The Fall Of The Walled Gardens: A Tipping Point For The Chinese E-Commerce Landscape?


Alexander Wei | October 01, 2021

Credit: Unsplash

Under increased antitrust scrutiny, Chinese tech behemoths such as Alibaba and Tencent have stated that they will embrace the notion of open platforms. This suggests that the online consumer journey in China will be seeing changes in the near future, with the existing e-commerce landscape poised to reach a tipping point.

Apple, the company with the highest market cap in the world, saw its share price dive drastically on September 10, falling 3.31 per cent. 84.3 billion dollars of market value was erased that day – a number equivalent to British petroleum company BP’s total value. The sharp drop stemmed from an injunction served by a California federal judge to Apple, mandating that iOS apps be allowed to direct users to payment options beyond those offered by the tech giant.

The ruling marks the latest development in the case brought against Apple by game developer Epic Games. The App Store has long charged developers commissions of up to 30 per cent of the total transaction value of all paid applications and in-app purchases made through the App Store. Analysts estimate that the App Store generated $20 billion in revenue for Apple last year, with a profit margin of 75 per cent, representing approximately 7.8 per cent of the company’s total revenue in 2020.

Although the court ruled that Apple’s actions were not a violation of antitrust laws, the monopolistic threat arising from huge closed ecosystems built by today’s tech giants has become a top issue in the global digital landscape. On the other side of the Pacific Ocean, Chinese tech firms such as Tencent, Alibaba and Meituan have also come under scrutiny in recent antitrust investigations.

This wave of sanctions against tech companies kicked off last November with the halt of Ant Group’s IPO. In April this year, Alibaba was fined 18.3 billion RMB for violating the Anti-Monopoly Law of China – also the highest fine issued since the law was implemented in 2008 – and this caused Alibaba to record an operating loss for the first time. Three months later, the State Administration for Market Regulation announced that it would impose administrative penalties and fines of 500,000 RMB on 22 merger irregularities by tech companies, including Tencent, Alibaba and

China’s anti-monopoly probe against tech companies recently saw a breakthrough. On September 10, the Communication Regulatory Bureau of the Ministry of Industry and Information Technology called for a deadline for Chinese tech giants to open up access to all external links on their digital platforms at a closed-door meeting with companies including Alibaba, Tencent, ByteDance, Baidu in attendance. This request echoes the ruling made on Apple’s App Store, and attempts to break down the closed digital ecosystem built by technology behemoths.

This month, the barriers between Alibaba and Tencent have lowered. WeChat now allows users to open links from Tmall/Taobao within the platform, while some of Alibaba's digital platforms, such as streaming platform Youku and meal delivery platform, have already enabled payments by WeChat Pay.

The Rise of Walled Gardens

The Chinese digital landscape has become increasingly fragmented as the tech oligarchy grows. The concept of walled-gardens built around digital devices and various online platforms do generate sustainable revenue for companies, but also enhances the user experience. The App Store was originally created to prevent users from installing third-party applications on iOS at will – every app on the App Store needs to be reviewed by Apple to eliminate malware as well as to ensure the safety of the system.

Chinese tech giants have done this on a much grander scale. Most of them have developed solutions that span the entire consumer journey, either within a singular digital platform or across a number of platforms belonging to the same company. In the case of Alibaba’s e-commerce business, the integration of its shopping marketplace Taobao/Tmall and digital payment solution Alipay (under Ant Group), allows users to explore, socialise and shop within the same ecosystem without having to jump out of this one application.

The rise of walled gardens in the Chinese digital landscape is not only the result of the interconnectedness of platforms, but also on the exclusivity established by Taobao/Tmall. In 2008, Taobao blocked crawlers from Baidu – which means blocking traffic from the top search engine in China. Since 2013, Taobao has also been blocking redirection options from third-party shopping search engines such as Meilishuo and Mogu. By the end of November 2013, any links from Taobao shared on WeChat could only be redirected to the download page of the Taobao mobile app. Taobao rejected traffic acquisition options via WeChat, citing security issues within the WeChat ecosystem.

Join Luxury Society to have more articles like this delivered directly to your inbox

This move did not affect Taobao’s business in the slightest, and instead allowed it to colonise the entire consumer journey and become a platform that took users from the awareness phase through to loyalty. At the same time, the closed nature of its ecosystem made it the most important advertising channel for merchants on the platform. The custom management revenue of Alibaba, which includes commissions and advertising revenue, reached RMB 306.1 billion for the fiscal year 2021, which ended on March 31 – accounting for 43 per cent of total revenue.

