2023, it announced in June. Much of that, Oracle's financials reveal, comes from cloud software that Oracle sells to its giant roster of customers, not from a company like TikTok using Oracle's cloud to run its own software.
Still, Oracle uses its TikTok contract much like it uses its Zoom contract – as a big name that proves its cloud can handle even a massive number of users serving up video, the most difficult type of data.
Oracle is investing heavily in beefing up its cloud for AI customers. It partnered with AI chipmaker Nvidia to offer a cloud AI supercomputing service. It's spending "billions" on advanced chips from Nvidia and other partners like Ampere and AMD to build such services, its chairman and CTO Larry Ellison said. That's exactly the kinds of high-end US-built advanced technology that President Joe Biden wants to keep away from Beijing.
Oracle and Moerdler did not immediately respond to requests for comment.
Are you an Oracle insider with insight to share? Reach Julie Bort through email, [email protected], encrypted chat app Signal at 970-430-6112 or DM on Twitter @julie188 using a non-work device.