China’s Internet giants begin their switch to mobile

Shiv Putcha, Principal Analyst, Consumer

Technology industry watchers are accustomed to looking at Silicon Valley tech giants such as Google and Facebook as the market leaders. However, Chinese Internet players have now established a serious presence, and Baidu, Tencent, Alibaba, and Sina have already broken into the global top 25 in terms of market capitalisation.

Although it is largely protected from foreign players such as Facebook, Google, and Twitter, the Chinese market for Internet services is still fiercely competitive, and local players must work hard to stay ahead of the pack. In fact, China’s Internet players are dealing with the same issues as their Silicon Valley counterparts, such as how to convert their successful service and revenue models from PC-based Internet access to the mobile Internet.

Indeed, as China’s mobile broadband market grows, Internet players have already begun to switch their business strategies to become increasingly mobile focused.

Mobile Internet growth is fueled by the smartphone boom

A recent report by the China Internet Network Information Center indicated that the number of mobile Internet users in China (388 million) exceeded the number of fixed Internet users (380 million) for the first time in June 2012. The report also indicated that over 70% of Internet users access content over their mobile devices.

While the latter figure does not refer to mobile use exclusively, it does indicate the momentum behind mobile Internet in China.

Much of this momentum is the result of the significant growth in smartphone use. In the report Smartphones in Emerging Markets: Shifting Landscape, Ovum singled out China as the biggest growth opportunity in terms of smartphone adoption and development not just in emerging markets, but globally.

We forecast that China will see over 250 million smartphone shipments in 2017, accounting for 17% of global volume. Both iOS and Android devices are selling in large numbers throughout China, and the improved quality of content through browsers and apps optimised for mobile is allowing consumers to enjoy superior experiences over mobile devices.

Internet players are scrambling to stay relevant in mobile

China’s Internet giants are grappling with new challenges as they start to compete with the country’s large mobile operators. These mobile operators have large user bases and are investing in and marketing their own services to counter the threat from OTT players.

Companies such as Tencent and Sina need to quickly come to terms with the mobile paradigm in order to continue their growth trajectory.

The first of these challenges is how to cope with the shift in traffic as users increasingly consume Internet services via mobile devices. Search giant Baidu, microblogging player Sina Weibo, and online video player Youku Tudou are all reporting that between 15% and 20% of their traffic is already coming from mobile devices. Internet companies are investing heavily to maintain the quality of the user experience as consumers transition to mobile devices.

The second big challenge stems from the need to differentiate in the face of the increasing convergence of online services. As players maximise their market dominance in their own segments they are diversifying into new areas to maintain their growth trajectories.

For example, Baidu has traditionally dominated search in China, but is now facing stiff competition from Qihoo. Similarly, Sina Weibo is seeing its microblogging users beginning to shift toward Tencent’s popular WeChat service.

Cracking the mobile monetisation puzzle is just as hard in China

The third and biggest challenge for China’s Internet players is the need to monetise mobile. Although Internet players are successfully extending their services to mobile to allow their users a seamless experience over multiple devices, they are not finding it easy to generate revenues on mobile. In this sense, China’s Internet players are facing the same issues as their Silicon Valley counterparts.

Sina Weibo is a good example of an Internet company facing this challenge. It had 424 million registered users as of September 2012, with nearly 43 million daily active users, and both metrics were showing double-digit growth on a quarterly basis.

However, the time spent per active user per day had decreased slightly to one hour. Sina has attributed this decline to the increasing popularity of WeChat: overlapping users are increasingly attracted to the latter’s features, and are reducing the time they spend on Weibo. That users are spending less time on Weibo is a problem for the company, given its ad-funded revenue model, even assuming that it has already extended its delivery network to mobile.

Ovum believes it will not be enough for China’s Internet players to offer their services through mobile browsers and as apps on various OS platforms. Nor will it be enough to extend their revenue models to mobile, whether through ad-funded or revenue sharing arrangements.

Ultimately, the pace of innovation in China will tilt the competitive balance in favour of Internet players that can balance their mobile strategies with maintaining product and feature innovation.

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