The New Anti-Trust Law - What Does the Future Hold for China's Internet Giants?

Large internet companies such as Alibaba Group, Tencent, and JD, played a crucial role in driving the Chinese economy, especially during the past decade. However, as various sectors in China's economy began to mature, key incumbent players have emerged and consolidated their status through significant first-mover advantages and economies of scale, in addition to the exploitation of certain regulatory loopholes. The strong and relatively unchallenged positions of these incumbents prevented new players from entering or competing in the industry, which has resulted in a shift from innovation-driven profit-seeking business activities to a focus on predominantly price-driven profit maximization.

On November 10th, 2020, China's State Administration for Market Regulation published a draft named "Anti-Trust Guidelines for Platform Ecosystems", aimed at regulating large intenet companies with dominant platforms or ecosystems. These Guidelines are intended to reduce market distortions and promote greater competition in the markets, through the use of a dynamic and flexible regulatory framework with clearly identified factors that are particularly relevant to internet companies.

In this article, we walk through each component of the new Guidelines with applicable examples of high profile Chinese internet companies to illustrate.

Note: although Ant Group's IPO was suspended only a week before the Anti-Trust Guidelines were launched, the IPO was suspended because of the new online microlending regulations in China that came into effect immediately preceding the IPO (see here) rather than because of the Anti-Trust guidelines. However, Alibaba Group has recently been fined for anti-trust violations (article coming soon), which is most likely a signal from the Chinese government that the regulators will be more stringent with anti-trust monitoring, prevention and penalization in the future.

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What is an Internet Platform?

Under the new Guidelines, an internet platform is defined as a business organization based on internet technology, where different entities that rely on each other interact with one another to generate mutual benefits under the specified rules created by the host.

For example, Meituan, the dominant food delivery services provider in China, qualifies as an internet platform since different entities including restaurant operators, riders and consumers, interact with one another to generate mutual benefits under the platform rules instigated by Meituan. Similarly, Taobao and China's popular travel booking website, Ctrip, also qualify as internet platforms.

How Are Markets Defined for Internet Platforms?

The Guidelines propose a set of specific factors relevant to internet companies that can be used to define the market(s) in which a company operates in. Interaction effects between different internet platforms (i.e. cross-platform effects) are also considered in market determination.

New Factors Relevant to Internet Companies

Since there is no such thing as a prototypical internet platform and each individual platform engages in a wide range of complex businesses with dynamically changing competitive landscapes, the traditional definition of what constitutes a market cannot be applied to internet platform companies. The new guidelines suggest that regulators should consider factors such as the platform's business function, business model, user demographics, and offline transactions in defining what constitutes a market.

Example - The Evolution of DiDi's Business Model and Growing Market Influence

DiDi is a Chinese app similar to Uber in the west and Grab in Southeast Asia where users can call private cars and taxis to get from place to place.

DiDi users can use the DiDi app to call a taxi and pay in cash to the taxi driver. In this case, the transaction is offline and does not count as a transaction via the DiDi platform. Even though it seems as if DiDi does not participate in the traditional taxi market, the company still has the potential to influence the market as consumers develop the habit of calling taxis through the DiDi app. Although DiDi did not charge a service fee at first for connecting drivers and riders, however after consumers became accustomed to using the DiDi app to hail their taxis, DiDi started piloting a small service fee for hailing taxies in select cities.

DiDi also gives out coupons to users which are only valid for DiDi cars rather than third-party taxis. Consequently, after building the consumer habit of calling private hires and taxis through the DiDi app, the company could easily influence consumers to shift from riding taxis to purely using private DiDi cars with online transactions on the DiDi platform.

Cross-Platform Effects

Depending on the platform's functionalities and/or cross-platform effects, an internet platform may be viewed as operating in a single independent market or as operating in an ecosystem of multiple related markets. Cross-platform effects are also recommended for consideration when evaluating an internet platform's monopoly status.

Example - Alibaba Group/Ant Group Ecosystem

The integration between Alibaba Group's e-commerce platform and Ant Group's various financial platforms is a prime example of an internet company ecosystem. Shoppers who purchase items through Alibaba or partner merchants use Ant Group's Alipay digital payment platform to pay for their purchases, whilst Ant's other financial platforms (i.e. CreditTech, InvestmentTech, and InsureTech) rely on user data from Alibaba to generate appropriate financial product recommendations to users.

Read more about Ant Group here.

Example - WeChat Mini Programs Ecosystem

WeChat was designed to be a messaging app but has ultimately emerged to become China's go-to super-app. Many companies create platforms (called WeChat Mini Programs) that are compatible with the WeChat platform as a way to enter the market and gain access to a large customer base. WeChat users can access these third-party platforms on the WeChat app, with many kinds of businesses offering Mini Programs ranging from news and media to games and restaurant ordering services platforms.

Example - Tencent's Cross-Platform Influence in the E-Commerce Market

Tencent (which owns WeChat) does not directly operate an e-commerce business but still has significant influence over the e-commerce market. Since Tencent was a large shareholder of JD, the company banned the sharing of website links that can encourage WeChat users to shop from JD's competitors (e.g. Taobao or Pinduoduo) via the WeChat app. Afterwards when Tencent acquired a stake in Pinduoduo, the sharing of Pinduoduo links was subsequently allowed, although Taobao links are still banned.

How is an Internet Platform's Market Power Determined?

The Anti-Trust Guidelines propose a set of additional new factors that can be used as part of a dynamic approach in evaluating internet companies' market power.

New Factors Relevant to Internet Companies

Traditionally, revenue and transaction amount were the main factors used in determining companies' market power. However, since internet companies differ from traditional companies in terms of their business models and operating environment, the new guidelines propose an additional set of factors that are more relevant in determining the market share of internet companies. These factors include new user growth, number of clicks, average platform usage time, and user stickiness. For example, a growth stage internet platform might have low revenues due to discounts and free credits given to attract new users, although the platform can still be considered as monopolizing the market based on user growth and/or transaction volume.

A New Dynamic Approach to Assessing Market Power

The guidelines also emphasize the importance of adopting a dynamic view of market power rather than the traditional static view where companies' market power were evaluated purely based on their market shares at a given point in time. With a dynamic view, the key points of consideration are expanded to include ease of entry and barriers to market entry, with economies of scale and the acquisition cost of user data being two particularly important factors.

Generally, internet companies enjoy a first-mover advantage and economies of scale that can significantly hinder new competitors from entering the market. Under the traditional static approach to assessing market power, internet platforms that have a small market share would be considered as having little market power even if these incumbent platforms have a significant first-mover advantage or enjoy benefits from economies of scale that can deter new entrants from entering the industry, resulting in a monopoly in the long run. The goal of adopting a dynamic approach to assessing market power is to lower barriers to entry in order to promote competitive markets driven by long term innovation, rather than industries with powerful incumbents whose long run profits are driven by high prices as a result of their dominant market positions.

Additional factors that will be considered in determining an internet platform's market power include the platform's influence and ability to control downstream and upstream markets, any network effects, the ability to possess and process relevant data, switching costs for consumers, as well as the nature of investors who have a stake in the platform. For example, if many venture capital firms have already invested greatly in an internet platform, it would be difficult for new challengers