Going Free Is Still Chinese Internet Companies’ Strategy for Land Grabbing

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Baidu announced they’d stop charging its navigation app. Later the same day AutoNavi, a veteran mapping data and service provider, held a press conference announcing the same thing. To fuel the hype, in the next day Baidu stated that they’d refund users who had paid for it. It’s unknown how many installs of Baidu Navigation, which costs 30 yuan, have been sold. AutoNavi cannot afford to do the same, for its premium navigation app, priced at 50 yuan ($8), had been downloaded and pre-installed in more than 70 million smartphones.

It’s no secret that Baidu looks AutoNavi as the biggest direct competitor in location-related service. AutoNavi is the first of conventional mapping data companies in China that shifted from serving businesses to developing consumer-facing services. Amap, the maps app developed by the company, is for free while its navigation app previously was not. It is estimated that the premium navigation apps sold to smartphone manufacturers or distributors and telecom operators must be at a lower price than those sold to end users. But still it’s a big chunk of AutoNavi’s revenues.

At AutoNavi’s press conference, Zhou Hongyi, CEO of Qihoo and an independent board director of AutoNavi, showed up in a video touting the going-free strategy, which he applied and succeeded with. When 360 Safe Guard, the flagship security product of Qihoo’s, started generating a considerable number of revenues, his company decided to offer the product for free — the first in China — and quickly gained a large number of users. Other security product providers had to follow suit for the sake of users but fail building a business model, while Qihoo successfully converted the security product users into its browser users and monetize their online activities on the browser.

He always argues that all the business models are based on a large user base where you can charge users for premium services or businesses for advertising. Since the costs for developing a product is fixed, the more users you have, the lower the cost per user. Although there’s still cost for a user, if your product got on the homescreen of a user’s PC or smartphone and it’s good enough, the user would promote for you. You’ll lose revenues after going free, but the result may be more effective if you otherwise use the money to do advertising.

Zhou said he didn’t know where Qihoo would make money when they decided to go free, either, but he predicted that the Internet security service would become one of the basic services that would eventually be offered for free. Till then, he said, Qihoo’s revenue streams would go away. What’s true is later Chinese Internet companies like Baidu and Tencent developed security products in-house and offer them as one of many services of theirs for free — to some extent the reason is they felt threatened by the rising Qihoo.

Several month ago, Alibaba’s Jack Ma said going free cannot work in today’s China. He argued big players, like Baidu, diho have money and talent would compete with you for users and beat you in one way or another.

Baidu has been competing with AutoNavi for users, not only users of navigation apps but also those use maps in general and those who will use the location-based services on top of maps. Baidu has established a division for location-based lifestyle services and bought a controlling stake in group-buying service Nuomi who is connected to offline businesses. It’s clear that Baidu will be the direct competitors of AutoNavis who wants to build a location-based Taobao platform in a lot of ways.

But the AutoNavi case cannot be a typical one that will prove Jack Ma’s assertion, for the company isn’t an ant waiting to be squashed by an elephant. Alibaba now is the biggest shareholder of AutoNavi.

Although Baidu and AutoNavi would fight for existing navigation app users, they can expand to the realm of other navigation devices that are sold at way higher prices than that for either Baidu Navigation or AutoNavi. People have been talking about the business potential based on locations. If the two could take over the majority of the market, there would be a whole world for them to explore and make money from.

image credit: shutterstock.com

  • http://Wilkinsonconsulting.co/ Joe Wilkinson

    Interesting thoughts on going free in China. It is definitely not solely a China strategy though. Different versions of going free have been around in the tech world for ages. There are many people who champion either side. Either claiming the only way to succeed is going free, and others like Jack Ma quoted in your article claiming free is impossible.

    At the end of the day, the most important thing you can do, is to make sure that you have a plan to earn money from your users once they are free. Google can do this with Android, Search, Gmail, Maps, etc because its revenue is built entirely from advertising. The more information it has about you, the better it can advertise you. Baidu.

    As you mentioned, AutoNavi likely wants to become a location-based TaoBao platform. If that is their goal, then going free absolutely makes more sense than the slower growth of revenue up front through paying users. Especially in this age of funding, where a company can last without revenue for much longer than before.