E-Commerce Questions

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Please provide complete thoughts and avoid single word bullet
points.
A. Short Answers (5 marks each):
Please answer only 4 of the following and be sure to use examples in all answers:
1 . Explain what the Freemium business model is and provide an example to illustrate the value
proposition.
2. What is the difference between ecommerce and ebusiness? What is cloud computing? How
has cloud computing affected the business possibilities offered by ecommerce?
3. What are the differences between mobile websites, mobile apps and native apps?
4. What is Web 2.0? Describe at least 3 key features with specific examples.
B. Article (10 marks):
Please answer all questions associated with the attached article (The future of e-commerce: The
great mall of China):
1. How would you compare the current e-commerce approach in China versus the West? (4
marks)
2.
a. What are the main pillars of the new retail architecture described in the article?
b. To what extent do you believe that the West will follow the Chinese e-commerce model
described?
Defend your answer. (6 marks)
The Economist January 2nd 2021
Business
The future of e-commerce
The great mall of China
The next big thing in retail comes with Chinese characteristics
A
lmost everyone in China knows “Austin” Li Jiaqi. The 28-year-old “Lipstick
Brother”, started out ?ogging make-up products in Nanchang, a provincial city, and
now sells them to millions by live-streaming on Taobao, part of Alibaba, China’s biggest internet retailer—once shifting 15,000
sticks of lipstick in ?ve minutes. Some will
recognise Chen Yi, nicknamed “Little Monster”, a 24-year-old girl-next-door from the
coastal city of Qingdao who sells sunscreen, snacks and lots more besides to her
20,000 followers on WeChat, a ubiquitous
messaging app: a nice supplement to her
day job as a bartender. More obscure but no
less enterprising, farmers and ?shermen
show o? juicy apples or prize lobsters in
short videos, digital showmanship accompanied by new delivery networks that allow city dwellers to procure the produce.
Such are the faces—lipsticked, sunscreened, weather-worn or besnorkeled—
that have helped propel an explosion of ecommerce in China. In rapid-?re videos or
days-long jamborees, they ?icker across
hundreds of millions of smartphone
screens in a cyber-bazaar that in 2019 was
almost twice the size of those of America,
Britain, Germany, Japan and South Korea
combined—and growing faster (see chart 1
on next page).
As online shopping has soared, even before covid-19 added extra fuel, Chinese internet ?rms have dreamed up new ways to
engage consumers. In contrast to Taobao,
the new ventures do not yet make money.
But they are growing apace. Chinese tech
Also in this section
49 Trustbusting in China
50 What is 5G spectrum worth?
50 Podcasting wars
51 Bartleby: Leftover leave
— Schumpeter is away
47
?rms are pouring fortunes into them.
Some of this capital ?ows straight back out
as subsidies to entice buyers and sellers to
the platforms, which clearly cannot go on
for ever. But the e?ervescence is here to
stay—and Westerners are only starting to
notice. “If you want to see the future, look
at China,” Mark Schneider, boss of Nestlé,
the world’s biggest food company, instructs his executives. Lubomira Rochet,
head of digital marketing at L’Oréal, a
French beauty behemoth, contrasts the
bottom-up, “consumer-centric” vibrancy
of Chinese e-commerce with the West’s
“tech-driven”, top-down approach.
Some Western tech executives dismiss
the Chinese experience as a function not of
creativity and enterprise but of structural
forces. They cite China’s higher mobile
share of e-commerce—90% versus 43% in
America (see chart 2). Others put it down to
a concentrated market, where the top three
?rms, Alibaba, jd.com and Pinduoduo, account for more than 90% of all digital merchandise sales, a state of a?airs that is beginning to trouble Chinese trustbusters,
who on December 24th announced an investigation into Alibaba (see box on subsequent page). In America the online titan,
Amazon, and its two challengers, Shopify
and eBay, accounted for less than 50%.
