Monday, Nov 24, 2014, 5:02 PM CST – China

Economy

Mobile Internet

Digital Warfare

As smartphones continue to outpace personal computers in user number growth, China’s IT giants are racing to redefine their territory in the mobile Internet market

Robin Li

Jack Ma

Pony Ma

People tend to use taxi-calling apps for discounts Photo by IC

"He who controls the three fragmented hours will own the Internet of the future” is a truism popular among Chinese IT professionals.

The “three fragmented hours” refers to the amount of free time that Chinese people, under pressure from the quickening pace of life, have to themselves – an aggregate length of time often scattered in minute-long intervals, such as while commuting or in the washroom. This change has helped pave the way for the rapid growth in the popularity of smartphones – according to analysts’ prediction, China would be home to over 600 million smartphone users by the end of 2013, leading many to predict that mobile Internet services will one day overtake traditional ones.

In China, the traditional online services market is currently dominated by the country’s three IT giants: Baidu, Alibaba and Tencent (collectively known as BAT). Baidu leads the online search market, Alibaba leads in e-commerce with its shopping platform Taobao and third-party payments service Alipay, and Tencent leads social networking with its ubiquitous QQ desktop instant messenger service.

This delineation, however, is beginning to fracture in the mobile Internet age, particularly since the launch of Tencent’s WeChat, a popular smartphone messaging app that incorporates social networking, games and, most recently, online payments. With over 270 million monthly active users, WeChat’s rapid success and aggressive expansion strategy have provoked its competitors, especially Alibaba and Baidu, to join the race to dominate China’s mobile Internet.

Dark Horse

Two years ago, when Tencent launched WeChat, originally a copycat of Canadian-developed Kik Messenger, the exponential growth in Chinese smartphone user numbers was just beginning.

Though not the first Chinese smartphone messaging app, WeChat enjoyed the significant advantage of access to users of Tencent’s flagship desktop messenger QQ, which, according to Tencent’s fiscal report, has acquired over 800 million monthly active users since its launch 15 years ago. In the second version of WeChat, Tencent enabled WeChat users to import their existing QQ buddy lists, bringing the number of WeChat users up to 200 million within one year.

In the following version, WeChat further expanded its friend-finding capabilities with a location-based service (LBS) function that allowed users to connect with other WeChat users by shaking their phones, thereby discovering other users in the surrounding area who were shaking their phones at the same time. While some criticized the function for encouraging the solicitation of extramarital affairs and casual sex, the ability to connect with strangers resulted in accelerated growth in WeChat’s user numbers.

Now, several versions later, WeChat has expanded beyond person-to-person networking by opening its platform to commercial and public services. According to Zhang Ying, WeChat’s deputy product manager, more than two million banks, media outlets, companies, organizations and government departments have registered public accounts on WeChat, and many provide services via the mobile platform. For example, in Guangzhou, vehicle owners can use the Guangzhou traffic police’s WeChat account to search the Ministry of Transport database for vehicle test results.

Boosted by these value-added functions, WeChat has reportedly seen its registered users reach 600 million in 2013, 100 million of which were based outside of China. By September 2013, Tencent’s market value had exceeded US$100 billion, with WeChat believed to be a key component in the company’s mobile Internet strategy. 

Counterattack        

Despite the growth in WeChat users, Tencent’s stock price remained relatively low for some time. Investors remained doubtful of the app’s prospects for monetization until the latter part of 2013 when the company integrated an array of new functions and services into the app, and began carving out a viable profit model with Weizhifu (literally “micropayment”), Tencent’s mobile payment tool that launched the same year.

This came as a clear challenge to Alibaba, which has dominated the online third-party payment business for many years. “The penguin [Tencent’s corporate mascot] has walked out of the Antarctic. They are trying to adapt to hot weather, and to force the world to adapt to their preferred conditions too. It is time for Ali to hit out, either on the offensive or the defensive,” Jack Ma, founder of Alibaba, reportedly warned his employees in an internal email.

In fact, Alibaba entered the mobile Internet market long ago, launching its online shopping and payments wings on smartphones. However, the lack of social networking capabilities, which have proven to be highly desirable among mobile Internet users, meant Alibaba’s applications were not as popular as Tencent’s.

In September 2013, Alibaba launched Laiwang, a messaging app, in an attempt to bind users to its other applications.

According to Zou Mengrui, Laiwang’s product manager, the app aims to offer alternative services to WeChat, rather than engaging in direct competition. “WeChat focuses more on interaction between acquaintances, while Laiwang intends to provide an online community culture through the ‘zhadui’ [interests-based discussion groups] function,” he told NewsChina.

Alibaba’s data shows that over 100,000 zhadui groups have been registered on Laiwang, 1,500 of which have over 1,000 members. Laiwang also incorporates a microblogging feature, and has enlisted a number of celebrities from the culture and entertainment industries.

By December 2013, Laiwang had more than 10 million registered users, a number which the company claims is still growing rapidly. Although its current user base is far from enough to threaten WeChat’s dominance, Jack Ma of Alibaba regards it an indispensable tool to secure the company’s territory and to facilitate development.

