Alibaba Tries Mobile Games, Eyes Qihoo
China’s top 2 Internet companies are starting to look increasingly alike, with the latest word that leading e-commerce company Alibaba is challenging social networking (SNS) rival Tencent (HKEx: 700) in the mobile gaming space. Alibaba’s move is just the latest into a new area for this hyperactive company, which spent much of 2013 in a series of major business initiatives and acquisitions as it prepares for a blockbuster IPO. In separate but similar news, media are reporting that Alibaba may be in talks to buy a stake in software security specialist and fast-rising search firm Qihoo 360 (NYSE: QIHU), though I have my doubts about that particular rumor.
From a broader perspective, I find this hyperactive diversification drive by both Alibaba and Tencent somewhat unique from the global perspective, as there’s really no parallel for it among major western Internet companies. I’ll comment more on that towards the end of this post, and what it might mean for both companies’ futures and the development of China’s broader Internet landscape.
But first let’s look at the latest headlines, starting with the news that Alibaba is preparing to launch a mobile gaming platform. (English article; Chinese article) Underscoring the Tencent rivalry, the announcement came from Alibaba’s head of digital entertainment Liu Chunning, who is also a former Tencent executive. Tencent is currently China’s leading online game company, leveraging its popular SNS platforms to build up a strong gaming business.
Alibaba’s entry into mobile games comes just months after it launched Laiwang, a mobile instant messaging service, again aimed at challenging Tencent’s hugely popular WeChat. Tencent has also been aggressively pursuing Alibaba’s dominant position in e-commerce, pouring millions of dollars into its Yixun online shopping service over the last year.
Meantime, media are also reporting that Alibaba is in talks to buy a stake in Qihoo 360, which was traditionally known for its security software but lately has soared on the rapid rise of its year-old search business that now controls about 20 percent of the market. (English article; Chinese article) Such a deal would look like Alibaba’s bid to enter the lucrative search space, which is now dominated by Baidu (Nasdaq: BIDU). It would also mimic recent moves by Tencent, which last year combined its own search business with a larger rival from Sohu (Nasdaq: SOHU) to create a major new player behind Baidu and Qihoo.
If the Qihoo talks were really happening, my advice to Alibaba would be: Don’t do it. Qihoo is a notoriously unscrupulous company, and was actually sued by Alibaba back in 2006 for unfair business practices. As a result of that clash, I doubt Alibaba founder Jack Ma would have much interest in any tie-up with Qihoo’s founder Zhou Hongyi. Instead, I suspect this particular rumor may have been strategically planted by Zhou or other Qihoo executives to hype the company’s stock, which nearly tripled last year and was up another 9 percent in the latest trading session.
All that said, I’ll close by returning to a point I raised at the beginning of this post, namely the uniqueness of this Tencent-Alibaba rivalry and what’s likely to happen in the future. Both companies are rapidly becoming polyglots with a wide array of unrelated businesses whose only common thread is the fact that they’re Internet based.
The US is far different, with companies like Amazon (Nasdaq: AMZN) and Facebook (Nasdaq: FB) largely staying in their respective core businesses of e-commerce and SNS. I suspect that Alibaba and Tencent will quickly learn a lesson now well understood by most major western firms, namely that too many businesses causes companies to lose focus, resulting in poor performance. Accordingly, I would expect both of these giants to ultimately spin off units that are unrelated to their original core businesses, which for Tencent is SNS and for Alibaba is e-commerce.
Bottom line: Alibaba and Tencent look increasingly alike as each enters the others’ businesses, but both are ultimately likely to break up as they become too diverse to perform efficiently.
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