Internet Business in China

Executive Summary

Throughout the last 20 years, the Internet Business in China had been changing from each Internet company just specializing in one area of online service to diversifying the businesses into different areas.

Tencent, founded in 1998, was an Internet companies in China which focused on online communication services in its early stage. With its technological strength and ease of use of its communication tool, QQ IM, it stood out from the competitors and became the market leader in online communication services. To cope with the rapid changing industries, it adopted a strategy to diversify its business in another new segments such as online games, social networking and online advertising to reduce the dependence on single segment. Tecent's strategy had been proofed successful and sustainable and led Tencent to become the top leader in the industries until the launch of its e-Commerce business.  With the belief of Chairman Pony Ma that the new online shopping experience should be based on instant communications, Tencent had invested to integrate communication and commerce and positioned e-Commerce as the subsidiary feature to increase the user connectivity. Yet, this strategy did not succeed. After 5-year launch of its first C2C e-Commerce website, Paipai.com, it failed to retain the customer and obtain the market share with less than 10% while its key competitor, Alibaba, dominated 80% of the market share.

With the success of Taobao, it was found out that the e-business strategy of Tencent did not succeed because it could not address two fundamental issues in the China's e-Commerce market - lack of trust and logistic problem. To address the needs of customers, it was suggested Tencent should enhance the existing platform by improving the payment and logistics areas. Yet, these are not enough to gain back the market share as Taobao had already taken the first mover advantage. By enhancing the features of existing platform will be only seen as the copycat of Taobao and will not attract the users to switch from Taobao to Tencent.

With the world-class development and technological capabilities, the rise of mobile number users and popularity of social media, Tencent should strengthen its capabilities and grab the market opportunities. To launch the e-Commerce business, Tencent should try to invent an entire new models which have never seen in the market before instead of improving the existing platform.  Tencent's next e-Commerce product should be mobile and social media focused and with the fundamental elements of digital authentication, e-payment and logistics. Last but not least, to win the competition, Tencent should invest more resources on developing this new product and building the infrastructure capabilities to support this product.

Tencent had been investing in e-commerce since 2005 with the launch of its C2C website Paipai.com in 2005 and B2C website QQ mall in 2010 with continuously increasing and improving their services throughout the years. However, the result was quite disappointing. While Tencent had over 700 million account users, they only recorded 9.9% of the China C2C market share in 2009.  This was due to the e-business strategy mis-orientation which it did not address the customers' needs and retained the customers in their e-commerce websites.

Tencent focused on online communication services in its early stage

The Internet business in China was emerging in the 1990s which most of the companies just focused on one area of online service and copied business models of Western companies and applied to the Chinese market. Tencent was founded during that time in 1998 which targeted to serve young Internet users by providing an online communication services and generating interactions within the online community. Taking reference to MSN, Microsoft's instant messaging, Tencent launched its first online communication tool – QQ IM. It allowed users to store information online instead of on the computers of the end-user. Since the first version of QQ IM, Tencent had continuously improved and upgraded its IM application with new features and content and integrated it with the growing mobile IM industry. With the key focuses on continuously improving the communication efficiencies on different platforms, integrating its online services and features across different devices as well as integrating and generating contents into communications and entertainment services, these had made Tencent's access to its users unique and differentiated from its competitors. With the ease of use, the number of QQ IM users had been growth rapidly reaching 99% penetration rate of all Chinese Internet users. Tencent became dominating in the instant messaging in the China's Internet industry between 2000 and 2006 while other major technology companies dominated in other specific areas such as Baidu, Sina and NetEase focused on search engine, news portal services and online games respectively.

Tencent diversified its business to reduce the dependence on single segment

The general Internet landscape had been changing since 2006, in response to the rapid changing Internet industry in China and copycat from the competitors, instead of just specializing in one area, Internet leading companies took a new strategy to diversify their services in areas of online games, social networking, mobile internet services, online media and e-Commerce so as to maintain the existing market shares and to reduce the dependence on revenue from single segment.  Leveraging on the advantage of growing number of IM users, Tencent developed new businesses on online games, social networking and online advertising. It had successfully overtaken NetEase and became the leading providers in online games. Tencent's revenue model was mainly based on charging the direct users two types of fees: 1) communication service fee and 2) entertainment service fees (pay-as-you-go).  Most of Tencent's products were free. Yet, if users wanted to upgrade the service or enhanced their identities, they had to pay. With the strategy of diversifying of the business, Tencent had taken over similar service providers and become the top 10 Internet companies in the world in 2010.

Tencent strategy mis-orientation led to the loss in market share

It seemed that Tecent's strategy had been successful and sustainable and led Tencent to become the top leader in the industries. Yet, the result of e-Commerce service was not what the company expected. The number of online shoppers in China was expected to grow to more than 300 million by 2015, the online retail sales showed an over 117% increase annually between 2007 and 2009 and the number of China's urban population shopped online was expected to grow from less than 10% in 2006 to double in 2010. These positive market projections was a key driving force that motivating Tencent to launch its ecommerce strategy into C2C market. Chairman Pony Ma designated the ecommerce business as the key development focus for the following ten years in the company's 2005 annual report. And he believed that "Online shopping experience should be based on instant communications. Without communications at the core, there would be no commerce" and it would be the key differentiator from other traditional e-Commerce website.  Thus, when Tencent built its first e-Commerce website, Paipai.com, just mainly focused the integration between communications and commerce. It is free-of-charge platform and allowed buyer and seller could simultaneously chat and view the product offered in the same window. To attract more users, Tencent promoted various assistance scheme to sponsor sellers. However, 5 years after launch, the figure showed that Paipai.com user stickiness was only 26.3 % while its key competitor, Taobao was 86.8%. Paipai.com could not attract user sickness because it did not address the customers' tastes or needs on e-Commerce while Taobao did.