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Lessons from China on mobile business models

o Lawrence Lundy
22.05.2014 kl 21:37 | Computerworld Hong Kong

With 590.6 million Internet users, China's online community is larger than the population of many countries on earth. However, this number only constitutes a penetration rate of 44.1%. The second largest population of Internet users comes from the United States, with 254 million (less than half of China's) and a penetration rate of 85% among adults. These numbers indicate China has overtaken the United States, offering Internet companies unparalleled growth potential.

 

With 590.6 million Internet users, China's online community is larger than the population of many countries on earth. However, this number only constitutes a penetration rate of 44.1%. The second largest population of Internet users comes from the United States, with 254 million (less than half of China's) and a penetration rate of 85% among adults. These numbers indicate China has overtaken the United States, offering Internet companies unparalleled growth potential.

China has, however, unique regulatory dynamics that make tapping into this huge market extremely difficult for Western Internet companies. Where these Western companies dominate the rest of the world, domestic companies dominate China: Alibaba dominates e-commerce and Tencent controls social media.

Tencent and Alibaba have strategies clearly converge regarding how to make money on mobile. The next battleground for these Chinese giants is m-commerce. The company that manages to most successfully execute could be the first to truly monetize mobile globally.

Tencent dominates social network

Tencent is a diversified Internet company that generated revenues of US$7 billion in 2012, making it the forth-largest Internet company in the world after Google, Amazon, and eBay, with greater revenues and profit than Facebook.

The company's core products include QQ with over 800 million users; QZone, a social networking site with 712 million users; and WeChat, the mobile messaging service with 272 million monthly users. Unlike Facebook, Tencent has managed to adapt to the mobile shift very smoothly, replicating its success with QQ and QZone on the desktop with WeChat on mobile.

Revenues are generated from WeChat in three ways: premium content such as stickers, filters, emoticons, and themes; brand building through sponsored stickers and official accounts; and in-app purchases and gaming. In-game virtual purchases such as costumes for avatars, extra lives, or new levels contribute a substantial part of Tencent's revenues.

With the rolling out of its transaction platform, TenPay, the company has begun searching revenues beyond the virtual world. This online-to-offline platform now supports purchase for McDonalds, cinema tickets, restaurants, and transportation by purchasing a stake in Didi, a Chinese taxi app. The extended platform suggests that Tencent's strategy is to use WeChat with TenPay as a digital wallet to make both virtual and real-world purchases.

Alibaba's dominance in e-commerce has yet to be replicated on mobile

Alibaba is China's largest e-commerce company, with revenues of $4.1 billion in 2012 and plans to go public in 2014. The company operates three main e-commerce platforms: Alibaba.com is a business-to-business trading platform; Taobao is an eBay-like consumer-to-consumer platform, and Tmall.com enables retailers to reach consumers directly.

With 90% of the market, Taobao is able to make significant revenues from advertisers. Unlike in the West, where the customers' first port-of-call is Google, Chinese customers do not need to go to Baidu first. Alibaba's e-commerce dominance in China is far greater than Amazon's in the West. Tmall is more exclusive than Taobao. It does not see the same volume as Taobao or own the market in the same way. However, due to the quality of the site and its lack of foreign competition, Alibaba is able to collect huge revenues from rents it charges for online storefronts as well as commissions on all purchases.

Both Taobao and Tmall have been able to overcome trust issues from Chinese customers by utilizing Alipay's escrow-based online payment platform, in which money is taken up front from the buyer and held in an escrow account, so vendors can verify the transactions.

Blurring of virtual and real-world transactions

While Alibaba and Tencent build businesses around very different Internet needs, the move to mobile has these two giants facing off against each other in the m-commerce space. Alibaba has millions of credit card details, transaction histories, and trusting relationships with buyers and sellers alike, whereas Tencent has millions of social accounts and engaged mobile users.

Frost & Sullivan believes that Alibaba will continue to invest in social features to attract buyers, and Tencent will continue to invest in their Tenpay platform and partnerships with retailers. With a growing Internet population, increasing smartphone penetration, and a growing e-commerce market, the revenue potential for m-commerce is boundless.

Noted that the views expressed by contributor do not necessarily reflect the views of Computerworld Hong Kong.

Lawrence Lundy is an ICT consultant with Frost & Sullivan. He focuses on providing marketing research and strategy consulting services on the social media, mobile, and Chinese ICT markets.

Keywords: Mobile  
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