A government agency has just released data showing that mobile Internet users in China have passed traditional desktop users for the first time, posing an interesting challenge for all players that have typically designed their products for people who surf the web from fixed-line PCs at home and in Internet cafes. This move reminds me of a similar shift to mobile from desktop computing now taking place worldwide that is dealing a blow to former PC giants Intel (Nasdaq: INTC) and Microsoft (Nasdaq: MSFT), which have long dominated the desktop computing arena but are having trouble in the mobile space.
So the question becomes: which Chinese companies are most vulnerable to the shift, and who is best positioned to capitalize on the move to mobile? In my view, search giant Baidu (Nasdaq: BIDU) is clearly the most vulnerable, controlling the big majority of the desktop search market but far less dominant in the mobile space. At the other end of the spectrum, names like Sina (Nasdaq: SINA) and Tencent (HKEx: 700) seem better set to capitalize on the shift, with both developing social networking products that work well on mobile devices. Mobile content developers like online literature specialist Shanda Cloudary, which is preparing to make a New York IPO, also look well positioned to gain on the trend.
Let’s look at the latest data, which have the China Internet Network Information Center (CNNIC) reporting the number of Internet users in China reached 538 million by the end of the first half of 2012, up by 24.5 million from the end of 2011 and equating to a penetration rate of 39.9 percent (Chinese article) Within those figures, the data also show that 72.2 percent of Internet users now access the web from mobile devices. By comparison, the number of users accessing the Web from desktop computers dipped 2.7 percentage points to 70.7 percent, reflecting the fact that a growing number of people prefer to access the web from mobile devices like smartphones and tablet computers rather than over their older desktop PCs.
In a nod to the mobile move, most of the country’s major Internet companies have announced initiatives in the last 2 years to develop their own smartphones — a move that really doesn’t look smart to me since most of these devices will be far inferior to products already on the market. (previous post) Instead, these companies need to form alliances to get their products prominently featured on well-established smartphones, a strategy that both Baidu and Sina have been pursuing in recent months by chasing deals with big-name companies like Apple (Nasdaq: AAPL) and HTC (Taipei: 2498). (previous post)
At the end of the day, the trend to mobile looks inevitable and could provide an interesting opportunity for investors to bet on who is best positioned to lead in this new space and who stands to lose the most as people abandon their desktop computers. As a result, we could see a major reshuffling among current industry players in traditional areas like search and online games over the next few years, with companies that fail to develop good mobile products potentially end up as losers to more innovative rivals.
Bottom line: New data showing a growing preference for mobile Internet by Chinese could spell bad news for dominant desktop players like Baidu, while providing new opportunities for more nimble rivals.
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