Yet a survey of Chinese e-commerce reveals genuine dynamism. It is not just Alibaba making the running. In a few years 1
48
Business
2 Pinduoduo has captured 14% of the market,
helping to trim Alibaba’s share from 67% to
61%—and forcing the giant to moderate the
“take rate” it charges those selling via its
platforms. Digital ?rms from outside retail
are muscling in, including Meituan, which
started out in food delivery, and ByteDance,
which owns TikTok and its Chinese shortvideo cousin, Douyin. The newcomers
bring the sort of verve to online shopping
in China that characterised America’s consumer boom of the 1950s and 1960s.
Indeed, to understand the evolution of
Chinese e-commerce, look back to the birth
of 20th-century consumerism in America.
It was built around overlapping technologies. The car carried people to the suburbs, giving rise to the shopping mall, a
place not just to shop but to mingle and
have fun. Although radio and television
played a role, through advertising and product placement, Western retail’s bedrock
was—and continues to be—bricks and
mortar. According to Bain, a consultancy,
America has 3.3 times as much physical
shop ?oor per person as China does. Bernstein, a broker, reckons that America’s
330m people have 30 times as many malls
as 1.4bn Chinese do.
The West’s ?nest shops are as dazzling
as ordering on Amazon is drab. They also
represent legacy investments that retailers
are loth to undermine. As a result, neither
retailers nor their customers have had
much of an incentive to shun them—at
least before covid-19.
Not so in China. Like everyone else in
the world, Chinese still buy most things in
physical shops. Especially outside big cities, though, many of these are shabby.
Some sell fake goods. So China’s nascent
middle class, armed with smartphones and
broadband internet, ?nds online shopping
both more rewarding and com?er than in
the West, says Marc-André Kamel of Bain. A
high population density makes delivery
cheaper for consumers.
The result is a mix of shops, entertainment venues, food courts, games arcades
and gathering places that replicates the
20th-century American mall in digital
form, and hybrid links of the virtual with
the physical. Videos show something being crafted by hand. In?uencers draw attention to how the item is used. Friends
recommend it (or not) on social media.
Shoppers band together with other netizens to buy it in bulk at a discount. Live
broadcasts turn the whole process into entertainment. And a network of real-world
businesses delivers the purchases.
The anchor cyber-tenant is commonly a
super-app like WeChat, which has 1.2bn users. It is owned by Tencent, China’s biggest
internet company—and directs tra?c to
jd.com and Pinduoduo, in which Tencent
holds stakes. The line in people’s minds between social networks and shopping web-
The Economist January 2nd 2021
1
How the West was wan
E-commerce sales, % increase on a year earlier
40
China
30
*
20
United States
10
Europe
0
2015
16
17
18
19
20†
*Year to Q3
†Estimate
Sources: Ecommerce Europe;
Fitch Ratings; US Census Bureau
sites does not exist in China, notes Frédéric
Clément of Lengow, a consultancy. Shoppers love it. Bernstein expects e-commerce
to account for more than a quarter of all retail sales in China by 2021, roughly twice
the share in America, even after the pandemic-induced stampede online.
The ?rst pillar of this new retail architecture is “social commerce”. This relies on
three related technologies: live-streaming,
short-form video and social-networking.
The biggest live-streamer is Alibaba’s Taobao Live. In just 30 minutes of presales for
Singles Day, China’s answer to Black Friday,
it notched up $7.5bn-worth of sales, about
as much as Amazon is thought to have sold
in its “Prime Day” in October (which actually lasted 48 hours). In June Douyin set up
its own shopping platform, having earlier
hosted live-streams where the likes of Taobao teamed up with celebrity in?uencers
to sell products. The video-app’s 600m
daily users confer a valuable resource—
their attention. In the autumn it made its
2
The great leapfrog forward
Online indicators, 2019
Internet users, bn
0
0.2
0.4
0.6
0.8
1.0
60
80
100
China
United States
Mobile share of e-commerce, %
0
20
40
China
United States
Top-three e-commerce firms’ market share, %
0
China
United States
Source: Bernstein
20
40
60
80
100
proprietary debut on Singles Day.
