There's value in being number two

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iol scitech feb 27 alibaba AFP Alibaba operates several Internet services, including retail sites, online payments and streaming video.

Hong Kong - In China's internet, being number two isn't so bad. The rapid growth of lesser-knowns such as JD.com, Qihoo 360, YY and VIPShop shows that while a few big names dominate the sector, the market is growing fast enough that smaller rivals can also thrive, and win funding. But the line between healthy competition and profit-eroding rivalry looks thin.

Three companies already have the country's 618 million internet users hooked: search-engine operator Baidu, e-commerce group Alibaba , and social media and gaming company Tencent.

Smaller players often avoid direct competition by picking a niche. Tencent's social network, which includes chat app WeChat, is China's largest, so the smaller YY has focused on live streaming social platforms akin to US peer Twitch, which Amazon recently acquired. YY's revenue and earnings doubled year on year in the second quarter of 2014.

Similarly, Alibaba reigns in e-commerce, but online discount retailer VIPShop reported triple digit year on year revenue and earnings growth in the second quarter by adding its own twist: flash sales.

Having different business models helps, even if end users don't always see the difference. While Alibaba's marketplaces act as a middleman for sellers and buyers, the Amazon-like JD.com focuses more on direct sales of owned inventory and its logistics network. The idea is that JD has an advantage for more sophisticated consumers who care about product quality and delivery.

Investors are happy to fund experimental also-rans. YY and VIPShop are among a group of Chinese tech companies who have issued $2.4-billion in convertible bonds this year, according to Thomson One.

Qihoo 360, a rival to search giant Baidu that made its name offering free mobile security products, raised over $1-billion in August - compared with a market capitialisation at the time of just over $12-billion.

The danger is that there may be a tipping point comes where “number two” turns into “enemy number one” for the market leaders, resulting in costly turf wars for market share.

That may already be happening for some. Margins for Qihoo, whose proclaimed 30 percent share of the search market makes it big enough to be a threat to Baidu, have dropped from 21.8 percent to 12.3 percent in a year. Being second is good enough, but being a distant second may be better. - Reuters

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