WeChat's a Monopoly. So What?
Author’s Note: If you want to watch the video first, you can do so below.
This week, the Chinese authorities fined Alibaba $2.8 billion for violating anti-monopoly industrial guidelines. The fine is pretty big. After all, a billion dollars is more (and a lot cooler) than a million dollars. The main issue at hand was the Pick One of Two policy, which forces merchants into exclusivity agreements with Taobao. This probably did not matter so much back when Taobao was the only game in town, but now there are multiple merchants coming along. You got Pinduoduo and Meituan Dianping, rising players in the e-commerce space (I am working on a profile of Meituan right now), and they are coming at the king.
Shares rose 6.5% after news of the fine came out and that is often quite normal when such big fines are announced. A big uncertainty has been resolved and the market values that more than the actual money. I think the question is whether the issues have actually been resolved or if there are more to come. After all, the draft law lists out a whole laundry list of no-no items. The fine is for just one of them.
The Chinese government seems to value these eye-catching, flashy events. $2.8 billion catches a lot of attention. An example of “Killing the chicken to scare the monkeys”, or 殺雞儆猴. I wonder if it will work. If Xi Jinping really sees Alibaba and Tencent as rising challenges to his power (a ridiculous sentiment to me if I have ever), then $2.8 billion is nothing.
I get a lot of snarky comments about how I write only about Chinese and Taiwanese economies and companies. Love those “Chinanometry” jokes. The original reason I started off this way was because I figured that I wouldn’t be qualified to write about on other countries.
But lately I have been looking to expand the portfolio. There are Asianometry videos about Japanese and Korean companies. I just finished and posted a video about Malaysia’s semiconductor industry. I hope to continue that expansion further. You can watch them on Early Access right now with the Early Access Tier on Patreon. Check it out. It would go to supporting the channel.
China recently released a new set of anti-monopoly guidelines with ominous applications to its tech giants. Alibaba's US traded stock took a haircut, piling on top of all the recent drama surrounding the failed IPO of its Ant Group subsidiary. I did a video about that if you want to learn about it.
But what about Tencent, the other Chinese mega-giant? Tencent has stakes in some of the world's biggest video games. They also own the two biggest messaging apps in the world: QQ and WeChat.
In this video we are gonna look at Tencent’s anti-competitive actions. Considering what has been happening to Ant Group and Alibaba, is Tencent at risk of an anti-monopoly investigation too?
What the Paper Says
The rules are in a draft phase and so have not yet been implemented. However their goal is to address abuses in the online market. Namely, they want to make sure that companies with a dominant market position are kept from abusing it. Such abuse is defined in multiple ways.
The first notable definition of abuse has to do with the selling or buying goods at prices that are unfairly low. That also includes selling goods at below costs, unless there is a justifiable reason for doing so. It also forbids modifying prices in real time using algorithms. This probably best applies to e-commerce companies.
Another abuse is restricting or outright refusing to transact with certain counterparts without a justifiable reason for doing so. For example, making it such that if a company wants to do business with you, you force them from doing business with a competitor. Choose one out of two, so to say. This particular piece is big because Tencent and Alibaba do just that, but more later.
Author’s note: This bit was what triggered the government’s recent $2.8 billion fine.
Companies are also prevented from performing actions that would allow them to eliminate or restrict their competition. For example, trying to take a competitor over by purchasing all of their shares or by signing contracts that effectively do the same thing.
These guidelines are now extended to be applicable to any company that does business in China. The anti-monopoly law enforcement agency (whatever it will be) is granted the power to undertake actions to ameliorate the abuse of market positions.
And notably for the first time, the anti-monopoly law is deemed to apply to variable interest entities as well. I previously did a video about this interesting quirk of Chinese law. It allows companies to establish shell companies in the Cayman Islands so to evade certain Chinese laws regulating share ownership of internet and tech companies.
Again, these laws remain in draft format and can change at any time whatsoever, as is often the case in China. But the way they are written right now, they arm the Party with the procedural tools to attack and dissemble the monopoly positions built up by Chinese tech giants like Alibaba, Tencent, and others.
Grappling with the New Law
In Tencent's Q3 2020 earnings call in November 2020, company management downplayed the potential effect that the law would have on company revenues. Management seems to have a two-pronged response to analysts.
The first prong is to promote the company’s support of "open platforms". President Martin Lau said with regards to the new paper:
> Fourthly, I would like to reflect on Tencent's business and strategy and philosophy, right? I would say it actually fits very well with the spirit of the regulatory framework. As you can see, our platforms are open in nature. We work with a lot of partners. We focus on providing great products and user value rather than very calculated business operations as well as monetization.
Shortly thereafter, the company points to the nature of its business model as a reason not to worry. Nodding to the fact that the company's revenues are majority derived from games Lau says:
I can't comment fully right now, but it looks like, right, from the paper that it's more related to transaction platforms. So for games which are essentially individual products rather than platforms, I think they are less of the focus.
