Opening the Walled Gardens – A Closer Look

China’s internet platforms, primarily Alibaba and Tencent, have long flourished by building comprehensive and diversified ecosystems. These “super apps” lock users in and keep competitors out – Alibaba’s Taobao and Bytedance’s Douyin links are blocked on Tencent’s WeChat, while WeChat Pay is not a payment option on most of Alibaba’s apps.

That is now set to change.

In mid-September, China’s Ministry of Industry and Information Technology (MIIT) called for a meeting with several of China’s top internet companies to request they stop blocking access to each other’s links on their respective platforms. This has been yet another salvo in the Chinese government’s recent anti-monopoly crackdown.

This likely didn’t come as a surprise.

Earlier this year in July, Alibaba had already pre-emptively suggested offering WeChat Pay as an option on its platforms. Alibaba also applied to Tencent for approval to launch two mini-programs in WeChat: Taobao Deals 陶特, a discounts/deals platform meant to compete head-on with Alibaba’s biggest e-commerce competitor Pinduoduo, and Idle Fish 闲鱼, a C2C secondhand goods marketplace.

What exactly does opening the walled gardens entail?

The full extent of how much interoperability is required between platforms has not actually been spelt out, but we can distil it down to two key areas of interoperability.

1. Traffic – This will be the gamechanger. Traffic that was previously captive to a single ecosystem will now be allowed to flow out to other platforms. The most obvious example: WeChat users being able to directly access Taobao or Douyin links from within WeChat.

2. Payments – Interoperability will simply allow for more payment options enabled on platforms (eg. WeChat Pay being allowed on Alibaba’s apps).

What does it mean for companies?

It is unlikely that payments interoperability will make much of a ripple to the existing Alipay-WeChat Pay duopoly, even as both Tencent and Alibaba reportedly start opening their ecosystems to UnionPay’s mobile payment service. If anything, Tencent will potentially gain an uptick in transaction volume via WeChat Pay on Alibaba’s platforms. However, this is expected to be marginal, since most Chinese users already maintain both Alipay and WeChat Pay accounts. The market will probably still eventually settle into a duopoly equilibrium.

With that, let’s zoom in on the issue of traffic. I illustrate 3 potential scenarios below.

1.     Alibaba gains users and GMV with more traffic directed from WeChat

Most evidently, if Tencent allows Tmall/Taobao links from within WeChat, Alibaba appears to be the immediate winner here with more traffic being directed to its e-commerce platforms. This will likely contribute to a subsequent jump in GMV.

Alibaba, unlike the traffic-rich WeChat, has always been hungry for traffic. Alibaba’s core competency is commerce, which means traffic on its platforms is often purposeful and directed – users are already there with an end in mind. It then follows that Alibaba would want more sources of organic traffic to drive activity on its platforms. We see this in their investments and acquisitions, AutoNavi (mapping)[1], Youku Tudou (video streaming)[2], Sina Weibo (social networking)[3], just to name a few. Alibaba had even tried to create their own instant messaging service in 2013, called Laiwang. Needless to say, despite best efforts to draw users in – each Alibaba employee was tasked to bring in 100 users each in order to qualify for a year-end bonus[4], and then-Chairman Jack Ma even publicly rallied for consumers to switch to Laiwang instead of WeChat – Laiwang flopped miserably.

On the other hand, WeChat’s traffic is latent; users spend time on the platform organically, which creates a vast monetization opportunity. In fact, Tencent has not yet fully monetized WeChat, thus far only dipping its toes into advertising. Even then, the number of ads on WeChat is minimal. We can attribute this to WeChat founder Allen Zhang’s philosophy that focuses on the product’s utility rather than monetization.[5]

At the same time, e-commerce is rapidly evolving. It is no longer solely directed and purpose-driven. Instead, it has increasingly become a social activity – the community becomes important, along with the people buying and sharing information with you. This speaks to the rise of group buying platforms and the incorporation of social elements in e-commerce such as livestreaming and gamification. We see this in Pinduoduo’s exponential growth and emerging e-commerce competitors like Xiaohongshu, Kuaishou and Bytedance threatening Alibaba’s stronghold in the space.

