Internet in 2016: From traffic to productivity

Faced with the "abdication of the gods" and the "Silver Age", as well as the shift of investors from "China premium" to "China discount", you must completely abandon the past traffic thinking and the big-spread model, and instead rethink and define yourself through structured thinking, and upgrade the Internet model to a productivity contribution model as soon as possible.

It is the annual review and outlook season again. As in previous years, Yin Sheng will combine the changes in the Internet industry over the past year with my research and present my judgment on the major changes in the Internet industry, especially the Chinese Internet industry, related to value trends. In last year's review article "Internet 2015: The Abdication of the Gods and the Silver Age", Yin Sheng defined 2015 as the starting year of the Internet Silver Age:

The Silver Age may be the reality of the Chinese Internet for quite a long time after the gods abdicated in 2015. The initial dividends built entirely on the Internet are close to being exhausted, just like what BAT is experiencing in the three traditional fields of search, e-commerce and social networking, and new opportunities mainly exist in the penetration of the Internet in all walks of life, which means that you have to compete with existing producers in those industries in terms of productivity, which will no longer be sexy, and squeezing bubbles will be a constant throughout.

In the year 2016 that is about to pass, China's Internet is sinking deeper and deeper into the track of "the gods abdicate and the silver age":

Xiaomi, which experienced "2015: The year of the decisive battle between Xiaomi and anti-Xiaomi people", is facing the situation in 2016 that "the Xiaomi era is over" and it is not sure whether the new era will come; Lenovo, which seized the opportunity of global PC industry restructuring and had a good few years, is finally facing the loss of "Lenovo" at the gate of the mobile Internet era ("How we lost Lenovo"); Baidu, the most technologically advanced Internet giant in China, has suffered considerable doubts about its traditional search business model since 2016; LeTV, a super player in the A-share Internet concept, has successfully resolved previous doubts and crises, but the new troubles it has encountered in recent months do not seem to be as easy to resolve as in the past;

Internet+, the hottest field in recent years, which has burned tens of billions of dollars, has shown signs of being stranded in more popular sub-sectors, such as Internet finance, Internet medical care, and Internet travel, following local life services. Didi, which has integrated Uber China and has the capital backing of the national team, saw a promising future, but did not expect to be pushed into an ice age by the new online car-hailing policies in cities such as Beijing and Shanghai. Although there are stars such as Ant Financial and JD Finance backed by Internet giants, they cannot cover up the double blow of credibility crisis and policy supervision encountered by Internet finance as a whole.

Even those companies that have temporarily stayed out of the trend, such as Alibaba and Tencent - both of which have returned to growth of 40% or even more than 50% in the past few quarters, which has helped their stock prices to experience a small bull market and the market value of the two companies once approached US$300 billion - have also benefited greatly from some unsustainable factors, such as acquisitions or new commercial businesses, and a lower base in the same period last year. If they cannot find a growth model suitable for the post-dividend era as soon as possible, they will probably have to return to a lower growth track soon ("Even Tencent may have to face up to the post-smartphone dividend era").

The challenges that some companies are facing now or will face in the future can be partially explained by the view in my previous article "For Silicon Valley, it is a more dangerous enemy than Trump", that is, "In the long run, Internet giants with market capitalizations of tens or even hundreds of billions of dollars must be given a Trump discount to reflect these potential regulatory pressures. On the contrary, companies that are challengers, innovators, or leaders in traditional economic models may receive a corresponding Trump premium."

The most lethal part of government regulation may not lie in direct regulation of the industry - although Didi's experience appears to be of this kind - but in seeking to maintain a balanced national treatment between the Internet industry and traditional industries. In the past, out of the need to stimulate industry development or simply because policies could not keep up with the development of new things, the Internet industry actually enjoyed super-national treatment in some areas, such as taxation, antitrust investigations, intellectual property protection, privacy protection and conflict resolution between social interests, etc.

When a government decides to do this, it is not difficult for it to gain sufficient public support. The backbone of this force comes from the traditional industries that have been hit. Due to the existence of the above-mentioned super-national treatment and the widespread existence of bubbled venture capital, the productivity contribution of some Internet companies has been magnified, while the economic value or overall social value of some excellent traditional industry companies has been underestimated, and these industries often accept more employment. When the overall economy faces challenges, traditional industries that account for the majority of the economy and are more sensitive to macroeconomic reactions will be hit harder, which may in turn force the government to tilt the balance in favor of traditional industries.

In addition, the evolution of the Internet's own development stages has also changed the balance of power. In the stage of rapid popularization, the user scale, penetration rate and the unique value of the Internet itself, such as the value related to the dissolution of time and space, are the main driving forces. At this time, it has fewer conflicts with traditional industries, but when more than half of the population is connected to the Internet (this has long been a reality in countries such as China and the United States, where the most Internet unicorns have emerged), new impetus will come from the application of the Internet as a productivity idea and means (replacing the independent industry positioning in the early stages) in all walks of life, which is the so-called Internet stage. In this regard, both the Internet and traditional industries have the opportunity to compete for the leading role, which will also affect capital, traditional industries and then government policies.

In comparison, American companies may be in a better situation than Chinese companies. On the one hand, this is because of their successful globalization strategy, which gives them the backing of a global population base and allows them to continue the demographic dividend. On the other hand, it is related to both specialization and globalization, which allows them to focus on vertical structure layout rather than adopting a horizontal diversification model like Chinese companies. The advantage of this is that it can avoid direct competition with traditional industries. At the same time, the vertical structure allows them to serve as productivity value providers in the future economic Internet and lay the foundation for a stable value engine, thereby gaining more strategic stability and becoming a true infrastructure like water, electricity and gas.

