PARIS SCIENCES & LETTRES (PSL)
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Overthrowing digital platforms: lessons from WeChat

Tencent's WeChat is your Whatsapp, Facebook, Skype and Uber, it's your Amazon, Instagram, Venmo and Tinder, and it's other things we don't even have apps for, says the NYT. Gathering all these functions within a single app is already very impressive. But Tencent has even larger goals: WeChat will soon distribute its very own apps. With this move, it takes competition from an app-to-app level to an app-to-OS one.

15
January 2017
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Executive Resume

In a mesmerizing video published in August 2016, the New York Times first coined the concept of “super-app” while describing the Chinese multi (omni?) function app WeChat, developed by Tencent. “It’s your Whatsapp, Facebook, Skype and Uber, it’s your Amazon, Instagram, Venmo and Tinder, and it’s other things we don’t even have apps for,” the video goes. Gathering all these functions within a single app is, per se, already very impressive. But Tencent, now the most valuable company in Asia before its local rival Alibaba, has even larger goals: the company founder announced last September that WeChat would soon distribute its very own apps. Well, “mini-apps” (xiaochengxu) to be precise. With this move, WeChat takes competition from an app-to-app level to an app-to-OS one: it aims at app distribution, a function currently only addressed by Google and Apple’s operating systems and their respective app stores.

This function plays a central role in the management of the two platforms ecosystems, hence WeChat capturing it would equal to if not overthrow at least weaken the two tech giants’ leadership over the smartphone industry. Obviously, challenges remain – some will be highlighted here – but the fact that WeChat, once a small complementor of way larger platforms, has now the potential to overthrow those same platforms and establish itself instead is sufficiently astonishing to wonder how it managed to be in this position.

WeChat was launched as a Tencent internal project in 2010, then a mere instant messaging app. It spread within the Chinese market and quickly reached 300 million users by January 2013. The messaging app then added an extra feature, the Moments, a Facebook Wall-like function where friends can share thoughts, photos and, soon, videos. The same year, it launches its own e-wallet in response to Alibaba Alipay development. Alipay and WeChat then engaged in a race to add more and more services to their respective wallets, turning them into the “Swiss Army knives” described in the New York Times video.

Up to this point, WeChat could still be considered an app, though a “super” one: it addressed alone functions that could have been addressed by distinct apps with a more focused scope.  It does not challenge the OS itself, responsible for those apps to work well together within their ecosystem, but rather starts a slow disintermediation manoeuvre: while those services used to be addressed by distinct apps directly built on the OS APIs, they are increasingly built upon WeChat’s own requirements. It reaches 650 million users by November 2015. The same month a year later, Tencent discloses that WeChat will soon be home to mini-apps, developed by third parties based on a framework provided by the company and accessible in the super-app. They are not installed on the smartphone, requiring no device memory but an internet connection: users therefore can remotely access their content, reducing the need for traditional apps. While previous moves aimed at capturing functions performed by Google and Apple’s complementors – Alipay, Uber, etc. –, the addition of mini-apps targets a function, app distribution, until now only performed by the platforms themselves.

The access to third party content, however, is key in smartphones platform architecture: it bridges one side of the market, third party apps developers, to the others, users, of course, but also hardware manufacturers and advertisers. If this function was to be increasingly performed by Tencent’s WeChat instead of Google’s Android and Apple’s AppStore, then their platforms would gradually lose control over their multi-sided market, weakening a leadership position built on intermediating these multiple sides. Platforms are known to be home to network effects: once they have reached a critical mass of users on its various sides, it is ensured to “take it all,” leading to exponential growth. But what happens when the platform loses control of one side? What was done in an incredible speed can be undone following the same laws. It is all the more true than WeChat has been working on its own network effects over the past years through the diversification of the services the platform handles, fuelling its growth.

Consequently, WeChat is today in a unique position to overthrow the existing platform thanks to its mini-apps. The potential is huge, but can it be fully realized? Interestingly, a similar move was attempted by Netscape, the once cross-OS Internet browser market leader (80% market share in 1996). Netscape envisioned a world in which software would be fully distributed over the internet, accessed through the web browser, and even started to develop an over-the-internet OS. The idea excited observers in a decade of frantic exploration of the Internet potential. It attracted so much attention that Microsoft freaked out: in a famous memo written by Bill Gates, the then-CEO analysed the “Internet Tidal Wave,” identifying it as a key threat to Microsoft. It led the company to react violently, bundling Internet Explorer with Windows, killing Netscape in a couple of years. In 2000, I.E. had 80% market share, Netscape about 15%. The lesson: even though WeChat is today able to overthrow Google and Apple, the two companies can still counter-attack.

Will they be as violent as Microsoft? They could bundle their OS with a certain number of value-adding apps. Apple seems to be following this approach on both the instant messaging and e-payment functions. Will they leverage their current leadership position? They could, since WeChat is built on both platforms’ APIs, but the manoeuvre will be delicate to implement without frustrating end-users or scaring away other developers. One factor to also keep in mind is that the WeChat revolution, until now, has been confined to China, a country in which Google and Apple are probably not expecting to be challenged, at least from the software point of view.

The once tiny complementor, WeChat as an instant-messaging app, of a larger platform, Apple’s or Google’s OS, today has the potential for an overthrow: it could become the platform on which the future of smartphones will be built. The underlying competition is a non-conventional one, in the sense that it does not happen between similar companies aiming at similar market positions with similar solutions, but rather opposes the platform leader to one of its complementors: the threat is not coming from outside, but inside. WeChat was developed upon both Apple and Google’s platforms, their operating systems. Yesterday, it grew within the borders that had been delimited by those platforms’ leaders, unifying various apps within its own growing ecosystem. Today, it is playing with those boundaries, looking at the other side of the fence, and maybe even at the farmer’s house.

One should not be surprised at such dynamics, as platform overthrows are neither new nor rare: it happened for example in the mid-80s when IBM got dethroned by the “Wintel” alliance or in the early 00s when Google won over Yahoo!. All of them were the result of similar causes: (1) the development of a new solution within the pre-existing platform to cover most of the functions the latter addresses, (2) reaching out to new functions that the platform cannot address and (3) convincing other stakeholders to switch platform. And, therefore, outcomes were similar: what used to be a complementor became the new platform, and the former platform became the new complementor. This should be kept in mind when competing in the digital world: fitting in a platform does not doom your company to be its complementor forever, but can be a unique chance to become, one day, the platform leader itself.

Julien Legrand
Yenching Scholar & Mines ParisTech Engineer