Bytedance builds walls for its budding e-commerce ecosystem

China’s tech world consists of multiple and loosely connected empires or ecosystems, led by three tech kings collectively known as BAT (Baidu, Alibaba, and Tencent). While the old kings expand the scope of their kingdoms to capture more and more of our daily lives, a fourth fiefdom is quickly expanding its boundaries: Bytedance. 

In the last two years, the rise of a new kind of online retail has created an opportunity for Bytedance to jump into the biggest arena in all of China tech: e-commerce. While livestreaming e-commerce is still small relative to overall e-commerce, the QVC-like format has seen massive growth since last year. With an edge in video, Douyin, the Chinese version of Tiktok, is riding the e-commerce livestream wave into the rich home waters of Alibaba, JD, and Pinduoduo.

The short video giant first got involved in e-commerce by referring traffic to e-commerce giants like Alibaba and JD. It was being paid for sharing the traffic, and kept its hands off the more lucrative e-commerce business.

But as shoppers began buying directly from livestreamers, the app integrated shopping features and got some traction in 2019, reaching RMB 10 billion in gross merchandise volume (GMV) for the year. With livestream e-commerce booming in the wake of Covid-19 lockdowns, the company has set a far more ambitious GMV goal for 2020: RMB 200 billion. 

Now, Douyin is moving to pocket all the revenue from selling goods during livestreams. To achieve this goal, Douyin has announced a series of e-commerce updates starting at the beginning of this year. With the most recent announcement on Aug. 26, the company is breaking alliances with e-commerce giants.

Starting Sept. 9, all the orders placed during Douyin’s livestream sessions to third-party e-commerce platforms have to go through Douyin’s service Star, according to the Aug. 26 statement. Then, on Oct. 9, the platform will block all third-party e-commerce referral links on livestream sessions.

“Douyin’s recent move shows its ambition in the lucrative e-commerce market, which saw greater growth driven by Covid-19,” Eliam Huang, analyst at retail research company Coresight Research told TechNode.

Douyin’s e-commerce push

Douyin started its push into e-commerce in late 2018, mainly through partnerships with e-commerce platforms to provide refer traffic. But as the app launched its own retail features, it began to favor stores running on its own platform. Its new moves, especially those rolled out in the past few months, are throttling referral traffic to existing retailers such as Alibaba’s Taobao and Tmall, and JD.

• Mar. 2018: Douyin announces e-commerce deal with Taobao, and added a shopping cart icon to the app, linking users to Taobao stores.
• May 2018: Douyin introduces Douyin shops, online stores only accessible via the app.
• May 2019: Douyin rolls out product search feature within the app.
• June 2020: Owner Bytedance consolidates control of retail-related functions across Douyin and other apps under new e-commerce department.
• Aug. 2020: Douyin says it will charge a 20% commission fee for orders transacted on third-party platforms. The rate for Douyin stores is only 5%.

Douyin is still playing catch-up in the livestream e-commerce sector. Taobao Live, the clear champion, sold GMV of around RMB 200 billion in 2019. Runner-up Kuaishou reportedly (in Chinese) reached GMV of RMB 35 billion in 2019. The Douyin rival originally set its 2020 GMV goal at RMB 100 billion, but upgraded the target to RMB 250 billion after Douyin released its goal.

Where the money is

E-commerce, gaming, advertising, and the emerging membership model are the most lucrative and popular monetization channels for Chinese internet companies.

Until now, Douyin had mostly been focused on ad revenue, holding audience attention with entertainment content. Bytedance has seen phenomenal growth in this area. Its share of ad spend nearly doubled to 22% (estimated) in 2019—trailing only Alibaba, which holds 33% of the ad revenue pie.

But the company needs more to support its $100 billion market valuation, under fire as it grapples with the potential sale of a large share of its most valuable overseas asset: Tiktok. Adding a robust e-commerce business could do the trick.

Tiktok alone is reportedly valued at $50 billion. Bytedance, meanwhile is facing headwinds overseas amid rising China-US trade tensions and political tensions with India. Under adverse global business conditions, the company might be forced to shift its attention to the domestic market, where it needs new revenue sources other than the ad businesses of flagship apps Douyin and Toutiao.

Ads are the minor leagues in China’s internet economy: Digital ad spend in China is forecast to reach $74.33 billion in 2020, while China’s e-commerce market was worth $1.94 trillion in 2019, according to Emarketer.

