As of April 2021, the Chinese companies with the largest market capitalization listed on both Hong Kong and US stocks are Internet companies (Tencent and BABA). At least seven Internet companies are valued at more than US $100 billion (Tencent, BABA, Meituan, Pinduoduo, Kuaishou Technology, JD.com, byte jump). There is no doubt that the Internet is not only the biggest economic miracle in China in the past two decades, but also the most wealth-creating industry.

In overseas capital markets, the compound word Chinternet (China + Internet) has emerged to describe Internet giants from China. In the world, only the United States has more Internet giants and higher valuations than China, such as the famous FAANG (Facebook,Apple, Amazon, Netflix, Google). After a boom in 2020, the gap between the valuations of China's leading Internet companies and FAANG has narrowed sharply.

At this moment, I would like to point out that the feast is coming to an end. The Internet growth dividends of the past two decades, especially those of Internet platform companies, have been exhausted. The business development logic of Internet companies needs to be fundamentally rebuilt, and their valuation system needs to be fundamentally rebuilt. Under the joint action of three factors, such as the depletion of traffic growth, macroeconomic structural adjustment and anti-monopoly of platform economy, the golden era of Internet platform is gone forever.

We need not be overly pessimistic about this, because the end of one era is the beginning of the next. In the past two years, more and more brand, product and content companies have dominated the market, and they will replace Internet platform companies to become the mainstream of the new generation of unicorns. After enjoying a dividend period of more than 20 years, the infrastructure built by the Internet platform will still support the economic and social development of countless generations in the future.

General contents of the Twilight of the Gods:

• Review History: four Internet dividends and their consequences

• The competitive territory of the Internet platform in 2021

• The essence of Internet platform: rule-making Power + Taxation Power

• The formation, development and collection of the three unfavorable factors

• Platform crisis and product / content side opportunities

• Ending: the Twilight of the Gods

Review History: four Internet dividends and their consequences

Since the mid-1990s, China has experienced four "Internet dividends", one of which is false, two are true, and one is half-true. As a result, the first dividend period led to a serious valuation bubble for Internet companies, the second and third dividend periods led to orderly fundamental-driven valuation expansion, and the fourth dividend period led to a resurgence of serious bubbles.

I am fortunate to have experienced the whole process of China's Internet industry from scratch. More than 20 years ago, when I was a middle school student, I read daily newspaper reports about Internet "knowledge experts" getting venture capitals. now, when I see financial media and self-media reports about Internet unicorns, I feel as if time has never passed.

However, history never repeats itself, but spirals up like a waltz, tossing and turning between rough seas and bubbles.

Bogus PC Internet dividend (1995 Muhammad 2001)

China's Internet infrastructure began in the mid-1990s. During this period, the Internet industry in the United States has become quite mature, which triggered the Nasdaq bubble that shocked the world. A little bit of this bubble spilled into China, bringing a certain amount of dollar capital, which catalyzed a large number of early Internet companies.

Looking back at the speeches, interviews and plans of those Internet entrepreneurs before and after 2000, we will find that their storytelling level is by no means inferior to that of today's descendants. it has also won a certain degree of support from investors and professional media.

Unfortunately, this was a false dividend period because Internet penetration in China was very low at that time:

By the beginning of 2000, there were only 8.9 million Internet users in China, most of them concentrated in first-tier cities. The vast majority of users use dial-up Internet access, which makes it difficult to use any function other than information browsing and e-mail; because the Internet is expensive, information browsing can only be carried out offline. In this environment, it is impossible to produce any decent Internet service.

This "PC Internet dividend period" is forced by capital to mature, so it is a false dividend period. With the bursting of the Nasdaq bubble in March 2000, it came to an end.

However, the growth of Internet users in China has not been affected by the bursting of the bubble at all. It is mainly affected by two factors-the growth of per capita income and the improvement of communications infrastructure.

It turns out that user demand is always driven by structural fundamentals rather than fleeting enthusiasm for capital. Internet companies that survived the bursting of that bubble will receive huge rewards in the next fundamentals-driven Internet dividend period.

Real PC Internet dividend period (2002mur2009)

At the end of 2002, the number of Chinese Internet users exceeded 50 million for the first time, and the number of broadband Internet users had official statistics for the first time. From then on, the "real PC Internet dividend period" began: Internet cafes are becoming more and more popular, more and more families have Internet computers, and Internet charges are gradually falling to a level acceptable to the urban population. The Internet infrastructure can finally support some of the more complex functions.

At first, the Internet companies that survived the bursting of the Nasdaq bubble have not yet found a reasonable business model and have no choice but to rely on mobile SP services to survive the most difficult time. By the mid-2000s, advertising and games, the two most efficient Internet business models, have finally matured, thus opening a breakthrough in the rapid development of the Internet platform. From 2004 to 2007, Tencent, Baidu, Inc. and BABA's B2B business were listed successively; Sina, NetEase, Inc and Sohu.com Ltd also made a profit.

However, until before 2010, Internet companies had not returned to the focus of the capital markets, when Hong Kong stocks and US-listed stocks were the hottest markets, with state-owned enterprises, new energy and consumer goods being the hottest.

In 2007 Mel 2009, there was another surge in the number of Internet users in China, especially the number of broadband Internet users, which far exceeded the level of previous years; broadband penetration was rapidly pulled to more than 90%. This may be caused by the upgrade of broadband fixed network (from 1~2Mbps to 10Mbps), or it may be related to the fierce competition after the reorganization of the three major operators. In the past two years, China has added more Internet users than previously accumulated users, and most of them use high-speed broadband.

In the second half of 2008, China's Internet user base surpassed that of the United States, ranking first in the world; at the beginning of 2010, the number of Internet users in China exceeded the total number of Internet users in the United States. The so-called Chinternet investment logic has been fully established: China's huge user base, combined with the marginal benefits of the Internet, in order to create huge economic benefits. The capital market began to give higher valuations to companies like Baidu, Inc. and Tencent, and looked forward to the listing of more companies such as BABA (Group), JD.com, 360and so on.

However, the capital markets still did not expect that a bigger and fiercer dividend was coming, which would dwarf the previous PC Internet dividend and make the Internet giant the dominant player in China's economy.

The strongest mobile Internet dividend in the world (2010 Mustang 2019)

China's mobile Internet dividend is not only real, but also the strongest in the world. The mainstream view in the market is that 2010 or 2011 is the "first year of the mobile Internet" in China, as Wechat and XIAOMI mobile phones are launched at this time, and Weibo Corp services, represented by Sina, are also popular at this time.

There is some truth in this view, but it seriously ignores the fact that China had the foundation of the mobile Internet as early as 2008, driven by the popularity of 3G networks. The popularity of smartphones is only a natural development on this basis.

At the end of 2008, the number of mobile Internet users in China exceeded 100 million; two years later, that number soared to 300 million, and mobile Internet penetration surged to 66%, far ahead of most major countries. At this time, smart phones are not yet popular, and most mobile netizens use functional phones (especially copycat phones) to surf the Internet, and can only use simple services such as web browsing, e-mail, music and so on. However, the functional machine has planted a seed, developed the habit of users, and made them very willing to accept mobile Internet access. From this point of view, MediaTek's contribution to China Mobile Limited's Internet is no less than XIAOMI.

The popularity of domestic smartphones such as XIAOMI, OPPO, vivo and Huawei, as well as the expansion of 4G mobile networks, have promoted the blowout growth of China Mobile Limited's Internet. By the end of 2015, China's mobile Internet penetration rate had exceeded 90%, a rate that has never been seen before or since.

During this period, the Internet industry is enjoying two waves of dividends at the same time: the PC Internet dividend is not over, and the mobile Internet dividend is coming again! You know, the mobile Internet is not just "the mobility of the Internet", it also means a significant increase in user stickiness and greater platform control over user data-both of which mean higher liquidity potential.

In the world's strongest wave of mobility, some Internet companies have declined because they failed to switch to mobile in time, but the most embarrassing ones are those in traditional industries-they have not even adapted to the PC Internet, let alone the mobile Internet.

