When Zhang Zhengxin sued the internet giant Tencent for anti-competitive behavior in April 2019, it seemed like the action of a quixotic lawyer tilting at windmills.

Zhang had challenged the company’s practice of blocking links to Alibaba’s Taobao stores from its flagship WeChat messaging app. Tencent’s lawyers simply denied that there was an instant-messaging market to monopolize. The case resulted in a standoff on this basis—debating the existence of such a market and how to define Tencent’s share of it. In January, Zhang dropped the case for “lack of evidence.” He came away feeling that big tech was “immune” to antitrust law, he told TechNode at the time.

Barely a year later, powerful Chinese regulators are coming around to Zhang’s point of view. They’ve dusted off China’s 12-year-old Anti-Monopoly Law and are applying it to big tech companies for the first time. Meanwhile, revisions to the law are giving it more teeth to go after tech.

“If my case hit the courts again today, my odds to win could increase by a lot,” Zhang, a lawyer at Beijing-based Yingke Law Firm, told TechNode on Wednesday.

On Monday, the State Administration of Market Regulation (SAMR), China’s top antitrust regulator, issued fines to Alibaba and affiliates of Tencent and logistics giant SF Express over three separate acquisition deals, a move that legal experts described as the country’s first batch of antitrust enforcements against tech firms. The regulator in January and November began laying the groundwork via multiple proposal laws and rules to tackle infractions by internet companies. 

China is clearly looking to tighten its grip on some of its biggest tech companies. Its suspension of Alibaba subsidiary Ant Group’s mega public offering, expected to be the world’s largest public fundraise ever, was a clear shot across tech company bows. Regulators are also stepping up scrutiny of data security measures and online content moderation, signaling the end of the relatively lax regulatory environment tech firms once enjoyed.

Tolerant no more

The fines were issued for failing to flag merger and acquisition (M&A) deals as possible antitrust issues, a sign that regulators are gearing up to enforce the anti-monopoly law against big tech, experts said. The penalties cited the existing Anti-Monopoly Law framework, which stipulates that such behavior would be subject to a fine of up to RMB 500,000 (around $76,556) or a reversal of the deal.

Applying the law to punish internet companies is a distinct shift in attitude toward tech companies.

SAMR’s recent moves are a response to the state’s call for “strengthening scientific and effective regulations on internet platforms,” Deng Zhisong, an antitrust lawyer at Dentons law firm in Beijing, told TechNode. “[The state] has changed its previous ‘tolerant and cautious’ attitude towards internet companies,” he said.

In 2017, Chinese Premier Li Keqiang encouraged a “tolerant and cautious” approach to tech regulation in a speech (in Chinese).

Questionable acquisitions

The three deals in question are Alibaba’s 2017 acquisition of Intime, a retail firm; Tencent-backed China Literature’s acquisition of television series studio New Classics Media in 2018; and the acquisition of China Post Smart Logistics by SF Express-backed Hive Box in May. Each is being fined the maximum amount of RMB 500,000, though none of the deals are being reversed.

While investigations into tech company acquisition deals are not new, until now none have resulted in any punitive measures. When Chinese ride-hailing platform Didi Chuxing merged with US rival Uber’s China unit in 2016, regulators opened an investigation into the deal. The case appeared to be unofficially suspended when Uber filed for an IPO in April 2019, according to Bloomberg. SAMR launched in January 2019 an antitrust probe into Tencent Music Entertainment’s dealings with the world’s three largest record labels after rivals complained that Tencent paid excessive fees for the initial rights and then passed those costs along to competitors. A year later, the regulator decided to suspend the investigation.

“With this latest development, regulators are signaling that they will no longer tolerate internet giants’ [monopolistic actions],” said Zhang, the lawyer who sued Tencent. He added, “They used to be more indulgent than tolerant.”

Beijing’s shift in attitude toward tech giants coincides with a global antitrust storm in which US and EU regulators are restarting efforts to check tech giants including Google and Facebook. In the US, several states filed Wednesday a lawsuit against Google over the search firm’s alleged antitrust violations in the online advertising market. In Europe, regulators proposed this week to designate companies with EU user bases exceeding 45 million as “gatekeepers,” making them subject to stricter antitrust regulations.

Changes to the law

Prior to the fines issued Monday, SAMR had proposed an overhaul of the Anti-Monopoly Law in January and introduced a set of antitrust guidelines tailored for the internet industry in November.

While the fines are relatively trivial amounts for the three companies—the smallest of which generated RMB 1.6 billion in revenue in 2019—future offenders may pay a much higher price for similar violations, according to the draft revision of the Anti-Monopoly Law. Companies will be fined up to 10% of their annual revenue if they don’t report M&A deals that could create a monopoly, according to the draft revision.

The proposed amendment also asks authorities to consider factors such as network effects—services which rise in value as their user bases grow—as well as company size and data assets when determining whether a company is a dominant player.

The November guidelines further explain what is allowed and what is not. The draft, dubbed the Antitrust Guidelines for the Platform Economy, specifically targets tech firms that run online platforms connecting businesses and consumers such as Didi Chuxing and Taobao. 

With the new rules in place, Tencent may no longer be able to argue that it doesn’t hold a dominant position in the instant-messaging market or that such a market does not exist. A dominant player in a market under the existing Anti-Monopoly Law is a company with more than 50% of market share. According to the newly proposed guidelines, a market could be determined by how hard it is for users to switch platforms. The proposed rules also expanded the parameters for determining market share to include factors such as transaction volume, user base, and page views. 

The changes could pave the way for further probes into tech firms over possible violations such as abuse of dominance and reaching monopoly agreements.

Pruning for long-term benefit

In November, the draft antitrust regulations sent Chinese tech stocks crashing. Bloomberg estimated that the shares slump wiped out more than $200 billion of value from Chinese tech companies within two days.

Analysts, however, are optimistic about the prospects brought by tougher antitrust regulations. Liu Zejing, analyst at brokerage Huaxi Securities, wrote in an investment note (in Chinese) that the government is not aiming to clamp down on the internet industry, but rather is making the “inevitable move” to curb potential monopolistic behavior, contributing to the health of the sector.

Commenting on SAMR’s Monday fines on tech giants, Huachuang Securities analyst Jin Xiangyi wrote (in Chinese) that tech giants are bound to fall under the purview of China’s antitrust law and that it is beneficial for them to return to technological innovation, thus boosting the industry. 

Nevertheless, the merger and acquisition tactic that formed incumbents such as Didi Chuxing, online classifieds marketplace 58.com, and Meituan will meet with greater regulatory resistance, said Zhang. Tech giants may have to reverse merger deals that run afoul of the antitrust law, he said.

Cause for tech company concern

Both Zhang and Deng of Dentons agree that Chinese tech giants don’t have to worry about being broken up as they grow bigger. “There are no such provisions for breaking up monopolies in China’s antitrust law,” Deng said.

Monopolists may be forced to open up their platforms or share their data with rivals as a consequence for abusing dominance, but also as a method of remedy, according to Deng.

Antitrust lawsuits against or between tech giants will likely to see the impact of recent changes. In the past, similar lawsuits were usually mired in stalemates on technicalities like Zhang’s suit against Tencent, and court rulings were usually in favor of defendants. A suit between Tencent-backed e-commerce platform JD.com and Alibaba will enter a court hearing stage in Beijing, Chinese media reported in November, without mentioning a specific date. The case, in which JD.com alleges Alibaba abused its market-dominant position in forcing platform exclusivity, will likely provide a clearer picture of how the new rules and antitrust law amendment will be used in legal practices.

Writing about semiconductors and telecommunications.