The US and China dominate global consumer competition based on the power of a few platform leaders. In the US, Amazon, Apple, Google, Facebook, Microsoft collectively touch the majority of consumer transactions, and in China Alibaba, Tencent, Baidu and JD.com dominate. These companies aren’t just different. The clear, narrow, and nearly universal value propositions with which they began (books, anyone? Intuitive search?) have allowed them to accrue such economies of scale and scope that they have become platforms for society at large. They are no longer just in business. They also play a big part in the national security apparatus of their respective nations.
Going forward, this platform competition will be a significant issue for both nations for the following reasons:
1. They have near insurmountable competitive power: Peter Weill at MIT has shown that platform businesses grow faster and are more profitable than non-platform businesses in the same markets. Their returns can also be extraordinary. For example, in the last quarter Facebook’s reported ROA was 14%. When you properly adjust the ROA for GAAP distortions, the real, economic, ROA was 61%. Returns like that create massive consolidation of market power in that they enable these companies to both reinvest huge amounts of capital, and to buy up complementary and competing companies, all of which solidifies their market share advantage.
2. They integrate the core infrastructure components needed by a society: These platform businesses don’t just provide a core service. They are also platforms for identity, payments, currency, taxation, voting, credit, and so on. When delivered in an integrated way that includes mobile phones, cellular and Internet technology, and developmental banking resources (such as the Asian Development Bank), they are a lynchpin for delivering a 21st century societal infrastructure.
3. They lead in the race for commercial-grade AI: Platforms are central to the AI efforts of both nations and, as Vladimir Putin said, the country that dominates AI dominates the world. The reason these platforms are so central to AI is that great data—from structured to unstructured, in vast quantities, and in different modalities—is critical to AI development. Likewise, AI requires great software talent, massive computer power, and a business model that can sustain huge investments in R&D. The strength platforms have in all these areas will continue to make them more powerful as commercial entities and more important politically.
4. They back—and have the backing of—the nation-state: In China, these firms help advance the strategy of the nation and support the vision of Mr. Xi. Baidu, with its headquarters in Beijing, is aligned with the national labs aimed at creating AI, and they have divested certain assets, such as their home delivery business, to focus more clearly on AI. It plans to deploy autonomous busses by 2018, and autonomous cars by 2019.
No other nations have anything like these internet giants.
As the investigations advance into the role Facebook and Twitter played in Russia’s attempts to influence the US presidential election, some important questions arise: How much does the United States want to lessen its power vis a vis the Chinese giants? How much should the US open markets to Alibaba, etc., given that China has closed itself to the US platforms?
From a corporate perspective, no company should compete in online retail, media, AI, etc. without a clear strategy involving these mega platforms. Companies in the business-to-consumer realm it is vital for both your go to market and recruiting strategies. If you in the b2b realm, the more important issue is how you use them to source talent because, as of yet, there is not as deep a link between these platforms and b2b buying behavior.