Fitch, a ratings agency, thinks the market for live-stream retail neared 1trn yuan
($153bn) in 2020, double the prior year’s
amount (see chart 3 on next page). Kuaishou, Douyin’s short-video rival, expects
the gross value of goods sold on livestreams to rise from 4.2% of online sales in
2019 to almost a quarter by 2025.
Live-streaming has boomed as covid-19
con?ned Chinese to their living rooms
while many captivating alternatives, like
Net?ix, remained banned in the country.
For people on relatively low salaries, the
discounts on some of the merchandise are
worth time spent glued to a live-stream.
According to Elijah Whaley, marketing
chief of parklu, one of a booming cottage
industry of in?uencer agencies, Western
brands shipped unsold products to China,
where live-streams o?ered a way to ?og
them. Ms Rochet says L’Oréal’s boss in China was ?ooded with emojis, likes and questions when he live-streamed a recent sales
event. It included “lucky charms” that gave
a few fortunate shoppers big discounts.
Many bargains are available for bulk
purchases. This is where the social networks come in. Pinduoduo, founded in
2015 and now worth $175bn, enables
groups, often formed via WeChat, to haggle
with merchants, especially on groceries. It
still makes a loss and burns cash. But its
revenues are soaring, by almost 90% year
on year in the third quarter. Seven-year-old
Xiaohongshu, or Little Red Book, is already
one of China’s most popular apps for crossborder commerce, with an estimated 85m
users, according to Tenba Group, a consultancy. Its customers, most of whom are
young women, exchange shopping experiences via text, images and video. Tenba
calls it a Chinese mix of Instagram and Pinterest, two American photo-sharing apps.
The second pillar of China’s great digital
mall is familiar to Western retailers as
“omnichannel”. Like social commerce, it
too has boomed amid pandemic lockdowns and shop closures. In China the biggest e-emporia have their own supermarket businesses, such as Alibaba’s Freshippo
and jd.com’s 7Fresh grocery chain. jd.com
also has what it calls a “new-markets” business, which works with some of China’s
6.8m local grocery stores. It ships them
branded goods, delivers what is already on
their shelves to local buyers, and feeds
them data to optimise their operations.
Some physical retailers, for their part,
o?er digital coupons to encourage customers to pay a visit, as well as using livestreaming to generate buzz and, hopefully,
foot tra?c. Others o?er “grab-and-go”
shopping, including sta?ess stores and
smart vending machines where payments
are made by scanning qr codes.
Alibaba says that its hybrid sales more
than doubled in the 12 months to March 1
The Economist January 2nd 2021
Business
2 2020, year on year, to 86bn yuan. They rose
from 11% of its main retail revenues to 17%.
Sales from jd.com’s supermarket business
grew by 48% year on year in the third quarter. Meituan has broadened its speedy deliveries from takeaway meals to groceries.
Mini-warehouses built by startups such as
Missfresh, which promises 30-minutes
grocery deliveries, are mushrooming in
Chinese cities.
Before 2020 both social commerce and
hybrid shopping provoked mostly bemusement in the West. Covid-19 has led to
a swift reappraisal. As George Lee, Facebook’s head of product, puts it, the pandemic was a “call to action”. The social network caters to the 160m businesses, mostly
small and medium-sized, that use its apps
and had to shift online as authorities ordered many physical shops to shut.