This is technically true. Tencent when you look at it from a revenue basis is a gaming company. Many gamers are very cognizant of this. But not mentioning WeChat as being a critical part of Tencent would be a grave error. WeChat, not its games, is the monopoly that Tencent controls.
A Brief History of QQ and WeChat
It is hard to do anything in China without WeChat. WeChat is your connection to any friend who lives behind the Great Firewall. It provides news. It helps you easily pay for things like fast food, taxis, traffic fines and more.
Previously I have an email newsletter about WeChat's rise to power. But in it, I did not much mention Tencent's other messaging product - QQ.
When the internet first came to China in 1996, the best way for people to message each other was using the texting protocol ICQ. ICQ let people open up private chats one on one or amongst groups.
Ma Huateng and his team at Tencent released an ICQ client in 1998 that appealed to local sentiments. This desktop messaging client joined a crowded field that included Microsoft's MSN but distinguished itself due to the use of value added items like stickers and helpful features like the ability to stop and start file downloads.
QQ moved from the desktop to the initial generation of pre-iPhone mobile phones. By partnering with mobile monopoly China Mobile, QQ achieved dominance in the mobile IM market. The tense relationship with China Mobile would continue for many years as the telecom resented being a dumb pipe for QQ's services.
In that Asianometry email newsletter about WeChat, I credited the mobile app's growth to its many innovative features. Yeah sure, cute things like the "message in the bottle" capability definitely helped grow WeChat's market share. But looking back on it now, I think what mattered more was how Tencent ruthlessly brought its existing base of QQ IM users over to WeChat.
This cross-promotion and lock-in is a common tech monopoly tactic. Alibaba used its existing dominance in e-commerce to create an equally dominant position in payments with AliPay. Facebook turbocharged Instagram's rise with its own Facebook user base. The thing is that, depending on how you look at it, it is probably illegal to do this per the newly released Anti-Monopoly Guidelines. Not that the state is going to cut down WeChat anytime soon. But they certainly will arrest growth of future products Tencent might try to cross pollinate in the future. Like its games perhaps.
Tencent's Anti-Competitive Practices
If you feel like American tech companies abuse their monopoly power, then you probably are not ready for what the Chinese do to each other.
WeChat is well known for its state-sponsored censorship. But they also have their own version of private censorship. If you compete with Tencent or are even not allied with them then it is highly likely that your links won't load on WeChat.
For example, on February 2021, an app owned by tech giant ByteDance sued Tencent and WeChat for monopolistic behavior. ByteDance is one of the few large tech companies that came to prominence without "allying" with either of Alibaba or Tencent. They are a $150 billion tech company of their own.
This 2021 lawsuit is because WeChat restricted links associated with the app from being shared on its messages. It comes on the back of a similar 2018 lawsuit regarding the same practice. That particular lawsuit failed to make ground.
Chinese users seem to be used to dealing with workarounds to these blocks. If you want to share a link to a Taobao item to a friend on WeChat, you cannot send the actual link. You got to send them a search term so that they can go to Taobao and search for it themselves. The Taobao share message literally directs you to do this. It’s wild.
I talked a bit about the Great Firewall of China in a previous video and how it enables Chinese tech companies to perform these anti-competitive acts. What if Google prevented Gmail from sending emails with Amazon links in them? Or if Facebook Messenger or WhatsApp stopped delivering any links by Google? There would be an internet uprising.
In 2011, an anti-virus software maker named Qihoo360 sued Tencent before the Higher People's Court of the Guangdong Province for anti-monopolistic practices.
A year earlier, the two companies had gotten into a major spat. First, Tencent started bundling its own anti-virus software with QQ. Qihoo then announced that QQ was accessing people's data without permission and updated their anti-virus software to block it. Tencent responded by making it so that QQ would not work on any computer with Qihoo installed. The Chinese Ministry of Industry and Information Technology had to get involved, undoing both actions and making the two companies apologize.
Now, Qihoo was suing Tencent for abusing its dominance in the IM market. The Guangdong court said that Qihoo did not submit sufficient evidence of Tencent owning a monopoly share in the IM market. The Supreme People's Court upheld the decision. The court cited the possibility that Chinese users can use foreign IM apps rather than WeChat as to why Tencent does not own a monopoly. For some reason, I find that amusing.
Ten years later, I get the sense that the government has realized that things have changed since that court decision. The 2018 lawsuit failed, but the 2021 one might not. The first government actions have been largely for irregular pricing abuses by ecommerce companies. If you recall, that was one of the big items listed in the new anti-monopoly guidelines.
If we take the paper as a blueprint for the future actions that the government intends to undertake over the next years, then actions like those done by WeChat and have previously been considered common practice are likely to be addressed in due time.