China’s Internet Empires | Solid Strategy or Reckless Diversification?

China International Business interviewed us for a column on “China’s Internet Empires“, looking at how the largest Internet groups in China were diversifying. Is there a logic to it? Are they spreading themselves too thin trying to cover news, search, gaming, cloud computing, email, payment and social networking?

In addition to our quotes in the column, you will find below the extended version of our views on this topic.

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While the first wave of Chinese web companies were making fire of all wood and entering new fields a bit recklessly, I think their perspective has changed a lot and that now companies enter fields in which they feel that:

1. There is a valid business case
2. This new field is somewhat connected to their service universe / ecosystem
3. They have a headstart thanks to their media power

Tencent entered only businesses that have proven revenue models. Search, payment, blogging with virtual goods (not blogging with ads), social gaming – all accessible from their IM service. Their focus remains “mainstream entertainment and communication”.

Shanda operates a huge number of servers and correctly identified that Amazon’s cloud computing was bringing close to 1/3 of Amazon’s profits by leveraging existing infrastructure with a service layer.

Taobao is doing the same, for the same reasons. Taobao also launched an e-commerce focused SNS, to encourage interactions between buyers, sellers and among them, to build up trust and “social commerce” – it is like Facebook Beacon done right.

Baidu is entering video now that Tudou and Youku paved the way by spending millions in bandwidth and clarified the IPR issues and the business case.

Sina, Sohu and Netease entered gaming after the mobile content market crashed. They recognized that the business of online ads wasn’t scaling greatly nor being as profitable as online gaming, and that a portal’s media power could be leveraged to promote games. If you are a major portal or email provider, you can promote pretty much whatever you want, event better if it’s your own property – a very profitable and semi-commoditized service like online games!

Eventually, while it might seem that they are doing a bit of everything, I think they are making quite pragmatic business decisions, finding ways to enter proven business fields by leveraging their existing reach and service universe.

It is also interesting to see how another underlying battle is going on as some players try to be the “access layer” of others. Especially, Taobao blocks Baidu from accessing its product pages directly as it would destroy its ad-based business model. Baidu accessing video sites also undercuts those sites’ ability to drive users through their homepage, and forces them to have revenue models that work in a standalone page – in a similar way to Google killing online newspapers by providing direct access. We see today pay walls being erected in the US Internet – as the battle is still on in China, it is likely search engines will pick up the remains unless services providers find sustainable business models.