The Fate of Mid-sized Internet Platforms: Transform or Die?

Author's note: This article is excerpted from the new book "The General Trend: The Internet Industry Standing at the Crossroads" by the head of the monster bandits. This book mainly discusses how the Internet and even the global technology industry will change under the intertwining of the three new technological forces of AI, Web3 and XR, and how our lives will be affected.

If you have ever started a business during the explosive growth period of the mobile Internet, that is, between 2010 and 2017, you must have been asked by countless potential investors: "Is your company a platform company?" How do you prove the attributes of your platform? "In the minds of mainstream investors, even the worst platform companies are better than most content or product companies. This concept exists not only in the primary market, but also in the secondary market. Therefore, companies with a little pursuit, once their scale is large, are eager to distance themselves from "content/products" in order to prove their "platform genes" to the capital market. As late as 2019, there were investors who asked: "Can Station B acquire Mihayou?" "Because Station B is a platform company even if it doesn't make money, and Mihayou is a content company even if it makes money, isn't it natural for the former to acquire the latter?"

By 2023, the layering phenomenon of platform companies has become very obvious: first-line manufacturers or "Internet giants" can still call the wind and rain and enjoy the dividends of scale and network effects; Second- and third-tier companies, that is, so-called medium-sized or vertical Internet platforms, are generally in an embarrassing situation. Whether it is Snapchat, Pinterest, DoorDash, Spotify in Europe and the United States, or a number of pendant e-commerce and pendant content platforms in China, the valuation has generally shrunk significantly, and it cannot be compared with game companies such as Activision Blizzard, EA (Electronic Arts), and Mihayou.

In an earlier chapter of this book (The Big Trend), we analyzed three core advantages of the business models of Internet platform companies, and the three main sources of their excess profits.

Network effect of platform barriers: The larger the scale of the Internet platform, the stronger the stickiness to users and businesses, thus forming a certain "natural monopoly" trend.

Marginal reduction of middle office costs: Technology development, product and operating costs will not increase in proportion to the scale of the platform, and infrastructure costs will not increase in proportion to the scale. So the larger the platform, the lower the marginal cost.

Relative weakness of content/product parties: Compared with the platform side, the vast majority of content parties or product parties do not have any advantages in terms of scale and user mentality, and can only be left to the platform.

All in all, much of the power of internet platforms comes from scale itself; The scale is several times worse, and the power and economic interests may be dozens of times worse. Among all Internet platforms, only a small number can rise to become giants, and another small number will be acquired by giants; A small number continue to operate as medium-sized platforms or vertical platforms, and most of the rest will collapse. In the golden age of Web 2.0, these medium-sized platforms, while not the most sought after companies in the capital markets, are often loved by some investors. The most familiar example for Chinese investors is Station B – at the beginning of 2021, it reached a market capitalization of $65 billion; Some unconscious analysts openly claim that because Station B has mastered Generation Z users, it will one day enter the ranks of "Internet giants". Needless to say, this illusion is extremely unreal and has long been mentioned.

The vast majority of medium-sized Internet platforms do not want to be "pendant" or "small and beautiful" from the beginning. In the startup phase, they just want to run as fast as they can until they reach their natural boundaries or are blocked by a stronger competitor. Among them, the most successful will break away from the pendant label and become a large-scale comprehensive platform; Less successful ones can only be relegated to the second rate, using "small but beautiful" as a self-comforting rhetoric - those who are familiar with the domestic e-commerce industry know that a certain duoduo belongs to the former, and a certain product will belong to the latter. In the era when the Internet traffic dividend has not yet been exhausted, medium-sized Internet platforms can also hope to seize the market increment and achieve a salted fish turnover. But today, whether in the United States, Europe or China, most of the Internet territory has been carved up, and the possibility of medium-sized Internet platforms rising to become giants is almost non-existent.

In the next era of the Internet, defined by both Web 3.0 and AI, medium-sized Internet platforms will fall into an even more disadvantaged situation. They do not have any advantages to survive in the new era, but they will fully expose all weaknesses.

Medium-sized Internet platforms basically do not have basic research and development capabilities for AI technology, and do not have enough funds, nor enough data and cloud computing resources. The frontier of AI technology is completely monopolized by Internet giants and their affiliates, and it is not easy for medium-sized Internet platforms to catch up with the trend, let alone lead the trend?

Similarly, the resource endowment of medium-sized Internet platforms determines that they are unlikely to enter the offline physical field, and even if they do, they can only become small players. Their only hope for success in the offline physical field is to actively integrate into the strategic territory of Amazon, or Internet giants such as Ali and Meituan, and take a piece of the giant's pot.

Once the trend of "decentralization" takes hold, medium-sized Internet platforms are likely to lose control of user data at the earliest, because their bargaining power over users is already weak. As for merchants or content parties, it is even easier to force content platforms to give up certain rule-making rights and taxing rights.

For decentralized organizations such as DAOs and DApps, it may take a long time (or even never be able to completely replace) to replace complex large-scale platforms such as Amazon or Douyin, but it is not so difficult to replace medium-sized Internet platforms such as Vipshop or B Station. As a result, Internet giants can still resist decentralized trend organizations for a long time, but medium-sized Internet platforms can only put up "white flags" early.

So, unless a miracle happens, will medium-sized internet platforms have to sit still? The capital market actually reflects this expectation to a certain extent: as of the third quarter of 2023, even after a wave of rebound, the market value of many second-tier Internet companies in Hong Kong stocks and Chinese concept stocks still only reaches 20%~30% of the historical high; The market value of second-tier Internet companies in the United States is still in a state of "slashing". It has become the norm for medium-sized Internet platforms to have a lower market capitalization than game companies, and may also be lower than other content companies such as leading film and television companies in the future. However, words cannot be said too hard. Medium-sized internet platforms are a broad concept, and by no means all companies are hopeless, and some may even be promising. We can name at least three possible transformation paths.

