INTERNET: WeChat’s Alipay Freeze-Out Smells Of Monopoly

Bottom line: China’s Internet companies should create a code of conduct to ensure fair competition, and the regulator should step in when they abuse their market dominance to promote their other products.

WeChat freezes out Alibaba

Internet giant Tencent (HKEx: 700) was in the headlines for much last week, as reports circulated that it had cleansed its popular WeChat mobile messaging platform of several services from rival Alipay, the popular electronic payments unit of rival Alibaba (NYSE: BABA). Tencent certainly isn’t alone in this kind of “freeze out” behavior, which has become a unique characteristic in China’s brutally competitive Internet landscape.
Such behavior owes to a number of factors, most notably the highly diverse nature of China’s biggest Internet firms that means that they inevitably compete in many different areas. But the result is often the same, creating confusion and unfair competition in the marketplace as unsuspecting consumers get artificially limited or skewed choices when they use services like WeChat and Baidu (Nasdaq: BIDU) search.

As private firms in a highly competitive sector, these companies certainly have a right to determine who to allow on their platforms and how to present information. But they also have a responsibility to be transparent in disclosing what they do. They also have a responsibility to maintain fair competition on their platforms when they dominate in certain areas.

Accordingly, the companies should work together, potentially with Internet regulators, to create a set of industry practices that protect their own rights of both companies and consumers. In some instances the regulator should even get directly involved by preventing companies from abusing their dominant status in some areas. Such steps can help to lay the groundwork for a healthier development of business on the Internet, which will benefit companies and consumers over the long run.

China’s major Internet firms have a long history of taking extreme measures as they compete in a wide range of different areas. The nation’s “Big 3” names, Tencent, Baidu and Alibaba, all began their lives in different areas, focusing on games, search and e-commerce, respectively, for the first part of their lives.

But all 3 have embarked on aggressive acquisition sprees over the last 2 years, with the result that they now compete in a wide range of areas. One such area is e-commerce, Alibaba’s traditional turf, where Tencent has become increasingly aggressive. Last year Tencent formed a major tie-up with (Nasdaq: JD), China’s second largest e-commerce company, and it has also strongly promoted its Tenpay electronic payments service that competes directly with Alipay.

Last week Tencent’s aggressive move into e-commerce was in the headlines twice, in moves aimed at freezing out Alipay from WeChat, China’s dominant mobile messaging service. One action saw Tencent block use of an Alipay red envelope, or hongbao, promotion designed to coincide with the upcoming Lunar New Year holiday. The second saw Tencent stop accepting the use of Alipay for all purchases from stores on WeChat. (Chinese article)

Tencent is hardly alone in this kind of action. China’s major e-commerce firms have reportedly blocked their content on several occasions from indexing by Baidu, and also by an e-commerce search engine operated by Alibaba. Baidu frequently places its own products at the top of its search results without disclosing that relationship, with its Qunar (Nasdaq: QUNR) online travel service and Wikipedia-like Baike as primary examples of brands the receive such preferable placement.

These cases come close to meeting the definition of unfair competition, since in most instances the companies are using their dominance in one area to promote their products in others and freeze out competitors. A famous similar case occurred in the US in the 1990s, when software titan Microsoft (Nasdaq: MSFT) used its dominant Windows operating system to promote its Explorer web browser at the expense of rival products. Washington ultimately brought an antitrust case against Microsoft for abuse of power, resulting in a settlement that saw Microsoft change its practices in 2001.

Baidu, Alibaba and Tencent all have similar dominant positions in their core spaces, since each controls more than half of the market. For that reason, each has a responsibility to maintain fair competition in the areas it dominates, and shouldn’t engage in the kind of activities like freeze-outs and favorable placements for their other products.

To ensure the preservation of equal access for everyone, the companies should consider coming together to create a code of conduct that includes pledges to provide equal access on their platforms to everyone and abandonment of practices that unfairly freeze out rivals. In cases where companies start to abuse their market dominance, the relevant regulators should also consider taking action to preserve order and fair competition in the marketplace.

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