Checking in on China’s Internet Giants

Three companies dominate Chinese internet life to the extent they have their own acronym – BAT – for Baidu, Alibaba, and Tencent. They’ve also often been compared to US-based equivalents – Google, Amazon/eBay and, to some extent, Facebook respectively. However, in the last couple of years, the massive growth that has characterized each of these companies in the past has been less consistent across the three and it’s worth checking in to see just what’s going on with each of them.

The first thing worth noting is two of the three companies continue to do very well, while the third – Baidu – has been struggling somewhat of late. The chart below shows revenue for these companies over the last couple of years:

As you can see even two years ago, Baidu was the smallest of the three but the gap was relatively small with Alibaba in some quarters just a couple of billion RMB ahead of it. But, by this past quarter, the gap had widened dramatically. While both Alibaba and Tencent have averaged roughly 50% year on year revenue growth in the past year, Baidu’s average has been in the low single digits and it’s had quarters in which its growth was negative.

From a margin perspective, too, the gap has been widening:

Again, Alibaba and Baidu began 2015 very close in operating margin terms but, while Baidu’s margin has slowly drifted southward, Alibaba’s has improved fairly significantly and Tencent’s has largely remained high, with the recent dip due to some acquisitions of lower-margin subsidiaries.

Baidu’s struggles seem to have resulted from a loss of focus, as the company has adopted a Google-like strategy of expanding rapidly into many new areas, albeit without the same balance between a high-performing core and modest-sized set of moonshots. It is now embarking on a new strategy focused on AI, one which it admits will take years to pay off in areas such as autonomous driving, while its traditional business continues to stagnate. Its mobile search and maps user growth appears to have leveled off, while its payments product is massively sub-scale compared to its competitors’ offerings.

It’s worth looking, too, at the composition of each of these companies’ revenues, which is quite different. Alibaba’s revenue is dominated by e-commerce, of which 90% comes from China and the rest from overseas. But, like Amazon, it’s invested in cloud computing as well and, though that business is still a fraction of its total, it’s growing rapidly. Interestingly, in contrast to AWS, its cloud computing business is unprofitable but the losses have been shrinking quickly and I would guess it will start generating decent profits in the next year or two as it continues to scale, though it’s mostly focused on growing share at present. It also loses money heavily in its online content businesses, several of which it acquired recently.

Baidu’s revenue comes mostly from online advertising, much as its US counterpart Google, but it’s losing advertisers and this part of its business has been in decline. The rest of its business is holding up a little better in revenue terms but has much lower margins than the core business. Meanwhile, it’s investing heavily in those AI initiatives.

Lastly, Tencent is a fascinating mix of gaming, social networking, subscription content businesses, online advertising, payments, and cloud, with gaming by far the largest contributor to overall revenues but subscription content a major component too. Tencent doesn’t break out margins by business segment but it does share quite a few metrics on its user numbers, which have been skyrocketing. It now has nearly a billion users of its Weixin and WeChat apps, which is particularly remarkable when you consider a high percentage of those are in its domestic market alone. Other apps such as QQ and Qzone also have over 600 million users, again mostly domestically.

To close, it’s worth briefly comparing these companies with their US counterparts. All are substantially smaller – Alibaba’s gross merchandise volume is much higher than Amazon’s but, as it’s primarily a marketplace for third party goods, its cut is very small – just 3% or so – so its revenues are significantly lower than Amazon’s. Baidu’s revenue, likewise, is a fraction of Google’s, reflecting both the much lower ad revenues per user available in China and its focus on its domestic market in contrast to Google’s presence in nearly every country but China. Tencent, despite its rapid growth, remains quite a bit smaller than the largest US tech companies, though its user numbers in some cases now rival Facebook’s global scale.

That last point bears repeating: these companies have achieved enormous scale considering they’re almost entirely tied to their home markets. None of them makes more than about 10-15% of its revenue outside of China and yet these are massive businesses, each of them dominant in some segment of the Chinese internet market. Yet they’re also characterized by the same barriers that seem to prevent almost all big Chinese tech companies from expanding successfully overseas and which prevent almost all big overseas tech companies from breaking into China. That’s a reflection in part of the massive cultural differences between China and the western world, not just in general but, more specifically, in their approaches to technology. That’s destined to continue to make life very difficult for companies trying to break into and out of China.

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Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

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