Veteran users may recall that between 2012 and 2014, Gome and SUNING vigorously developed their e-commerce platforms and launched an onslaught on JD.com, which proved to be ineffective. because JD.com (and its old rival Taobao) has already begun the mobile transformation, thus completely leaving the traditional retailers in the previous generation.

When capital markets talk about the term "flow dividend", they are actually talking about mobile traffic dividends after 2010. With the growth of users, the use of users is also getting longer and longer, thus forming a two-wheel drive. In the process, there are periodic "market segment traffic dividends" that can create one or more new giants each time:

• The decline in mobile data charges and the increase in bandwidth have brought dividends to short video platforms such as Douyin

• The continuous improvement of the computing power of mobile smart devices has brought continuous dividends in new categories of mobile games.

• The penetration of the mobile Internet into the Z generation has brought dividends to Bilibili Inc. and second-dimensional content.

• The penetration of mobile Internet into low-line cities and towns has brought dividends from Pinduoduo and Kuaishou Technology.

Almost everyone underestimates the duration of China Mobile Limited's traffic dividend. The issue of "running out of mobile traffic dividends" has been discussed since 2017, but in the next three years, China will still have about 100 million new mobile Internet users each year, and the average daily usage time is still slowly rising. This is mainly due to the fact that the growth rate of users in the sinking market is much faster than expected, thus delaying the point in time when mobile traffic dividends are exhausted.

Until 2020, the sudden outbreak broke everyone's plan, bringing the most unexpected and final wave of traffic dividends.

Seal of flow dividend: half-true epidemic dividend (2020)

At the beginning of 2020, when the epidemic began, few people really thought it would bring any dividend to the Internet industry. After all, the SARS epidemic in 2003 did not bring any dividends, and the so-called "SARS made Taobao and JD.com" is nonsense. However, people soon discovered that the Internet industry really seems to have received an "epidemic dividend", which can be clearly reflected in statistics and financial statements:

In 2019, the average daily use time of China Mobile Limited Internet users remained stable at about 6 hours, almost no increase compared with the previous month. But by the first quarter of 2020, the average daily usage time had soared to 7.3 hours.

As people stay at home and have a lot of time, the stickiness of heavy games, live streaming, short videos, medium videos and other entertainment content has increased significantly, and users' propensity to consume has also risen to an all-time high.

Homestead has led to the decline of offline retail and catering consumption, while greatly increasing consumers' dependence on e-commerce and O2O. Although the actual shipping volume of the e-commerce platform in the first quarter is limited due to the decline in express delivery capacity, the cultivation of user habits is real.

The epidemic has stimulated the demand for telecommuting and distance learning, which has brought huge traffic dividends to a number of related applications such as Tencent conference, nails, flying books and even Bilibili Inc..

However, the "epidemic dividend" for the Internet industry is by no means a mixture of rain and dew: although the duration of user use has increased significantly, there has been little increase in the number of APP opened by users. During the epidemic, neither a new large-scale Internet platform nor a new vertical head platform was produced. Some of the less risk-resistant unicorns have died, and their market share has fallen into the hands of a limited number of giants.

Capital markets have reached a consensus: the impact of the epidemic on the real economy means the promotion of the Internet economy, while the crackdown on small and medium-sized enterprises means the promotion of large companies. All in all, large Internet companies will only benefit, not suffer, so their share prices have hit record highs.

Unlike the previous waves of "flow dividends", this "epidemic dividend" is half-true and half-false, and there are certain solid arguments for optimism and pessimism in the market:

The increase in the duration of user use as a result of the outbreak proved to be a flash in the pan-by the third quarter of 2020, the length of user use had fallen to the level of a year ago. Of course, during the Spring Festival in 2021, "celebrating the Spring Festival on the spot" brought another wave of traffic dividends, but the scale is not very large. Anyone who builds a growth model based on how long users use it at the peak of the epidemic will be disappointed. This is the false side of this dividend.

The user habits cultivated by the epidemic are to some extent permanent-community group buying is the best example; the growth of short and medium video platforms continues; and the transfer of offline consumption to online consumption has accelerated. This is the true side of this dividend.

In addition, the specific impact of the epidemic on the economy is difficult to measure. In the short term, it may be reflected in the continuous transfer of offline consumption to online (and the same is true of offline advertising budgets); in the long run, it may revolutionize the economic growth paradigm of the past years, thus greatly increasing the uncertainty of the business model of all Internet platforms. Now the market only sees the former, but selectively ignores the latter. This is the true and false side of this dividend.

In any case, this will be the seal of four Internet traffic dividends in the past two decades, that is, the "final dividend". From now on, it is difficult to expect any structural growth, both in terms of user base and duration of user use. So, the growth of the Internet industry can only come from three aspects:

1. Improve the level of commercialization, that is, increase the income of a single user, and explore new ways of commercialization.

2. Shift from consumer side (To C) to enterprise side (To B) to "empower" traditional industries

3. Go to overseas markets to seek the growth of users and income.

The above three paths have been discussed countless times by practitioners and capital markets. Unfortunately, they all have some serious problems, so they do not constitute the "second growth curve" of the Internet industry as a whole. We will discuss the advantages and disadvantages of the above path in detail in subsequent chapters. The more important question now is to figure out the competition pattern of the whole market when the Internet traffic dividend is coming to an end.

The competitive territory of the Internet platform in 2021

By the end of the first quarter of 2021, Internet platforms had carved up the vast majority of users, tracks and business models. Today, it is almost impossible to build a "platform company" from scratch. The capital market is also aware of this, so now the main battlefield of venture capital has already shifted to the content and brand side.

Therefore, it is also the most stable period in the history of Internet platform competition, because the increment is limited and the overall situation has been decided. Although some people still hope that byte jump will overthrow Tencent, Pinduoduo or Meituan to subvert BABA, this kind of thing cannot be accomplished in a few years. We are moving from a drastic "non-steady state" to a slowly changing "steady state". The current competitive pattern is likely to remain roughly in place for the next three to five years or more.

Incidentally, there are different definitions in the market about what is an "Internet platform" company (rather than a product or content company). In the next chapter, we will elaborate on the definition of "platform company" by the rogue regiment.

The "five circles" of the Internet platform according to user attributes

Any Internet platform has two natural attributes: user and commercialization. Users are the basis of their income, and commercialization is the process by which they generate revenue from users. Therefore, we can divide the Internet platform into different levels and "circles" from these two natural dimensions. Let's start with user attributes.

We believe that the user attributes of any Internet platform can be divided into two dimensions:

1. User base: the total number of users using this platform can be measured by MAU (monthly active users), DAU (daily active users) and other indicators. For e-commerce platforms, AAC (annual buyers) is also important. For content platforms, VIP paying users are also an important indicator.

2. User stickiness: it is the attraction or "irreplaceability" of this platform to users. We cannot accurately measure "user stickiness" because there are too many and complex indicators, including user turnover rate, average daily opening frequency, average daily use time, percentage of paying users, DAU/MAU ratio, repurchase rate / renewal rate, and so on. It is difficult to directly compare the user stickiness of different types of platforms-for example, Douyin users must have used much longer than Taobao, but we can't simply and roughly conclude that "Taobao users are not as sticky as Douyin". We can only synthesize the various indicators and come to a generally reliable conclusion.

With the user base as the horizontal axis and the user stickiness as the vertical axis, we can divide the mainstream Internet platform into "five circles":

1. Overlord: the one who reaches the highest level in terms of user base and user stickiness is the well-deserved overlord. There were only Tencent and BABA before, but now there is another byte jump. The three overlords all have at least 2 top APP and have their own APP in most vertical markets, thus forming a complete ecosystem. In the foreseeable future, it is unlikely that new companies will join the ranks of hegemony.

2, the former overlord: the platform with a large user base but weak user stickiness is the former overlord. Such companies have either made mistakes in the transition from PC to mobile, or their original business has been seriously eroded by competitors in the mobile era. Baidu, Inc., Sina (including Weibo Corp), 360 can all be classified as overlords in the past, among which Baidu, Inc. has a tendency to break away from this circle through hard struggle in recent years.

