The "butterfly effect" after China fines internet giants for irregular pricing

 

On Dec. 30, the State Administration of Market Regulation (SAMR) took action again to fine JD.com, Alibaba's Tmall and Vipshop 500,000 yuan ($76,657) each for irregular pricing, since it received consumer complaints over the companies' pricing strategies related to Nov. 11 shopping events.

Although the amount of fine is not much, the regulators' stance on regulating e-commerce operations is significant, catering to the current positive pace of Internet anti-monopoly and releasing a strong signal to society to create fair competition. This matter is not difficult to understand when combined with a series of recent movements.

On Dec. 28, Meituan suffered an anti-monopoly lawsuit due to the cancellation of the Alipay channel, which has been filed by the Beijing Intellectual Property Court. Meanwhile, Alibaba is also the focus of regulation, with its stock price having plunged 30% at its peak this year, which made it present a $10 billion buyback programme in this regard.

Alibaba, Meituan and other giants facing anti-monopoly regulation are bound to experience pain and re-climb after shocks and adjustments. However, it is not just e-commerce platforms that regulators are eyeing.

Internet giants need to urgently re-examine their own expansion, even the pending listing companies are no exception, including Kuaishou, Didi and ByteDance. They may face more stringent compliance regulation. 

 

The "butterfly effect" that caused by Alibaba's anti-monopoly

 

The "trigger" for this domestic anti-monopoly wave in China may be Jack Ma's radical "bank pawn shop ideology" at the Bund Financial Summit two months ago, and the social wealth creation boom triggered by Ant Group's listing.

As a direct consequence, Ant Group's listing was interrupted by the regulator, which became a landmark event of Internet anti-monopoly.

On Dec. 14, China's antitrust regulator fines affiliates of Alibaba, Tencent and SF Holding for "monopolistic behaviour", hoping to create deterrence with 500,000 yuan fine and to signal that enforcement against internet monopolies was strengthening.

Only 10 days later, China's antitrust regulators also held "supervisory and guidance" talks with Alibaba and its gigantic financial services subsidiary Ant Group, and proposed five rectification requirements.

On Dec. 26, Ant stated that it would establish a "rectification" working party and implement regulatory requirements in full. The statement revealed three main points: Ant complies with financial regulation and operates its financial business in compliance; it serves the real economy and small and micro enterprises without competing with businesses for profits; and it uses technology to cooperate with the traditional financial system to promote the growth of domestic demand.

With the changing market environment and policy tendencies, in order to encourage innovation and temper disorderly competition, the Internet giant is facing up to regulation.

Data from The Economist shows that in the decade since 2010, the proportion of STAR Market in the total market value of Chinese listed companies has risen from 6.8% to 23.8%. Six of the 20 listed companies with the highest market capitalization are Internet companies, and their control over resources and information and the speed of seizure far exceeds that of traditional giants by several times.

Internet giants such as Alibaba, Tencent and ByteDance, which have hundreds of millions of active users,can get multiple financial licenses. It means that they can quickly access real customer data and connect or control trillions of liquid credit assets through consumer channels and payment platforms.

In the digital economy, if left unchecked, the capital giants will control all market elements, leading to the failure of the free market competition mechanism. Therefore, the target of market regulators is no longer limited to unfair competition at the level of traditional investment and mergers and acquisitions, but also includes monopolistic tendencies and behaviors at the level of data and channels.

 

Internet platforms grab the market domination

 

In recent years, the e-commerce model is quite favored by the capitalists. It may require significant investment up front to build the platform and attract a sufficient number of suppliers and users, and once they succeed, they will quickly scale up at a low marginal cost.

Until making profit, those platforms will use cash-burning, commission/service fee waivers, and low price dumping of goods to attract users, seize early dominance of the market. They drive down supplier costs through strong-arm tactics, and raise the barrier to enter the market.

When there were only one or two companies left on the track, the survivors used the Internet to amplify the "scale effect" in order to keep users engaged and increase ad sales and commission draws.

At that time, the giants who have the power to set industry standards and competition rules can not only make back all the money they spent in the past, but also use scale or data barriers to maintain channel dominance and even beat potential competitors through strong control-type acquisitions and other means.

With the development of AI, cloud data and IoT, Internet giants like Alibaba, Tencent and Meituan can easily generate personal data in the future.

Some users may support the exchange of personal data for free services in China, but this does not mean that e-commerce, credit and other platforms, can recklessly collect consumer information and push advertising or induce loans.

In the context of the platform-based business model, the biggest problem for startups is access to data, in addition to raising funds. If data and channels are allowed to be monopolized by Internet giants, it will fuel disorderly capital expansion, inhibit innovation, and ultimately harm the interests of merchants and consumers.

From Alipay, WeChat payment war, to the courier price war, Meituan / Didi price increase commission, forcing merchants to stand in line, as well as community group buying vicious competition, in the giant monopoly of the data kingdom, the bargaining power of small and medium-sized businesses and individuals is very weak.

Over the years, Chinese anti-monopoly laws have not exempted Internet companies such as Alibaba and Meituan, but the latter have also never been the subject of regulation in anti-monopoly cases, or have not been put on the table for explicit criticism.

 

Anti-monopoly may force changes in the internal mechanisms of the giants

 

Nowadays, the state wants the Internet industry to change its past expansion route, especially after the epidemic, and it has clearly proposed that "we hope the Internet will set the stage and the real economy can develop on its own, to benefit businesses and the upstream and downstream of the supply chain." The Internet giants cannot just focus on their own profit growth and erode the living space of offline entities and SMEs.

Anti-trust and anti-monopoly are international practices, aiming at controlling the unrestricted growth of a few giants and maintaining fair competition and financial market order. Companies such as Apple, Microsoft, Google, and Facebook have experienced antitrust investigations and lawsuits, and have even been fined huge amounts.

Now Chinese regulators have begun an anti-monopoly investigation into the Internet industry, not to bring anyone down, but to regulate the industry. Regulation for the entire Internet industry will become a new normal.

After the interview with Ant Group, the head of Zhejiang market supervision also talked about the need for market regulators to clarify the monopoly boundary, optimize the whole chain of supervision of prior compliance, review and post-event enforcement, and regulate the platform's data collection and use management behavior.

According to the rectification requirements, Ant needs to set up a financial holding company to carry out business around payment scenarios. And activities such as asset credit, insurance and wealth management and securities trading must be included in the regulatory scope, which means that the micro-loan revenue, accounting for 39% of Ant, may slow down its growth and the attributes of financial transactions will be weakened.

Ant also has to license and comply with the law to operate personal credit business, improve the transparency of transactions and protect the privacy of personal data, which puts higher demands on the openness of the credit system, and its innovative business.

In the future, the Internet giants like Alibaba, JD.com, Meituan and Pinduoduo will have to learn how to operate their companies under regulatory scrutiny and fix the BUG of ecological prosperity. It is not only to comply with the law, but also to gain long-term social recognition and drive their own sustainable growth.

This is an article from WeChat official accounts Bizwhale (ID: bizwhale), written by Zheng Ruilong, translated by Chris Yuan.