Value.able: An­drew Macken

With its huge e-com­merce mar­ket, China is busy cre­at­ing the Ama­zons and Face­books of the fu­ture

Money Magazine Australia - - CONTENTS - An­drew Macken

There has been a lot of buzz around Amer­i­can tech­nol­ogy stocks and the so-called “FAANG” (Face­book, Ama­zon, Ap­ple, Net­flix and Google). Most of these high-per­form­ing tech com­pa­nies have hit all-time high share prices. Given the re­cent ex­cite­ment, it is im­por­tant to re­mem­ber not to ex­pect to gen­er­ate out­sized re­turns if one over­pays for an as­set – no mat­ter the qual­ity of this as­set.

The emer­gence of dom­i­nant busi­nesses such as Alibaba, Face­book and Ten­cent stems from a truly great busi­ness model: the on­line tech­nol­ogy plat­form (OTP).

We be­lieve there are four ma­jor sources of ad­van­tage for own­ers of OTPs:

1SCALE

Re­search and de­vel­op­ment, sales and mar­ket­ing and cap­i­tal in­vest­ments can be spread across a larger base of rev­enues stem­ming from the cu­mu­la­tive sales of the en­tire ecosys­tem. Fur­ther­more, the plat­form’s bar­gain­ing power over ven­dors will be larger than that of any single in­di­vid­ual busi­ness from within the ecosys­tem.

2DATA

The owner of the plat­form has sole ac­cess to the data gen­er­ated by all of the users, ap­pli­ca­tions and/or ser­vices within the ecosys­tem. Such data is crit­i­cal for de­sign­ing in­tel­li­gent and highly valu­able al­go­rithms to en­hance mar­ket­ing, ad­ver­tis­ing and cus­tomer util­ity.

3NETWORK EF­FECTS

As more busi­nesses, ap­pli­ca­tions and/ or ser­vices are added to the plat­form, more users and cus­tomers are at­tracted to the ecosys­tem, thereby in­creas­ing the value of these busi­nesses, ap­pli­ca­tions and/ or ser­vices, as well as the plat­form it­self. Fur­ther­more, the more rev­enue that is gen­er­ated by the ecosys­tem the greater the in­vest­ment in the plat­form by the owner, which fur­ther en­hances the ecosys­tem and en­cour­ages new mem­bers to join.

4MERGER AND AC­QUI­SI­TION VALUE EX­TRAC­TION

The ben­e­fits of ac­quired tech­nol­ogy can be shared across a larger base of busi­nesses, ap­pli­ca­tions and/or ser­vices. There­fore, newly de­vel­oped value-adding tech­nol­ogy is more valu­able to plat­form own­ers than to any other owner. Plat­form own­ers can, in turn, ra­tio­nally out­bid com­pet­ing suit­ors for the same tar­get.

Lion’s share of ad­ver­tis­ing

Did you know that the largest e-com­merce mar­ket in the world is not in the US?

While most global in­vestors are lured first to the US in search of these op­por­tu­ni­ties, one should con­sider that China al­ready has over three times the on­line pop­u­la­tion of the US and with GDP per capita of $13,000 China is ex­pected to ac­count for 120 of the For­tune Global 500 by 2025.

Like Face­book, the China-based Alibaba and Ten­cent are emerg­ing as great global tech­nol­ogy busi­nesses.

Alibaba is the world’s largest e-com­merce plat­form, upon which more than $US500 bil­lion worth of mer­chan­dise is trans­acted each year, more than three­quar­ters via a mo­bile de­vice. What is par­tic­u­larly in­ter­est­ing about Alibaba, how­ever, is that to­day more than half of its rev­enue comes from a com­pletely new busi­ness: on­line mar­ket­ing ser­vices.

With more than 500 mil­lion highly en­gaged monthly ac­tive users, Alibaba has com­plete ac­cess to all user and mer­chant data and can cre­ate highly ef­fec­tive mar­ket­ing al­go­rithms to tar­get con­sumers

based on highly spe­cific cri­te­ria. This, in turn, sig­nif­i­cantly in­creases the “re­turn on in­vest­ment” of mar­ket­ing spend via Alibaba’s on­line channel. As a re­sult, Alibaba now at­tracts the lion’s share (around 30%) of Chi­nese mo­bile ad­ver­tis­ing spend.

Ten­cent, on the other hand, owns WeChat, China’s most pop­u­lar mes­sag­ing app. Around 900 mil­lion ac­tive monthly users spend nearly two hours a day, on av­er­age, on Ten­cent’s mo­bile prop­er­ties.

Ten­cent’s “app-within-an-app” model cre­ates sig­nif­i­cant net­work ef­fects: app de­vel­op­ers want their apps to be on WeChat to ac­cess the enor­mous cus­tomer base while at the same time, con­sumers are at­tracted to Ten­cent’s ecosys­tem to in­ter­act with other users, as well as ac­cess the mil­lions of apps that ex­ist within the WeChat app.

Like Alibaba, Ten­cent has also cre­ated a new mo­bile ad­ver­tis­ing busi­ness in re­cent years. Own­ing the most pop­u­lar mo­bile prop­er­ties in China makes Ten­cent the nat­u­ral fu­ture leader of Chi­nese mo­bile ad­ver­tis­ing. While still in its in­fancy (less than 19% of to­tal rev­enues), Ten­cent’s on­line ad­ver­tis­ing busi­ness is grow­ing by more than 50% a year. This side busi­ness will be the fu­ture Face­book of China.

Alibaba and Ten­cent are be­com­ing the duopolies of Chi­nese mo­bile in­ter­net traf­fic. This means that they stand to dom­i­nate many in­dus­tries as they move on­line: pay­ments, video, gaming and cloud com­put­ing to name a few. They also man­age what are essen­tially very ac­tive ven­ture cap­i­tal funds fo­cus­ing on third-party pay­ment plat­forms, a food delivery ser­vice, an In­dian on­line mar­ket­place and the Uber of China.

The point is this: not only will Alibaba and Ten­cent be among the great global busi­nesses of to­mor­row, they are also likely to par­tic­i­pate in the growth of other great busi­nesses of to­mor­row.

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