3. Alternate hegemony: the user base is second only to the overlord, and the user stickiness is second only to or even equivalent to the overlord's platform, which we call the alternate overlord. Compared with overlords, alternate hegemons generally have a single business and do not have a complete flow and business ecosystem (although they are trying to expand their business scope). Meituan, Pinduoduo, Kuaishou Technology, JD.com and DiDi Global Inc. are typical alternate overlords; they all accepted Tencent's investment, and one of them (DiDi Global Inc. Travel) accepted the investment of Tencent and BABA at the same time.

4. Drooping princes: the platform that has the dominant position in a certain market is drooping princes. It is difficult for outsiders to break into their territory, and it is also difficult for them to expand into other vertical categories. This circle can be further subdivided into two categories: vertical content platform and vertical e-commerce platform. There are only three ways in front of them: either expand at any cost to seek "out of the circle", the typical example is Bilibili Inc., or strive to dig deep into the commercial potential of their vertical category, such as KE Holdings Inc. and Autohome Inc; or integrate into a hegemonic ecosystem to gain operating leverage, and the typical example is China Literature.

5. Lost princes: this kind of platform has a certain user base, but does not occupy a dominant position in any vertical category; it has a certain user stickiness, but it is not irreplaceable to anyone. Due to insufficient commercial income and difficult to raise valuations, it is also difficult for them to obtain sufficient financial resources to break the existing situation. For these lost princes, it is the most realistic choice to fall into the arms of overlords or alternate overlords-the problem is that not everyone is qualified to be included by overlords.

It must be pointed out that the above analysis framework is highly simplified and ignores many special cases. For example, there are many tool platforms with a large user base and low user viscosity; the user stickiness of some platforms varies greatly at different points in time. Moreover, we analyze on a company-by-company basis, not on an APP basis, which ignores the differences in APP within the same company. None of this matters, because the framework is inherently simplified and a tool to guide our thinking. Readers only need to pay attention to the limitations of our framework.

The "five circles" of Internet platform according to commercialization

The fundamental goal of any Internet platform is to make money, that is, commercialization. Investors support a platform to burn money for user growth, in the final analysis, they still want to make money from these users. The ways to make money on Internet platforms can be roughly divided into two categories:

1. Collect money from B-end, that is, enterprises or merchants. The most typical example is advertising. This is the earliest mature Internet commercialization model, applicable to all tracks, all vertical platforms.

2. Collect money from C-end, that is, consumers. In this model, the earliest mature is the payment for in-game purchase, followed by the subscription or reward payment for other content. Proprietary e-commerce businesses such as JD.com and Vipshop Holdings Limited can also be classified as C-end charging models.

There is no strict distinction between the advantages and disadvantages of the above two commercial models. However, the advertising model is early mature; (except for games) the C-side charging model is relatively late mature, and the mature process continues. Today, most Internet platforms operate two commercial models at the same time, such as charging users for subscriptions or internal purchases while inserting advertisements. Specific focus on which of the above models is not a decisive factor in the revenue of the Internet platform.

So, what indicators determine the earning power of the Internet platform? In our view, the following two indicators are the most important factors:

Business scope: that is, the number of business operated by a platform and the number of tracks involved. The broader the business scope of a platform, the more vertical categories it covers, the stronger the ability and potential of commercialization. Of course, any platform has its own "commercial stronghold", and other businesses are often just a foil.

Commercialization intensity: that is, the degree to which a platform develops commercial resources. For example, how high is the advertising load rate? What are the types and prices of props purchased in the game? What is the price of VIP paid members? Wait. In reality, any commercialization will inevitably damage the user experience, so the Internet platform is always trying to find a balance, not to fish, and to leave room for growth in the future.

It is worth noting that the "commercialization intensity" is actually determined by two factors-what the platform can do and what it wants to do.

For example: the ad load rate of a video platform is much lower than that of its competitors, perhaps because the platform is unwilling to insert too many ads, or because the product features determine that there are not so many ad spaces. If a company is less commercialized than expected, it is difficult for outsiders to tell whether the company does not want to do it or cannot do it. This is the fundamental reason why the revenue forecast of the Internet platform by the capital market is always far behind the reality.

With the business scope as the horizontal axis and the commercialization intensity as the vertical axis, we can divide the mainstream Internet platform into "five circles":

1. Super winner: a platform with a wide range of business and high commercialization intensity can enjoy the highest level of income and profits, so it is called a "super winner". Tencent, BABA and byte beat are all among the super winners. Among them, Tencent's business scope is the widest, but the commercialization intensity is low, whether the game or advertising business has left a lot of undeveloped inventory, the future potential seems to be greater than the other two.

2. The backbone of the market: the platform with a wide range of business and a high degree of commercialization is the backbone of the capital market. Please note that not all companies can achieve the same commercialization intensity-the monetization rate of Puduo is significantly lower than that of Taobao / Tmall, because this is how it survives; Baidu, Inc. 's commercialization intensity may not exceed the byte jump again, unless it can do a good job in short video and live streaming.

3. High expectations: the favorite companies in the capital market are companies with a wide range of business and low commercialization intensity, because they have huge virgin land to develop and great potential for revenue growth. Unfortunately, this kind of company is very rare. at present, there are only a few targets such as Kuaishou Technology, Bilibili Inc. and so on. Because of the high market expectations, these companies are under great pressure and must enhance the intensity of commercialization as soon as possible.

4. Zhanshan is the king: mainly the vertical platform with high commercialization intensity, which can create stable and growing income and profits, but the space for imagination is limited. Such companies tend not to be liked by the capital markets and can only enjoy low valuations unless you are on an imaginative track-KE Holdings Inc is a case in point. In order to break through the growth bottleneck, such companies often have to rely on M & An integration, and cases are common in recent years.

Potential stocks / problem children: if the business scope of a vertical platform is narrow and the commercialization intensity is low, there will be two diametrically opposed views in the outside world-when the market mood is good, the mainstream view will think that they are "potential stocks" and can take off as long as they make a breakthrough in either direction; when the market mood is poor, the mainstream view will think that they are "problem children" and are not worth studying. Therefore, their valuations always fluctuate between the two extremes, and China Literature and the investors of Heart Company must understand what I am talking about.

Of course, there are more than the above two factors that affect the commercialization of Internet platforms. Many people will point to the importance of the algorithm and data center (the secret to the success of the byte jump advertising business), the decisive significance of advertising sales (Baidu, Inc. and byte jump are both good at this), and the impact of game operators on the overall pay plate. In the final analysis, "commercialization intensity" is a fait accompli that can only tell us what happened, not why it happened. In the following chapters, we will analyze the nature of the commercialization of Internet platforms and the underlying reasons for the differences in the intensity of platform commercialization.

The connection of the platform: why Tencent is always a "peacemaker"

Careful readers must have noticed that as one of the three "overlords" and "super winners", Tencent's investment territory is much higher than BABA and byte jump. Meituan, Pinduoduo, JD.com and Kuaishou Technology are all associated companies of Tencent (holding more than 20 per cent or having seats on the board); in vertical platforms such as Bilibili Inc., Tencent's investment tentacles are omnipresent.

So the question is: why are so many platforms willing to let Tencent invest, or even occupy a higher stake? Why can't competitors do this?

There are many reasons. For example, Tencent's corporate culture is more introverted and generally does not interfere with the day-to-day operation of the invested company; for example, BABA is more inclined to take full control and merge the table, just as he did with Cainiao Network and Da Runfa. However, in addition to the above macro reasons, we also need to analyze the business attributes of the platform. For the invested companies, they certainly want to get as much strategic support from the investors as possible; in other words, the top APP of the investors must export resources to the invested parties. Therefore, the following factors are very important:

1. The degree of traffic surplus: a top APP must be in a state of traffic surplus, that is, "there is no shortage of traffic" in order to output to partners. Obviously, Wechat is the APP with the highest traffic surplus in China, and there are few alternatives, so users are extremely sticky. By contrast, Taobao has been in a state of traffic hunger and needs to rely on the external "flow prairie"; Alipay, as a tool APP, the actual traffic is not as large as it seems; Douyin is of course an APP with excess traffic, but the degree of surplus is still not as high as Wechat. All in all, Wechat has the most abundant and stable traffic to output, and everyone wants to get Wechat traffic.

