Internet giants' dominance 'smothers' start-ups

Updated 2017-12-19 11:00:18 Global Times

Vipshop deal shows smaller players' struggle to gain resources

With domestic Internet giants increasingly holding resources, users and capital, independent market players have begun to seek them out. But experts said this situation may harm the Internet ecosystem, leading to the "Matthew Effect" of the strong getting stronger.

The "Matthew Effect", a term coined by U.S. sociologist Robert K. Merton, refers to the phenomenon that the strong ones will become stronger and the weak ones will become weaker or that the rich will become richer or the poor will become poorer.

Their warning follows a move by Internet giants Tencent Holdings and JD.com Inc to invest a combined 3 million into domestic fashion e-commerce platform Vipshop for a total 12.5 percent stake and pursue strategic cooperation.

Separately, Tencent proposed last week to buy a 5 percent stake in Yonghui Superstores Co, a Fujian Province-based supermarket operator.

Under the latest agreement, the two companies will buy Vipshop Class A shares at .40 each, about a 55 percent premium over Vipshop's Friday close, said a statement JD.com sent to the Global Times on Monday. Tencent and JD.com will own 7 percent and 5.5 percent of Vipshop's total outstanding shares, respectively.

Founded in 2008 in Guangzhou, capital of South China's Guangdong Province, Vipshop was listed in New York in March 2012. Since then, the company has seen profit for consecutive 20 quarters.

Tencent will grant Vipshop entry via its WeChat Wallet. JD.com will provide Vipshop entry on the main page of its mobile app and its WeChat Discovery shopping channel to assist Vipshop achieve its sales goals.

The tie-up indicates a trend of resource complementation and industry integration in the nation's Internet sector, experts noted.

"Developing e-commerce is a key strategy for Tencent. Like its purchase of a significant stake in JD.com in 2014, this investment will further solidify Tencent's place in the online retail sector," said Liu Dingding, a Beijing-based independent technology analyst.

At the same time, the deal will bring into play JD.com's strengths in electronics and Vipshop's expertise in fashion, creating a competitive edge against domestic e-commerce giant Alibaba Group Holding, Liu told the Global Times on Monday.

"We, together with Tencent and JD.com, will leverage our respective strengths to form a strategic cooperative alliance aiming to achieve a deep, win-win cooperation and benefit Internet users and consumers," Shen Ya, Vipshop's co-founder, chairman and CEO, was quoted as saying in the statement.

In the third quarter, Vipshop generated net revenue of 15.3 billion yuan (.3 billion), an increase of 27.6 percent year-on-year.

"For years, Vipshop has operated independently. But with more and more resources flowing to Internet titans, small and medium-sized platforms are under increasing operation pressure and it's inevitable that they will seek the embrace of Internet giants," Li Yi, a research fellow at the Internet Research Center under the Shanghai Academy of Social Sciences, told the Global Times in an interview on Monday.

With plentiful users and capital resources, Tencent and Alibaba reach out to second- and third-tier cities via investment, gradually developing into business empires, Li said.

Domestic news site 36kr.com reported earlier this month that Tencent has invested in more than 400 companies since 2010, compared with 201 for Alibaba.

However, the development of the domestic Internet sector is unhealthy, as the growth of Tencent and Alibaba far outpaces the industry average and crimps the growth prospects of small and medium-sized Internet companies, experts said.

The annual revenue of the industry leaders increases about 50 percent compared with the average level of 15 percent to 20 percent, Liu noted.

He also said that this discrepancy illustrates the imbalances of the Internet ecosystem.

Li said that unbalanced development may produce the "Matthew Effect" of the strong getting stronger, while killing off many start-ups.

"Because of user and capital limitations, many entrepreneurs can't achieve success in areas where Internet giants operate. As a result, these small businesses are seeking support from Tencent or Alibaba, which doesn't foster free entrepreneurship," he said.

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