Qihoo’s Blephone buyout latest indicator that China’s ecosystems are going vertical


It looks like Qihoo is having another go at the smartphone market with the purchase of Blephone earlier this month, but behind this I see the next stage of competition between the Chinese ecosystems.

Baidu, Alibaba, Tencent (a.k.a. the “BATmen”) and Qihoo are all very good at what they do but in the mind of the users they are quite focused in their particular niches. This is why the Chinese market is so fragmented as most users use services from all of these providers rather than sticking with just one.

In developed markets, users predominantly spend their digital lives in one ecosystem or another – but not so in China. This is how the sum of all the users of BATmen and Qihoo services is comfortably more than three times the number of total smartphone users in China.

While the market and usage is growing, these players can grow nicely. But as it begins to slow, they will need to compete more aggressively with each other in order to maintain their growth.

RFM research indicates that the best way to encourage users to try a new service over one that’s already established in the market is to install the service on the device at the factory and set it as default. This is commonplace in developed markets, but in China, devices are effectively blank when they reach the user, who then picks and chooses which services he wants to download and use. This is why I think Alibaba has purchased a controlling stake in Meizu, and why it has created its own version of Android called Yun OS.

Now it looks like Qihoo is going the same way with the purchase of Blephone following its ill-fated relationship with CoolPad during 2015.

Qihoo has nearly 900 million users of its mobile security software on mobile devices from which it derives advertising revenues, but it has been trying to diversify away from this for some time. The areas into which it is diversifying bring it directly into competition with the much bigger and much stronger BATmen. But if it has control over hardware, it has a chance to encourage users to try its service over those from the BATmen.

The problem of course is that Blephone does not have the volume of devices in the market to make a real difference, but it is this same thought process that could lead to the acquisition of Xiaomi, which has all of the elements required – including a good user experience and good volume in the market – making it a prime candidate for acquisition by one of the BATmen.

Here I would put Baidu or Tencent at the top of the list, as neither have yet made a play to assert greater control over hardware. Xiaomi faces another very difficult year in 2017 and while it drifts sideways, I can only see its valuation continuing to sink and its investors getting itchy feet.

This article was first published on RadioFreeMobile.

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