2. Applicable scenarios: as social APP, Wechat and QQ have a wide range of applicable scenarios, which are suitable for outputting traffic for all kinds of partners. Taobao is a relatively pure e-commerce APP, the application of the scene is naturally limited. As a single-page short video APP of information flow, Douyin is famous for its immersive experience, which not only achieves the extreme, but also reduces the applicable scene. Kuaishou Technology's application scene would have been slightly larger, but with the product revision, it is becoming more and more like Douyin. Tencent has the absolute upper hand in this game.

3, its own commercial value: the lower this index, the better! The reason is simple: if a top APP itself is of high commercial value, there is no need to direct it to its partners, leaving the traffic in the body is the right way to realize it. Therefore, Mobile Taobao and Douyin, which are highly commercialized APP, are not suitable to be used as vertical and horizontal tools. On the contrary, Wechat, although has a higher commercial potential, but more restrained commercial development (in order not to damage the user experience), more friendly to partners. As a result, Tencent won this game again.

4. Ecosystem scalability: any top APP diversion to partners must be efficient, strategic, and try not to affect the user experience, so as to form a sustainable ecosystem. Wechat does the best job in this respect-the highest priority is the secondary entrance to the "Discovery" page (JD.com Shopping), followed by WeChat Pay Nine Gongge (Meituan, Maoyan, Pinduoduo, Mogu Inc, Vipshop Holdings Limited, transfer, KE Holdings Inc.). Then WeChat Mini Programs, official account, H5 landing page, etc. Alipay, Douyin and mobile Baidu, Inc. have achieved some results in learning about the ecosystem, but they are still far from it.

The conclusion is very clear: even without considering the factors of corporate culture and Tencent's tendency towards strategic investment (rather than mergers and acquisitions), cooperation with Tencent is the best choice for most "alternate overlords" and "vertical princes". Because, working with Tencent means getting Wechat's huge surplus flow, a wide range of applicable scenarios and flexible ecosystem expansibility; because Wechat's own commercialization is more restrained, there will be no urgent need to compete with partners for profits. It is not so much that Tencent's investment department has a good vision and can always invest in high-quality companies, it is better to say that high-quality companies are always more willing to accept Tencent's investment.

For BABA and byte beating, it is not without the possibility of breaking this situation:

Alipay has been revamping in recent years in an attempt to become a local life service platform. Due to regulatory requirements, Ant Group is likely to reduce the size of its lending and wealth management business; that means more resources can be exported to partners. The biggest problem now is that Alipay is too instrumental and users use it for a short time. If this problem can be overcome, Alipay will become an important outlet for partner diversion.

Douyin has become the APP of DAU, second only to Wechat, and has the ability of closed-loop e-commerce transactions. Compared with Wechat, Douyin has the advantage of TikTok, which provides an one-stop shop for Chinese companies trying to go abroad. Douyin's immersive playback interface greatly limits its applicable scenarios, but this is not a fatal problem. Douyin can compete with Wechat in e-commerce and local life.

In any case, when Tencent has a huge upper-hand advantage, it is very difficult to break this advantage. For most neutral Internet platforms, Tencent is still the best choice for peacemakers. In the steady state after the Internet traffic dividend is exhausted, "Peace under Tencent" is the most likely scenario, although many people may not be able to accept it.

The essence of Internet platform: the right to make rules + the right to tax

All the Internet companies we discussed above are "Internet platform" companies. The question is: what exactly is a platform company? What is the difference between it and a product, content, or operating company? This is a muddle-headed account, and everyone has his own opinion. Our view is simple: companies that have both "rule-making power" and "tax power" are platform companies; such companies also exist offline, and the online focus is the Internet platform.

The right to make rules: you can "legislate" within your own rule, welcome those who abide by the law and expel those who break the law. Wechat can make rules for ordinary users, official account managers and Mini Program operators; Taobao can make rules for both sellers and buyers; and any content platform can make rules for content creators and viewers. It is easy to understand that people who do not abide by the rules should not expect to play on this platform.

Tax right: especially the right to collect economic resources from platform partners, mainly content parties or brand parties / merchants. Please note that charging end users is not a unique attribute of the platform-most games charge players in a variety of ways, we can't say that game companies are platforms; all physical products charge consumers. They're obviously not platforms either. Only the right to charge platform partners (content / product suppliers) is the real "tax right".

Below we will specify how the Internet platform creates, retains, and uses these two powers.

"Internet thinking": build a platform, grow savagely, and then cut the clan.

Since 2011, the term "Internet thinking" has become very popular, but few people can give it an accurate definition. In fact, what most investors call "Internet thinking" is "the thinking of building an Internet platform", which follows the following process:

Choose a circuit that has not yet been occupied, or directly copy the track of your competitors, and set up a consumer Internet company with mobile APP as the core. This can be done by entrepreneurs, existing Internet giants, or even investors themselves.

Take money from investors, and then burn money at any cost to occupy the market, while using a variety of preferential policies to attract content or product parties. This stage is a bonus period for platform partners, which is suitable for them not only to take the flow, but also to roll the wool.

After a period of time, the money is almost burned, and the industry pattern tends to be stable. if you are lucky enough to be in the forefront of market segmentation, you can become a vassal and seek listing. If this cannot be done, it can only be acquired and integrated. In any case, the money burned will not be completely wasted.

As the industry fully stabilizes and the money-burning comes to an end, the surviving platforms will begin to "cut clans" (tighten control over partners) and increase monetization (exercising taxation rights). Since then, the surviving platforms will be able to earn back not only the money they burned, but also the money burned by closed or merged competitors.

The business path of "establishing a platform and exercising the right to levy taxes" is not uncommon and has been common since long before the birth of the Internet. Why in the Internet era, this path can be carried forward, quickly resulting in a large number of companies with a market capitalization of hundreds of billions or even trillions? This is caused by the combined action of three factors:

1. The scale effect of platform barrier: Internet platform has some characteristics of "natural monopoly"-the larger the scale, the stronger the stickiness of users and the stickiness of advertisers / merchants / content parties. Especially in the era of mobile Internet, users are becoming more and more lazy, which promotes the concentration of traffic to a small number of top APP, and merchants / content parties have to concentrate along with it. Unless the leaders make serious mistakes, their economies of scale are generally unbreakable; they can also further expand their lead by applying traffic and successes to other market segments.

2. Diminishing marginal cost: the term "Zhongtai" here mainly refers to technology and data, as well as some operations; they all have diminishing marginal costs. The revenue scale of an Internet giant expands 10 times, and the cost of Taiwan may only increase 2-3 times, thus creating huge financial benefits. Therefore, Internet platforms always have a tendency to expand indefinitely, not only to increase income, but also to dilute costs; their "natural monopoly" characteristics have become more obvious.

3. Weakness of content / product side: when Internet traffic dividend appears, Chinese content / product side is not ready, and consumers have not yet formed the habit of brand awareness. Such being the case, the content / product side can only be in a very weak position in the game with the platform. Because the platform leads the consumption habits of the whole society, they will certainly share the biggest piece of the cake. However, this situation is changing as the content / product side matures.

Since 2016, as mobile traffic dividends have been exhausted, the tendency of Internet giants to do business offline has become increasingly obvious. Their wishful thinking is that online traffic is becoming more and more expensive, but offline will become a "flow depression", providing themselves with a second growth curve. However, most of the platforms immediately bumped their heads against two major obstacles.

First of all, the scale effect of offline platform is far less than that of online platform. The competitive advantage accumulated in one location cannot be replicated to another, or even the successful experience cannot be translated. It will take much more time and cost to set up barriers to competition offline than expected.

Second, the "mid-Taiwan cost" of technology and data is only a small part of the offline business cost. Most of the costs will not be diluted naturally as the size of the business grows. There is also little room for technology-driven cost reduction.

Even if there is such a huge disadvantage, many Internet platforms have stuck to their heads and invested in the transformation and competition of offline business for several years. This process is very interesting, accompanied by blood, but it is not the subject of this article, so we will not discuss it.