More tech firms are starting to see the importance of offering a complete consumer journey on their platforms. Douyin, which plans to achieve 1 trillion RMB in GMV sales by 2021, took the plunge in October last year and started banning links from third-party e-commerce platforms (such as Tmall and in livestreams, driving purchase intentions to its native Douyin store, and generating in-platform sales. The company launched its payment solution ‘Douyin Pay’ this January, facilitating the payment process for online shopping and purchasing virtual livestreaming gifts as well. At the same time, after suspending its pilot programme that offered redirection options to Tmall on selected KOL accounts, social commerce app RED launched launched the ‘one-account-one-store’ concept in August in a bid to develop its in-platform e-commerce business. By this point, the walled gardens created by China’s tech giants have started to take shape.

The Walls Are Coming down

Early this year, Alibaba submitted Mini Program applications to WeChat for Taote (a discounted e-commerce platform to rival Pinduoduo) and Idlefish (a second-hand marketplace). This move will allow both platforms to support WeChat Pay and users to share links from Taote and Idlefish, on WeChat. This is the first time Alibaba and the WeChat ecosystem has displayed signs of integration since 2013.

Although integration with WeChat can reduce the traffic acquisition cost for Taobao/Tmall, given that Chinese consumers have already developed the habit of leveraging Taobao/Tmall as a search hub, this move will not impose a significant impact on Alibaba’s share of online retail today. 

Alibaba’s share price saw a modest rise on the same day after the companies stated that they would open up their ecosystem on September 14, but e-commerce platforms invested in by Tencent, and Pinduoduo, dropped by 2.79 per cent and 1.4 per cent respectively.

Tencent holds a 15.6 per cent stake in Pinduoduo and a 16.9 per cent stake in through Huang River Investment Ltd. Both platforms have developed Mini Programs on WeChat, and their platform and products can be freely accessed within the WeChat ecosystem. It should be noted that Pinduoduo’s entire group-buying model is built on top of the immense traffic offered by WeChat, whose ecosystem facilitates the sharing of and participation in shopping activations among users. Given Taote’s strong ambitions of developing social commerce on WeChat – the e-commerce platform has a 78 per cent overlap with Pinduoduo in terms of users – the existing dominance of Pinduoduo in lower-tier markets might be shaken.

The liberalisation of ecosystems will also affect the e-commerce business on emerging platforms, such as short video platform Douyin. Its e-commerce business achieved a GMV of 500 billion RMB in 2020, but more than 300 billion worth of transactions happened outside its platform.

Although today’s current requirement of opening up external linking between platforms target only instant messaging applications like WeChat, other platforms such as Douyin will be at risk of losing traffic to third-party marketplaces. Jin Yechen, a media practitioner active in the Chinese digital sector, opined that Douyin and Kuaishou, which have been expanding their e-commerce presence, do not lack traffic. In fact, developing their supply chain will be the next focus. “Today, cooperating with more brands and distributors is the heart of the battle between these two short video platforms,” he adds.

After shutting down the external redirection option in livestreams, Douyin’s in-platform merchant supply chain has blossomed. From January 2020 to May 2021, merchants on the platform grew 32 times and the GMV generated on Douyin Store increased by 75 times. Users are now able to access the Douyin e-commerce page for exploring content and shopping via their homepage feeds, and it is rumoured that a standalone Douyin e-commerce app will be launched in October this year.

Douyin e-commerce page on Douyin

With platforms opening up, redistribution of traffic will be inevitable and those that wish to retain users have to innovate in order to continue capturing traffic within the existing in-platform consumer journey. “Chinese digital platforms are rolling out more strategies on private traffic, such as Mini Programs as an attempt to retain customers.” Pablo Mauron, Partner and Manager Director China at DLG (Digital Luxury Group), said. “Mini Programs allow brands to offer more enhanced experiences on top of existing functionalities, such as AR/VR filters and personalisation engines, which can help to capture consumer interest and turn that into a purchase intention within the same platform. As a brand’s number of private traffic communities grow, bringing together all of that behavioural and transactional data with a CDP to better predict purchase intentions and tailor content and advertising strategies will also becoming increasingly important.”

The crumbling of these walled gardens in the Chinese digital landscape will bring more diversity to the consumer journey, and this trend will lead to more intense competition, especially in the face of Chinese shoppers that are already so used to jumping between platforms for specific needs. Consumers will eventually vote with their wallets, and as Judge Yvonne Gonzales-Rogers said in her ruling on Apple, “Success is not illegal.”

Analysis | Antitrust | Policy