In May it introduced Facebook Shops,
enabling businesses to set up a single online store on its core social network and its
sister app, Instagram. In November Instagram redesigned its home screen for the
?rst time in years, introducing tabs called
Reels and Shop, which promote short videos, as well as online retail. Facebook’s
messenger apps, including WhatsApp, can
be used to communicate with businesses
on its platforms and may eventually be
used for sales. Facebook Live also does
streaming. In December Walmart, America’s largest supermarket chain, held what it
called a “Holiday Shop-Along Spectacular”
on TikTok, with which it has formed a partnership. It allowed viewers to buy some of
its fashion items exhibited by celebrities
directly via the video app, apeing what
Douyin has been doing in China.
Vishal Shah of Instagram makes a distinction between “buying” and “shopping”
to describe Facebook’s aim—in other
words, turning a utilitarian process into a
more personal experience. Other socialmedia ?rms are moving in the same direction. Since 2020 Snapchat users can try on
make-up and shoes virtually, bolstering
what the app calls “shopability”. Shopify
has enlisted TikTok to enable its 1m-plus
3
The shopping channel
China, live-streaming and short-video online sales
Yuan trn
1.0
0.8
0.6
0.4
0.2
0
2017
18
Source: Fitch Ratings
19
20*
*Estimate
merchants to market their wares by video.
In omnichannel sales, as in most things
e-commercial, Amazon is ahead of the
pack. It owns almost 500 Whole Foods Market stores and has opened some Amazon
Fresh grocers in America that o?er free
same-day delivery to some members of its
Prime subscription service. But big-box retailers like Walmart and Target, whose instore pickups on online purchases have
been a hit with covid-wary shoppers fearful
of crowded aisles, have made huge strides.
Not everyone thinks that America will
follow the trail blazed by China. Bain says
that recent inroads notwithstanding, social commerce accounts for a much smaller share of total retail sales in America than
in China. Russell Grandinetti, Amazon’s
head of international retail, says consumers want di?erent things at di?erent times.
Sometimes they just want to buy stu?
quickly and cheaply, not be wowed by celebrities. He says Amazon pioneered certain browsing techniques, such as online
book reviews and tips that “people who
bought this also bought that”. He notes that
Prime Video and Twitch, Amazon’s gaming
platform, have attracted “millions of customers” primarily interested in entertainment to its free shipment of goods. As for
live-streaming, “It just hasn’t taken o? in
the West the same way it has in China.”
It will do eventually, Mr Grandinetti
thinks. Other observers point out that the 1
Online competition
Mo money, Ma problems
H O N G KO N G
China’s trustbusters go after its mightiest internet titan
“A
cting on information, China’s
State Administration for Market
Regulation [samr] has started investigation [into] Alibaba Group for alleged
monopoly conduct including implementing an ‘exclusive dealing agreement’.” This brief note, posted by Xinhua,
the state news agency, on December
24th, was all it took to cut China’s mightiest online titan down to size. Not even
the announcement three days later of an
extra $6bn in share buy-backs arrested
the slide in its market value. By December 28th it had fallen by 13%, or $91bn. By
comparison, American regulators’ detailed charge-sheets against tech giants
such as Facebook and Google in recent
weeks elicited a yawn from investors.
The Alibaba investigation is the ?rst
of its kind into Chinese e-commerce. Its
timing—a month after authorities suddenly halted the $37bn initial public
o?ering (ipo) of Alibaba’s ?ntech a?liate, Ant Group, and days before regulators told Ant to curtail lending and
wealth-management activities—hints it
is China’s way of chastening the two
?rms’ ?amboyant co-founder, Jack Ma.
That could be. Ant’s ipo was put on ice
after Mr Ma likened China’s state banks
to pawn shops. Chinese watchdogs often
launch lightning crackdowns to deter
others from misbehaving, says Angela
Zhang of the University of Hong Kong.
But the probe also signals concerns over
the online economy, which is e?ervescent but also ever more concentrated.
As investors parsed the Xinhua note,
share prices of other internet giants,
such as Tencent and Meituan, fell nearly
as steeply as Alibaba’s.
