Alibaba and Tencent Can Be Friends But Business Might Suffer

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A possible move by China’s internet giants to break down the walls between them may be an important first step in pacifying increasingly aggressive regulators in the People’s Republic. But as much as Beijing likes such gestures, they may leave stockholders cold.

Alibaba Group Holding Ltd. and Tencent Holdings Ltd. are looking to open up their platforms to each other, the Wall Street Journal reported Wednesday, citing sources it didn’t name. For example, customers could use Tencent’s WeChat Pay on Alibaba’s Taobao and Tmall shopping sites; in return, Alibaba listings could be shared on  Tencent’s WeChat messaging app.

Both companies have been the target of regulators. Last week, two game-streaming companies in which Tencent is a major shareholder — DouYu International Holdings Ltd. and Huya Inc. —  announced they’d canceled a planned merger after Beijing rejected the deal. The State Administration for Market Regulation said the tie-up would have given Tencent too much power. Alibaba, of course, was infamously set back last year when it scrapped the public listing of its financial affiliate Ant Group Co. after authorities decided to rein in its booming loan business.

From a legal point of view, the move to open up to rivals makes sense. But it’s risky from a business perspective and unlikely to make investors happy. 

A closed-off platform is to Tencent’s advantage. Its fintech and business services division accounted for 27% of revenue last year but contributed only 16% of gross profit. Customers use WeChat Pay for everything from purchasing coffee to buying online games, but Tencent makes very little from the money sloshing through its platform. The convenient payment system is there to keep eyeballs on the company’s suite of gaming and entertainment products — where it earns really good profits — instead of straying into offerings from the likes of Alibaba. 

Similarly, Alipay is the primary vehicle for payments on the e-commerce giant’s various websites. But the transaction business itself runs on thin margins. It’s there mostly to help keep shoppers around.

By opening up to competitors — and possibly bearing inter-network transactions costs — profit margins in the payments business are likely to get thinner for both. That’s okay if more valuable products, such as loans and other financial services, pick up more of the slack. But Beijing frowns on such cross-selling, viewing it as uncompetitive, especially when done at such thin costs that smaller rivals get crushed. To truly satisfy regulators, the two giant companies will probably need to make it easier for their customers to sign up for — and send money to — rival platforms. 

Among the possibilities proffered by the Wall Street Journal is that Tencent could give Alibaba direct access to its customers on WeChat through the use of that app’s mini-programs feature. These act as product homepages inside the instant messenger and are a powerful tool for engagement. But Tencent can’t be too excited about the prospect of its customers spending money on Alibaba within its own app. In a different regulatory environment, it might have mitigated that by collating data on usage. But Beijing is now focused on data security and will clamp down if it sees anyone overstepping the line. It’s not yet clear what that boundary is.

 Much may come down to how the two rivals finesse the terms of any collaboration deal, specifically revenue and cost sharing, and the use of each other’s data. But the bigger factor will be how involved Beijing becomes as the finer details are worked out.

Making peace with an archrival might seem like a deal with the devil. But better the devil you know.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

©2021 Bloomberg L.P.

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