China's Feudal Internet

Du Chen

A little over a week ago, it was announced that Tencent and Alibaba were investing $10 billion in China Unicom, one of China’s three telecom companies. Ten billion is a hefty investment, even in China’s feverish industry, but it’s the least remarkable part of that news. Alibaba and Tencent more often back competing companies than join up behind the same one, and Unicom is, like China’s other telecom companies, state-owned. In other words, one of China’s major state-owned companies has taken on investment from the two largest private (and rival) companies in Asia.

It’s a bit of a puzzle, but there’s another piece to it which might clarify: Tencent recently partnered with Unicom to release what it has branded as its own Tencent “King” card, or data plan, with 19 yuan per month for phone service, with 1 yuan for a 500MB data package per day. For most users that will come out to no more than 49 yuan per month—something of a bargain. And there’s one more perk: data for Tencent’s services is free.

While many in the US campaign for net neutrality, China’s internet has always been a bit skewed, and as this new alliance between its two largest tech companies and one of the triad of telecoms suggests, it is about to become even more so. And at least in the short term, Tencent may have tilted the board in its favor.

Not all carriers have quite so much love for Tencent. In 2010, Unicom’s competitor China Mobile had already realized that much of its network was being taken up by Tencent’s social networking and messaging apps, leading the director of the company to “have tea” with Tencent’s CEO Ma Huateng. Tencent agreed to pay an extra “signal fee” to compensate China Mobile for its “losses.” That didn’t quite put the matter to rest, though, and Tencent’s relationship with China Mobile remained difficult for years. China Mobile even tried launching its own messaging app, Fetion, to compete directly against Tencent’s WeChat. (It did not quite succeed; Tencent’s WeChat app now has more than 900 million active users. Fetion, to put it mildly, does not). Fortunately, China Mobile could only make so much noise, and with time it has become more reasonable: by this point, cutting off WeChat would only hurt itself.

BitTorrent services have not been so lucky, however. In 2003, because of heavy broadband usage, carriers in Chongqing, Xiamen, and other cities choked torrent downloads, or even cut them off completely. Although the content downloaded was frankly often pirated material, it does not seem that was the real concern for carriers. And torrents themselves are not illegal. A court later ruled against one carrier in Xiamen, but seemingly to no effect; the restriction on torrents continued.

The latest deal between Tencent and Unicom therefore looks like a complete reversal: instead of conflict, there is now partnership. And this time it is the carrier giving favor to the online service, rather than the other way around.

But it might amount to just more of the same. For Chinese mobile users, Unicom’s latest offering has plenty of advantages. Data-heavy services like Xiami (music), Youku-Tudou (video), or 360 (an app utility) all have deals with Unicom. And the carrier has put forward a plethora of “cards” or plans in partnerships with the likes of Baidu, ecommerce company JD.com, news aggregator Toutiao, and delivery services Meituan and Ele.me. Each plan entails its own monthly payments, but the key is that data used on the corresponding partner’s service is entirely free.

The most formidable of these proferred plans, however, is Tencent’s “King” card, if for the simple reason that Tencent’s apps rule so much of the market. WeChat is the number one app in China, with average usage of more than an hour a day among its hundreds of millions of users. And that is to say nothing of Tencent’s other apps, including video, music, utilities, news clients, nor its wildly successful games like Honor of Kings (which, incidentally, was number one in Apple’s App Store worldwide at the start of this year). With the “King” card plan, data usage on all of those apps is free.

Tencent’s own music service may not have certain artists available. Its video service may not have certain shows. Its voice calling service may not even have very good quality. But for users with the Tencent branded data plan, going over to the competition like Xiami for music or iQiyi for watching shows will become an added cost. And it would be foolish not to take what’s free.