Opening the Tencent walled garden could allow captive traffic within Tencent’s traffic-rich ecosystem to “leak” out to traffic-hungry Alibaba. Alibaba is eager to access this traffic, especially given rising customer acquisition costs (CAC). However, this could potentially commoditize Tencent’s traffic, Tencent’s most valuable asset. We see Tencent already trying to mitigate this by restricting how Taobao links can be shared. To date, Tencent has cited “security concerns”, only allowing Taobao links to be shared in one-to-one chats, but not on WeChat Moments or group chats.

2.     WeChat may become the dominant super app

Already, people in China reportedly spend a third of their total time online on WeChat.[6] Hypothetically, should WeChat truly allow free access to links shared on its platform, it could very well cement WeChat’s position as the dominant super app in China. Alibaba has been trying to replicate this strategy, positioning Alipay as the super app and bringing on other services as mini programs that can be accessed within Alipay. However, without the social element or the instant messaging use case, it hasn’t caught up with WeChat.

The increasing consumer reliance on WeChat will not be something Alibaba will be thrilled about. Back in 2008, this was the very reason that Alibaba blocked web crawlers from Baidu, Google and Yahoo search engines from indexing its e-commerce site. This was to ensure that Alibaba could hold a monopoly over the entire search, browse and purchase journeys of consumers captive on its platforms and capture primary data accordingly. This has paid off, as Alibaba has used such data to grow its advertising business. Little known to many, Alimama is Alibaba’s digital marketing arm, and it is the Group’s crown jewel, responsible for ~60% of Alibaba’s total revenues today. If users default to WeChat as the dominant platform to discover and browse goods, Alibaba loses its grip on such rich data on user behavior. This will threaten its advertising revenues. Interestingly, we see this dynamic and anxiety also emerging between Amazon and Google.[7]

Aside from that, the more pressing problem is actually the issue of private traffic (私域流量), a phenomenon that has emerged strongly in recent years. Merchants are forced to spend on advertising to stand out amongst hundreds of thousands of competitors selling similar products on platforms like Alibaba’s, pushing up CAC. This has prompted merchants to set up their own channels, mainly WeChat groups, to manage customer relationships and push promotions to them, even directing customers to their standalone online shops instead of their shopfronts on e-commerce platforms. We see this with the rise of e-commerce enablers like Youzan and Baozun who help brands manage their independent shops and channels. As consumer reliance on WeChat grows, it could accelerate the rise of private traffic, and decant consumers off e-commerce platforms, and onto WeChat as a one-stop portal.

Now, not only may Alibaba lose the ability to collect user behavior data on their platforms, it may even lose GMV as transactions increasingly occur off the platform and directly between customers and merchants. Thankfully, with Tencent restricting link-sharing to only in one-to-one chats, this scenario is unlikely to play out just yet.

While Alibaba is faced with the prospect of losing precious data and GMV, strengthening WeChat’s dominance in the Chinese consumer market could offer Tencent a prime opportunity to monetize its traffic. Today, gaming continues to be Tencent’s main revenue driver, contributing over 50%. Advertising, fintech and enterprise services contribute the rest, but WeChat’s monetization has yet to be fully unlocked, representing a significant potential uptick in growth. Imagine if Tencent were to charge per click for each external link to key platforms (eg. Alibaba/Bytedance platforms), or even better, utilize the primary data lost by Alibaba around user preferences and browsing history to push ads to consumers. Alimama’s success has demonstrated how big Tencent’s advertising revenues could grow, and Tencent is well-poised to capture a slice of Alibaba’s pie, aided by the fact that it now has a direct link to conversion (ie. the transaction, or application scenario, 场景, as it is referred to in China).

WeChat as the dominant app, potentially even for e-commerce, could also provide a welcome boost to Tencent’s enterprise services business. WeCom was built for easy integration with WeChat and designed to enable social commerce. The increased reliance on WeChat and potential interoperability with Alibaba’s e-commerce platforms could increase the attractiveness of WeCom as a social CRM tool for SMEs.