“While Laiwang currently has shortcomings and lags far behind WeChat…We have to take measures right now to re-shape the mobile Internet … We have to challenge the dominant power, no matter how weak we are and how many obstacles we face. Sleep well tonight, and begin the fight again tomorrow,” he posted publicly in Laiwang on January.

Merger Rush

Due to its lack of a huge user base like that of WeChat, Alibaba, according to analysts, has adopted a “multiple strategy model” towards mobile Internet business development, challenging its competitors on a variety of different fronts.

Besides purchasing an 18 percent holding in China’s Twitter equivalent Sina Weibo to provide another channel for its payment service Alipay, Alibaba is also planning a buyout of AutoNavi’s Amap, China’s leading free navigation service, to promote its O2O (online to offline) business. In June 2013, Alipay used a finance company it had acquired to facilitate the launch of Yu E Bao, a banking service through which users can buy Alibaba financial products using their Alipay account. Branding itself as “a wallet that makes money,” Yu E Bao’s trade volume had reportedly exceeded 400 billion yuan (US$66bn) by February 2014. iResearch, a leading Chinese IT consultancy, revealed that Alipay occupied 75 percent of the mobile payments market in Q3 of 2013.

However, Alibaba was beaten by Baidu in bidding for 91 Wireless, China’s biggest distribution platform of third-party mobile applications, an acquisition that many consider to be Baidu’s most aggressive move in the mobile Internet market to date. The search giant set a new record for Internet company mergers, spending US$1.9 billion to acquire 57.41 percent of 91 Wireless, compared to US$16,700 that NetDragon Websoft, 91 Wireless’s former owner, paid for the company six years ago.

“[Compared to the other IT giants], Baidu reacted very slowly to the rise of mobile Internet. It is in a race against time, but has deep pockets…the price is really too high [compared to 91 Wireless’s market value], but in the context of Baidu’s mobile strategy, it’s worth it,” commented Chinese business newspaper the 21st Century Business Herald.

Another major Baidu purchase in 2013 was the US$379 million acquisition of the video website PPStream, which it then integrated into iQIYI, another video website Baidu had purchased earlier. Recently, iQIYI has purchased the exclusive online rights to broadcast the popular Chinese sitcom iPartment 4, attracting a great many new users to the application. Analysts believe the expanding number of iQIYI users will bolster Baidu’s dominance of mobile video, a potentially huge market given the imminent rollout of 4G (fourth-generation mobile communications technology) in China.

Tencent has also refused to stick to its traditional domain. In 2012, the company purchased e-commerce website yixun.com, drawing new battle lines with Alibaba. In September 2013, Tencent purchased over a 40 percent share in Sougou, a search engine, at US$450 million, a challenge to Baidu and Qihoo 360, China’s top two web search companies. Liu Zhiping, president of Tencent, reportedly revealed at an internal meeting that although Tencent performed very poorly in desktop search, it would not abandon mobile search, since a clear leader was yet to emerge.

Dimmed Bounds

The BAT companies have a long history of competition in traditional Internet service sectors. For example, Tencent launched a C2C e-commerce website paipai.com through its QQ platform, but ultimately failed to compete with Alibaba’s Taobao. Somewhat less courteously, Alibaba removed the Baidu-powered search function from its e-commerce website and launched its own search engine, restricted to within the Alibaba empire.

For years, the dominant powers have kept to their respective domains, remaining careful not to overstep their limits. The rise of mobile Internet, however, has seen this unspoken truce disintegrate. “Given the fragmentation of users’ free time, integrated functions are more valuable in mobile Internet. Therefore, service providers will have to expand their services and integrate them into their mobile Internet platforms,” explained iResearch analyst Liu Leiming.

Alibaba and Tencent are currently engaged in fierce competition for taxi-calling services. Collaborating with competing mobile taxi-calling companies, both have encouraged users to call taxis through their respective apps, offering discounts on fares paid with their mobile payment tools.

Although competition on discounts means that both are losing money, taxi functions have helped increase user numbers for their respective mobile payment services.

According to Zhang Jing, the deputy operation director of Tencent’s taxi-calling service, over 5000 taxi rides were arranged through WeChat in the service’s first 12 hours on the market, and 25 percent of users registered with Tencent’s payment service to pay their fare.

“Tencent plans to build WeChat into an open platform, welcoming various innovations from outside of Tencent,” Pony Ma, founder of Tencent, once told the media.

His intention tallies with Alibaba’s efforts on another O2O app under its brand, Taodiandian, a food delivery service for smartphones, which allows users to order delivery meals from nearby restaurants, and pay with Alipay.

According to Wang Yulei, the app’s product manager, Taodiandian connects an array of Alibaba’s mobile applications – Alipay payments, Amap, and Laiwang’s social networking functions. “Catering is just one of our entries [into mobile Internet], we aim to extend our services to various other fields related to local life,” Wang told NewsChina.

“[In 2013,] IT powers have finished dominating their respective specialist areas in mobile Internet...in the following year, they will focus on more diversified services to seize user resources,” predicted iResearch in its report on the development of mobile Internet.

Although analysts are still arguing about the business models of mobile Internet services, the subversive rise of mobile Internet seems to have slowed the decline of China’s IT powers.

“We are all irrevocably invested in the future, though we may suffer losses in profits,” said Liu Zhiping, president of Tencent.

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