Chinese Ecosystems BATmen September 12th, 2016 Dr. Richard Windsor PhD CFA Radio Free Mobile Fixed: +1 415 830 6032 Fixed: +44 203 239 9904 Mobile: +971 56 1142 482 Skype: rhswindsor Twitter: @RadioFreeMobile [email protected] To entertain as well as inform www.radiofreemobile.com

Digital Life To entertain as well as inform

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Usage between smartphones and tablets is very different. Radio Free Mobile China Digital Life Pies - 1 2015A, % time spent Smartphone Q1 2016A Tablet Q1 2016A Media consumption 14% e-book Instant reading messaging 15% Gaming Instant 10% 16% Media messaging consumption 10% 35% social shopping networking 14% Browsing 20% 12% Microblogging Browsing Mapping 1% Gaming Search Search 10% 2% 20% 4% Banking and 8% social Payments networking 5% 4% An ecosystem needs more services in China than in developed markets to establish a credible position as an ecosystem provider Source: Radio Free Mobile, e-marketer, www.radiofreemobile.com 3 QuestMobile, WBR Research. DataEye, China Internet Watch, Flurry, iResearch

Radio Free Mobile China Digital Life Pie - 2 Q1 16A, % Smartphone vs. tablets % total time used Weighted average Digital Life Pie e-book Top two services in developed markets reading are Social Media 2% Networking and Smartphone Usage consumption Gaming 17% Instant Tablet Usage Gaming messaging 11% 15% 87% Tablets are used less as most connect over Wi-Fi with social shopping fixed backhaul resulting in a 12% worse experience than networking cellular 18% Microblogging 1% 13% Mapping Banking and Browsing 2% Smartphone Usage Tablet Usage Payments Search 10% 4% 8% Usage in China is more balanced with the top 2 services making up 35% of usage compared to 51% in developed markets Source: Radio Free Mobile, e-marketer, www.radiofreemobile.com 4 QuestMobile, WBR Research. DataEye, China Internet Watch, Flurry, iResearch

Coverage of Digital Life by each Chinese ecosystem 2015A, % Digital Life pie covered. Tencent has a clear lead but has been less effective at monetisation than Baidu. 77% Xiaomi has real problems as it lacks the ability to invest to increase its coverage RFM sees Alibaba, 53% and Baidu investing heavily to catch up 45% 44% with Tencent When usage is 30% taken into account the three big ecosystems appear almost completely dominant (Slide 28 in deck, fig. 14 in note) Tencent Alibaba Baidu Xiaomi China Mobile Source: Radio Free Mobile, e-marketer, www.radiofreemobile.com 5 QuestMobile, WBR Research. DataEye, China Internet Watch, Flurry, iResearch, Company data

7 Laws of Robotics To entertain as well as inform

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Laws 1 - 4 How good is it today? To entertain as well as inform

Laws of Robotics 1-4 for the Chinese ecosystems 1 An Ecosystem 2 An Ecosystem 3 An ecosystem 4 An ecosystem must provide easy must be simple must capture must offer access and fun access to and easy to set up traffic on its own to a good range of digital life and use servers third party apps Only 4 = 5 Xiaomi has really developed a unique 1 = 4 UX across services…. = 3 Still 3 experimenting it seems = 2 …that is ready to = 1 go out of the box SSoouurrcece:: Radio Free Mobile www.radiofreemobile.com 8

Laws of Robotics 5-7 for the top 6 ecosystems 5 An Ecosystem 6 7 An ecosystem must allow Digital An Ecosystem’s must have Life services to user data must be consistent device share data integrated software = 5 Only Baidu = 4 shows any understanding of the importance of = 3 sharing and integration Tencent achieves some data sharing = 2 using Weixin / Wechat as its platform… but shows no sign of = 1 integrating QQ or anything else. SSoouurrcece:: Radio Free Mobile www.radiofreemobile.com 9

Conclusions from 7 Laws of Robotics Analysis Software Consistency This is huge problem for everyone based on Android Xiaomi Xiaomi is the most advanced despite being the weakest player. Could be acquired by one of the BATmen. Baidu The only one that really understands the ecosystem beyond Digital Life coverage. China Mobile Least developed despite being the biggest and having a billing relationship with 68% of users. SSoouurrcece:: Radio Free Mobile www.radiofreemobile.com 10

