Thinking the unthinkable

The longstanding rivalry between Alibaba and Tencent on China’s internet scene has sometimes been compared to the decades of Cold War tension between the Soviet Union and the United States. Both internet superpowers want to spread their influence. Both have chosen not to fight head-to-head in their core businesses, preferring to wage a series of proxy wars instead. In trying to do so, the duo and their respective ecosystems of portfolio firms have divided much of the Chinese internet sector into two feuding camps.

There have even been comparisons to the contrasting ideologies that separated NATO countries from those of the Warsaw Pact. In this context Tencent has been portrayed as more liberal in its approach and more willing to allow its allies to retain a say in how they run their businesses.

Alibaba is painted as the more authoritarian entity, however, demanding fuller control over the investee companies marching under its flag.

Yet after a stand-off that has lasted for nearly two decades, the duo might be close to calling some kind of truce.

This tantalising possibility has the Chinese internet buzzing. But what has led to the change of heart at the two old foes?

What are the rumours on a rapprochement?

News of a potential detente first filtered through the Western media last week. Citing unnamed sources, the Wall Street Journal reported that Tencent and Alibaba were considering moves to “gradually open up their services to one another”.

That was a reaction from both firms to Beijing’s increasingly heavyweight crackdown, the Wall Street Journal said. The campaign against allegedly anti-competitive behaviour has made both of the behemoths reconsider the “virtual barriers” they have erected around their bread-and-butter operations in recent years.

With more than 1.2 billion monthly active users, Tencent’s messaging service WeChat has a strong claim to being the most important app in China. On the other hand, Alibaba operates the country’s busiest marketplaces in Tmall and Taobao. By the end of March it was reporting over a billion annual active users (AAUs), of which about 240 million were from its growing overseas markets.

But the two ecosystems, Chinese consumers have long lamented, are notoriously incompatible with one another – mostly by design.

Imagine being prevented from sharing Amazon content on WhatsApp or Facebook. In China it’s difficult for netizens to cross between the platforms of the king of e-commerce and the titan of messaging and social media. To share e-commerce listings or recommendations sourced on WeChat in Alibaba’s vast shopping domain, users have to copy code onto their clipboards and then paste it into the Taobao app, for instance. In the other direction, WeChat Pay isn’t an option for paying for goods purchased on Alibaba’s dominant e-commerce platforms. It’s even more troublesome if someone wants to transfer cash from accounts in WeChat Pay to those in Alipay, or vice versa.

Yet both companies have this month been reported to be “separately working on plans” to loosen some of these curbs and make life more convenient for consumers. Both have chosen neither to confirm nor deny the news, prompting widespread reports from local media outlets that the duo is close to reaching a “truce of the century”. Some news sites also noted that initial steps had already been taken: Alibaba’s secondhand marketplace Xianyu and its supermarket chain Freshippo can now be accessed via WeChat’s mini-programmes, for instance (a Tencent platform with similarities to Apple’s App Store).

“It may not happen anytime soon, although many users are already applauding these developments. There has been a giant Berlin Wall between the two heavyweights, which has made people on both sides suffer for too long,” a tech blogger wrote on Huxiu.com.

Is this a ‘forced marriage’ amid Beijing’s antitrust enforcement?

The plans being hatched at Alibaba and Tencent are “still fluid” (according, again, to the Wall Street Journaland). Both firms may still opt to largely maintain the status quo.

Yet informed observers believe some key changes are inevitable, because of the Chinese government’s continuing intervention in the internet and tech scene. In April the State Administration for Market Regulation (SAMR) slapped a record Rmb18.2 billion ($2.8 billion) fine on Alibaba for monopolistic behaviour, particularly a strategy known as “pick one out of two” that forbids retailers from setting up shop on rival online platforms (see WiC536).

The same antitrust regulator said this month that it had vetoed the merger between US-listed Huya and Douyu, two leading eSports livestreaming platforms that are both backed by Tencent (see this week’s “Internet and Tech”).

More state agencies have since joined the fray, taking aim at the sector’s leading players. Citing national security concerns over data privacy, the Cyberspace Administration of China (CAC) caused shockwaves earlier this month by blocking Didi from app stores just days after the ride-hailing firm’s New York listing (see WiC548).

