Building Mobile Internet Platform Business Models in China: Vertical, Horizontal or Conglomerates
Building Mobile Internet Platform Business Models in China: Vertical, Horizontal or Conglomerates
Friday, June 24, 2016: 4:15 PM-5:45 PM
107 South Hall (South Hall)
Platform theory suggests that a firm adopting “the best platform strategy and the best ecosystem to back it up” should be the competitive winner (Cusumano, 2010). The key to a successful strategy is to provide a platform that constitutes a bottleneck allowing the platform owner the potential to evolve, while encouraging adoption by complementors (Cusumano & Gawer, 2001; Jacobides, 2006). Building, reinforcing, and retaining a bottleneck is difficult, because competitors and often complementors have an incentive to challenge or circumvent the bottleneck. In the information technology industries nearly all of the studies have been based on the outcomes in pioneering Western markets and, in particular, the U.S. One question that has been little addressed in the contemporary industry architecture and platform literature is whether results in different economic environments will converge upon a single equilibrium or whether multiple equilibria – hence non-convergence is possible.
The industry architecture in the mobile Internet that has developed in China is particularly interesting academically for two reasons: First, government policy has essentially kept the market at the apps and cloud-layer closed to outside competitors (the exception is Apple, for which China is the second largest market). Second, in terms of users China is the largest Internet and smartphone market in the world, so it is sufficiently large to support a rich and varied ecosystem. These two reasons make China an ideal environment to explore whether similar industry architecture has emerged.
The U.S. has developed a particular App economy industrial architecture. The industry leaders are Apple, Google and Facebook which came from different parts of the ICT industry. Apple adopted far more vertically integrated strategy and used iPhone to establish a tightly curated apps store, while Google, with a business model based on search and advertising adopted a much more open strategy, as its profits were based on serving advertisements, not from the OS itself. Facebook’s operations were entirely in the social media space. Extension into smartphones was a relatively trivial as it merely required building an app. While Apple and Google have unique strategies, most of the other firms are independent with distinct app-based services and are vertically siloed. For example, Uber and Lyft provide transport, Airbnb rooms, LinkedIn business contacts, Amazon sales (Amazon does provide some other services), Pandora streaming music, etc. This then describes a particular industry architecture. It also appears as though it is a “natural” outcome.
Smartphone diffusion came to China slightly later. As was the case in the U.S., the incumbent Chinese Internet firms were faced with an opportunity and a threat. The firms that appear to be becoming the Chinese giants are Alibaba, Tencent and Baidu (ATB) have all been building platform strategies to confront the emerging opportunity/threat of the mobile Internet. In contrast to most U.S. firms, ATB expanded horizontally to verticals that may not appear to have direct relationship to their existing businesses. In the process, they came to appear more like conglomerates or “digital business groups” that as much as possible and tried to exclude non-members. Following the theory of technological layers, we classify the Internet industry into four stacks including broadband, device, software and service. While GAF focus a lot in the first three layers in a vertical way, most of ATB’s businesses are positioned in a variety of horizontal service sectors.
This article mainly focuses on describing the platform strategies of ATB and explaining the differences from the U.S. Platform theory usually assumes that a firm has a single platform that it is trying to manage (Evans & Gawer, 2016; Cusumano & Gawer, 2001). This perspective does not fully explain the strategy adopted by ATB that optimize the interaction between their multiple platforms. In China, these firms are attempting to leverage their advantages to connect all of the platforms and build a walled garden from which the can exclude competitors.
The ATB firms were not founded with these complicated structures, rather they were a response to the rise of mobile Internet. To presage the paper, Alibaba was once considered to be an E-commerce company. However, Alibaba has shifted its aims to be a “business infrastructure platform”. In contrast, Tencent formed in 1998 as value-added information services for enterprises, now aims to be the “connector” of everything, through which they will link their large user base with appropriate content and services. As the dominant search engine in China, Baidu now embraces a transformation from “connecting people with information” to “connecting people with services”. Each has chosen to expand horizontally into different verticals to form platform conglomerates, not only to secure the advantages of a platform owner, but also to control a disproportionate share of the value network.
In our paper, we will evaluate the reasons for this particular evolutionary trajectory and reflect upon the usefulness of theories of convergence and mimicking. First, we begin by considering whether the relatively weak intellectual property regime in China may have affected this evolution.
Second, there has been a general critique of Chinese entrepreneurship and innovation as being very short-term in focus and the unwillingness of Chinese investors to make long-term commitments (for some evidence on this score, see Fuller 2010; Huang et al. 2015). The unwillingness to make long-term commitments might result in firms exploiting new verticals being forced to sell themselves to existing dominant firms
Third, the protected nature of the Chinese market could be responsible for these differences. The protected market certainly reduced the competitive pressure from foreign firms and thus may have weakened the pressure on Chinese Internet companies to innovate.