The first, of course, is to transform into content. In the era of Web 3.0, the status of leading content companies will be unprecedentedly enhanced, and the promotion of AIGC will further strengthen their position. If first-tier Internet giants such as Microsoft, Amazon, and Tencent can do content, why can't medium-sized Internet platforms do it? In fact, many medium-sized Internet platforms already have a strong content business, or even attach equal importance to the platform business and the content business. For example, Xindong has two core businesses: TapTap game platform and self-developed game content; While operating a video platform, iQIYI also carries out its own content business; Alibaba Pictures is also operating Taotaotickets, a movie ticketing platform, while carrying out movie content production business. According to common sense, medium-sized Internet platforms with smaller scale and fewer administrative levels may be less prone to "big enterprise disease" and can more smoothly shift their development focus to the content business.

But the reality is much more complicated. For any platform company to do a good job in the content business, a series of complex factors need to work together. It is the norm for platform companies to make bad content, but it is not normal to make good content - this summary certainly applies to medium-sized Internet platforms.

In this regard, many domestic long-form video platforms can be regarded as "negative teaching materials": in theory, they have huge traffic and financial resources, which can comprehensively transform film and television content and achieve "Internet upgrade" of the film and television industry. However, in reality, their content business development is difficult, and even if they make achievements, they often have to pay a great price, so the business model of long-form video platforms is widely questioned by the capital market. This book does not intend to discuss in depth "why long-form video platforms cannot transform the film and television content industry at a small cost", but only to illustrate through this case that the success rate of medium-sized Internet platforms in transforming into content may be very low, even if these platforms are supported by larger Internet giants (such as domestic iQiyi, Tencent Video, Youku).

The second is to transform into branded physical products. Content and product can be said to be two sides of the same coin, the former is virtual and the latter is physical; The former is based on IP, the latter on brand, and IP and brand are essentially the same thing. If pendant content platforms can make their own content, why can't pendant e-commerce platforms build their own brands? People born before the 90s of the 20th century may remember that one of the earliest pendant e-commerce platforms in China, "Vancl", was based on self-built brands, but it declined very early. Now, almost all e-commerce platforms have platform-owned brands or private label products, although their proportion of transaction value is often not high, but they are always a force to be reckoned with.

The problem is that in general, building a brick-and-mortar brand is much more difficult than in-house content, because the former has more complex supply chains, fulfillment, and customer service links than the latter. The "distribution" of a movie is just to deliver a digital copy to the theater, and this process can even be completed through an encrypted network; The complexity of a garment's "shop" is astronomical, and the warehousing logistics and channel supermarket elements involved are enough to make people's heads explode. The "customer service" of a game generally only involves recharging, purchasing or drawing cards, and the worst case is just a refund; The "customer service" of a household appliance will involve nightmarish door-to-door maintenance, damage assessment, return and replacement processes, and the cost and legal risks are much higher. In the past ten years, the Chinese consumer market does not know how many "new domestic" brands have emerged, most of them are "their rise is also booming, and their death is also sudden"; The D2C (Direct-to-Consumer) brands that have emerged in the US consumer market are not declining at an ordinary rate. Can internet platforms be an exception if they do their own branding?

There is a third way, perhaps the most fashionable one in China: transformation to provide industry solutions, called the "industrial Internet". This is not only the direction encouraged by the regulators, but there are indeed some success stories. As long as the pendant Internet platform is proficient enough in its own pendant, it seems that it has the opportunity to provide more in-depth value-added services to industry customers, and even gradually shift the main source of income from the consumer side to the industrial side. Regardless of the impact of Web 3.0, anyway, the period of the fastest value-added of the consumer Internet has passed, why not prepare for the transformation to the industrial Internet in advance?

In the United States and Europe, the above transformation strategy may be feasible, and a number of professional, large-scale industrial Internet companies have already been born. However, in China, a very real problem is that corporate customers are often unwilling or unable to pay for professional solutions. Specifically, many state-owned enterprises and large private enterprises are often not willing to pay, and even if they do, they will only pay to internationally renowned first-line solution providers. Small and medium-sized enterprises do not have the most basic ability to pay. For much of the 21st century, China's enterprise software industry has been growing significantly slower than the consumer Internet industry, not so much because of insufficient software companies as because of poor market conditions. If you change the Internet platform company to do this business, can it be different?

If the above three paths do not work, for many medium-sized Internet platforms, the most practical way out may be to be acquired and integrated by Internet giants. Before 2020, the path to M&A integration was always open; However, since then, all major economies around the world have tightened their scrutiny of Internet giants' mergers and acquisitions, and Microsoft's acquisition of Activision Blizzard has been under review from early 2022 to 2023; If Microsoft had acquired a platform company rather than a content company, the pace of censorship could have been even slower. Even without antitrust censorship, it may be wiser to invest valuable resources in more important strategic directions such as AI technology and content development when the Internet giants themselves are facing pressure to transform. Who wants to pay a high price to buy a company that is stormy and insecure, like tomorrow's flowers?

There is no answer. In fact, it doesn't matter if there is an answer or not. Over the past few years, medium-sized internet platforms have been slowly moving away from capital markets and media. Companies that really go into decline never decline in the spotlight, but first sink into darkness and then decline. For those platforms that are unable to transform content, physical brands, or industrial Internet, their fate is to disappear into darkness.