Last week officials from seven central authorities, including the CAC, the SAMR and the ministries of public security, transport and land resources, jointly raided Didi’s offices to conduct further “onsite cybersecurity reviews”.

The Ministry of Industry and Information Technology has stepped up too. Last week it announced it had ordered app developers to do away with the advertisements that pop up whenever an app is opened, typically forcing users to view them for a few seconds (highly lucrative for the app).

At a higher level the signal is that the Chinese government wants to curb the colossal influence of major internet platforms, making life easier for the individuals and smaller businesses that rely on their services. As the leading powerbrokers, Alibaba and Tencent are facing increasing pressure to open up their systems and marketplaces to more competition, not only from each other but also from less influential competitors.

(Apart from finally accepting WeChat Pay as a payments tool on more of its online acreage, Alibaba is said to be working on plans to add another digital payment gateway to its Tmall and Taobao platforms – this time operated by state-owned UnionPay – currently Alipay and WeChat Pay account for more than 90% of China’s vast mobile payments market).

Is a truce going to be beneficial to both firms?

Any cessation of hostilities is likely to be the result of some hard negotiation. A complex equation will be playing out at both sets of headquarters, as each firm weighs the implications of a wider shake-up across the sector.

On one side is China’s busiest e-commerce marketplace. On the other is the country’s most active social media app. Should both open up to each other, Tencent will have to forgo more of its competitive advantage than its arch-rival, reckons Phoenix News.

The rationale is simple. As China’s ubiquitous instant messaging app, WeChat is an undisputed leader in social media (more on this later). Many see it as the “de facto operating system” for smartphone users across China and as the gateway to the online world. But the same cannot be said for Tmall or Taobao. In other words, Alibaba’s marketplaces aren’t quite as indispensable for Chinese users. Indeed, Alibaba’s market leading position has been under constant threat from challengers like JD.com and, more recently, Pinduoduo. And both these e-commerce rivals count Tencent as their second biggest shareholder (behind their founding teams).

Even within the digital payments market, Alipay hasn’t forged an unassailable lead over WeChat Pay (Alipay was once the dominant player but the latest estimates put the pair’s market shares at 55% and 32% respectively). The growing number of weishang – or retailers that do more of their trade on WeChat’s ecosystem – also points to a greater vulnerability in Alibaba’s e-commerce business than in previous years. This also underscores why there’s a fundamental difference in the investment preferences of Alibaba and Tencent. Primarily Alibaba has been keen on investing in companies that help to generate ‘traffic’ – as defined by their number of users and also by the ‘stickiness’ of these users to the platform in question. Its goal was to divert more of this audience to its online marketplaces. A prime example of this was Alibaba’s strategic investment in Sina Weibo, the Chinese version of Twitter.

Sourcing third-party traffic has been less of a concern for Tencent, because WeChat already generates so much of activity. It disclosed in January this year that daily active users (DAUs) on the app had surpassed 1.09 billion. Many of them spend hours a day browsing Tencent’s services. That means that Tencent’s strategists are looking more for portfolio firms that can help to monetise more of WeChat’s vast traffic. This partly explains its recent focus on eSports, as well investments in e-commerce players like JD.com and Pinduoduo.

A selective alliance between the two arch-rivals would allow either firm to draw on the other’s strengths. Alibaba might capture more of the audience flowing through WeChat, while Tencent could earn more fees from its traffic if it struck a savvy revenue share with China’s biggest marketplace.

Tech news website 36Kr.com says that Tencent will see the chance of grabbing a slice of Alibaba’s business as too good to pass up. Tencent’s market share in internet gaming, its highest-earning unit, has surpassed 50%, it points out. Growth in gaming is going to get more difficult so it needs to explore other options. And both companies have something to gain by funnelling more of the WeChat audience into Alibaba’s online marketplaces. Gross merchandise value at Alibaba last year was Rmb8 trillion, or about a fifth of China’s total retail sales. That suggests that there is plenty of scope to persuade people to do more of their shopping online with Alibaba.

