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TOKYO – Chinese authorities are cracking down on the country’s tech titans harder lately, putting internet services company Tencent Holdings in their sights, after doing the same with e-commerce leader Alibaba Group Holding.
On the surface, regulators are focused on anti-competitive practices and protecting customer personal information. But many observers believe the move was driven by a desire to control powerful IT companies.
The big Chinese tech players have used their monopoly power over the country’s closed markets to consolidate their dominance. But their business models are now being tested by the recent regulatory crackdown.
Tencent’s WeChat messaging service said on July 27 that it had temporarily suspended registration of new users, apparently to strengthen its information security system as requested by Chinese regulators. WeChat is a text and voice messaging application similar to WhatsApp. With over 1.2 billion users, it has become a lifeline for the Chinese. Tencent’s WeChat Pay handles nearly 40% of the country’s mobile payments.
WeChat’s announcement follows an order issued on July 24 by the State Administration for Market Regulation ordering Tencent to pay a fine of 500,000 yuan ($ 77,323) in connection with its acquisition of a leading Chinese music streaming company. Claiming that the acquisition has enabled Tencent to capture more than 80% of the national music streaming market, the market watchdog has asked the computer giant to give up its exclusive music streaming rights.
The reprimand to Tencent is seen as part of the Chinese government’s drive since last year to strictly enforce the anti-monopoly law and force the company to tighten controls over personal information.
With a market capitalization greater than that of Alibaba, Tencent is one of the 10 largest companies in the world. But in the aftermath of the crackdown, its shares temporarily plunged more than 20% in July, wiping out $ 170 billion in market value.
Regulations apparently directly targeting Tencent have been tightened several times in the past, and the company has seen its shares cut each time. The latest swoon was the biggest yet, perhaps because investors view the latest regulatory move not as a one-off event, but as something that will definitely undermine Tencent’s business model.
Tencent is widely regarded as the world’s first “super app” – one that allows users to access a wide range of Internet services in a single package. This was done in 2017 by adding “mini-program” functions to WeChat for games, e-commerce, food deliveries, groceries, and event ticket purchases.
With WeChat functioning as a suite of apps, users can perform a large portion of their online activities in one place. When using new apps, they don’t need to go through the tedious process of downloading and registering them. Payments can also be made through WeChat Pay.
This prevents small and medium-sized application developers in China from independently promoting their services; Tencent turned these apps into mini-programs, there are millions of them. Tencent has also broadened its scope by acquiring or taking stakes in application developers.
Tencent’s ambitions are not limited to the Chinese market either. It took over or formed capital ties with foreign companies in games, music, films and other content, starting with its acquisition of Riot Games, an American company known for developing a multiplayer online fighting game called League. of Legends.
Its business strategy is to attract people to its messaging app and then sweeten the offering with a variety of other services. By seizing national streaming channels for games and music popular with young people, it can offer them new content from companies in which it has stakes.
Tencent’s pristine monopoly model has been followed by Alibaba through its online payment platform Alipay.
Ironically perhaps, given the current crackdown, the Chinese government was partly responsible for helping Tencent and Alibaba become super apps, for example by restricting foreign internet companies’ access to the Chinese market.
Now regulators are changing their minds. After berating Alibaba for its anti-competitive practices, Beijing focused on bringing Tencent to heel. As measures to prevent tech giants from abusing their monopoly power and to force them to protect personal information gain momentum globally, China is moving in the same direction.
“The two companies have grown so large that they could move away from Communist Party control,” said Minoru Nogimori, senior economist at the Japanese Research Institute. “The regime probably wants to keep them under its control.”
Alibaba’s financial activities have embezzled customers and funds from public banks and insurance companies, while Tencent’s content activities have become more influential than party-affiliated media.
Will the empires of Tencent and Alibaba be dismantled? On July 19, before the severity of the crackdown on Tencent became apparent, the company announced plans to acquire UK video game developer Sumo Group for $ 1.27 million. No media reported that Beijing intervened to stop business acquisitions by Chinese companies abroad.
The government does not appear to intend to completely strip Tencent and Alibaba of their power. The Communist Party “just wants them to expand their operations within its control,” Nogimori said.
China has no reason to object to domestic content companies buying from foreign players, as this helps to increase its influence. Tencent is reportedly trying to buy a German games company with technology useful for military simulations. There are even fears that the competitive threat from Chinese IT companies will increase with Beijing’s backing.
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