Bytedance, the world’s most valuable startup, is making its presence felt on China’s digital landscape. It is ascendant, and as I’ll argue below, it has all the momentum.
First, let’s look at the lay of the land.
Bytedance’s core platforms, Jinri Toutiao and Douyin, are digital heavyweights, wrestling time and advertising dollars away from existing players, as illustrated below.
Michael Norris is Research and Strategy lead at AgencyChina. He focuses on how culture, technology, and digital trends affect industry and business. He has no position on the stocks mentioned in this article.
The result? Bytedance is making money hand over fist. Based on a combination of corporate updates and internal leaks, it’s already estimated to have made large inroads on Baidu’s ad revenue, as illustrated below, well and truly staking its claim to be the BAT’s new “B.” This year, Bytedance is expected to bank $25 billion in revenue. If the company achieves this, it will have broken the $25 billion-dollar threshold three years faster than Facebook did.
The coronavirus outbreak has wiped billions in market capitalization from China’s digital giants. Those plugged into China’s physical economy, like Alibaba and Meituan, have been hit hard. Alibaba, for instance, shed $26 billion in market capitalization from Jan. 21 to Feb. 24.
Yet for social media and entertainment headline acts, like Tencent and Bilibili, the momentum’s gone the other way. Since the outbreak, Tencent’s added $18 billion in market capitalization, fueled by news of eye-popping gaming expenditure and overwhelmed servers (in Chinese).
Bytedance, as a strict digital economy player with little exposure to physical goods and services, is riding the same wave.
This flurry of activity has made a few players very, very uncomfortable.
Six of the company’s apps made it onto App Annie’s most downloaded in January. And, since the coronavirus outbreak, Bytedance has:
- Scooped up exclusive rights to stream holiday movies
- Revealed plans to make gaming a more prominent force in its entertainment empire
- Tested e-commerce integration with TikTok
- Promoted a popular coronavirus-themed game; and
- Extended from in-app search to a standalone search engine.
Sources tell me this flurry of activity has made a few players very, very uncomfortable. In particular, the folks responsible for ad revenue at Baidu and Tencent are shitting kittens.
First, the obvious. Bytedance is capturing eyeballs. Douyin’s latest daily active user figures suggest that a tick under half of China’s internet users open the app each day. And, as early as June last year, Bytedance’s news and boredom-busting entertainment properties commanded a total 1.5 billion monthly active users. That scale has Baidu eating Bytedance’s dust.
Second, something less obvious: Bytedance is nabbing chunks of the digital advertising pie under adverse conditions. China’s digital advertising industry is essentially a zero-sum game, where the top four players command 85% of the money pile.
While the pie’s slowly growing, economic headwinds are making brands look for efficiencies. The net effect is a slowdown in advertising revenue growth across the back end of last year, which bruised Baidu and Tencent.
As ad growth gets harder, Bytedance is one of the few digital advertisers that’s growing advertising revenue at scale and speed. It more than doubled its advertising revenue in the past year. That means price and result-conscious advertisers are reallocating their spend, taking dollars away from other platforms and handing them over to Bytedance.
Why are they doing that? This brings us to the least obvious but most important point—at present, Bytedance’s advertising platform is probably better than Baidu’s or Tencent’s.
Much about Bytedance’s recommendation algorithm is unknown. However, its ability to capture, parse, and stitch together data about news articles, short videos, and games users are interested in is incredibly valuable. This creates all sorts of targeting and retargeting potential for savvy advertisers. Industry chatter (in Chinese) and interviews with a handful of local companies suggest that advertisers believe Bytedance is more cost-effective than Baidu or Tencent.
As Bytedance itself has shown, there’s huge upside running advertising campaigns across its ecosystem. One of the company’s secrets in quickly making inroads into hyper-casual games is how it used Jinri Toutiao and Douyin to run hype-building ads and drive game downloads (in Chinese). Those are the kind of results advertisers are looking for as brands navigate China’s economic contraction.
All this is giving ad teams at Baidu and Tencent cold sweats. Economic contraction and coronavirus dislocated digital advertising growth, yet Bytedance is still hoovering up advertising dollars. If it wasn’t apparent before, it should be now: Bytedance is eating incumbents’ lunch.