This difference has been reflected in the performance of major Internet companies in China and the United States: in the past few years, Facebook's revenue growth has always remained above 50%, and mainly comes from advertising. After a period of stagnation, Amazon and Google returned to the medium-to-high growth track in 2016. Google's revenue has increased by more than 20% for several consecutive quarters, while Amazon's revenue growth has reached about 30%. If calculated based on the value-added part after deducting the purchase of goods and services, the growth is even faster.

Back to the major Chinese Internet giants, Baidu's current growth has almost stagnated, and as mentioned above, if nothing unexpected happens, the current high growth of Tencent and Alibaba does not seem to have a sustainable foundation. Being too limited to the Chinese market makes them more vulnerable to changes in demographic dividends, economic trends, etc. At the same time, the relatively limited market also makes the vertical structure strategy unable to compete with American companies due to the lack of necessary scale. This does not take into account the possible impact of government factors. For example, in the field of cloud computing, the enthusiasm of local governments may indirectly lead to non-market pricing, so that even leaders like Alibaba may not be able to fully reap the business results that match their status in the future, at least not so easily.

These will inevitably affect the judgment of the capital market. In September 2015, Yin Sheng (WeChat public account jia-zhi-xian) once reminded of the relevant issues in the article "Injured BAT: Wall Street Re-evaluates Chinese Internet Companies", namely, "Compared to the past, investors usually gave Chinese companies a certain premium to reflect their higher growth levels. Now, with the slowdown of China's economic growth and the limitations of Chinese companies in their business structure - still mainly in the Chinese market, global investors seem to be re-evaluating the stocks of Chinese companies in their hands and giving Chinese stocks a certain discount - BAT's slowing growth and fluctuating profitability gave them a reason. At that time, the stocks of global Internet companies had experienced a sharp decline, but the decline of Chinese companies was far greater than that of American companies.

This shift in investors' attitude from "China premium" to "China discount" will continue, and this has been reflected in the current valuations of several major Chinese and American Internet giants: when I wrote the aforementioned article, except for Baidu, which was in a period of transition and had an abnormally low valuation, Alibaba and Tencent's PSG (price-to-sales ratio adjusted for growth rate) were higher than the three major US giants. Now the PSG of the two companies has dropped to 0.21 and 0.2, respectively. In comparison, Google, Facebook and Amazon (according to the adjusted caliber) are 0.3, 0.21 and 0.27, respectively. This is also reflected in the stock price growth of several companies since 2015: during this period, Google, Facebook and Amazon increased by 45%, 41% and 120%, respectively, while Baidu, Alibaba and Tencent increased by -30%, -20% and 57%.

The following are suggestions for possible directions for the Internet industry to build a value-driven engine in the new era:

Returning to the role of the Internet as an advanced means of productivity, that is, infrastructure. Vertical structure strategy is still a possible breakthrough direction. For example, artificial intelligence may provide opportunities to build future technology and social infrastructure. At the same time, since vertical structure strategy often involves segmentation strategies in different technical professional fields, these fields can be separated from specific businesses (which require more localized characteristics) to a certain extent, making it easier to implement globalization and cooperate with all levels of the economy.

Weibo, the star of Chinese stocks listed in the United States over the past year, has benefited greatly from the rediscovery of the value of its role, namely, its infrastructure positioning as an information production and distribution platform with social media as its core. JD.com was close to breaking even, but has been significantly stronger than Alibaba in recent months. This may also be related to its vertical structure strategy around e-commerce, which may provide more value for dealing with future uncertainties than a simple light-asset platform model. In fact, calculated based on the adjusted caliber after deducting the purchased goods and services, its growth is stronger than it appears.

The newly emerged global super upstart Nvidia has the imagination space to play the role of infrastructure in the future artificial intelligence society, and this imagination may become the core force supporting Baidu's stock price in the future. WeChat Pay has been able to achieve offline transcendence, and it has also benefited greatly from its infrastructure so far, rather than its financial industry positioning. The upcoming mini program may also be an important step for it to further implement its vertical structure strategy, although its effectiveness still faces some internal and external uncertainties, such as the game between different internal departments and growth pressure. Even WeChat is the same. Sooner or later, it must make a choice between business and infrastructure. Setting boundaries for itself and resisting short-term financial temptations or pressures are necessary prerequisites for the vertical structure strategy.

If you can't do this, you might as well go Internet and technology-oriented and become a single or diversified industrial group, just like other traditional single or diversified industrial groups. In this process, the Internet and related technologies may be an advantage and resource for you, but you must not abandon the traditional traffic thinking mode and think that you can easily gain more advantages than traditional industry competitors by controlling users and traffic. In the end, the competition is still about productivity. Therefore, even on this path, you need to replace traffic thinking or the pancake model with structured thinking.

Industry restructuring driven by these two different strategic choices has already begun, just like when Microsoft acquired LinkedIn and AT&T acquired Time Warner. Yin Sheng commented: Microsoft's acquisition of LinkedIn is just the beginning. In the future, more new and old giants with future strategic shortcomings but abundant cash flow or strong financing capabilities will join the largest harvest and integration since the birth of the Internet... AT&T's acquisition of Time Warner for $85.4 billion only pushed the TMT integration trend brought about by the Internet to another small climax. Whether it is the traditional aristocracy or the Internet upstarts, they must rethink their roles in the future industry and even the entire economy and society.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.