Western visitors to China frequently find themselves baffled by the deep level of integration of services, often allowing Chinese internet users to handle several errands on one or two platforms. WeChat in particular has been covered in-depth by Western media over the last two years. In some cases, it is even predicted to be China’s future operating system given its features of mobile payment wallet, official accounts (comparable to certified pages on Facebook) and mini-programs (light versions of applications, running in the WeChat app; almost 3,000 as of July 2018).
Indeed, the extensive coverage from the last years hit a point. More so, WeChat is far from being the only mega platform in China. In fact, the existence of mega platforms in China can be seen as a natural extension of the existence of the “two camps”, namely the ecosystem of e-commerce company Alibaba and the ecosystem of social networking and gaming company Tencent (operator of WeChat). Both having invested massively into other emerging local internet companies in China and abroad. Tencent alone is managing a portfolio of over 600 investments. The dominance of Alibaba and Tencent can be explained by their unique positioning with regards to customer access thanks to control of traffic, given their hundreds of millions of active users. This allows them unique insights based on data and helps to build lasting entry barriers. Thereby, they achieve cash flow and profitability which is rare among the internet giants in China. Recently, the need to choose-either-side of the “two camps” has further been accelerated due to competition in payment services in which the Alipay and WeChat Pay account for 94% of all mobile transactions. Yet, Alipay (launched 2004) is increasingly losing market share to WeChat Pay (launched in 2013). The strategic investments of Alibaba and Tencent into ride hailing, bike sharing and food delivery have often been discussed in the context of gaining market share in the mobile payment market.
In attempting to explain the existence of mega platforms in China, the answer can be derived by the comparison with the Western internet industry where these mega platforms do not exist to the same degree. What differs in China compared to the Western internet industry are three factors: first, the increased level of competition due to higher speed of innovation and implementation, as illustrated by the battle in the bike sharing industry where entrepreneurs were willing to start and investors willing to back more than 60 firms to put around 20 Mio bicycles on China`s streets. Second, the weaker regulation of competition, as seen by the M&A activities in the ride hailing industry including the mergers of Didi Kuaidi and Kuaidi Dache in 2015 and the acquisition of Uber China by Didi Kuaidi in 2016, each time creating monopoly-like structures. And, third, Chinese internet companies are willing to look at customer journeys end to end and allow to lose money in part of it while making money in others, as illustrated by the example of travel giant Ctrip where only some services are truly profitable and yet the others services remain in operations to cover the whole customer journey. These three factors combined allowed the initial formation and maintenance of these platforms. Out of those three, the most important one being the fierce and fast-paced competition in China, where ideas can be copied anytime and implemented elsewhere. Moreover, investors often seem to be willing to support several competitors with financial resources in hope to eventually capture a fair share of users in the world´s most populous country. This is to be seen in combination with the fact that in the by now largest China is the largest VC market globally, so that financial resources are largely available. The playbook of creating mega-platforms to prevent new entrants through organic user growth, M&A or via partnerships, has been observed multiple times in the past. What happens in the process of achieving this “user lock-in”, has been showcased by the many expensive battles in video platforms, commerce, ride hailing, bike sharing and food delivery, among other industries, where billions of RMB were burned.
Alipay is the mobile and online payments platform of e-commerce juggernaut Alibaba. In comes as a stand-alone application and besides its several finance-related applications, it also allows third-party services (often Alibaba-invested companies), those other services include buying movie tickets, hailing a car, finding shared bicycles, ordering food, shopping, booking hotels, etc. Besides that, Alipay has launched a broader effort for its own mini programs this year. On a daily basis, it has more than 200 Mio transactions, and boasts more than 500 Mio active users.
Ctrip is the go-to travel platform for Chinese internet users. Its service offering is broad, allowing for a perfectly integrated user journey with booking everything from trains, flights, hotels, airport transfer, group activities but also social features, including travel tips and rating. Ctrip has more than 300 Mio active users.
Being part of the Tencent camp, JD emerged from an offline retail company into an e-commerce company and later a mega platform itself. Besides the core e-commerce business, it also offers offline retail, O2O services, logistic and financial services. Moreover, partnerships for streaming (i.e. iQiyi), among others, bundled in the JD+ premium service offering allow for the aspired user stickiness. JD has more than 300 Mio active users.
The recently IPO-ed O2O giant Meituan-Dianping is another example of such a mega-platform ecosystem where everything from finding restaurants, group-buying activities, buying tickets, booking trips to hailing a car and finding shared bicycles is possible, truly allowing for an integrated user journey. It has more than 20 Mio daily transactions and more than 300 Mio active users.
字节跳动ByteDance´s今日头条 Toutiao and 抖音 Douyin
The last string of companies announcing a broader venture into mini-programs (and thus its platformitization) is ByteDance, mother company of the popular AI-fueled news service Jinri Toutiao and short-video hit Douyin (internationally known as Tik-Tok). While both platforms are already highly integrated, the idea here is to build both platforms into entertainment hubs and potentially building tighter integrations with commerce. They have 150 Mio and 300 Mio active users, respectively.
So, what does all of that mean for Western observers?
The learnings from the platform strategies of Chinese internet companies should surely be:
Customer access means power and allows for control. Companies can take further steps in enhancing their monetization of customer access via “selling” traffic.
Despite potential data privacy concerns, customers appreciate end-to-end journeys for better customer experience. That said, Western internet companies should seek to vertically integrate in order to allow for those integrated journeys, allowing certain unprofitable offerings for a better overall experience.
Start-ups (and incumbents) have to constantly monitor the development of markets and must follow a smart partnership and investment strategy to forge integrations. The key here is to think “big” and beyond the core competitors.
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