For Unicom and its partners, the logic is simple. What is lost in giving away free data to users is made up for by reshaping users’ habits in what they consume and where. And in time, users may find themselves adjusting from Xiami to QQ Music, from Baidu Cloud to Tencent’s cloud services, from app manager Wanjiadou to Tencent’s YingYongBao. Users can be unwittingly made into Tencent partisans—but who can complain, when it saves them money? Yet for any online service outside of Tencent’s sphere of control, this is nothing short of a threat to their survival. And, likewise, any company that doesn’t have a partnership with Unicom risks losing users to rivals that do.

The telecom industry is built upon mountains of capital, and carrier markets are usually cornered by just a handful of large companies. In contrast to China, however, carriers in the US and many other countries are not state owned, and so are not responsible for public infrastructure, only their own bottom lines. In recent years, North American internet traffic has mostly come from YouTube and Netflix, up to almost 70%, and Comcast imagined it saw a business opportunity in this. In 2013 it asked Netflix to pay an additional broadband fee, and when it was rebuffed, it lowered speeds on Netflix traffic by 25%, severely affecting Netflix’s streaming quality. It later signed a “mutual benefit” agreement with Comcast and a number of other carriers, and its streaming speeds, coincidentally, recovered.

Such unfair practices are precisely what net neutrality is intended to avoid. It is, quite simply, the idea that carriers should treat all data, all users, and all sources that use their networks equally, giving favor to none. Netflix, Google, Amazon, Microsoft, Twitter, and many others give their backing to the principle, and in 2015 the FCC formalized net neutrality in a set of rules indicating, for example, that data could not be handled differently because of the protocols it used or the IP addresses it was moved between. The future of this policy is not certain, of course. At the time of writing, the current chair of the FCC, Ajit Pai, has planned to roll it back.

Yet whatever the state of official policy may be, net neutrality remains an issue championed by many in the US, tech companies included. In China, however, it appears to have no traction with either the public, government, or industry. Still, the deal struck between Unicom and Tencent reveals something unexpected. Today in China it is the internet-based content provider, not the carrier, that seems to hold the power.

Tencent’s data plan with Unicom stands to offer users free data on nearly a hundred apps, from Tencent’s instant messaging to news clients, online video, music, utilities, browser, social media, email, camera app, finance apps, and games. Tencent now has a unique degree of power to lure users away from its rivals. Even Alibaba and Baidu may feel some losses; what hope then do smaller, newer companies have to win and keep users?

We have argued once before that China’s internet is essentially split in two: Tencent’s internet and Alibaba’s. Both are designed to draw users deeper and deeper into their folds and to keep them there. For instance, Alibaba blocks switching between WeChat and Taobao, WeChat used to block red envelopes from a ride-hailing app backed by Alibaba, and some music apps will not support sharing to WeChat.

But that is merely the territorialism one expects of large companies. With the new data plan, however, Tencent no longer needs to worry about competition from startups, because it will have already locked in its advantage. If an established business were able to give its products away for free (and yet still have plenty of other ways to rake in money), how could newcomers ever hope to challenge it?

This is more than the principle of net neutrality itself. Rather, it touches the deeper problems that net neutrality is meant to guard against: stifled innovation, the loss of positive competition in the market, and the skewing of the field as a whole towards one player.

Of course, the average user may neither see nor feel the impact directly, and apart from the inconveniences of, say, shifting from one photo app to another, it may not cause much trouble in the short term. But over the long term, China’s internet companies may put the nail in the coffin for net neutrality, and in the process threaten users’ personal rights, for all the usual and predictable reasons. With the competition choked out of the market, the prevailing players will have their monopoly, or something close to it, and there will be little to stop them from then squeezing their users for “fees” to continue using the services on which they have become so dependent.

Then again, Alibaba was right there with Tencent in leading the funding round for Unicom. A data plan branded for Alibaba and the many services and sites under its umbrella, from Taobao to Youku, may not be far off. And if that does happen, then China’s internet may yet truly become the duopoly it already seems, staked out and divided between the two largest companies in Asia.