Fourth, the particularities of the Chinese market and, in particular, the fact that it is still a relatively nascent economy in which many taken-for-granted services in developed nations such as credit cards are still underdeveloped creating barriers but also business opportunities.
China offers an opportunity to understand platform creation in an environment that differs markedly from that of the rest of the world, which has largely adopted the U.S. firms.
The industry architecture in the mobile Internet that has developed in China is particularly interesting academically for two reasons: First, government policy has essentially kept the market at the apps and cloud-layer closed to outside competitors (the exception is Apple, for which China is the second largest market). Second, in terms of users China is the largest Internet and smartphone market in the world, so it is sufficiently large to support a rich and varied ecosystem. These two reasons make China an ideal environment to explore whether similar industry architecture has emerged.
The U.S. has developed a particular App economy industrial architecture. The industry leaders are Apple, Google and Facebook which came from different parts of the ICT industry. Apple adopted far more vertically integrated strategy and used iPhone to establish a tightly curated apps store, while Google, with a business model based on search and advertising adopted a much more open strategy, as its profits were based on serving advertisements, not from the OS itself. Facebook’s operations were entirely in the social media space. Extension into smartphones was a relatively trivial as it merely required building an app. While Apple and Google have unique strategies, most of the other firms are independent with distinct app-based services and are vertically siloed. For example, Uber and Lyft provide transport, Airbnb rooms, LinkedIn business contacts, Amazon sales (Amazon does provide some other services), Pandora streaming music, etc. This then describes a particular industry architecture. It also appears as though it is a “natural” outcome.
Smartphone diffusion came to China slightly later. As was the case in the U.S., the incumbent Chinese Internet firms were faced with an opportunity and a threat. The firms that appear to be becoming the Chinese giants are Alibaba, Tencent and Baidu (ATB) have all been building platform strategies to confront the emerging opportunity/threat of the mobile Internet. In contrast to most U.S. firms, ATB expanded horizontally to verticals that may not appear to have direct relationship to their existing businesses. In the process, they came to appear more like conglomerates or “digital business groups” that as much as possible and tried to exclude non-members. Following the theory of technological layers, we classify the Internet industry into four stacks including broadband, device, software and service. While GAF focus a lot in the first three layers in a vertical way, most of ATB’s businesses are positioned in a variety of horizontal service sectors.
This article mainly focuses on describing the platform strategies of ATB and explaining the differences from the U.S. Platform theory usually assumes that a firm has a single platform that it is trying to manage (Evans & Gawer, 2016; Cusumano & Gawer, 2001). This perspective does not fully explain the strategy adopted by ATB that optimize the interaction between their multiple platforms. In China, these firms are attempting to leverage their advantages to connect all of the platforms and build a walled garden from which the can exclude competitors.
The ATB firms were not founded with these complicated structures, rather they were a response to the rise of mobile Internet. To presage the paper, Alibaba was once considered to be an E-commerce company. However, Alibaba has shifted its aims to be a “business infrastructure platform”. In contrast, Tencent formed in 1998 as value-added information services for enterprises, now aims to be the “connector” of everything, through which they will link their large user base with appropriate content and services. As the dominant search engine in China, Baidu now embraces a transformation from “connecting people with information” to “connecting people with services”. Each has chosen to expand horizontally into different verticals to form platform conglomerates, not only to secure the advantages of a platform owner, but also to control a disproportionate share of the value network.
In our paper, we will evaluate the reasons for this particular evolutionary trajectory and reflect upon the usefulness of theories of convergence and mimicking. First, we begin by considering whether the relatively weak intellectual property regime in China may have affected this evolution.
Second, there has been a general critique of Chinese entrepreneurship and innovation as being very short-term in focus and the unwillingness of Chinese investors to make long-term commitments (for some evidence on this score, see Fuller 2010; Huang et al. 2015). The unwillingness to make long-term commitments might result in firms exploiting new verticals being forced to sell themselves to existing dominant firms
Third, the protected nature of the Chinese market could be responsible for these differences. The protected market certainly reduced the competitive pressure from foreign firms and thus may have weakened the pressure on Chinese Internet companies to innovate.
Fourth, the particularities of the Chinese market and, in particular, the fact that it is still a relatively nascent economy in which many taken-for-granted services in developed nations such as credit cards are still underdeveloped creating barriers but also business opportunities.
China offers an opportunity to understand platform creation in an environment that differs markedly from that of the rest of the world, which has largely adopted the U.S. firms.