M A R K E T I N S I G H T

Finding a Mobile Business Model: Lessons from China

By Lawrence Lundy - Consultant ICT

Frost & Sullivan | Market Insight

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FINDING A MOBILE BUSINESS MODEL: LESSONS FROM CHINA

With 590.6 million Internet users, China’s online community is larger than the actual population ofalmost any country; India is the sole exception. However, this number only constitutes a penetrationrate of 44.1%1. The second largest population of Internet users comes from the United States, with254 million, less than half of China’s, with a penetration rate of 85% for adults and 95% for teenagers.Combine these numbers with the fact that China has overtaken the United States as both the world’slargest eCommerce market and the world’s largest smartphone market to see that China offers Internetcompanies unparalleled growth potential.

China has, however, unique regulatory dynamics that make tapping into this huge market extremely difficult for Western Internet companies. Social behemoths Facebook and Twitter are banned by censors,and Amazon and eBay have a minimal presence with their website access intermittently blocked orthrottled, rendering them virtually unusable. Google’s struggles with Chinese censorship demands haveresulted in a fractious relationship with the government, severely curtailing the company’s attempts toprovide its core search product in China. Where these Western companies dominate the rest of theworld, domestic companies dominate China: Alibaba dominates eCommerce, Tencent controls socialmedia, Baidu rules search, and Sina leads Web portals.

The next battleground for these Chinese giants is mCommerce. The company that manages to mostsuccessfully execute could be the first to truly monetize mobile globally in a sustainable way that generates profits equal to, if not greater than, those from the PC-era.

Tencent, the social network that dominates PC and mobile

Tencent is a diversified Internet company that generated revenues of $7 billion in 2012, making it theforth-largest Internet company in the world after Google, Amazon and eBay, with greater revenues andprofit than Facebook. The company’s first core product was QQ, an instant-messaging service modelledon ICQ, the Israeli messaging service bought by AOL. While Tencent initially generated revenues throughadvertising and by charging for premium features, it now offers a huge variety of services, includingsocial networks, Web portals, eCommerce, and online multiplayer games.

Alibaba’s dominance in eCommerce has yet to be replicated on mobile

Alibaba is China’s largest eCommerce company, with revenues of $4.1 billion in 2012. The companyplans to go public in 2014, with estimates suggesting a valuation of between $55 billion and $120 billion2.The company operates three main eCommerce platforms catering to different audiences. Alibaba.comis a business-to-business trading platform; Taobao is an eBay-like consumer-to-consumer platform; andTmall.com enables retailers to reach consumers directly. In addition to its eCommerce platforms, Alibabaoffers a variety of other services, including a Groupon-like, time-sensitive discounting website calledJuhuasuan.com and a third-party, online-payment platform similar to PayPal called Alipay. The companyalso recently moved into the social space with Laiwang to compete with Tencent’s QZone, and it hasan 18% stake in Sina Weibo, the most popular micro-blogging site in China.

1Desilver, Drew, “China has more internet users than any other country,” Pew Research Center, http://www.pewre-search.org/fact-tank/2013/12/02/china-has-more-internet-users-than-any-other-country/ [Accessed on 05/01/14] 2The Economist, “Tencent’s worth” http://www.economist.com/news/business/21586557-chinese-internet-firm-finds-better-way-make-money-tencents-worth [Accessed 06/01/14]

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Frost & Sullivan | Market Insight

The blurring of virtual and real-world transactions has pitted Tencent against Alibaba

Whilst Alibaba and Tencent build businesses around very different Internet needs, the move to mobilehas these giants of the Internet now facing off against each other in the mCommerce space. Alibaba has millions of credit card details, transaction histories, and trusting relationships with buyersand sellers alike, whereas Tencent has millions of social accounts and engaged mobile users.

Comparisons to Western companies are not easy. In the West, for example, Facebook is the de factosocial network on the PC; however, its transition to mobile has not been as smooth as Tencents’. Facebook lacks the dominant social app that Tencent has with WeChat. For its part, Alibaba can be seenas an amalgam of Amazon and eBay, but in fact is more dominant than either in eCommerce. That is, itsdominance prevents Baidu from having the same monopoly over search that Google has in the West.

Tencent has certainly been more effective at monetizing mobile than Alibaba has, and arguably more effective than any company, including Google and Facebook, who both rely on advertising. Tencent hasbeen extremely successful at selling virtual goods to users and understands that the extension of thisstrategy is to enable users to make purchases offline with Tenpay. Alibaba’s business model for Tmall,with rents from storefronts and commissions, can be adapted for mobile, but the revenues from advertising on Taobao will be hard to replicate. However, with Alipay, the company is developing a verystrong payment platform that is already attracting the interest of retailers and merchants. Tencent hasthe buyers’ attention, whilst Alibaba has the sellers’ attention. Frost & Sullivan believes that Alibaba willcontinue to invest in social features to attract buyers, and Tencent will continue to invest in its Tenpayplatform and partnerships with retailers. With a growing Internet population, increasing smartphonepenetration, and a growing eCommerce market, the revenue potential for mCommerce is boundless.

For more information on Frost & Sullivan’s Mobile research, please contact the author:

Lawrence Lundy: lawrence.lundy@frost.com Join our LinkedIn group: Future Growth Opportunities in ICT Follow meon Twitter:@lawrencelundy Follow uso n slideshare: FrostandSullivan

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