China’s ‘Big Tech’ crackdown: A step forward

China’s ‘Big Tech’ crackdown: A step forward

There’s a growing consensus around much of the world that internet platforms have enjoyed a consequence-free environment for far too long. Many governments want to put in place stronger regulations for ‘Big Tech’, but there’s a significant variation in the nuance, speed and intent of regulatory response across regions.

The decisive actions taken by China may have surprised many, but we don’t see them as signs of China not appreciating innovation. Nor do we think that China intends to impose greater state control on (or even ownership of) its tech giants. Much of the regulatory agenda appears to be driven by pragmatic concerns around abusive monopolistic behaviour and reckless competitive engagement. In our view, this will ultimately strengthen both leading Chinese tech innovators and their ecosystems, as they encourage entrepreneurial innovation.

Looking ahead, we see the future through the following lenses:

1.   ‘Ecosystem’ does not mean exploitation

The economic temptation to become gatekeepers is often too great to resist for internet platforms. Mobile app stores in China continue to charge 30% (or more) in gatekeeper fees on all throughput across all applications in their stores. This hurts smaller developers while providing an unfair and transparent view to app store owners on innovative new ideas. Social networks, such as those owned by Tencent, wall off rivals, while providing an easy channel for group investee companies (such as Pinduoduo and JD) to reap the rewards of the social traffic.

This must change. But not all change needs to be disruptive or damaging. Opening social media to all might make Tencent’s WeChat even stronger than it is today. Pinduoduo and JD may lose their exclusive access to Tencent’s social channels, but we believe their advantages in cost effective, “gamified” shopping (as with Pinduoduo) and fulfilment infrastructure (as with JD) will sustain. We expect regulatory action to sustain what was well-earned, while removing that which was appropriated.

2.   Extraction differs from facilitation

Internet platforms can earn money in two ways: by extraction or through facilitation. Extraction is defined by commissions, take rates, operating fees – charges that can be ‘extracted’ from merchants and raised on a whim without the need to deliver better service. The other side of the coin is facilitation. Every business is currently seeking online expansion through traffic and higher sales. In our view, internet platforms that can help them achieve this by offering creative solutions will thrive.

A regulatory pushback to extraction while encouraging facilitation could make internet platforms more creative and consumer friendly. ‘Earn your keep’ should be the hand regulations play here.

3.   Financial ‘innovation’ cannot come at the cost of systemic stability

One of the most important outcomes of this intervention is the provision of clear regulatory guidelines for fintech disruptors. Fintech’s desire to operate in an unregulated zone separated from traditional financial institutions was always a step too far.

Society would benefit far more, if traditional financial institutions were given incentives to digitalize and artificial barriers around access to consumer data, traffic, and payment methods were removed. Data transparency and a fair sharing of risk and reward are all worthy objectives. They remove moral hazard from the system, forcing skin in the game for all players – traditional and online.

Fintech players don’t need to feel restricted. As traditional institutions gain fair access to online channels, fintech platforms should also be able to expand as digital banks, bearing the same regulatory responsibility as incumbents, while being allowed the freedom to choose their point of scale, market focus and cost structure.

4.   Data belongs to no one… and everyone

Data ownership has been framed as a battle for consumer privacy in the West. In China, it will be hard to divorce the debate from the watchful eyes of the ‘Big State’. As a result, we expect this reform to come slower. Early wins might centre around combining online with offline data, and then making this framework available to all innovators. This could help spur innovation – China has no dearth of talented entrepreneurs willing to try new things.

While there are uncertainties about many things in China, we believe that the recent antitrust regulatory interventions and guidelines will ultimately strengthen leading Chinese innovators by encouraging more rational competitive behaviour. US regulators, who are beginning to grapple with similar questions around the monopolistic behaviour of their own tech giants, could possibly learn a few things from the evolution of internet regulation in China’s very vibrant digital economy.

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