Caixin
Sep 27, 2021 02:38 AM
BUSINESS

Cover Story: China’s Assault on Big Tech’s ‘Walled Gardens’

China’s months-long regulatory campaign targeting the tech sector is taking aim at a common practice that leading industry players deploy to foil rivals — blocking external links, which regulators consider anti-competitive.

For years, large Chinese internet companies from e-commerce behemoth Alibaba Group to social media giant Tencent Holdings have used various means to block their users from sharing links to posts and products on other companies’ platforms. These techniques set up what are known as “walled gardens” to protect the creators’ own digital ecosystems, stymie rivals’ growth and prevent users from spending their cash elsewhere.

Now authorities vow to tear down the walls to promote connectivity among different internet platforms, a move to protect users’ rights and market competition. But it may shake the tech giants’ long-valued growth models.

At the same time, there is no unanimity among Chinese regulators on how the walls should be dismantled, as some are concerned that completely open connectivity will increase the difficulty of supervision, one industry source said. The Ministry of Industry and Information Technology (MIIT) wants healthy growth of the internet industry, while the cybersecurity regulator focuses on content security, and the public security department is concerned about online fraud, another person close to the matter said.

At a Sept. 9 meeting, the MIIT pressed executives from leading tech titans including Tencent, Alibaba, ByteDance Ltd. and Baidu Inc. to dismantle link blockades. Companies were ordered to submit plans by Sept. 17. The ministry has been pursuing a campaign since July to crack down on online misconduct including pop-ups, data collection and link blocking.

“We will urge related companies to follow requirements and open up links to each other’s instant messaging platforms step by step,” Zhao Zhiguo, the general director of MIIT’s Information and Communication Management Bureau, said at press conference shortly after the meeting. Blocking links “messes up users’ experience, harms their rights, and disrupts the market,” Zhao said.

How the three largest internet platform operators — Tencent, Alibaba and ByteDance — will open their system is the focal point of the wall-dismantling campaign. Tencent, which operates popular messaging apps WeChat and QQ, has combined monthly active users of nearly 1.9 billion. Alibaba has access to 1.6 billion monthly active users through its Taobao app and the largest payment service Alipay, and ByteDance’s short-video sensation Douyin, the Chinese twin of TikTok, has grown quickly and secured 640 million users.

With heated competition on all business fronts, the giants have used their walled gardens to fend off competition from each other. Since 2015, Tencent has erected barriers preventing its users from directly sharing links from rivals. For instance, a user who wants to share a product from Taobao with a WeChat friend will find that the link can’t be opened in WeChat. Douyin users are unable to directly forward a video clip to WeChat contacts.

Alibaba, in turn, bars shoppers on its Taobao and Tmall marketplaces from using Tencent’s WeChat Pay system. The companies have had a series of tussles for years and initiated multiple lawsuits against each other.

Although regulators have yet to clarify how much connectivity there should be, industry experts said Tencent and WeChat — sitting on the largest pool of user data — will be most affected, while Alibaba and ByteDance are more willing to push it through.

It is a matter of redistributing internet traffic — the most valuable asset for internet businesses — and a tug-of-war has been quietly underway among companies and regulators, analysts said.

Smaller players are looking forward to changes.

“We have been suffering (from big techs’ link blocking) for a long time,” said an executive of a big data company. Hurdles created by big companies have greatly increased small companies’ costs of acquiring new users, the executive said. “We are all eagerly waiting for the traffic to be redistributed and expecting further policy clarification.”

“1”

Tencent, Alibaba, ByteDance and rivals come under sustained government pressure to quit blocking links to one another’s services, putting growth models at risk.

Tearing down walls

The regulatory storm started July 26 when the MIIT announced a six-month campaign to clean up misconduct in the internet industry. For the first time, the regulator listed malicious link blockage among eight types of activities to be corrected. On Aug. 17, the market watchdog issued draft guidelines to regulate anticompetition practices in the internet industry, banning malicious link blocking.

Alibaba Chief Executive Daniel Zhang in an August earnings briefing called for counterparts to make changes.

