China’s Internet Scale is Something Else

The week before last, my weekly column talked about user bases and their potential. The focus of that piece was on the global scale of some of the biggest technology ecosystems. Among other things, I said, “The kind of scale Facebook, Microsoft, Google, and Apple have achieved is unmatched by almost any other company on a global basis. The only exceptions are some of the largest Chinese companies, which are able to achieve similar scale, but within China itself rather than globally.” Today, I wanted to pick up on that because one of the things that continues to be staggering about China is the sheer scale of its in-country internet audience and the kinds of user bases Chinese companies are able to build within China itself.

User bases in the hundreds of millions

Let’s start with user bases, because that’s where Chinese companies’ scale really shines. These bases are dominated by domestic users, though each country has a minority of users overseas as well. Here are some examples (all numbers as of September 30, 2015):

• Tencent’s monthly active QQ user accounts: 860 million
• Tencent’s monthly active QQ user accounts on smart devices only: 639 million
• Baidu’s monthly active mobile search users: 629 million
• Baidu’s monthly active maps users: 304 million
• Alibaba’s “active buyers”: 386 million
• Alibaba’s mobile monthly active users: 346 million.

We could go on, but those numbers from just the three largest Chinese internet companies should give you some sense of the scale we’re talking about here. For context, let’s drop those numbers into the chart I shared two weeks ago:

As you can see, some of those numbers are right up there with some of the world’s largest companies. Tencent’s instant messenger base is larger than the entire global base of iOS devices, Baidu’s monthly mobile search users as well as Alibaba’s active and mobile users are larger than Twitter’s user base, and Baidu’s Maps users alone eclipsing Amazon’s customer accounts. For further context, consider that all of those Chinese user numbers (other than Baidu’s Maps number) are larger than the population of the United States, the third most populous country in the world after China itself and India.

An enormous mobile market is a huge driver

The single biggest driver of this massive scale in China is the size of the Chinese smartphone market. With around 500 million users, the Chinese smartphone market is the largest in the world by a huge margin (by comparison, India, with a similar total population, only has around 150 million smartphone users). The Chinese information agency, CINIC, estimated there were 668 million internet users in China. So the vast majority of these were accessing the internet at least in part through those 500 million smartphones. It’s striking to see how close some of the mobile MAU numbers in China are to the total number of monthly active users for some of these services, but that’s because, in China, the smartphone market essentially is the internet market.

E-commerce brings the scale home

There is perhaps no better illustration of the massive scale of the Chinese internet market than its e-commerce sector. Within that sector, no company better exemplifies that scale than Alibaba. Though it’s often compared to Amazon, it’s probably better compared to eBay. Or at least seen as a sort of hybrid of eBay and Amazon, since it’s more of a marketplace than a direct e-commerce player like Amazon. The chart below shows gross merchandise volume for Alibaba and eBay, which both treat this as a key measure, along with total product sales for Amazon, which is an imperfect proxy but the closest thing we have as a comparable measure of scale:

You’ll note for Alibaba I’ve included both total GMV and Mobile GMV, as a further illustration of the importance of mobile to the Chinese internet economy (Alibaba’s mobile GMV was 62% of total GMV in Q3 2015, and is rising rapidly as a proportion of the total). As you can also see, Alibaba long since passed eBay for GMV and its mobile business passed eBay back in Q2 2014 and now dwarfs it. Given that Alibaba’s results are still dominated by Chinese sales, this is pretty remarkable. Another great illustration of Alibaba’s scale is its Singles Day sales from last week, when its GMV was $14 billion in 24 hours, with mobile around 69% of the total volume. Alibaba’s payment platform, Alipay, processed 710 million transactions during those 24 hours, with 140,000 transactions per second at the peak period of the day.

Revenues still lag truly global Internet companies

The one area, though, where the big Chinese internet companies still lag the global (predominantly US-based) companies is in revenue. Even Alibaba, with its enormous gross merchandise volume, takes only a small cut of the total value that passes through its systems and generated just under $14 billion in revenue in the past four quarters. Amazon’s product sales alone (i.e. excluding AWS and other services) were $76 billion during that period. You can see similar unfavorable comparisons with the other two big businesses – for all its dominance of the Chinese search market, Baidu generated just under $10 billion in revenue over the past four quarters, compared with $64 billion in advertising revenue for Google over that period.

What’s clear is China is essentially the only country capable of producing a global-scale internet company that serves mostly its own population. Japan’s Rakuten is the only non-US, non-Chinese company that ranks highly in the global rankings of internet businesses and there’s a simple reason: only the very largest economies can generate enough domestic revenue to provide a company with the foundation to eventually break out globally and achieve significant scale. The largest US companies all have significant scale outside the US as well. What’s remarkable about the Chinese companies is they’re able to do all this with mostly domestic revenue. That’s even more extraordinary when you consider their revenue per user is much lower than for US-based companies.