The market in China China plays to its own rules To entertain as well as inform

Access : Mobile is the primary choice for users in China, in contrast to USA Fixed Internet vs Mobile Internet in China & USA Q1 2016A, Users (m), MBPS, %, Milliseconds (ms) % connections over 4MBPS Average speed MBPS Average page load time ms 4.7 2661 63% 41% 4.1 2426 Fixed Internet Mobile Internet Fixed Internet Mobile Internet Fixed Internet Mobile Internet 83% 14.2 3559 2564 35% 4.8 Fixed Internet Mobile Internet Fixed Internet Mobile Internet Fixed Internet Mobile Internet Mobile broadband in China has greater penetration, is faster on average with lower latency than fixed. Opposite to USA. Source: Akamai, Radio Free Mobile www.radiofreemobile.com

Control: The Golden Shield Project has allowed the Chinese ecosystems to emerge with no foreign competition Number and penetration of ecosystem users in China 2011A – 2017E, Users (m), Penetration population (%) The market for the mobile ecosystem has grown up with Chinese Digital Life offerings only. Ecosystem users (m) Penetration 864 There is no sign of the 812 Golden Shield Project 739 coming to an end. 659 508 This is very likely to 60% 63% ensure that China 54% remains a huge market 48% for Chinese Digital Life 263 37% services provided to 109 Chinese users by 19% Chinese companies 8% 2011A 2012A 2013A 2014A 2015A 2016E 2017E SSoouurrcece:: CNNIC, Radio Free Mobile www.radiofreemobile.com 14

Everyone uses everything Percentage China ecosystem users with each player 2012A-2018E, % of total ecosystem users in China Alibaba Users Tencent Users (China only) Baidu Users 91% 90% 91% 89% 89% 88% 90% 82% 85% 86% 81% 69% 71% 61% 65% 60% 57% 53% 40% 27% 22% 2012A 2013A 2014A 2015A 2016E 2017E 2018E Almost all users in China are members of Tencent and Baidu’s ecosystems and over half are also members of Alibaba’s. SSoouurrcece:: Company Data, Radio Free Mobile www.radiofreemobile.com 15

One of the big three ecosystems dominate almost every single segment of Digital Life. The Digital Life of most Chinese users Q1 2016A Video Video Music e-book reading 2% Media consumption 17% Instant Gaming messaging 11% 15% Baidu, Tencent and shopping Alibaba are already social 12% in a dominant networking position. 18% Microblogging Mapping 1% Banking and 2% Payments Search Browsing 4% 8% 10% Source:Radio Free Mobile, e-marketer, www.radiofreemobile.com 16 QuestMobile, WBR Research. DataEye, China Internet Watch, Flurry, iResearch, Company data

Default lacks power. Penetration of mobile browsers in China Q3 15A, % total smartphone users A good example of how default is currently irrelevant Chinese smartphone users routinely in China use more than one browser 70% Despite being included with the 48% device, the stock Android browser 39% has very low, if any share in the 27% Chinese market Users have learned to pick and choose the services that they want instead UC browser (Alibaba) QQ browser (Tencent) Baidu browser Qihoo 360 browser of being spoon-fed them by default. SSoouurrcece:: China Internet Watch, www.radiofreemobile.com 17

Market share of App Stores in China Q1 2016A Present but questionable whether it functions The landscape is very fragmented 8% 5% creating a 13% frustrating 6% experience for 15% 3% developers. 4% The top 4 reach 10% 64% of users 16% owned by Tencent, Qihoo, Xiaomi and 20% Baidu. This is a weak spot for Alibaba Source:Talking Data, newzoo.com, Radio Free Mobile www.radiofreemobile.com 18

Market forecasts A greatly slowing outlook To entertain as well as inform

Smartphone growth is rapidly slowing meaning that one should look to the ecosystems for growth China Smartphone, Tablet and Ecosystem forecasts 2013A-2017E, Units (m), % growth YoY Smartphone shipments (m) Growth Tablet shipments (m) Growth 74% 439 454 462 67% 430 21.5 353 19.1 18.1 17.7 17.2 LOW / NO 25% GROWTH 22% -5% -2% 2% 3% 2% -11% 2013A 2014A 2015A 2016E 2017E 2013A 2014A 2015A 2016E 2017E Ecosystem users (m) Growth 812 864 93% 739 659 Baidu, Tencent, MID LEVEL 508 Alibaba exposed to GROWTH users will fare better than Apple, Xiaomi and other handset 30% makers 12% 10% 6% 2013A 2014A 2015A 2016E 2017E Source: Radio Free Mobile, Counterpoint Research www.radiofreemobile.com 20