Who will be most threatened by the Ali-cent, Ten-baba mammoth?

An ecosystem alliance makes sense if it strengthens the majority of companies in the mix. But some of the allies of the two giants won’t be as welcoming of the idea if it weakens their position in the marketplace.

In the trading session following rumours of the potential truce, Pinduoduo’s US-listed shares slumped 6%, for instance. With a focus on less affluent parts of the country, Pinduoduo has emerged as a major challenger to Alibaba. In May it reported that its AAUs had reached 823 million, overtaking Alibaba’s 811 million. That made it China’s largest e-commerce marketplace, Pinduoduo triumphantly claimed.

Consumers glued to Alibaba’s platforms are still spending more than Pinduoduo’s. However, according to Caijing magazine, Alibaba’s customer acquisition costs are nearly Rmb1,000, compared with Pinduoduo’s much lower Rmb200. The difference, of course, owes something to the traffic that arrives at Pinduoduo via its ecosystem partner (and shareholder) Tencent. If Tencent opens up more of its WeChat empire to Alibaba, Pinduoduo could lose a portion of its competitive edge in generating traffic leads to its online bargains.

Another company that will be watching events closely is Bytedance, now valued at more than $400 billion and firmly established as China’s biggest unicorn by some distance. Bytedance is also a rarity as a major player affiliated with neither Tencent or Alibaba. And it has emerged as the biggest challenger to Tencent in winning traffic and time spent by internet users on a single platform.

Just a few years ago netizens were spending more than 50% of their internet time on apps such as WeChat – that was, until the rise of short-videos, led by brands owned by Bytedance. This is a trend we first reported in late 2017 (see WiC383) and which has fuelled the worldwide fervour for TikTok. Its sister app Douyin has been even more disruptive in Chinese social media (see WiC405 for our first piece on its fast-growing appeal). According to 36Kr.com, internet users spent 44% of their time in 2019 using Tencent’s app universe versus 13% in Bytedance’s ecosystem. But the gap had shrunk dramatically by the end of March this year, with 27.8% of time spent on WeChat versus 25.7% on Bytedance apps.

Bytedance and Tencent have clashed repeatedly, including in an ongoing lawsuit in which Tencent is accused of blocking links to Douyin and Toutiao (another Bytedance platform) on WeChat.

Battles like these may have persuaded Tencent that Bytedance is more of a threat than its older Hangzhou-based rival. Talks with Alibaba then take on the flavour of the manoeuvring of the Three Kingdoms era (a period of China’s history that often comes up in business analogies; see WiC305). In this way of thinking the rising Bytedance becomes the expansionist ‘third’ kingdom that the older two kingdoms unite against for their mutual preservation. “Pinduoduo’s active users surpassing Alibaba; and internet users close to spending more time on Bytedance than Tencent: this marks the beginning of a dramatic new chapter for the Chinese internet,” one commentator remarked on a widely forwarded WeChat post. “Both Alibaba and Tencent are having big trouble [fending off their challengers]. So it’s understandable that the duo may seek a truce temporarily.”

Why else is it worth pairing up?

Many of the leading players in the internet sector have pursued a ‘last man standing’ strategy, betting that the survivors of some truly brutal battles will be positioned for tremendous profits. In most cases the assumption was that these conflicts would be waged with little intervention from the government, which seemed willing to leave the online battlefield to Darwinian market forces.

That changed last year when the government entered the fray in force, taking a new interest in regulating the sector. Most analysts agree that talk of a truce between Alibaba and Tencent is also a reaction to Beijing’s more active stance and that the duo is showing willingness to open up its online empires in a bid to ward off more dramatic state intervention. With the government now showing a much sharper set of teeth, a truce between Tencent and Alibaba is also defensive in tone, designed to cushion the growing scrutiny of their pre-eminent positions. The two giants now need to protect themselves from the changes in the political mood and may have decided that this is a bigger priority than waging war on one another.

By aligning their ‘Two Kingdoms’ they’ll be hoping for more clout in what looks like a long struggle ahead – with policymakers in Beijing – for the mastery of China’s internet…

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