China’s Internet industry suffers many disadvantages compared to the US. It is burdened by heavy regulation, underpowered data centers, and censorship, just to name a few. But one of its great advantages comes from a counterintuitive source: The country’s underdeveloped tech-commerce infrastructure. The implications are significant, and they are shaping China’s Internet landscape in a way that the US may ultimately follow.
In the US, Internet businesses have developed in an environment in which they must compete with already-mature industries that have long had good access to technology. That’s true of ecommerce businesses, for example, which have had to build on, against, or over established bricks-and-mortar networks of retail stores. It’s also true of the online travel industry, which has had to adapt to pre-existing technology systems tied to airlines, agency groups, and, more recently, early-Internet booking verticals such as Expedia and Orbitz.
China, on the other hand, has been able to do some leapfrogging, skipping past stages of Internet and commercial development that in the US played out over the course of many years, or are still playing out. That’s what happened with the shift from PC-based Internet to mobile Internet, which was sped up by the relatively high costs of computers and the affordability and abundance of Internet-enabled mobile devices. Many Chinese Internet users have never owned a PC, or even used one. A similar shift is happening with the proliferation of cheap smartphones, which is catapulting huge parts of the population into an era of more useful and versatile handheld Internet.
These instances of accelerated development have allowed Chinese Internet companies to build new tech-commerce infrastructures from scratch. That means they have been able to create many products, services, and entire businesses in a consolidated fashion right from the start, in a way that makes sense for consumers and partners.
The online travel service Qunar is a great example. Qunar started off as a Kayak-like travel search aggregator that allowed users to find the best deals on flights. Then, as now, its chief competitor was Ctrip, a more traditional, Orbitz-like vertical that supplements its bookings portal with call centers. It employs 12,000 people to work in those call centers. By contrast, Qunar employs only 1,300 people, half of which are on development teams, and relies on an algorithmic approach to solving travel queries.
Today, I met with Qunar’s CEO and co-founder, CC Zhuang, in the company’s Beijing office. He described Qunar as a “technology and marketing company” rather than a travel company. When he, Douglas Khoo, and American co-founder Fritz Demopoulos started it in 2005, travel just happened to be an industry that could benefit from an Internet-based approach. It helped that it had no political risk involved, but it was also ripe for disruption, because China’s travel technology ecosystem was still in its infancy.
Since Baidu invested $306 million in the company last year to take a majority stake, Qunar has been able to extend its reach, integrate with Baidu’s main search function, and invest in its back end. Now it is switching focus to mobile, and offering its technology to traditional suppliers, so hotels and travel agents don’t have to build their own Web services – they can just use Qunar.
That model, which combines the search portal with software as a service, doesn’t exist under one umbrella in the US, where those services are distributed among various individual players such as Kayak, Orbitz, and Interglobe Technologies. But even if a Qunar analogue already existed in the US, it wouldn’t matter to Zhuang. “I don’t really care about what traditional business format is,” he says. “I look at value creation.”
In the US, where Internet businesses haven’t enjoyed the luxury of tech-commerce leapfroggery, we have seen an approach to consolidation that has, by necessity, been a kind of reverse engineering. Because of strong existing commercial infrastructure and advanced technology, companies have been allowed to grow vertically without being forced to confront problems in the ecosystem that might ultimately have forced them in different directions and that, paradoxically, could have produced better solutions for consumers.
Facebook and Tencent’s Weixin provide a helpful case study. Facebook started off as a network of friend connections centered on a PC-based Internet experience. Over time, it has had to adapt to evolving consumer demands and tastes. Most obviously, it integrated with Skype and acquired Instagram.
Weixin, on the other hand, launched about a year ago as a multi-feature product that was mobile native and boasted all the most popular social networking functions, including photo and video sharing, instant messaging, voice messaging, a timeline, and even Google+-style “circles.” Facebook, which is still trying to figure out its mobile strategy, may well end up looking a lot like Weixin, if not aesthetically, then at least structurally. (Weixin, by the way, “borrowed heavily” from predecessors Kik and Talkbox.)
There are other examples. Leading consumer-to-consumer ecommerce site Taobao, for instance, is a combination of Amazon and eBay-like services, with stronger social elements. Dianping, sensibly and lucratively, combines a Yelp-like consumer-review service with Groupon-like group-buying. And Wandoujia, a startup, combines an Android marketplace search experience with a mobile media management tool and, soon, an open API for developers. The Chinese call it a “mobile phone assistant,” and it’s like a combination of Google Play and the synching part of iTunes, with a potentially strong platform element to come.
It is not clear which approach is superior, or even if only one will prevail in either market. In China, services like Weixin negatively impact the chances that, say, a messaging-focused startup or a photo-sharing startup could succeed. That doesn’t necessarily mean an outstanding vertical can’t challenge Weixin on either of those fronts and find an exit, at least by way of acquisition.
But given China’s history of big players copying good ideas and crushing the creators, coupled with the rise of catch-all players like Weixin, that seems unlikely. On the plus side, the M&A market is heating up, and the door is open for visionary startups to claim a grand prize by building a service that dominates a particular sector, or competes fiercely alongside one or two other challengers. Naturally, that’s easier said than done.
In the US, the Internet ecosystem has been fragmented and distributed in a way that has favored startups, to the point where pure-play companies such as Instagram and Yammer have enjoyed billion-dollar exits. If such consolidation continues to the point where we start to see China-like businesses with multiple competencies, that could be good news for startups in the short term as the market pays out for the best bit-part players, but discouraging in the long term. If the likes of Google and Facebook suck up all the most lucrative verticals in an increasingly unified Internet environment – as has already started to happen – then it figures that IPO prospects will get ever slimmer.
Ultimately, the contrast between the US and China proves nothing other than that both ecosystems are still in their early days, especially because of the advent of the Age of Mobile. At the very least, however, there has never been a more compelling reason for Silicon Valley to watch closely how China’s fast-developing domestic market plays out in the coming years.