3.     A mixed bag of emotions for other players in the industry

Both Alibaba and Tencent leverage their closed ecosystems to incubate and grow new businesses. These new products/services are shielded from external incumbents on the onset and benefit from first access to these giants’ vast user base and integration with existing products and services (eg. Alipay/WeChat) to grow. The opening of the walled garden may reduce Alibaba’s and Tencent’s space to do this. Say for example, had Alibaba been forced to open its ecosystem to Meituan Dianping from the beginning, Alibaba’s inhouse competitor Ele.me would probably see a smaller market share than it does today. Of course, Alibaba and Tencent could use different tactics, even discounts, to reinforce ecosystem integration and protect its own products and services (again, subject to regulations). But that would admittedly still increase the cost of operations and customer retention.

In the same way, the opening of the walled gardens could impede other large internet companies in their efforts to build competing products, say Bytedance’s interest to build a new e-commerce platform. Without the ability to erect artificial barriers to keep users within the Bytedance ecosystem, consumers could choose to gravitate towards existing dominant platforms Tmall/Taobao, JD.com or Pinduoduo instead. Similarly, companies that partnered Tencent to drive traffic to their platforms may no longer be protected from the king of the jungle that is Alibaba. After all, this partnership with Tencent and the promise of traffic was what helped JD.com and Pinduoduo grow in their early days.

Perhaps overall, it could be hypothesized that with the opening of the walled gardens, it could strengthen the core businesses of these large internet companies, but hinder their attempts to build new competing businesses in sectors where there are already dominant players.

On the other hand, to smaller enterprises, which this law was designed to protect, the opening of the walled gardens is naturally a boon. Interoperability streamlines merchants’ efforts to engage consumers, reducing the need to duplicate efforts across multiple siloed platforms, and subsequently reducing CAC.

Final Thoughts

It remains uncertain how much opening up will eventually happen (or is mandated). Given a choice, it is likely both Alibaba and Tencent will gravitate towards just surface level integration with sharing of links and opening up payment options. This will allow them to keep their ecosystems relatively captive and retain ecosystem synergies.

Should full interoperability be mandated, while Alibaba could benefit from an immediate uptick in traffic and GMV, it could stand to lose its tight grip over amassing precious user behavior data, which will in turn harm its advertising cash cow in the longer term. On the other hand, Tencent could see the depreciation of its most valuable asset – traffic – but perhaps may be offered a prime opportunity to monetize WeChat.

Another point of uncertainty will be around the treatment of data, especially amidst the increasing scrutiny around data in China in recent months. How much data would be shared between platforms with the opening of walled gardens? Or even within a single ecosystem? Already, the government has shown signals of wanting to avoid data concentration in the hands of large platforms and could implement further measures to restrict companies’ ability to access and monetize consumer data.

We are already seeing cautious attempts by the internet companies to open their ecosystems, while still protecting their competitive moats. But just how much opening up will be required to appease the regulators, no one knows. Everyone’s waiting with bated breaths.

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[1] Alibaba acquired mapping and navigation company AutoNavi for USD 1.5 billion in 2014.

[2] Alibaba acquired Chinese video streaming giant Youku Tudou for USD 3.5 billion in 2015.

[3] Alibaba invested USD 586 million in Chinese social networking site Sina Weibo in 2013.

[4] https://www.globaltimes.cn/content/819872.shtml

[5] In a speech by Allen Zhang in 2019, he was quoted as saying, “If WeChat was a person, certainly it would be your best friend, that’s why you’re willing to spend so much time on it. Then, how could I stick an ad on your best friend’s face? Every time you saw him, you would have to watch an ad before you could talk to him.”

[6] Source: Business of Apps

[7] https://www.wsj.com/articles/google-battling-amazon-tries-an-e-commerce-makeover-to-win-back-advertisers-11632936601?utm_source=sg&utm_medium=email&utm_campaign=article_email&utm_content=article-6346 The Wall Street Journal reported search volumes in the US moving from Google to Amazon, and consequently, Amazon’s share of search ad sales has eaten into Google’s in 2019.