Service industry will realize the huge potential of Internet innovation

The year 2010 has been marked a milestone for e-commerce development, especially the B2C segment.

The Chinese online retail market has seen a number of foreign competitors entering the scene, as well as the rise of ambitious local enterprises that used various measures including initial public offerings (IPOs) and fund raising to push competition in the online retail market fiercer for the coming decade.

The successful IPO of Mecox Lane Limited (NASDAQ: MCOX), an online platform for apparel and accessories; and E-Commerce China Dangdang Inc (NYSE:DANG), an online bookstore and general merchandise retailer in the US stock market, is only the tip of the iceberg. The past quarter has also experienced the eruption of IPOs for Chinese B2C websites.

360buy.com and Taobao Mall, two Chinese online retailers, also made strategic changes in 2010.

360buy.com has extended its business to apparel, general merchandise and books, marching toward a Chinese Amazon.com; while Taobao Mall, after being separated from Taobao.com, has launched an all-round marketing promotion in the second half of 2010 and achieved record high daily sales of 1 billion yuan (115 million euros) on Nov 11.

Analysys International's research shows that many factors have been influencing the business trend, including the changes in industry policies, technology advancement, consumer behavior and the evolution of innovative business models. Based on the analysis above, the future trends will be as follows:

Better environment

With the intervention of local governments, as well as the implementation of industry supervision and supportive measures, regional e-commerce development will be faced with a more benign policy environment in the future. In 2010, the Ministry of Commerce and the Ministry of Industry and Information Technology, together with supervision departments such as the local Commission of Economy and Information Technology, included the development of e-commerce in the 12th Five-Year Plan (2011-2015).

As a typical business model of a new media economy that helps upgrade industrial structure and push up GDP growth, e-commerce will be backed by more supportive policies and expect more State-owned enterprises to join the market, posing as potential competitors to current leading enterprises.

In view of the existing conditions, the supervision environment in Shenzhen, Hangzhou and Chengdu is comparatively more mature and local e-commerce enterprises normally have better funding and policy support. Since the e-commerce in the above regions is growing faster than those in any other first-tier and second-tier cities, they can provide the lead for the popularizing of e-commerce in China.

Open platform

Openness in the basic features of the Internet as well as crucial characteristics of future Chinese e-commerce. As the leading B2C enterprise in China, 360buy.com has already opened its platform to retailers to profit from Internet traffic. The B2C platform rakuten.com.cn, co-owned by Baidu.com (NASDAQ: BIDU) and Rakuten (JASDAQ: 4755.q) also initiated elaborate preparations and has started searching for business cooperation in big cities throughout China.

At the end of 2010, Amazon.cn also announced the launch of its open platform Marketplace. Amazon.com will fully support its Chinese platform with its extensive resources and rich experience.

With the emergence of these platforms starting from 2011, open platforms will become an important business model for e-commerce in China.

From the viewpoint of industry, traditional enterprises are similarly speeding up their expansion into the e-commerce field. An independent online sales platform will not satisfy their demand for the flourishing sector. Therefore, the solution for accumulated demand will be an open online sales platform, which will provide standardized and tailored services to these traditional enterprises, in order to render all-round services for their daily operation and a better e-commerce development.

For this reason, the structure of a platform catering for basic services is crucial in transforming economic development and updating industrial structure.

Facing competition

A simple and primitive price war will continue, while competition in service differentiation will gradually gain attention from enterprises. One reason for the price war is that consumers are particularly sensitive to price fluctuation. The fact that consumers normally give more prominence to prices instead of service quality has resulted in the chronic behavior of some enterprises used to growing market share and sustaining current consumers by fierce price wars.

Taking the development cycle of e-commerce into consideration, Chinese e-commerce is about to step into a mature stage. Online consumers have started to shift their price-oriented shopping toward a more balanced and rational model.

Price wars will also imperil revenues and finally force enterprises to survive by lowering service quality, hitting consumers in turn. Accordingly, unhealthy competition will gradually exit the stage. Service competition marked by technology and advanced concept will then evolve as the core of future business wars.

Tapping interest

The integration of the Internet sector is becoming more prevalent, and e-commerce has been turned into the key point of value transformation for Internet application platforms.

As business models for online industry diversified, enterprises have attracted not only enough attention from the public, but also numerous investments at home and abroad.

Despite the lack of a mature business model, some application models that own large numbers of registered consumers and vast Internet traffic have already conducted IPOs successfully. Different profitable business models including SNS, online video websites, Kaixin001.com and Youku.com (NYSE: YOKU), even Sina's (NASDAQ:SINA) micro blog service, all largely rely on advertising income as their revenue model. Although it is a little stereotyped, its effectiveness should not be denied.

According to Analysys, the revenue model from Internet applications will be more diversified while e-commerce will become the most important outlet of value transformation for platforms with plentiful resources. Some enterprises are experimenting with the combination of SNS and e-commerce. Although it can hardly become the core business of these platforms, the contribution of e-commerce will increase progressively in the future.

Growing together

The concept of e-commerce is extending continuously. The rise of group buying indicates that the traditional service industry has realized the value of e-commerce and started their expansion.

Although e-commerce in China has been developing for more than 10 years, it has always focused on barter trade as the core business model. Changes in payment technology, Internet security and consumer behavior, e-commerce after 2010 that is independent of logistics, such as financial products, tourism services and high-quality goods consumption, will become an important supplementary segment for the online shopping market. With the easing of supervision policies, e-commerce of funds and financial planning products in the financial category has already taken off. With abundant experience and years of accumulation, other market segments like online tourism services and ticket sales will emerge as a crucial business model.

Group buying websites are the most innovative creation of Chinese e-commerce business models in 2010. A vast number of copycats appeared globally after the great success of Groupon in the US.

Toward end of 2010, there are more than 1,000 group-buying websites on the Chinese mainland with many similarities in business models. They all provide fine online services to netizens.

Apart from the low business entry threshold and high gross profit margin, another essential reason for the eruption of group buying websites is that the traditional service industry has extended its business to the e-commerce field. Plenty of traditional enterprises that need better online marketing have outsourced their promotions to group-buying websites and obtained positive feedback.

As a result, the service industry will fully realize the strategic meaning of e-commerce and the huge revenue by innovative business models will attract more enterprises to integrate themselves with the Internet.

The author is an analyst with research group Analysys International.

By Chen Shousong