I recently finished reading former Secretary of Treasury Hank Paulson's terrific book on China, appropriately named "Dealing with China". His recount of doing business in China as a Goldman Sachs investment banker got me thinking about just how modernized China's economy has become, despite it's vastly different political overhang. Capitalism in the U.S. facilitates healthy competition but we have a tendency towards monopolies and oligopolies. Over time, large industries tend to consolidate and big companies keep getting bigger and bigger until anti-trust issues arise. China is almost the inverse of the U.S. in some sense.
Historically, there have been many government supported entities or state owned enterprises (SOEs) with a more recent shift towards healthy competition, that is, healthy domestic competition, often willed by the government through brute force. China's internet sector, in particular the burgeoning mobile ecosystem, has been a great case study in China's move to become a modern, global economy. Let's sample four key Internet sectors and see what makes China's Internet and mobile ecosystem unique:
[Note: all data from Wall Street research reports or public news]
China - Internet Explorer, Qihoo, Chrome and Safari are the dominant players in China, but there are respectable percentages put up by the likes of Sogou (6.0%), Tencent (5.8%), UCweb (2.1%), Maxthon (1.3%), Cheetah (1.1%) and Firefox (0.8%). Keep in mind that with almost 700M internet users in China, a 1% market share implies 7M users, not a paltry sum.
US - Four main browsers dominate the market - Internet Explorer, Chrome, Safari and FireFox. I have also seen alternative estimates where Chrome has the dominant market share but the takeaway is the same in that there are four key players that have a stranglehold on the market.
China - UCWeb (acq. by Alibaba) and Tencent are both very strong with 75% of the market between them, but Baidu and Opera both have very respectable market shares. Smaller players like Qihoo, Dolphin and others still grab anywhere from 1-5%. China has about 550M mobile internet users so just 2% market share 11M users, nothing to sneeze at. It's worth noting that in China the leaders in the desktop browser market (Microsoft, Qihoo, Apple, Google) are entirely different than the mobile browser leaders (Alibaba/UCWeb, Tencent, Baidu, Opera). This is in stark contrast to the US where aside from Internet explorer on the desktop, Google and Apple dominate both mediums.
US - Apple and Google totally dominate the market between Safari, Chrome and the Android browser. Internet Explorer has not gotten their act together on mobile, and Opera is very small.
China - Highly fragmented with major app stores operated by OS operators (Google Play, Windows Phone), phone producers (Samsung, Motorola, Nokia), mobile operators (China Mobile), and 3rd party app centers (Qihoo, Tencent, Baidu).
US - Again, just as in the browser market, Apple and Google own the entire market. Google has more market share by number of downloads but naturally iOS users monetize better. Let's call it 50/50.
China - China's search market actually bears a strong resemblance to the US. There is one dominant player (Baidu) with two strong alternatives (Qihoo, Sougou).
US- Google dominates, followed by a more distant Microsoft and Yahoo.
If we were to observe other categories like messaging apps, directory pages, web gaming and others, we would see similar trends. Still, just looking at four key Internet sectors (desktop browsers, mobile browsers, app stores and search), we can observe that China has an incredibly competitive Internet ecosystem, much more so than what we currently have in the US. Microsoft, Google and Apple did well in the desktop market, but Qihoo was able to rise near the top. In search, although Baidu dominates, Qihoo has been able to leverage their browser and security into a viable search competitor. However, on mobile, the Tencent and UCWeb were able to build the strongest mobile browser businesses, and in the app store marketplace no one has been able to monopolize. In the US, it's uncanny how often Apple and Google suck at the air out of each and every market.
Additional Thoughts - China's Future
In the US, I've noticed that many of our big user base businesses like WhatsApp, Instagram, Snapchat choose the path of user growth vs monetization more often than not. We see a lot of single app businesses grow their user base as quickly as they can and then either get acquired before ever having to start the monetization engine. I have come to admire China Internet's playbook which feels quite different from what we've seen at home. The playbook is: 1) gather a large user base via a single product or service, 2) cross-promote user base into others products/services, 3) retain and ensure user stickiness, and 4) monetize traffic. Companies like Qihoo and Tencent have pioneered this strategy and it is now being leveraged by businesses across the spectrum. Let's look at a quick case study on Qihoo:
After gaining good traction from it's 360 Safeguard product in 2006, Qihoo launched its desktop browser in 2008, then introduced it's free anti-virus software in 2009. The company leveraged its user base from its core security products to cross-promote its browser and directory site (Hao.360), eventually expanding into search, web game operations, mobile browser and app store. Due to the large Internet user base in China, Qihoo was able to acquire hundreds of millions of users on their core security products alone. This gave them a good base with which to expand into other products and services. They were then able to monetize in a variety of different ways, some of which are fairly unique to China such as directory links, web gaming, emoji/sticker monetization, etc.
A similar playbook has played out across other large Internet companies like Tencent, Sina, Baidu, Alibaba and others. We're also seeing this to a lesser extent with "super tool" businesses like Cheetah Mobile (huge user base with tool apps like Battery Doctors, anti-virus, etc), as well as various mobile "launchers", keyboards apps, etc. I expect that we will continue to see China's own twist on industries we are familiar with in the US such as ride sharing, classifieds, social commerce, on-demand delivery companies and more. Mary Meeker detailed some of these emerging categories in her annual Internet Trends Report, and Max Motschwiller from Meritech had a good post on how some of these "China-first" business models might be adopted by U.S. companies.
I think that we will continue to see healthy competition and fierce rivalries in China. Back in 2010, Qihoo's fierce rivalry with Tencent flared up to the point where Tencent was having their QQ Instant Messenger users uninstall Qihoo Safeguard or else the user might be restricted from logging into QQ. This anti-competitive behavior did not go over well with China's Ministry of Industry and Information Technology (MIIT), causing them to circulate a notice to both parties criticizing them for "improper competitive behavior". It also required the companies to apologize to the public within 5 days of publication of the statement and to ensure proper customer services. I repeat, the Chinese government made Tencent and Qihoo APOLOGIZE TO ONE ANOTHER (news article here). Can you imagine this happening with Apple and Google in the U.S.?!
About a third of the top 20 internet companies in the world by market cap are now Chinese-based. I for one expect this trend to continue. However, we need to realize that the fate of U.S. and China's economies are inextricably linked. When one coughs, the other will sneeze. As was described in Hank Paulson's book, China first changed their own country to get tens of millions of people, if not hundreds of millions, out of poverty and into economic growth. Now, China has entered the modern global economy in a meaningful way and the US is one of the biggest benefactors. Now that China has an emerging middle class and needs to spur more consumption domestically, I expect we will see a much more innovative China, with many more examples of companies like Qihoo and Tencent, and perhaps a greater opportunity for U.S. companies to play in China (Uber seems to be doing just fine). Hopefully our countries can learn from one another, after all, we're in it together.