Chinese Ecosystems – Ball and Chain

A losing strategy.

• More draconian regulations are falling upon the Chinese ecosystems that I think will kill innovation, raise costs and severely hamper China’s ambitions to lead the world in digital services.
• First, it was games (see here) but now platforms that host user-generated video content (like ByteDance’s TikTok) will be responsible for any inappropriate content posted by their users.
• That means that if someone re-posts the much-maligned Winnie The Pooh – President Xi meme (see here), then the platform owner will bear the consequences.
• In the vast majority of countries, digital ecosystems are not held responsible for the content that their users post as long as they remain neutral platforms or marketplaces.
• It is clear that this immunity has played a very important role in allowing them to become the huge networking businesses that they are today.
• By making the Chinese ecosystems responsible for the content, the government will have turned them into an extension of its own censorship activities.
• The net result will be that the Chinese ecosystems will have recruit thousands of workers to view every piece of content posted before it is uploaded.
• At the same time, engagement with the platform will fall as the user experience will become less interesting and entertaining.
• The net result will be lower revenues and higher costs which is the last thing one needs when considering a highly valued IPO (ByteDance).
• 2019 looks to be a year of increasing regulation of the Chinese Internet with games and now short video content.
• I suspect there is more to come.
• This will severely hamper innovation meaning that developers in other countries will able to build on Chinese ideas more quickly and more freely.
• The time is rapidly coming when Chinese companies will need to have a government interference discount applied to their valuation in order to compensate investors for the higher risk to long term growth that will surely result.