Tencent and Alibaba battle for internet dominance in China

It's been called "the most expensive competition in online history" - but it's one you might not have heard about.

More than 15 years ago, two firms launched in China within months of each other, looking to take advantage of the growing numbers of internet users in the country.

Alibaba, founded at the start of 1999 by former school teacher Jack Ma, was a platform created to help businesses sell products to each other.

It quickly grew into a marketplace where not only firms did business, but consumers as well.

In 2003 Alibaba launched Taobao, essentially China's eBay. This was followed a year later by Alipay, a Paypal clone.

But the internet, of course, is not just about selling things, it is about people connecting with each other via social media.

Huateng Ma - known as "Pony" - founded Tencent just a few months before Alibaba in 1998 as a place to connect the growing number of young users on the web.

QQ - the company's instant messenger platform - quickly became the world's largest, with more than a billion accounts. The company then launched a variety of social platforms before going public in 2004, and quickly becoming the fifth largest internet company in the world - currently valued at over $140bn (£84.1bn).

So far, so fine.

But as China's internet usage has grown - the country has 618 million internet customers - so have the two firms.

And now, as the Western saying goes, this town - or this country - isn't big enough for the both of them.

"Alibaba is the largest e-commerce company in China - it's been the market leader for the past 10 years, and nobody has been able to challenge that position," explains Forrester Research's Bryan Wang.

Alibaba is essentially Amazon, eBay and Paypal in one. It had an estimated 1.1 trillion yuan (£107bn; $178bn) of sales in 2012, more than eBay and Amazon combined, and it accounts for 60% of all parcels delivered in China.

The firm just announced plans for an initial share flotation in the US, which many analysts believe could be the largest ever for an internet firm.

But recently, something has shifted - of the 618 million internet users in China, more than 500 million of them access the internet via their mobile phone, according to China Internet Network Information Centre, a Chinese government agency.

"Around 85% of Chinese are now interested in buying goods and services through their mobile phone - three or four years ago, it was 30%," says Andrew Pitcher, a senior vice-president with SAP Asia Pacific Japan, a software firm.

"It's moving very quickly."

That quick shift to mobile has benefited Tencent, China's largest internet firm, the most.

That's because Tencent's WeChat - a mobile messaging service estimated to be worth $64bn, three times the price Facebook paid for similar product WhatsApp - has more than 270 million users who use the platform to do everything from book a table at a restaurant to order a taxi.

Crucially, those users have linked up their debit and credit cards as well as bank accounts in order to make these transactions.

This year, when Tencent launched a mobile payment service during Chinese New Year to allow users to send and receive traditional "red packets" of money, more than 200 million users signed up for the service in 15 days.

"That was more than what Alibaba has tried to do - and it was a clear sign that Tencent has the foundation because of its user base, so it's actually able to challenge Alibaba's leadership in China," says Mr Wang.

He adds that in China, being able to see what others have bought - in essence, a mix of social and e-commerce - is very valuable.

"China purchasers are very likely to seek advice from their friends and peers - in that sense, Tencent has an edge."

Needless to say, Tencent's ascendance hasn't been a welcome distraction to Alibaba's share sale plans.

In an effort to stave off competition, Alibaba has attempted to launch new products, including WeChat competitor Laiwang in 2013, and acquire firms, including an 18% stake in Sina's Weibo - essentially China's Twitter - which recently announced an initial public offering (IPO) share floatation of its own.

"I think Alibaba is running scared - as they're about to IPO, it's really damaging for them," says Shaun Rein, managing director of the China Market Research Group.

"Jack Ma looks desperate right now."

And Tencent hasn't been intimidated by Alibaba's big spends, as it has deep pockets of its own.

The firm recently bought a large stake in JD.com, the second-biggest e-commerce site in China behind Alibaba, for $215m.

Alibaba's Tmall, which allows business to sell to consumers, has about a 50% market share, followed by JD.com with 19%, and Tencent's own platform with 7%, according to research firm Analysys.

"The two giants are competing with each other, making acquisitions in very similar areas - travel, online lifestyle websites, shopping - it's head-to-head competition," says Mr Wang.

"I believe it will be one of the most expensive competitions in online history."

And the competition is just heating up. "In the next six to 10 months, you're going to see a lot of consolidation in the mobile start-up space," says Mr Rein.