The "taxing right" of the Internet platform is the core source of excess income.

As mentioned above, the main feature of platform companies is their "taxing power". Most companies have the ability to charge users, but only the platform has the ability to tax partners (content parties / merchants). This kind of taxation was also common before the Internet age-such as booth fees charged by hypermarkets, franchise fees charged by retail chains, and so on. However, the "taxing power" of the Internet platform is very wide and deep, which constitutes the core source of their excess income. We can divide this "right of taxation" into two major categories:

1. Explicit taxation: that is, to ask for economic returns directly from the internal party / merchant. The most typical examples are content sharing, such as the sharing of game CP by mobile app stores, live streaming platforms to anchors, online literature platforms to authors, etc., and the marketing fees and commissions charged by e-commerce platforms to merchants, which Taobao / Tmall or Pinduoduo merchants are all too familiar with.

There is also an imperceptible "tax", the platform's "scissors gap" on partners: using its market position to drive down offers for content or goods, thereby driving down partners' profits. This is common in proprietary e-commerce platforms and long video platforms. Therefore, whether a platform is based on "proprietary business" does not affect whether it has tax behavior or not.

In recent years, the taxation behavior of the platform shows a trend of continuous expansion. For example, on most self-media and short video platforms, if KOL wants to receive custom ads, it must go through the platform or pay a "toll" to the platform, otherwise it will be restricted or deleted. KOL receives less and less free traffic and has to advertise on the platform like e-commerce stores in exchange for traffic.

2. Implicit taxation: even if there is no direct money transfer, the platform can still indirectly occupy the output of the content party / merchant. For example, the content platform inserts advertisements in the information flow, or tilts the traffic of the emerging KOL that it supports-although there is no direct economic loss to the content side, the user's attention resources are diverted, and it is still the content side that pays the bill.

Discount activities such as shopping festivals dominated by e-commerce platforms are more typical of "implicit taxation" because most of the discounts are ultimately borne by merchants, while most of the benefits of increased user consumption are occupied by the platform. Therefore, the financial statements of the e-commerce platform may show that the monetization rate may be very low, but the actual burden rate of merchants is much higher.

Finally, the stringent terms that the platform puts forward to partners often become a way to generate income. For example, mobile app stores often require the game CP to sign betting agreements, forcing CP to charge itself; O2O platforms often set extremely high KPI for riders, and those who fail to do so will face a fine. This is also an implicit tax that is most likely to lead to criticism from the outside world.

Although the platform is in an absolutely strong position relative to the content side / merchant, this does not mean that they can be taxed at will. Even without taking into account regulatory factors such as anti-monopoly, the "right of taxation" of the platform is also restricted by the following factors:

The ability to make rules: inefficient management platforms are often unable to make rules and, even if they are, unable to enforce them. Human relations and corruption often seriously weaken the ability of platform operators to maintain rules. It is conceivable that if a platform's ability to make rules is very weak, its "taxing power" is just empty talk.

Ability to tax: taxation is a technical job because content parties / merchants will always try their best to evade it. For example, both sides of B2B e-commerce transactions often bypass the platform directly, forcing the platform to adopt more efficient charging models such as annual fees; live e-commerce anchors often induce users to transfer transactions to their own Wechat, thus avoiding the technical service fees of the platform. Generally speaking, the larger the scale of the platform and the fewer competitors, the stronger the taxation ability; the improvement of technical capability and operational efficiency also helps to improve the taxation capacity.

Willingness to tax: the platform's willingness to tax is not necessarily very strong. Sometimes it is to achieve sustainable development without damaging the user experience; sometimes it is to leave room for growth in the future; sometimes it is to meet regulatory requirements. Generally speaking, the higher the expectations of the capital market, the greater the pressure on platform companies and the stronger their willingness to tax.

If a platform is strong in all three, it is the favorite platform in the capital market; if it has a strong ability to tax, but not too strong willingness to tax, that is the most ideal platform in the eyes of the content / product side (did you think of Wechat? ). Common sense tells us that "the ability to make rules" is a prerequisite for "the ability to tax", and if a platform does not even have the former, it will certainly not have the latter. For any platform, the above three factors are in dynamic balance. In the final analysis, rules are formulated and enforced by people, and taxation is also carried out by people. The higher the quality of personnel and the stronger the organizational structure of a platform, the more effectively it can exercise the "right of taxation".

However, we can't ignore the attributes of the industry itself-some industries are naturally more suitable for the platform to eat meat, while others can only make the platform earn some hard money. Let's try to analyze what factors affect the taxation ability and efficiency of the platform in different Internet market segments.

Important indicators affecting the Taxation capacity and efficiency of the platform

In our view, in addition to legal and regulatory factors, there are at least four industry indicators that influence the "taxing power" of the Internet platform:

Degree of standardization of goods / services: obviously, the stronger the "replicability" of goods or services and the higher the degree of "industrialization / standardization", the stronger the voice of the platform, and the more the content / product side will degenerate into screws. Of all the attributes of goods / services, "location" is the most difficult to standardize, so O2O will suffer very much; to be exact, all platforms involved in offline consumption will suffer in this respect.

Requirements for platform infrastructure: infrastructure determines "compliance capability"-for e-commerce, the ability to deliver goods to users as soon as possible; for app stores, the ability to allow users to download and install as soon as possible. Video, live streaming and other forms of streaming media, because of the high storage and bandwidth resources, also need a strong infrastructure. The higher the requirements of a business on the infrastructure of the platform, the easier it is to form the Matthew effect, and the stronger the voice of the platform.

Importance of operational activities: some Internet services are naturally re-operational, such as traditional e-commerce and game distribution. In recent years, with the depletion of traffic dividends and the weakening of the natural customer acquisition ability of content / product parties, they generally rely more and more on the operation of the platform; this further enhances the voice of the platform. Operation is not simply to distribute traffic on the platform, but involves a lot of Know-how, so it is difficult for small and medium-sized platforms to compete with large platforms in this respect.

The possibility of consumption process bypassing the platform: any e-commerce transaction has the phenomenon of "running order" bypassing the platform; any content consumption also has the phenomenon of piracy, or the phenomenon of consumption provided directly by the author. If "running single" is easy and does not break the law, then it is difficult to expand the taxing power of the platform. The most typical example is that a number of domestic vertical games, including Yuanshen, refuse to log on to mainstream app stores and choose non-traditional channels such as official websites and TapTap to distribute them.

After scoring the above four indicators, we will find that the tax right of traditional e-commerce is almost perfect, but the tax right of O2O e-commerce is worse; the tax right of short and long videos is very strong, but the flow of picture and text information is relatively weak. Network literature is even weaker. This is completely in line with our intuitive perception and the financial data of these platforms. Among all types of platforms, stranger socializing and marriage are not dominant on every indicator-so there are few mainstream listed companies in this field (Momo Inc has long been transformed into a live broadcast platform).

It must be pointed out that what we have analyzed above is only the income side of the platform, but not its cost side. For example, long video platforms seem to have strong taxation capacity, but the costs are higher (including content and bandwidth costs), resulting in a general loss; traditional e-commerce platforms often face the problem of high customer costs, so it is not easy to make a profit. It can be seen that the higher the requirements of a business on the infrastructure of the platform, the higher the infrastructure cost of the platform itself; the higher the importance of operational activities, the higher the operating costs of the platform itself (including manpower and one-time expenses). This is a dynamically balanced relationship, needless to say.

Triple disadvantages to the Internet platform will be gathered in 2021

Any growth is not endless, and Internet platforms are no exception. Since 2018 at the latest, they have faced the shadow of three headwinds: the drying up of traffic growth; changes in consumer habits; and antitrust in the global platform economy. The 2020 "epidemic dividend" dilutes the market's understanding of these adverse factors to a certain extent, but it is impossible to really eliminate them.

In fact, the Internet platform itself has long been aware of the problem and is trying to find a new growth model-whether it can be found or not, the "barbaric growth" of the past decade or so is unlikely to return. Because economic fundamentals do not allow, consumers do not allow, regulators do not allow.