The complaint against Alibaba cen-
49
tres on the practice of having merchants
or brands sign contracts to sell products
exclusively on its platform. Those that do
business on rival marketplaces risk
having internet tra?c diverted from
their online shopfronts on Alibaba’s
Tmall emporium to other sellers.
Such arrangements aren’t new. In 2015
jd.com, a smaller e-emporium backed by
Tencent, ?led a legal claim against Alibaba over a similar issue. Nor are they
unique to Mr Ma’s ?rm, which launched
a competing complaint against jd.com
the same year. These and other complaints since have been largely ignored
by regulators. Why the about-turn?
Chinese trustbusters long resisted
hobbling an industry seen as worldbeating, and backed in Beijing. Now, as in
the West, they fret that a few giants control indispensable services—e-commerce, logistics, payments, ride-hailing,
food delivery, social media, messaging.
Common practices, such as selling products below cost to lure customers, look
more troubling in an industry where the
top three ?rms control over 90% of the
market than they would in a less concentrated one. In November samr said offering shoppers di?erent prices based on
their spending power, divined from user
data, may be unlawful.
Another reason for China’s newfound
zeal (Mr Ma’s jibes aside) is greater trustbusting capacity. samr was formed only
in 2018, by combining the o?ces of three
regulators. It still struggles to keep up
with the fast-changing online market;
most sta? are busy assessing mergers
and acquisitions. But it has more knowhow and manpower than it used to—and
looks eager to deploy them.
50
Business
2 sheer size of America’s physical retail pres-
ence makes the logistics of weaving o?ine
and online cheaper—which may encourage more hybrid shopping models. In other
ways America will chart its own path. Pricier labour than in China may lead to faster
automation of online ful?lment. Greater
concern over privacy relative to convenience may dampen shoppers’ appetite for
sharing their spending habits with friends
on social media.
And China’s retail razzmatazz could yet
lose its vim. An ageing population will
eventually reduce supply of cheap warehouse workers and delivery drivers. That
may mean higher delivery fees, longer
waiting times, perhaps even unions demanding better working conditions, further raising costs. Trust in in?uencers, particularly those paid big money to promote
brands, is waning. Those making less may
lose patience and stick to their day jobs.
“The top 1% make a killing. The rest are
starving artists,” says parklu’s Mr Whaley.
Perhaps the main reason Western ?rms
have been slow to emulate Chinese e-commerce is not its inherent ?aws but their
overspecialisation. From Amazon’s home
in Seattle and Facebook’s in Silicon Valley
to Walmart’s in Bentonville, American
companies have tended to focus on their
core business—be it e-commerce, social
media or supermarkets. Only recently have
they begun to invade each other’s turf. In
time that may lead to more blurring of
business boundaries. As Eric Feng, Facebook’s head of commerce incubations,
summed it up at a recent virtual panel, tongue only slightly in cheek: “China, you are
the light that will show us the way.” 7
Telecommunications
The $90bn prize
?ght
N E W YO R K
America’s auction of 5g spectrum is
turning into a blockbuster
I
t may be the most hyped technology
since blockchain. But even sophisticated
telecoms giants are now placing huge bets
on 5g. In early December American regulators started the process of auctioning o?
radio-frequency bands needed to roll out
superfast ?fth-generation mobile networks. Industry experts had expected bids
to come in at $25bn-30bn between them,
less than the $45bn fetched in the last big
4g spectrum sale in 2015—but a tidy sum
nonetheless.
In fact, when the ?rst part of the auction
was concluded on December 23rd, the bids
had reached a staggering $70bn. The winners will be on the hook for “clearing costs”
The Economist January 2nd 2021
of another $13bn-15bn, in part to compensate satellite ?rms for giving up some of
their spectrum that is particularly wellsuited for 5g. The auction will resume on
January 4th. By the time it ends, the proceeds may exceed $90bn.