“Allowing external link access can reduce the cost of internet traffic for small and medium-sized enterprises,” Zhang said. “It will also be more convenient for consumers.”

Tencent took a more cautious posture. On an earnings call, President Liu Zhiping said “the interconnection between different platforms is very complicated” because each platform has its own rules.

On Sept. 13, MIIT’s Zhao again made clear at a State Council press conference that regulators are acting against groundless link blocking that disturbs competition. Two days later, the cybersecurity watchdog issued a set of guidelines requiring platforms to cooperate on data and traffic in accordance with national rules.

Tencent, Alibaba and ByteDance all expressed support for the regulators’ calls.

On Sept. 17, Tencent made the first move, allowing users of its main WeChat social media service to access rival Taobao and ByteDance links. It applies only to one-on-one messaging, not group chats or its Facebook-like Moments pages, the company said, citing security concerns.

Tencent’s plan followed months of communications between the MIIT and the company. That included an urgent trip by Chairman Pony Ma to the ministry after the Sept. 9 meeting with tech leaders, Caixin learned.

“The ministry made clear that the basic request is to open, and the big companies should take the lead,” said a person close to the MIIT.

“Tencent knew that the regulatory trend is irreversible, but it has kept negotiating with regulators on how the opening should be carried out,” a person close to Tencent said. Tencent has worked out a series of plans to discuss with regulators, the person said, and the company will still take the initiative in defining what to unblock.

Tencent cited security concerns for blocking external links, saying the purpose was to protect users from fraud and privacy risks. The company said Sept. 17 that it would provide ways for users to report suspicious content and establish a rating system while partially opening its platform to others.

To press Tencent to open up, Alibaba and ByteDance have filed a number of complaints with regulators demanding antitrust investigations of Tencent.

But it is a difficult task for regulators to decide whether blocking rivals’ links is a reasonable business tactic or an anti-competitive practice that hurts consumers, said Han Lijie, an antitrust lawyer in the Shanghai office of the Chicago-based law firm Katten Muchin Rosenman. A resolution will have a profound impact on the industry, and regulators won’t reach one easily, Han said.

The key question is whether apps like WeChat should be deemed as public infrastructure offering fair access to all parties, Han said. Regulators in other countries including the U.S. face similar challenges, he said.

Traffic redistribution

“The interconnection of online platforms under current discussion is far from real data connectivity,” an internet security professional said. “It is just a redistribution of traffic, which Alibaba and ByteDance are willing to see but Tencent is not.”

Some analysts said the regulatory push for platform connections will allow Alibaba to tap Tencent’s massive user base. But others said the benefit will be limited given current market conditions. It is impossible for Alibaba’s Taobao to replicate the explosive growth of e-commerce upstart Pinduoduo, they said. Established in 2016, Pinduoduo grew into China’s second-largest e-commerce site in less than five years mainly thanks to traffic from WeChat. Tencent is the second-largest shareholder of Pinduoduo.

An Alibaba executive said the company expects to bring some of its services such as used goods platform Xianyu and workplace messaging app Dingding to WeChat’s miniprogram platform that allows WeChat users easily access.

“But whether it can be done will depend on Tencent,” the executive said. He is not optimistic about the partnership, he said.

ByteDance, which has been cut off from the WeChat platform since 2018, has also lobbied for Tencent to open its platform. The company said link blockage by Tencent bars nearly 1 billion users from accessing a variety of its products. About 49 million users who want to share content from Douyin on WeChat and QQ are blocked, according to ByteDance.

In February, ByteDance filed a lawsuit against Tencent for allegedly violating Chinese antitrust laws by blocking access to Douyin on its messaging platforms. No more updates on the lawsuit have been released.

But ByteDance also has its own walled garden, although much smaller than Tencent’s. In September 2020, Douyin started to limit users’ access to e-commerce platforms including Taobao and Tencent-backed JD.com as it develops its own e-commerce service. The company has yet to make public any plan for changes.

The industry is still looking for more detailed policy guidelines on the wall-cracking campaign.

“Platforms have invested heavily in traffic growth and operation, and whether opening traffic access should be free or with costs should be further clarified by policy,” a big data company executive said.

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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