Traffic growth dries up: there is no new territory to grab

During the Spring Festival in 2021, under the call of "celebrating the Spring Festival locally", a large number of young white-collar users stayed in first-tier cities for the Spring Festival, and Internet platforms saw it as an once-in-a-lifetime opportunity to "pull growth". In the past, every Spring Festival, major platforms will launch a huge amount of red packet activities, this year's red packet scale is the largest in history, and some platforms have even more than doubled. Top APP icons show "2 billion points", "2.1 billion points" and even "2.8 billion points", which has become a spectacle reprinted by social media.

The fiercest red packet campaign in history has had mixed results-Douyin, Kuaishou Technology and Pinduoduo seem to have seen a wave of good growth, while other platforms have had mediocre results. Moreover, the total plate of Internet traffic has hardly increased during the Spring Festival, and the average daily duration of users has increased by only 12 minutes compared with the same period last year, but traffic has shifted from low-line cities to the first and second tier. We can boldly infer that during the Spring Festival this year, the ROI of customer acquisition activities on most platforms is an all-time low, and the wastage rate is also an all-time high.

The question is, doesn't the platform realize this? On the contrary, they have long realized that with the ebb of the "epidemic dividend", China's Internet traffic dividend is about to completely dry up. Therefore, they have to use the most direct and naked means of customer acquisition, and must outdo their competitors. In the past, because the entire traffic plate was increasing, the platform could achieve the most basic growth rate even if it did nothing; now, the traffic growth of all platforms may come from the loss of competitors. The transition from positive-sum game to zero-sum game often means that the game will be more cruel.

If the Internet platform is to achieve a level of growth similar to that of the past few years (which is almost impossible), it will have to attack the opponent's core territory; this attack is not just an attack at the traffic level. it also includes business model and ecological attacks. If the self-built business is too slow, it can be done through mergers and acquisitions, or both. The most typical example in this respect is byte jumping, which attacks almost all Internet segments, thus becoming a competitor to all other giants. In fact, Kuaishou Technology's "attack on all sides" degree is not inferior to the byte beat.

The live e-commerce track is a perfect example of how Internet giants attack each other's hinterland: the business was founded by traditional e-commerce platforms such as Taobao and Mogu Inc and experienced its first period of rapid growth from 2016 to 2018. Soon, short video platforms such as Kuaishou Technology and Douyin have invested a lot of troops into this battlefield, first working with e-commerce platforms to direct their own traffic to external shopping carts for transactions, and then they are no longer satisfied with outbound traffic. but try to build a closed loop of e-commerce transactions. Next, Wechat began to try live e-commerce in the form of official accounts, Mini Program and video accounts, and even Baidu, Inc. entered the battlefield in 2020.

No Internet platform is content to cooperate with competitors and export traffic to competitors in exchange for sharing; sooner or later, they have embarked on the road of "internal closure of live e-commerce". This is an ominous sign, and it will probably happen to other emerging businesses in the future. Because the major platforms do not trust each other, nor do they want to let fat and water flow to outsiders. Even Pinduoduo and JD.com, who have accepted Tencent's investment and have always been considered to belong to the "Tencent system", are not willing to rely too much on Tencent in terms of traffic and commercialization. It is conceivable that relations between other Internet companies will only become more strained.

Over the next few years, the competition among head Internet companies will become more and more dangerous: everyone is pointing a gun at a competitor, while several people are pointing a gun at it. Even if the gun is fired, it will not kill the competitor, but will only lead to a more violent counterattack. As the flow market has stabilized and it is impossible to invent enough new business type, this is destined to be a highly consumed "trench warfare" rather than a quick "mobile war". Both investors and employees need to get used to this "beautiful new world", whether they like it or not.

The change of Consumer habits: differentiation and Personalization

For many years, people have been debating whether there will be "consumption upgrading" or "consumption downgrade" in China, whether Pinduoduo represents "consumption downgrade", and so on. We feel that this question was wrong from the very beginning, because what actually occurred was not an one-way "upgrade" or "downgrade", but a "differentiation of consumption". This differentiation occurs not only in different regions and different classes of people, but even in the same person.

You can try to search for "Bluetooth headphones" in Mobile Taobao-of course, the highest sales are those entry-level headphones with 200 yuan or less than 20 yuan, but Huawei with 499 yuan and AirPods Pro with 1599 yuan are also selling well, and professional headphones worth more than 2000 yuan are also in steady demand. In fact, if you search for any other product, the result is pretty much the same-- "Pinduoduo identical dresses" worth dozens of yuan sell well, and new international designer dresses worth thousands of yuan will be snapped up on the first day. What does that mean? Does it mean that there is a big gap between the rich and the poor?

Many data and cases prove that users' consumption decisions depend not only on their total budget, but also on the priority given to them by their hearts. Young users, in particular, tend to "save desperately in unimportant aspects and spend desperately in important aspects". They will be desperate to order authentic hand-made products of 899 yuan and authentic perfumes of 2000 yuan, and will not hesitate to scramble for 3 yuan of patch boards and 6 yuan of paper towels.

The problem is that there are different "important" and "unimportant" things in everyone's mind, and there are as many "consumption differentiation" paths as there are consumers.

For e-commerce platforms, and even for all platforms related to consumption, "consumption upgrading" is the best scenario, because it means higher ARPU, higher monetization, that is, higher profits; "consumption degradation" is actually not bad, because in this scenario, the platform only needs to support those large items with lower prices and higher performance prices, so as to achieve comprehensive control over production and circulation. In any case, the dominant position of the platform will be very strong, and the difference lies in whether it is ruled by Tmall / JD.com or Pinduoduo.

"consumption differentiation" is a very different challenge: consumers are highly personalized. It is true that the platform can realize "thousands of people and thousands of faces" through algorithms, but it is very difficult to implement in practice. Personalization will increase the importance of private domain traffic, and the platform is always afraid of private domain traffic, because it is essentially uncontrolled. The platform can also cater to the needs of all kinds of consumers as much as possible through content e-commerce and C2M customization-but the cost is high and the results will not be too fast.

In the content industry, the trend of "consumption differentiation" and "personalization" is more obvious. Take games as an example, in just four years, TapTap has become the largest channel for games besides mobile app stores in China, especially for hard-core players. In TapTap, you can hardly see traditional heavy games such as Legend and skin-changing SLG; there are independent games, innovative games, two-dimensional games and other vertical games that dominate. In 2021, "Jiangnan Baijing" and "Pascal contract" are popular games on TapTap, and they are difficult to succeed in traditional application distribution channels.

The process of "personalization" of gamers is accompanied by the collapse of the dominance of mobile app stores. In 2020, Yuanshen announced that it would not log on to app stores such as Huawei, causing an uproar; in 2021, it has become routine for QQ and niche games not to log on to app stores, but to rely on official websites, TapTap or Bilibili Inc. channels. The reason is simple: vertical games don't need full-channel traffic coverage, just a handful of highly viscous core players. Even if you want to make a large player base, relying on the word-of-mouth effect of the core players to "out of the circle", it is also more efficient than extensive traffic operation.

Isn't this the case in other areas of content? In the field of long video, the "head drama" created by the platform has faced the collapse of both word-of-mouth and ratings, not once or twice; in the field of short video and medium video, the platform has never really grasped the wind direction of popular content (although they are keen to create gods on their own initiative). The longer the history of a content category, the more dispersed the user's tastes and the more vertical categories will be formed-and the more challenging the control of the platform will be.

The game between platform and content / product is a long-term and dynamic process. In the period of flow dividend, the discourse power of the platform is getting stronger and stronger on the whole; now, consumer differentiation and personalization may constitute a challenge to the discourse right of the platform. This does not mean that the platform has lost control, let alone that all content / product parties can wrestle with the platform. We just think that in the long run, this process is disadvantageous to the platform.

Internet antitrust is a global long-term proposition.

By the end of 2000, of the 10 largest companies in the world by market capitalization, seven were Internet companies (if you don't think Microsoft Corp is an Internet company, then six); four of them are American companies and two are Chinese companies. Tencent, China's largest Internet company, has a market capitalization very close to Facebook Inc, the fifth largest Internet company in the United States. By contrast, the stock market value of all components of the French CAC40 index is only equivalent to 2.8 Tencent or 0.8 Apple Inc; the combined market capitalization of Amazon.Com Inc and Alphabet Inc-CL C exceeds that of France's GDP. Since 2017, most of the added value of US stocks has been created by FAANG, just as most of the added value of Hong Kong stocks has been created by the New economy Corporation.