At ?rst blush, this seems like a classic
case of overbidding by zealous telecoms
?rms chasing a shiny new technology. It
could leave at&t and Verizon, America’s
mobile-telephony giants, saddled with
huge debts. New Street Research, a ?rm of
analysts, reckons that the industry’s overall debt will be between $45bn and $60bn
higher than previously forecast.
There is an alternative view, however.
As Jonathan Chaplin of New Street puts it,
“it is almost impossible for carriers to overpay for this spectrum.” This case rests on
three arguments.
First, the speci?c frequencies on o?er
give ?rms their best chance to get “large
swathes of contiguous spectrum needed
for 5g to realise its full potential”, points
out Tom Wheeler, former chairman of the
Federal Communications Commission,
the agency supervising the auction. These
frequencies, clustered around 3ghz, enable transmission speeds ten times higher
than 4g. The current, pseudo-5g o?erings
in lower frequencies are often barely faster
than 4g connections. The new spectrum
also supports 20-25% more capacity than
bands of 2ghz or lower.
The second justi?cation for splurging
on spectrum is to defend market share. tMobile, America’s third-biggest provider,
leapt ahead in 5g thanks to its recent acquisition of Sprint, a smaller rival endowed
with desirable frequencies. For at&t and
Verizon the auction was “do or die”, as one
analyst puts it. For its part, t-Mobile may
be entering stalking-horse bids to ensure
bigger rivals do not win chunks of spectrum for a pittance. As Mr Wheeler notes,
?rms are asking “How do I keep my competitor from getting an advantage over me
through his spectrum position?”
And competition is not con?ned to
wireless rivals. Comcast and Charter, two
large cable-television ?rms, have formed a
joint venture to bid on 5g spectrum in the
hope of taking on the incumbents. Dish
Network, a big satellite-tv provider, is also
taking part in the auction. Walter Piecyk of
LightShed Partners, a research ?rm, adds
that the bids are soaring because earlier, futile e?orts at using inferior frequencies
have left America far behind China, its
main strategic rival, in the 5g race.
The ?nal factor fuelling the bidding war
is cheap money. Mr Piecyk reckons an extra
$10bn in bids costs just $500m a year to ?nance at today’s rock-bottom interest rates,
which telecoms giants can easily a?ord. Or
as Dish’s boss, Charlie Ergen, puts it more
colourfully: “They are printing money, but
they aren’t making more spectrum.” 7
Podcasting
Sound investments
The expensive battle to be the Net?ix
of audio
A
bove the din of chat-shows, dramas
and documentaries streamed to blaring voice-activated speakers, a louder
sound can be heard: ker-ching. On December 29th Spotify, an audio-streaming service, aired the ?rst in a series of exclusive
podcasts by Prince Harry and Meghan Markle. A few weeks earlier the Wall Street Journal reported that Amazon was in talks to
buy Wondery, a producer of popular podcasts including “Dirty John” and “Dr
Death”, for $300m. The tech giant, which
got into podcasting only in September, has
also signed up expensive stars such as Will
Smith and dj Khaled.
The deals are the latest in an industrywide spree. Last year Daniel Ek, Spotify’s
boss, declared that “audio—not just music—would be the future” of his ?rm. Since
then Spotify has been on a billion-dollar
podcasting binge, acquiring production
and ad-tech ?rms such as Gimlet, Anchor
and Megaphone, as well as shows; in May it
paid $100m for “The Joe Rogan Experience”.
Apple, the biggest podcast distributor, has
bought Scout fm, a podcasting app, and
signed up stars like Oprah Winfrey.
Podcasting makes most of its money
through ads, which last year generated revenue of just $1.3bn, according to Omdia, a
data ?rm—equal to 6% or so of the recorded-music industry’s sales, or the box-o?ce
takings of one Hollywood blockbuster.
Why the big noise about a small business?
One reason is growth. Global podcast
listeners will exceed 2bn by 2025, Omdia
reckons, from 800m in 2019. Ad sales may 1
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