Do Chinese internet users need another Facebook? Probably not: An analysis of the regulatory and market conditions for the Chinese internet

2016 Annenberg-Oxford Media Policy Summer Institute participant and PhD student at York University and researcher for Canadian Media Concentration Research Project, Lianrui Jia, is researching Post-WTO Internet policies in China – in particular, how the country is supporting and regulating its telecommunication and Internet industry. In an interview with 2016 CGCS visiting scholar Till Waescher she discusses the growing importance of China’s online companies both domestically and internationally, their ambivalent relationship with the Communist Party, and the prospects of U.S. internet companies’ re-entry into the Chinese market.

Your research focuses on media concentration in general and the political economy of Chinese internet companies in particular. Describe the rise of Tencent, Alibaba, and Baidu in the last five years in terms of revenue, traffic and user numbers. How do these companies fare in comparison with their U.S. counterparts?

Baidu, Alibaba, and Tencent (BAT) are now the biggest three Chinese Internet companies. Due to vertical and horizontal integration these three have become behemoths in their respective areas (Baidu in search, Alibaba in e-commerce, and Tencent in social media and gaming). All three are public companies listed on NASDAQ, and they have generated some pretty staggering numbers. Revenue wise, BAT have achieved, on average, nearly three folds of revenue growth from 2011 to 2015, with Baidu’s revenue growing from 2,303 million to 10,247.6 million (357.8% increase), Alibaba from 3181.9 million to 12,293 million (280.5% increase), and Tencent from 4528 million to 102,863 million RMB (261% increase). Alibaba’s IPO was the world’s biggest at the time it went public in September 2014, valuing at 25 billion. On September 5th, 2016, Tencent became the most valuable company in Asia with a market capitalization of 255 billion, surpassing Alibaba’s 250 billion. Compared to their U.S counterparts Google, Amazon, and Facebook, BAT’s market capitalization is substantially smaller, although they have been slowly catching up amidst the fluctuations.

In terms of users, Tencent’s online chat service QQ and mobile messaging app WeChat had 853.1 and 697 million monthly active users (MAU) in 2015, respectively. For these two products combined, there was a roughly 500 million MAUs increase in the last three years. In 2015, Baidu occupied 85.7% of the search engine market with 657 million monthly active users. Alibaba had 350 million customers in 2015, up from 231 million in 2012. This substantial growth is underpinned by the growth in Internet population in China. In 2011, there were 513 million users online; in 2015, there were 688 million. In particular, the number of mobile internet users has grown exponentially: in 2011, only 69.3% were mobile users but in 2015, 90.1% of internet users were mobile users as well.

However, the most notable difference between these Chinese companies and their U.S. counterparts is that Chinese companies derive almost all of their revenue from the domestic market. In other words, Chinese internet companies are not as global as the U.S ones, in terms of revenue distribution, users, or product reach. For example, Google, in 2015, generated 54% of its revenue internationally, and nearly half of Facebook’s revenue (49.9%) comes from markets outside the U.S.

To increase revenue, Chinese companies have begun to expand globally. As CGCS Internet Policy Observatory affiliate Sarah Logan pointed out in a Chinese companies’ investments outside China have faced scrutiny from the public and regulators due to the companies’ close ties to the Communist Party. Do you think public companies such as Baidu and Tencent, whose executives have to answer to international shareholders, can and will change or rethink the nature of their relationship with the Chinese government in order to further grow internationally?

Sarah Logan’s piece is an excellent study into the conundrum that Chinese Internet companies have to face in the course of global expansion: the process is always embedded in and influenced by geopolitics. I do not think companies like Baidu and Tencent will change or rethink their relationship with the Chinese government, at least not in a drastic way. First of all, the home market is too important. Over 90 percent of revenue for Baidu and Tencent comes from mainland China. In their annual report in 2015, Alibaba did not report any international revenue because it was too insignificant. Their dominance in the domestic market hinges upon their experience in dealing with the government for well over a decade, and they will not risk or break it for the sole purpose of gaining a larger foothold in overseas market.

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