Going Free Is Still Chinese Internet Companies’ Strategy for Land Grabbing

Going Free Is Still Chinese Internet Companies’ Strategy for Land Grabbing

By Tracey Xiang on August 30, 2013

Baidu announced they’d stop charging its navigation app. Later the same day AutoNavi, a veteran mapping data and service provider, held a press conference announcing the same thing. To fuel the hype, in the next day Baidu stated that they’d refund users who had paid for it. It’s unknown how many installs of Baidu Navigation, which costs 30 yuan, have been sold. AutoNavi cannot afford to do the same, for its premium navigation app, priced at 50 yuan ($8), had been downloaded and pre-installed in more than 70 million smartphones.It’s no secret that Baidu looks AutoNavi as the biggest direct competitor in location-related service. AutoNavi is the first of conventional mapping data companies in China that shifted from serving businesses to developing consumer-facing services. Amap, the maps app developed by the company, is for free while its navigation app previously was not. It is estimated that the premium navigation apps sold to smartphone manufacturers or distributors and telecom operators must be at a lower price than those sold to end users. But still it’s a big chunk of AutoNavi’s revenues.

At AutoNavi’s press conference, Zhou Hongyi, CEO of Qihoo and an independent board director of AutoNavi, showed up in a video touting the going-free strategy, which he applied and succeeded with. When 360 Safe Guard, the flagship security product of Qihoo’s, started generating a considerable number of revenues, his company decided to offer the product for free — the first in China — and quickly gained a large number of users. Other security product providers had to follow suit for the sake of users but fail building a business model, while Qihoo successfully converted the security product users into its browser users and monetize their online activities on the browser.

He always argued that all the business models are based on a large user base where you can charge users for premium services or businesses for advertising. Since the costs for developing a product is fixed, the more users you have, the lower the cost per user. Although there’s still cost for a user, if your product got on the homescreen of a user’s PC or smartphone and it’s good enough, the user would promote for you. You’ll lose revenues after going free, but the result may be more effective if you otherwise use the money to do advertising.

Zhou said he didn’t know where Qihoo would make money when they decided to go free either, but he predicted that the Internet security service would become one of the basic services that would eventually be offered for free. Till then, he said, whatever Qihoo had earned would go away. What’s true is later Chinese Internet companies like Baidu and Tencent developed security products in-house and offer them as one of many services of theirs for free.

Several month ago, Alibaba’s Jack Ma said going free cannot work in today’s China. He argued big players, like Baidu, diho have money and talent would compete with you for users and beat you in one way or another.

Baidu has been competing with AutoNavi for users, not only users of navigation apps but also those use maps in general and those who will use the location-based services on top of maps. Baidu has established a division for location-based lifestyle services and bought a controlling stake in group-buying service Nuomi who is connected to offline businesses. It’s clear that Baidu will be the direct competitors of AutoNavis who wants to build a location-based Taobao platform in a lot of ways.

But the AutoNavi case cannot be a typical one that will prove Jack Ma’s assertion, for the company isn’t an ant that an elephants. Alibaba now is the biggest shareholder of AutoNavi.

What to behold is who, Baidu or AutoNavi, will gain more users and what they’d turn into revenue sources.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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