How innovative China is beating Facebook, Google and Amazon at their own game

Niall Ferguson says China, unlike Europe, has shown great economic and political acumen in choosing to challenge the dominance of US internet giants

PUBLISHED : Monday, 20 March, 2017, 2:03pm
UPDATED : Monday, 20 March, 2017, 8:49pm

Only in China could there already be a museum of internet finance. Though most Britons have barely adopted the term “fintech”, online banking is old hat in Beijing.

I toured the museum with its founder, Wang Wei, who delighted in showing me exhibits such as a bitcoin cash machine. The cryptocurrency is eight years old: in today’s China, that’s ancient enough to belong in a glass display case.

Some time soon, Europe needs a similarly designed museum of political idiocy. In its glass cases, I would like to exhibit stuffed specimens of politicians who have so hopelessly failed to understand the information technology revolution that began in California in the 1970s and has now almost completely taken over the world.

Prime candidates for the taxidermist’s knife are the members of the UK’s Commons Home Affairs Committee. They have laid into Google, Facebook and Twitter for not doing enough to censor the web on their behalf. Yvette Cooper, their chairwoman, complained that Facebook had failed to take down a page with the title “Ban Islam”. As she put it: “We need you to do more and to have more social responsibility to protect people.”

Another possible exhibit in the museum of political idiocy is Germany’s justice minister, Heiko Maas, who unveiled a draft law last week that would impose fines of up to 50 million euros (HK$417.6 million) on social networks that failed to delete “hate speech” or “fake news”. He said: “Too little illegal content is being deleted and it’s not being deleted sufficiently quickly.”

If these people want censorship, let them get on with it, but arguing that Google and Facebook should do the censoring is nuts. As if these companies were not already mighty enough, European politicians want to give them the power to limit free expression.

Arguing that Google and Facebook should do the censoring is nuts

Best of all is the revelation that government advertising has ended up on jihadist and white supremacist websites. The news that London’s Department for International Development and the Metropolitan police have been spending taxpayers’ money in this undiscriminating way just strikes me as more evidence of European naivety.

There are three essential points to understand about the IT revolution. First, it was almost entirely a US-based achievement, albeit with contributions from computer scientists who came to Silicon Valley from all over the world and Asian manufacturers who drove down the costs of hardware.

Most of the big breakthroughs in software that made mass personal computing possible were made in America – think Microsoft and Apple. The internet, too, was made in America. Online retail was made by Amazon, founded in 1994 in Seattle. Online search based on the PageRank algorithm: made by Google, founded in 1996, its first office a garage in Menlo Park, California. Online social networking for one and all: made by Facebook, founded in 2004 at Harvard. YouTube (2005), Twitter (2006), the iPhone (2007), Uber (2009), Snapchat (2011) – you get the idea.

Point two: the most important of these companies are now mind-blowingly dominant. In Facebook’s little red book for employees, it is written: “The quick shall inherit the Earth.” Mark Zuckerberg has certainly inherited quite a chunk of this planet. His social network now has 1.23 billion active daily users.

Google and Facebook are predicted to increase their combined share of all digital advertising this year to 60 per cent. Google has 78 per cent of US search advertising. Facebook has 39 per cent of online display advertising.

Time spent on Facebook, Instagram, and Messenger each day is growing

Third point: this dominance translates into crazy money. Facebook will make US$16 billion from display advertising this year. The business is valued today at about US$400 billion, including a US$30 billion cash pile. That equips Zuckerberg to buy up pretty much whatever comes along that he likes the look of – as he did with Instagram, for example.

It is an amazing state of affairs. Consider the functions these companies perform. Google is essentially a vast global library; it’s where we go to look things up. Amazon is a vast global bazaar, where more and more of us go to shop. And Facebook is a vast global club. The various networking functions these companies perform are not new; it’s just that technology has made the networks both enormous and very fast. The more interesting difference, however, is that in the past libraries and social clubs did not make money from advertising. They were funded out of donations or subscriptions or taxes.

Facebook sales soar in Q3 by 56 pc; powered higher by video advertising and Instagram

In other words, the truly revolutionary fact is that our global library and our global club are both making money from advertising, and that the more we tell them about ourselves, the more effective the advertising becomes, sending us off to Jeff Bezos’ bazaar with increasing frequency.

The rest of the world had two options: capitulate or compete. The Europeans chose the former ... the Chinese opted to compete

Not for nothing is “Fang” the investors’ acronym for Facebook, Amazon, Netflix and Google. These guys really have got their teeth into us.

Confronted with this American network revolution, the rest of the world had two options: capitulate or compete. The Europeans chose the former. You will look in vain for a European search engine, giant online retailer or social network. The US Fang has been well and truly sunk into the EU.

The Chinese, by contrast, opted to compete. By fair means and foul, they made life difficult for the Americans. And they encouraged their own entrepreneurs to build businesses that rival the giants of Silicon Valley. The acronym of the moment in Beijing is “Bat”: Baidu (the biggest search engine), Alibaba (Jack Ma’s answer to Amazon) and Tencent (the nearest thing to Facebook).

These companies are much more than clones of their US counterparts; each has been innovative in its own right. A good example is Tencent’s ubiquitous messaging app

WeChat, which, by using QR codes to allow users to exchange contact details, is fast destroying the business card.

Tencent begins in-app feature for 800 million users, extending WeChat’s usefulness

Needless to say, Silicon Valley gnashes its fangs at being shut out of the vast Chinese market. Zuckerberg has not yet given up hope, doing interviews in Putonghua and even jogging through the smog of Tiananmen Square. The recent experience of Uber cannot encourage him. Last year, it ran up the white flag in China, accepting that it could not beat the homegrown ride-sharing business Didi Chuxing. Cue more gnashing.

I have to say I admire how China took on Silicon Valley and won. It was not only smart economically but smart politically, too. Beijing now has the big data it needs to keep very close tabs on Chinese netizens. And good luck to the US National Security Agency as it tries to get through the Great Firewall of China.

Museums are where history’s victors display their trophies. What I learnt last week is that China may be winning the latest battle in the IT wars: to take not just banking but money itself online.

Niall Ferguson is a senior fellow of the Hoover Institution, Stanford