This is enough to remind regulators around the world that the Internet industry is too big and its influence on the economy is strong enough to upset everyone. Even the large trusts of the "gilded age" at the end of the 19th century did not have such pervasive influence. Regulators in the United States and Europe have proposed numerous restrictions on "technology giants" (Big Tech), the harshest of which include breakups and market bans. Public opinion is also very bad for the "tech giants", no matter in any country.

In China, regulatory action against the internet "platform economy" dates back at least to the second half of 2019. The Anti-monopoly Guide on platform economy (draft), launched in November 2020, attracted the attention of numerous media and investors, and was finally officially released in February 2021. During this period, a number of mergers and acquisitions involving Internet companies have been reviewed. It is conceivable that there will be more and more restrictions on Internet platforms.

From the above policy documents and the policy interpretation of the state media, we can sum up the following main points:

The core expectation of the competent department for the "platform economy" is to "set up the stage with the help of the Internet", that is, giants to set up the stage and small and medium-sized enterprises to perform; to develop the "platform economy" is not to expand the platform itself without restriction, but to use the power of the platform to promote the emergence of new enterprises and new business type.

Proposals to strengthen supervision and even break up Internet giants in Europe and the United States have attracted the attention of domestic authorities and have been widely quoted by various official media.

"fair competition" and "information sharing" have been mentioned repeatedly-the former refers to fair competition between platforms and shall not abuse their market position, while the latter means that "information partition" should not be built between platforms and consumers should be allowed to share information across platforms.

The concept of "platform economy" covers not only traditional formats, but also new business type. For example, time-sharing rental of cars, live / short video delivery, and community group shopping are all included in the scope of the "platform economy".

Obviously, the strengthening of the regulatory momentum of the Internet platform is a global long-term proposition. From now on, it will be more and more difficult for Internet platforms to achieve epitaxial growth through mergers and acquisitions; there will be more and more obstacles to the use of user data; and the "tax rights" of partners will also be more strictly restricted. Due to the lack of information available, we cannot accurately estimate the impact of antitrust on the performance of Internet companies; we can only say that this impact cannot be overestimated.

Platform crisis and content / product opportunities

Internet platforms certainly will not turn a blind eye to the crisis. The management of the platform is much clearer than the capital markets and has prepared follow-up plans a long time ago-unfortunately, each has its own problems and is not enough to constitute the "second growth curve" of the platform.

At the same time, some investors are pinning their hopes on high-quality content / products, giving them extremely high valuations and expecting them to be the next batch of unicorns to lead economic growth. This view is reasonable, but we cannot judge the content / product side in the way of judging the platform, because the growth logic of the two is essentially different.

An Internet platform based entirely on expansion

The organizational structure of mainstream Internet companies is almost entirely based on expansion and is created to meet the goal of expansion. Most investors and employees believe that "growth can solve all problems", whether it is management, organizational or strategic issues. The management of the vast majority of Internet companies is highly pragmatic, open-minded and trendy, and this style is well suited for offensive warfare in a fast-growing market. The question is, what should we do if the environment for offensive warfare disappears?

In 2020, the organizational size of the Internet platform is still expanding rapidly: the number of employees of Tencent has increased by 37%, and that of BABA has more than doubled (most of which is the result of the acquisition of Da Yun Fat); the employee growth rate of Kuaishou Technology is unknown, but it must be fast. Such a large organization and such a complex business will bring countless potential problems. In fact, growth cannot solve the problem, it can only cover it up. You must remember that in 2016, 2018 and 2020, the outside world noticed the organizational and management problems of Baidu, Inc., Tencent and BABA respectively. In fact, the problem has always existed, and it is only because the company has encountered a growth bottleneck that it has attracted serious attention.

To sustain expansion, look for a "second growth curve" (the term is now fashionable). Internet platforms have found many alternatives to the "second growth curve", but each has its own problems:

Improve the commercialization space of a single user: in other words, to gain higher value from the existing user base. This is what most platforms have been doing, and many "wastelands" have long been reclaimed as "ripe land". Due to the scale effect (especially the diminishing marginal cost), the profit margin of increasing the value of a single user may be high. However, in the anti-monopoly situation, regulators will not encourage excessive commercialization of the platform, especially not to affect the survival of small and medium-sized enterprises. All in all, there will be more and more restrictions on this road.

Enter the To B information service market: cloud computing, enterprise software, industry application solutions, which used to be the territory of software companies, but now have become a must for Internet platforms. BABA and Tencent attach particular importance to To B services and give them high strategic priority. However, To B service is a very difficult market, the scale effect is very low, the user payment habit is also very underdeveloped. Capital markets are skeptical. Regulators encourage this, because the Internet platform can undertake some social infrastructure obligations here.

Overseas expansion: the TikTok incident has cast a shadow over the prospects for overseas expansion of Chinese Internet platforms, especially in some key countries. The overseas expansion of Chinese games is very fast, but the game products are not "platforms". Even if it has accumulated a large number of overseas users, it is still difficult to commercialize the platform. For example, the overseas cash efficiency of TikTok is lower than that of Douyin. The cost of localization also reduces the cost-effectiveness of overseas expansion. All in all, overseas expansion is a path that can be expected, but not too much.

In addition to the above three flawed paths, there is another way, that is, the platform itself to play the role of content / product, to achieve vertical integration, so as to get more room for commercialization. This is the path that Tencent has been following over the years; this is the path that the three major video platforms have always wanted to follow, but have not yet reached; and this is also the path that some e-commerce platforms are trying cautiously. The attitude of the capital market is also Hedong and Hexi in the past-they used to disapprove of the platform doing the content / product business of "heavy assets", "low replicability", "bitter and tiring", but now they approve again.

The new darling of the capital market: quality content / brand side

To be fair, in any era, in any market segment, most content / brands are destined to make only a little hard money (or even no money). Only high-quality content / brands can make a lot of money, even less of which can continue to make a lot of money. Moreover, even the most profitable content / brands with strong IP and mature methodology do not have much revenue space, such as a drop in the bucket compared to the platform.

The above stereotypes are rapidly being broken. The original God, released in September 2020, proves how terrible the moneymaking power of a platform-independent, purely inclusive company like Mihayou is. If this development continues, the income of Mihayou may even exceed that of Bilibili Inc. in the next 2-3 years, thus completely breaking the so-called law that "platform is greater than content". In addition to Miha Tour, we can also cite very successful cases such as Eagle Horn Network ("Ark of tomorrow"), paper folding ("Miracle Nikki" and "Shining warmth"), Lilith ("Sword and Expedition" and "Awakening of all Nations").

Our point of view is very simple: vertical games such as "the original God" and "tomorrow's Ark" are only the first ripe fruits of the vertical and fine quality of the entire content industry. Offline film industry, boutique has developed to a certain stage; online video, audio, reading and even self-media industry, the momentum of verticalization and boutique is irreversible. Consumers are mature enough, their payment methods are diversified enough, and they have already formed the habit of "paying for love"-this is the golden age of quality content companies. We don't know who will be Mihayou or Lilith outside the gaming industry, but such companies will emerge sooner or later.

Compared with Miha Tour, Pop Mart International's case seems more incredible. Five years ago, someone asked you, "how much is a consumer goods company that sells physical goods, mainly offline goods, and whose core IP is not entirely self-owned?" "most of your answer is:" it's worthless. Even if the other person mentions the concepts of 'trendy play' and 'blind box', it is impossible to change your answer, because no one has heard of them at the time. The company is Pop Mart International, with a net profit of more than 500m in 2020 and a market capitalization of more than 100 billion at its peak.

You are sure to say that Pop Mart International is not a consumer brand and succeeds purely on the addiction of the blind box. So let's take another example-- if five years ago, someone asked you, "how much is a domestic make-up brand that caters to the middle and low end of the market and mainly sells goods in e-commerce channels?" "most of your answer is:" it's worthless. "this company is Yatsen (perfect Diary), with a market capitalization of more than 100 billion at its peak.

