Alibaba and Tencent are getting ahead of Beijing’s sweeping internet reforms

Jack Ma is fond of downplaying the rivalry between Alibaba, the e-commerce and fintech giant he founded, and Tencent, whose messaging app WeChat is ubiquitous in China. “WeChat had a good hand, but played it poorly,” he once condescended. 

Even so, Ma took the competition seriously. Since 2013, the two companies have blocked interoperability between their platforms: Tencent’s payment systems can’t be used to buy goods on Alibaba’s e-commerce sites, while links to Alibaba sites can’t be shared easily on WeChat. Last week, though, the ground shifted. Among a swath of internet reforms to be enacted over the next six months, China’s Ministry of Industry and Information Technology ordered that companies “rectify” the kind of linkblocking described above.

But the wall dividing the Alibaba-Tencent ecosystems could already be crumbling. Alibaba has quietly launched at least two mini-programs on WeChat since April — one for its supermarket unit, Hema, and another that generates ticketing for travel business called Fliggy. (WeChat dominates in mini-programs, apps that allow companies to build e-commerce sites or services within an ecosystem.) A report in the The Wall Street Journal this month claimed that Alibaba might be about to go much further, and allow WeChat Pay to be used on its marketplaces.

Here’s the reality: even if the walled gardens are going to open up, it will probably be in a fairly controlled way. Both companies are taking a calculated gamble that they can access the other’s user base — and strengths — without cannibalizing too much of their own. Most importantly, opening up plays into the wider set of internet reforms: consumers and merchants will see more benefits as artificial competitive constraints are removed.

Let’s play this out. Alibaba is by far the dominant player in Chinese e-commerce — not just because of its market share, but because of its power to make brands. If a direct-to-consumer brand wants to break out today, it has to win on Alibaba’s online shopping platforms, Taobao or Tmall. WeChat, which is still first and foremost a private messaging service, doesn’t have anything like this power. 

And yet, although Alibaba owns all of the customer’s steps closest to the final transaction, it doesn’t own the “top of the funnel,” where discovery of brands and products happens. In China tech parlance, that means Alibaba doesn’t have any of that valuable “self-generating high-frequency traffic” like WeChat or Douyin, the video social networking site owned by ByteDance. So, Alibaba has the dominant destinations for customers, but it has to spend big to get them to come through the door; it reportedly dropped more than a billion dollars last year on Douyin advertising. 

Getting onto WeChat through mini-programs could boost Alibaba’s user numbers and conversion rates, but it’s not clear by how much. While WeChat did recently allow links to open up other apps, it severely limits notifications and doesn’t allow much automated advertising in its core service. Essentially, that means WeChat doesn’t give Alibaba many ways to spam users at scale, which it needs to make the most of that access. Alibaba’s core advertising business could also suffer, as merchants would now be able to market to users directly within WeChat — a worry I suspect haunted Jack Ma years ago.

Currently, no core e-commerce transactions come to Alibaba’s platforms via WeChat mini-programs. That could grow rapidly. Other e-commerce companies’ mini-programs funnel hefty percentages of their business through WeChat — around 50% for food delivery service Meituan, and 40% for group-buying service Pinduoduo (a good indicator for the Alibaba-owned equivalent, Taobao Deals).

What does Tencent get out of this? It does pretty well too. It could see increased advertising dollars, and if WeChat gets to access Alibaba’s user base — even if not all of them use WeChat Pay — a whole lot of new orders will flow through the platform.

Even so, a fuller rapprochement between these two companies would be a double-edged sword. They’d each be opening up one part of their business to gain from the other’s strength, but it would mean abandoning the idea of creating their own version of that business. So, Tencent would limiting its hopes of building a rival to Taobao, while Alibaba would be curtailing its attempts to grow a mini-program business of its own.

This might not be a bad thing. For years, Alibaba and Tencent have been making second-rate, less-used versions of each other’s ecosystems, and, in Tencent’s case, trying to build it up through an investment portfolio. If they open up, there’s less duplication: both can rest on their competitive strengths.

If there is a meaningful opening up between the two giants, the impacts are likely to reverberate through the e-commerce sector. Pinduoduo would probably have the most to worry about, with user growth trailing off, and its significant traffic from WeChat suddenly under competitive pressure. Social video service Kuaishou and local services super app Meituan could also suffer.

But here’s the next battle I’m watching (and the more exciting one, in my opinion): Tencent and ByteDance. If the pressure to open up extends to ByteDance and WeChat — and it looks like that’s the mandate — we might see Tencent’s ambitions as a content destination curtailed. My bet is that ByteDance will edge ahead here. Stay tuned.