Ecosystem Status Quo. To entertain as well as inform 21

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How the Chinese market differs Access & Control The quality of fixed and mobile access is the inverse of developed markets. Internet is controlled Monetisation The same three methods apply but monetization from O2O is much greater. Privacy No one seems to care about privacy Default The power of default has yet to emerge in China Usage Everybody uses everything SSoouurrcece:: Radio Free Mobile www.radiofreemobile.com 12

Users can no mix and match Digital Life services from different ecosystems… Gated Community concept in Chinese ecosystems China Digital Life Pie, 2015A, % The degree to which the user mixes and matches ecosystems will have an impact on the overall brand strength and monetisation opportunity. Ecosystem A 1) The more services of an ecosystem that the user chooses to use, the greater the potential revenue opportunity from that the user for the ecosystem. 2) The more of the services that are used, the greater the stickiness and brand strength of that ecosystem In China, users have always mixed and matched Digital Life services Ecosystem B SSoouurrcece:: Radio Free Mobile www.radiofreemobile.com 22

One of the big three ecosystems dominate almost every single segment of Digital Life. The Digital Life of most Chinese users Q1 2016A Video Video Music e-book reading 2% Media consumption 17% Instant Gaming messaging 11% 15% Baidu, Tencent and shopping Alibaba are already social 12% in a dominant networking position. 18% Microblogging Mapping 1% Banking and 2% Payments Browsing Search 10% 4% 8% Source:Radio Free Mobile, e-marketer, www.radiofreemobile.com 23 QuestMobile, WBR Research. DataEye, China Internet Watch, Flurry, iResearch, Company data

The degree that the user takes services from only one provider will have a non-linear impact on monetisation The direction the BATmen must take to grow RFM Laws of Robotics. The better each 4 An ecosystem ecosystem must offer access meets the to a good range of criteria of Laws third party apps 4,5,&6, the less a user will want to mix and 5 An Ecosystem match Digital must allow Digital Life services and Life services to the more share data valuable users will be to that ecosystem 6 Value creation An Ecosystem’s user data must be is not linear as integrated the having the Potential for value whole of the creation / monetisation pie generates much more value than the sum of the 4 5 4 5 parts 6 6 SSoouurrcece:: Radio Free Mobile www.radiofreemobile.com 24

Software consistency is a huge problem for everyone in China leading to proprietary solutions. Proprietary software development options in China ? GMS MIUI YunOS AOSP AOSP AOSP AOSP AOSP Hardware Hardware Hardware Hardware Hardware ? Obscure since 2012 RFM fully expects Google to take GMS fully proprietary in 2017. Alibaba, Xiaomi and Tencent have their own software development but Baidu, and China Mobile effectively have no OS of their own. Cyanogen, Acadine, Sailfish, Tizen and others as well as acquiring Xiaomi are all options. SSoouurrcece:: Radio Free Mobile, Xiaomi, Cyanogen, www.radiofreemobile.com 25 Amazon, Google

% China Digital Life Pie dominated by each ecosystem Q1 2016, Sum of Digital Life segments where dominant, % Incudes Ant Financial which Alibaba does not own but receives 37.5% of profits. 30.5% if this is removed The reasons for Xiaomi’s 45.0% problems start become Tencent is by far very clear the most advanced in creating a 34.5% thriving ecosystem when its service is the missing 1% offering is considered. 18.5% Removing Ant Financial puts Tencent 14.5% points clear of its next rival. 0.0% 1.0% The battle for China Mobile and Xiaomi Tencent Alibaba Baidu Xiaomi China Mobile seems already to be lost Source:Radio Free Mobile, e-marketer, www.radiofreemobile.com 26 QuestMobile, WBR Research. DataEye, China Internet Watch, Flurry, iResearch, Company data

The big ecosystems already have the majority of all users on board. Now they must fight for engagement. China Ecosystem users by provider 2015A, The Top tier 300m+ active users - success Very undeveloped eiz The mid-tier s 100m+ active users m e ? - sustainable ts ys o Ec Less than 100m - losers The main contenders already have the users on board. Now they have to fight it out between them. Source: Radio Free Mobile www.radiofreemobile.com 27

To entertain as well as inform Disclaimer The views and opinions expressed in this report represent the views and opinions of Radio Free Mobile. They are not the views and opinions of any third party past or present with whom the author of Radio Free Mobile has been or is associated. Radio Free Mobile is objective and independent. Radio Free Mobile aims to entertain as well as inform and in this vein can be irreverent at times. This is the expressive style of the author of Radio Free Mobile and should not be construed in any other manner Source: www.radiofreemobile.com 28