I have discussed the perfect diary with a lot of female users, and they have different opinions. Most people think that the moat of the perfect diary is not enough, mainly depends on marketing, and the user stickiness of makeup is not enough. In fact, none of this matters; the important thing is that such seemingly low-barrier consumer brand companies can also grow up quickly and be recognized by the capital markets. Someone pointed out to me that the users of skin care products are more sticky and perhaps more technology-intensive. If it is true, then the "perfect diary" in skin care products may be worth more?

It should be recognized that the infrastructure and user habits provided by Internet platforms are the basis for the success of quality content / brands and the driving force behind them to break the revenue and valuation ceiling. The three companies listed above are taken as examples:

Prior to the "original God", Mihayou cooperated with mainstream application distribution channels. The launch of "original God" is still landing on "new channels" such as TapTap and Bilibili Inc.. Social networks magnify the word-of-mouth effect of the game, making Mihayou's "broken" series and "original God" quickly out of the circle.

Although Pop Mart International is still dominated by its own channels, its Tmall flagship store and WeChat Mini Programs contributed a lot of sales to the 2020 epidemic. The spread of social networks has greatly enhanced the popularity of concepts such as "trendy play" and "blind box", and even stepped out of the ranks of young people.

Not to mention the perfect diary, it mainly relies on e-commerce platforms such as Taobao / Tmall for sales, and social networks have also played a huge role in spreading its brand image.

In these three cases, the perfect diary is the most dependent on the mainstream Internet platform, followed by Pop Mart International and Mihayou. With the expansion of their own scale and the improvement of user stickiness, the ultimate goal of all content / brand parties is to reduce their dependence on the platform as much as possible, or even to complete the work of the platform themselves. If this goal can be achieved, the Internet platform will be reduced to a tool or channel like today's telecom operators. Will there really be such a day? I have no idea. But we should at least be prepared for this scenario.

The growth logic which is completely different from the "Internet platform"

Today, the vast majority of investors, whether from the primary market, the secondary market or the industrial sector, will be happy to invest in a company like Mihayou or Pop Mart International. However, they often understand these "content / brand companies" in the way of understanding "platform companies". As a result, you often see these strange remarks in the media:

"the success of Miha Tour makes Tencent restless, because it will completely lose the two-dimensional and 3A game market. "

"even if it's a little more expensive, you still have to buy Pop Mart International, because there may be no such shop after the village. "

"although the marketing expenses of most new domestic products are on the high side, it is worth it, and Internet companies also spend money in this way. "

I don't know if these people can understand that no one can monopolize the content / brand market, and first-mover advantage is not the most important thing. If the above strange theories are true, then the domestic game market should have been terminated by NetEase, Inc as early as 2015, and the domestic animation market should have been terminated by Tencent animation as early as 2018. And the domestic film market should have been completely carved up by Huayi, Light and Wanda as early as 2013. Because the scale of content / brand is far less than the platform, and the demand for infrastructure and technology is not as high as the platform (although there is an upward trend), there has never been a trend of "natural monopoly" in this area.

In addition, the tastes of content / brand consumers are naturally diversified. A user probably doesn't need a second social platform, or even a second e-commerce platform, but a gamer needs a lot of games, and a moviegoer has to watch countless movies in a lifetime. In the platform world, your success may completely dispel my hope of success; in the content field, your success will trigger a wave of excitement and arouse the appetite of the audience, which will make it easier for me to succeed.

There is a mainstream view in China that the success of the content / brand side will eventually be occupied by the platform, because the latter has more resources, more powerful technology and data, so the former can only listen to them. Please allow me to sing a different tune: the result of the game between the platform and the content / brand depends on which side is more mature. In the past, China's content / brand side was very immature and certainly did not have game capital; now it is completely different. This kind of thing happens first in the game industry, simply because the content side of the game industry matures first.

I must also point out that history has repeatedly proved that giving content / brand more power and that the platform only provides the necessary resources is the best way to do this business well.

I will take great pains to cite the example of Harry Potter: J.K. Rowling has never relinquished absolute control of the HP universe; she has a veto over the casting of HP films and is responsible for deciding who to direct; and in the last films, she has been ranked as a producer and ranked higher and higher. I will also cite the more successful example of Star Wars: George Lucas was the master of Star Wars IP until he sold the company to Walt Disney Company for $4 billion; the Star Wars sequel trilogy lost control of word-of-mouth and box office decline.

Of course, for people who are used to the path of Internet development over the past decade, who are used to the omnipotence of the platform and the content / brand side as a foil, it may be difficult to accept my above point of view. Not long ago, when I discussed "IP Economics" with some people in the industry, I cited J.K. In the case of Rowling and George Lucas, they asked me to "get rid of these two special cases, and then we'll talk about it." I don't know why we have to get rid of two of the most successful "exceptions" in the world-it's like getting rid of Lionel Messi from Barcelona and LeBron from the Lakers. If any of the "IP dramas" developed by domestic Internet platforms could reach the 1/10 level of the above two special cases, they would have boasted all the way to the Oscars.

In a word, the development of Internet platform must emphasize speed and scale effect, but the development of content / brand is not necessarily. Investors who are used to having only two or three winners in a market segment will probably find it hard to get used to the new situation that "the more winners there are, the more winners there will be." The winners on the content / brand track must be very familiar with their products and must not be regarded as a "black box"; the qualities of these winners must be completely different from those of the founders of previous Internet platforms. This is an unprecedented war, but it doesn't matter, as long as you learn from practice.

We should understand that even if the content / brand track is thoroughly developed, the benefits shared to the capital market will not be as big as the Internet platform at that time. Because the content / brand side is not a capital-intensive industry, it is highly dependent on individuals or small teams, and the demand for mergers and acquisitions is not high. None of China's best start-up games companies, including Mihayou, are listed; even if they do, there may not be much room for the capital market. Investors have to get used to this-after all, every era has its own rules, and existence is reasonable.

Ending: the Twilight of the Gods

Human history is constantly evolving, but it is not a linear evolution, but a leap from time to time. The extent of this leap may be astonishing.

Suppose you lived in 230 BC, when Qin Shihuang began to destroy the six Kingdoms. At that time, the royal family of Qin had dominated the world for a hundred years and produced six generations of outstanding monarchs. Although the royal families of Qi, Chu, Yan, Han, Zhao and Wei are on the verge of being wiped out, they still have strong strength, and the family members are prosperous. Over the past 500 years, the history of the world is the history of these princes' families, and the difference is nothing more than who has performed on the stage.

You are fortunate to meet a traveler who swore to you: "the royal families of the six Kingdoms will all be destroyed by the State of Qin within ten years." The king of Qin will be called emperor, but in less than fifteen years, his whole family will be wiped out. The man who was finally destined to sit on the throne of the son of Heaven is now working as a farmer in a small county at the junction of the State of Chu and Wei. He is an idle scoundrel named Liu San. This descendant of Liu San will rule the world for 400 years, and your descendants will be proud of the name of his country. "

You must think this is a psychopath. Even if the traveler told you all about Liu San's exact location and time of his rise, you wouldn't believe it. Look at it another way, so what if you believe it? You have to survive the ten years of war at the end of the warring States period and the rule of Qin Shihuang for more than ten years, and finally go to Peixian to find Liu San during the war in the late Qin Dynasty. Unless you believe it from the bottom of your heart, you probably won't have the courage to do it to the end.

I mean: the real historical process is always more exaggerated than the novel. Just a decade ago, if anyone had said that China would create Internet companies with a market capitalization of 1 trillion yuan, I certainly wouldn't believe it; today, even a market capitalization of 1 trillion yuan is not out of reach. Meituan, byte beat, the rise of Pinduo, as well as the sudden prosperity of Miha you, Lilis and Pop Mart International, are still incredible to many people today. In that case, what incredible things will happen in the future?

I don't know, because I'm not a traveler. I am only sure of one thing: the logic of the next decade will be very different from that of the past decade.