China’s internet firms are finding new ways to turn their loyal fans into paying customers. At the same time, their operations are expanding and they can afford less financial waste. Here is an overview of the key trends.
While many media companies and service providers in the West are still asking how to profit from avid users of their apps, considerable progress has been made in Asia. Advertisements in messenger apps have made real breakthroughs, with mobile live streaming revealing itself to be a major cash cow. Payment through mobile devices has become so commonplace that many consumers go entirely without their wallets. And the communication service providers get a percentage for every purchase.
Advertising in Messenger Apps
Customers in Germany would probably complain en masse if Whatsapp was suddenly inundated with adverts, but the approximately 800 million users of leading Chinese messaging service WeChat have taken such a change in their stride. This is likely due to a gradual introduction of new advertisements.
In spring 2015, the first paid content appeared in WeChat users’ “moments”. These are analogous to timelines on Facebook, a place where users can upload photos, videos and personal musings and updates. Tencent, the company that owns WeChat, now displays PR material from paying customers among this private information, taking care to prevent the insertions from becoming too distracting. Business is booming.
The internet giant has thus found a way to make money from the enormous popularity of its chat app. According to Chi Tsang, an industry analyst at HSBC: “Tencent has generated a considerable profit from its new monetization systems.”. Some brands have turned their small-scale, in-app adverts into an art form. Jaguar celebrated its 80-year anniversary with a pencil-sketch animation, while Chanel has built an online game into its adverts. At the same time, the messaging service Line, a major regional competitor from Japan, has also begun integrating advertising into its app.
The fact that large-format smartphones are very popular in China plays right into the hand of these online advertising offensives. Boasting the size of a hefty chocolate bar, the Huawei Mate 8, for example, is a popular “phablet”—midway between a tablet and a phone. Significantly more content can be displayed on the screen of such a device, allowing advertisements to appear less conspicuous. According to industry insiders, Tencent earns about 10 Euro per month per WeChat user; Whatsapp has to settle for a mere Euro on the same scale.
Live streaming also made a breakthrough this year as a mass-phenomenon in China. According to market-research company iMedia Research, there are currently 325 million registered users of live streaming portals in China. One reason for the tremendous success in this sector may be soft-core pornography. While depictions of sex are freely available through certain online portals in the West, pornography is completely outlawed in China. Paradoxically, conventional live streaming services help cover this erotic market segment.
On the homepage of China’s leading live-streaming service, YY, one encounters scantily clad young women, supine and giggling. More than this would not be allowed, and indeed, more is not shown.
Apparently, however, this teasing goes down well with its male audience. Tencent estimates that 80 percent of the performers on its own portal QQ are young women, while its viewers are overwhelmingly young men. The gay dating app Blued has also enjoyed massive success with its live stream function. Not wholly unexpectedly, it features countless lads presenting themselves in sleeveless tops. Nonetheless, on most portals, school bands, philosophers, seniors, and goldfish also count among the ranks of live streamers.
From the perspective of the companies offering the service, live streaming is an enormously important source of revenue. Not only can viewers send messages directly to performers’ displays, but they can also send them virtual gifts, such as bonbons, pickles, or roses. Users pay streaming services mere pennies for every such gift, but the sheer size of the market means it still yields a considerable profit. By the end of 2016, the more than 300 million live streamers in China will have spent a combined 2 billion Euro on virtual gifts.
According to analysts, by 2020 the Chinese market for purchases on streaming platforms will reach a volume of 8 billion euro. Even data-centre companies like Xunlei are eager to make an entry into this fledgling industry. “We’re talking about a new line of business that is capable of generating amazing profits”, according to a company spokeswoman. As far as the technology is concerned, streaming is not all that different from downloading. This means the infrastructure needed for a smooth data transfer is already in place.
Can China keep up the pace?
After years of relentless expansion in China’s tech sector, a phase of consolidation appears to have begun. For the first time, internet giant Alibaba hired fewer employees this year, while the other market leaders, Tencent and Baidu, scaled down their previously aggressive campaigns to recruit talented graduates.
Venture capital is also harder to come by. In the second quarter of 2016, investments shrunk to only half of those registered in the first quarter. Over the course of the year, 160 internet companies registered as insolvent. This represents a fairly new situation for China: for years, hyper-growth and a surfeit of capital have propelled even the weaker players in its tech industry onwards and upwards.
Expert observers believe that the causes for this recent plateau lie in weak overall economic growth. “Every industry has been impacted in one way or another”, according to Liu Haufang of the Watermelon Institute, a company that assists startups in their early stages, and author of the book “The Third Internet Revolution”.
Nonetheless, for the major players in the industry, profits continue to skyrocket. The retail platform Alibaba is again anticipating a nearly 50-percent increase in revenue for 2016, while the search engine Baidu along with game and app provider Tencent can also boast enviable margins. The most important driver of growth remains the mobile market. Analysts expect that the more innovative companies will enjoy growing returns despite the larger economic slowdown, and that 2017 will bring breakthroughs for many new ideas and concepts in China’s tech sector.
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