Where Does the Online Industry Go From Here?

Where Does the Online Industry Go From Here?

Yicai Global

Date: Thu, 05/18/2017 - 19:44 / source:Yicai
Where Does the Online Industry Go From Here?
Where Does the Online Industry Go From Here?

Zhou Jiangong

(Yicai Global) March 22 -- China's bustling online market is undergoing changes, and it's still hard to determine exactly where these changes will lead.

The first part of forming online businesses is about getting demographic dividends, which many companies have achieved. The number of internet users has long become saturatedwhile the number of mobile users is closing in on its peak and the desire to buy new phones declines. The marginal cost for online companies to acquire new users is climbing higher and higher and thereis no guarantee it will be a genuine user.

At the same time, the experience a non-paying user gets is becoming worse, with 'free' actually being the cost of privacy and viewing adverts.

More than half of revenue at the world's most successful online companies come from advertising, including Google, Facebook [NASDAQ:FB], Baidu [NASDAQ:BIDU], Alibaba Group Holding Ltd. [NYSE:BABA] and Tencent Holdings Ltd. [HKG:0700]. However, as thesebecomes more expensive, it also becomes less effective. At the end of last month, the global chief marketing officer of Procter &Gamble, the world's largest advertiser, attacked data falsification in online advertising at an industry conference. If one considers the business of increasing page views through improper channels as an online company, it would be valued as highly as some online giants.

China's major online firms have recently been under the watch of the Beijing Internet Information Office, and the state has started to buy shares in influential online companies to show its mettle as the 'ultimate leader.'

Entrepreneurs find that the cost of operating online is actually higher than offline, because of commercialism on the internet. Looking at popular smartphone makers over the past two years, those not adopting an 'online mindset,' like OPPO and Vivo, are outperforming internet-focused companies like Xiaomi.

The internet has redefined entertainment and consumption, but has not yet touched on the biggest economic and social demands, like education, health care, energy and environmental protection. People talk about online vehicle production, but the core technologies of future vehicles are actually the battery and artificial intelligence algorithm, rather than the internet.

The internet's benefit to the economy is far lower than expected. Both the US and China have created online giants and have new startups continually coming forward to replace failed companies. However, internet companies need to push harder in public relations, only then can they prove their contributions to the economy in such aspects as labor productivity, employment, income distribution and others, and prove they deserve the resources consumed. Baidu, Alibaba and Tencent are a prime example of online firms dominating the market, though China hasn't made a significant technology breakthrough in recent years.

Where to Go From Here

The first thing to do is create new opportunities. Online companies in China are keen to label themselves as artificial intelligence companies with such tags as 'AI+' or '+AI.' Baidu, Tencent and Xiaomi, among other companies, are trying to persuade the government to offer more support in the artificial intelligence sector. While Alibaba, which has avoided the technology market, recently held an internal tech conference at which Jack Ma called on over 20,000 scientists and engineers to research and develop its core technology over the next 20 years, with artificial intelligence at the forefront.

China's approach to internet companies is becoming more common with startups in India, Southeast Asia and countries taking part in the 'One Belt, One Road' initiative imitating Chinese firms. Smartphones, e-commerce, social networking, payment services, games and information application products are swarming into overseas markets while China's venture capitalists make more and more foreign mergers and acquisitions.

Consideringthe real economy, China's government recently clamped down on 'barbarian' investors, shocking the online industry. In China, the market value of successful internet firms is rising, but the development of the real economy is getting more and more difficult. E-commerce platforms, like Alibaba and JD.com Inc. [NASDAQ:JD], are taking their business to a new level by opening physical stores; smartphone developer Xiaomi is looking to develop chips and patents; social-networking creator Tencent is moving into all walks of life and search giant Baidu is stepping in to artificial intelligence, hardware and services.

China has quickly taken over the US in terms of online business-to-consumer(B2C)companies, however, Chinese business-to-business (B2B) firms lag far behind those in America. Many venture capitalists in Asia are talking about the transition from B2C to B2B, and how the internet can be used to serve industries concerning people's livelihood, like manufacturing, transport, energy, health care and education. At the end of 2013, I wrote an article titled Stronger Subversion of the Internet in China. To a great extent, the rapid rise of e-commerce, online media and internet finance in China is due to the backwardness of these industries. In fact, efficiency in China's real economy has a lot of room for improvement. The era of technology geeks dominating the online world is coming to an end, as experts from all industries become more and more able to move into the digital space.

The new era will be based around post-truth and virtual reality, with the internet being used to disseminate information. China's social media is full of false news, exaggeration and prejudice, and people cannot figure out where the truth lies. Regulators are putting regulatory standards of traditional media on social media. Perhaps it is their age, but big shots in the industry have returned to orthodoxy, and started to talk about global politics, state affairs, the macro-economy and supply-side reform.

The question remains on whether experienced entrepreneurs or young minds will take over from here. Successful internet firms dominated the industry early on, but a generation on, they may find new startups taking over the sector.

The author, Zhou Jiangong, is the CEO of Yicai Media Group.

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