China Mobile, Alibaba JV Takes Aim At WeChat

Alibaba to revive ailing Fetion

The near-monopoly held by Tencent’s (HKEx: 700) WeChat in China’s mobile messaging space could soon get a fresh shot of competition, with word that e-commerce giant Alibaba (NYSE: BABA) was in talks for an alliance to revive China Mobile’s (HKEx: 941; NYSE: CHL) fast-fading Fetion text messaging service. Such a powerful tie-up could take direct aim at the current stranglehold on the market held by WeChat, which now has more than 400 million active users and has become an indispensable communications tool for many.
This new initiative by Alibaba and China Mobile is a welcome private-sector development that could perform well due to the vast resources of both partners. It also conforms with Beijing’s broader recent drive to break monopolies in a wide array of sectors. But China’s anti-monopoly regulators should also step into this equation and take their own more active steps to rein in companies like Tencent that dominate in various Internet spaces.

Other Internet sectors with near monopolies include e-commerce, where Alibaba controls more than 80 percent of the market, and online search, which for years has been dominated by Baidu (Nasdaq: BIDU). Combinations of private and public sector initiatives could rein in these giants, bringing more balance to China’s online sectors and fostering innovation through healthy competition.

Tencent’s WeChat has posted explosive growth since its launch in 2011, and has rapidly become the primary mobile text messaging tool for many of its millions of users in China since then. That rapid rise has led to sharp declines in traditional SMS text messaging, once a cash cow for mobile carriers, and prompted China Mobile to complain 2 years ago that WeChat was stealing its business by operating a de facto virtual mobile carrier.

China Mobile tried to get the regulator to intervene, only to be rebuffed after the Ministry of Industry and Information Technology determined the matter was a commercial one that should be resolved in the private sector. Now China Mobile could finally be preparing to take the matter into its own hands, with world late last week that it was discussing a joint venture deal for Alibaba to revive its faded Fetion service, known in Chinese as Feixin. (English article)

Like WeChat, Fetion uses the mobile Internet to transmit messages, allowing users to circumvent fees that carriers charge for traditional messages sent over their networks. The original Fetion was once extremely popular in the pre-smartphone era, but its lack of functions like the ability to support graphics and share news articles have caused it to fade into obscurity over the last 2 years.

That could all change quickly if Alibaba and China Mobile forge a new partnership, which would almost certainly see Alibaba pour its massive resources into a complete overhaul to make Fetion more directly competitive with WeChat. China Mobile rival China Telecom (HKEx: 728) formed a similar alliance with leading online game company NetEase (Nasdaq: NTES) with their own product, YiChat, launched a year ago.

Alibaba’s charismatic founder Jack Ma made no secret of his concern about WeChat’s dominance, and a year ago launched a rival service called Laiwang in response. But that product has yet to gain any real traction, even as WeChat continues its meteoric rise. This new alliance would have a much better chance of success, since Alibaba would get access to Fetion’s large user base and also have the advantage of working with China’s dominant mobile carrier.

This particular private-sector challenge to Tencent would come as China’s anti-monopoly regulators engage in their own series of investigations to break up market dominance by individual companies in a wide range of sectors. Many of those probes have leveled accusations of anti-competitive behavior at big multinationals like software giant Microsoft (Nasdaq: MSFT) and luxury car maker Audi, raising some protests that foreign companies are being unfairly targeted.

Private sector moves can sometimes help to break monopolies, and another such initiative by security software maker Qihoo (NYSE: QIHU) has made some early strong gains toward breaking Baidu’s previous stranglehold over the lucrative Chinese online search market. But such moves can only be financed and backed by large wealthy companies like Alibaba and China Mobile, effectively locking out the many smaller, dynamic firms that often drive innovation.

Accordingly, China’s anti-monopoly regulators should strongly consider turning their sights to the Chinese Internet and challenging the current dominance of companies like Alibaba, Tencent and Baidu in areas they dominate. Such a move would not only boost innovation on the Internet, but would also send an important signal that China is committed to healthy competition in all sectors, regardless of the nationality of companies involved.

Bottom line: A new Fetion joint venture between Alibaba and China Mobile could challenge WeChat, but China’s regulators should also do more to challenge such new media monopolies.

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