Does size matter? - The WTO-column

China's chaotic growing internet industry seems sometimes a place with only winners. Tudou was the icon of that feeling that when you play your cards right, you can build up a company from nothing into world class company in less than two year. Building on the success of the Backdorm boys, the company created the video-sharing industry and sparked off -according to some estimates - already 150 competitors.

Especially in the months before the third generation of mobile phones will merge increasingly the internet and mobile phone usage, and billions will be spend on new hardware, software and services, it seems time to take a step back and get an overview of the battle field.

Bill Bishop points in a comment at Danwei in an important direction the competitive climate is heading:

the only barrier to entry to this business is the size of your audience... the technology is trivial, and while the infrastructure can get expensive, cash has been very cheap for most of these startups. but none of them can touch Sina or Tencent when it comes to audience size

His argument in short: size matters. The big boys are going to crush the small ones. The latest research by Baidu into the now 20 million webloggers in China (up 24 percent compared to last year) confirms that trend. (Here in an overview by China Web2.0 Review). China has now 1,460 blogging services (up 122 percent compared to last year). Only four of the top-10 weblog hosting companies of last year return, giving way in the top to QQ-zone , Sina-blog and MSN Spaces.

In short: the online services that have the larger audiences, are also the winner when they move into different online services like weblogs. That might well happen also to the now very successful startups in video-sharing, says Bishop, and in other service that might emerge later.

Tencent's QQ now claims to have 220 million accounts. That does not equal the number of internet users as some wrongly assume, but it still impressive. My friends in the video-sharing industry claim that being huge on the internet does not mean the Sina's can become popular: building up a community is more important in the long run.

Evidence among the webloggers now points in a different direction. It does not mean the original startups do not have a function anymore in the long tail of the internet. But they will certainly move back a few notches and lose the battle to be in the top-5.

The question whether size matters is going to play up also at another level in the upcoming battle: at that of the telecom providers. China Mobile is of course a sure winner in mobile communication while it is very unsure whether number two, China Unicom , even has enough capital to roll out the upcoming 3G-service. Both China Telecom and China Netcom do have an impressive customer base for their fixed line business, but that does not automatically translate into mobile customers. Most of their fixed line customers might have already an account with China Mobile too.

So, whoever is going to get the 3G-licenses, there will be a massive new battle for the Chinese customers, to keep them or get them. Since pricing is most likely to be regulated by the government - as it is now - content will be king. China Mobile has developed a particular nasty way of dealing with its service providers, based on its quasi-monopoly in the industry.

In the months to come, the government is going to define this battle field. More licenses means more competition and perhaps more possibilities for content providers. But China Mobile is still in top of the game, and there is no indication that is going to change dramatically in the short run. When the content providers become stronger, perhaps competition for China Mobile might increase, a bit of competition might also here be noticeable. Also here, size matters.

Fons Tuinstra

PS: Conversations more fast on the internet. Silicon Hutong has build upon my argument and points at the "duplicate-and-destroy- strategies the larger mobile telecoms might use to keep the 3G party for themselves, at least in terms of services and content.