Bloomberg Businessweek

 TECHNOLOGY Bloomberg Businessweek August 20, 2018

20

DATA: STAR

T-UP NATION CENTRAL, BLOOMBERG CALCULATIONS

THE BOTTOM LINE Alibaba and Tencent have helped seed a

great many of China’s next generation of startups, but their control

may also choke of those companies’ longer-term prospects.

“limited choices” in cloud and payment provid-

ers in China. It says if it can’t maintain its rela-

tionship with Tencent, which will provide those

essential services through December2020, its

business could be adversely afected. The com-

pany declined to comment beyond referring

reporters to its public ilings.

When China’s second-largest search engine,

Sogou Inc., went public last year, the U.S. Securities

and Exchange Commission asked it to disclose more

information about its relationship with Tencent.

Sogou then warned investors of a potential blow

if it lost its perch as the default search engine on

WeChat and other Tencent platforms, which deliver

36 percent of Sogou’s traic. The company said

Tencent could choose another provider or create its

own search service. Tencent owns 52 percent of the

voting power in Sogou and can pull out of an exclu-

sivity agreement in September 2018. Sogou hasn’t

publicly announced if the agreement will extend

past next month. A spokeswoman says Sogou and

Tencent have “deepened their partnership” since

the company went public.

China Literature Ltd., Tencent’s e-books

spinof, warned investors at its November IPO

that the larger company’s 53 percent control

meant “Tencent’s decisions with respect to us or

our business may be resolved in ways that favor

Tencent” and “may not coincide with our interests

and the interests of our other shareholders.” On

Aug. 14 investors sent shares in China Literature

down 17 percent, the biggest drop since its IPO,

after it agreed to buy New Classics Media Corp.,

another Tencent ailiate, for $2.3 billion. China

Literature defended the deal, but analysts ques-

tioned its strategic value and high price.

Tencent has pursued IPOs of portfolio compa-

nies at a faster pace than Alibaba. That may be

because its growth strategy depends on monetiz-

ing its 1 billion accounts on WeChat, which doesn’t

make money on its own. The tech giant rents eye-

balls to other companies, such as PDD or Meituan,

in return for advertising and other fees. It’s bought

out some companies related to its core business,

notably Finnish game developer Supercell Oy,

but in most cases it doesn’t want to run all ancil-

lary products and services; it just wants a cut of

the money.

By contrast, Alibaba’s e-commerce businesses

make money but rely on outside traic to keep

growing. That’s partly why the company is more

likely to buy and absorb startups such as Ele.Me, a

food-delivery service. Still, a look back at the 2016

IPO prospectus of parcel-delivery provider ZTO

Express Cayman Inc. suggests Alibaba’s support

looms large. That year, ZTO warned investors that

75 percent of its parcel volume came from Alibaba.

ZTO said accommodating many of Alibaba’s part-

ners “may increase the cost of our business,

weaken our connection with our end custom-

ers, or even be disruptive to our existing business

model.” The company declined to comment for

this story.

All of this is a reminder of the growing power

of China’s tech giants, says Bloomberg Intelligence

internet analyst Vey-Sern Ling. “It’s getting

impossible to avoid,” he says. —Shelly Banjo, with

Lulu Chen and David Ramli

○ Layofs at pharma giant Teva have

set of a wave of startups in the sector

Israel’s

Healthtech

Catalyst

For decades, Israelis in the prescription drug indus-

try pretty much faced a binary choice: work for

Teva Pharmaceutical Industries Ltd. or emigrate.

So when Teva last year said it planned to cut its

domestic workforce by a third as it struggled to pay

its debts, those who faced layofs fretted that their

careers were at a dead end.

Instead, Teva’s downsizing has given new vigor

to Israel’s life sciences industry. Veterans of the

company have launched or joined startups that

seek novel ways to discover drugs, develop soft-

ware to help physicians work more eiciently, or

tap technology that lets patients monitor their

health. “When I started looking for my next posi-

tion, it seemed like the pool of relevant companies

in Israel wasn’t very big,” says Micah Pearlman, a

former strategist for drug launches at Teva, who

quit in April and found a job the next month with

○ Investment in Israeli

digital health and

pharma statups

2015 2018

$600m

300

0

Projected