The company expects to generate income beyond ad revenues by leveraging the 400 billion plus daily active users on its platform. Expansion to China’s e-commerce sector, a coveted revenue source for tech firms, is a logical next step, both because of the market’s massive size in China as well as the close ties between livestreaming and its core short video business.

More importantly, e-commerce is a crucial link in creating a closed loop online ecosystem in China. Its absence would ultimately hurt the company’s ad revenue, said Zhuang Shuai, founder of Beijing-based consulting firm Bailian.

Zhuang “E-commerce and advertising are inseparable,” Zhuang told TechNode. If Douyin lets platforms like Alibaba and JD have its traffic, it runs the risk that they will capture all the revenue, he says—and the same goes for other ad platforms like Weibo and Sina.

The content platforms get paid for sharing their traffic with e-commerce sites, but once users have switched to browsing deals their attention often stays in the e-commerce app. This shift of attention ultimately costs the advertisers the resource they’re selling.

My colleague Sheng Wei, who covers content and entertainment topics including Bytedance for TechNode, says that e-commerce is an important business for Douyin as it searches for revenue sources in addition to advertisement. 

“Douyin is competing with e-commerce platforms for ad revenues and a homegrown e-commerce business could bring more value for the company,” he told me.

To complete its business loop, Bytedance has obtained a payments license (in Chinese), which is an important link in e-commerce transactions.

Douyin is not the only Chinese tech firm that has looked to e-commerce to boost growth. Companies like Baidu and Weibo all have tried to expand into e-commerce over the past decade, though neither achieved much success. 

Is Douyin ready?

Bytedance has conquered new fields before. But success in the hyper-competitive world of e-commerce is far from assured.

E-commerce is a complicated system, requiring companies manage a range of links from supply chain, operating system, membership, performance evaluation, and after-sales services. Douyin, a latecomer to the field, has a basic infrastructure in place, but it still has a lot to work on.

Before blocking links, Douyin’s own retail channel was already taking a larger share of sales. From May to August 2020, Douyin shops’ sales rose from RMB 50 million to RMB 100 million per month, while third party sales through Douyin fell from 63 million to 43 million per month, according to data from Chanmama.

In addition, it formed a partnership with Suning.com in July, under which the omnichannel retailer opened its products, logistics, and after sales services to Douyin store operators. The deal allows Douyin to capitalize on Suning’s offline retail and supply chain resources while keeping users in the Douyin app. 

The partnership was tested during Suning’s 818 shopping festival held on Aug. 18. A Douyin livestream session hosted by celebrities Jia Nailiang and Guan Xiaotong drew 51 million viewers (in Chinese). GMV for the 10-hour session hit RMB 230 million.

In a similar deal, short video rival Kuaishou partnered up with JD, allowing its users to purchase JD-held inventories without leaving the short video app.

However, there is more to do. “Douyin will need to invest and make sure its infrastructure will enable its users to enjoy a smooth shopping experience, such as managing supply chain and logistics which are e-commerce giants’ strength,” said Huang.

Next step: building a loyal user base

The new policy will not only change the dynamic between Douyin and its e-commerce rivals, but pose new questions to merchants, social media influencers known as KOLs (key opinion leaders), and users who are accustomed to using Taobao or JD.com for deal transactions.

Merchants on e-commerce sites will have to either give up Douyin as a traffic source, or build a Douyin store from scratch in addition to running their existing stores, increasing operation costs. 

It will also take time for KOLs (key opinion leaders) and MCNs (multi-channel networks), or content creator agencies, to adapt to the change, used as they are to focusing on Taobao and JD. In addition, some KOLs are contractually obligated to send traffic to third-party e-commerce platforms. This is risky for Douyin, as KOLs may switch to rival platforms rather than adapt.

For users, purchasing from in-app stores is a more streamlined shopping experience. Removing the additional step in the customer journey may result in better user retention rates for third-party links. But customers have lots of things to consider when choosing a platform, from pricing, product quality control, to logistics, to after-sales services. Douyin will have to compete on all these fronts to retain users.

Frenemies for the near future

Chinese shopping and video platforms are increasingly becoming frenemies as e-commerce and content blend together. For Bytedance and Alibaba, the push-and-pull dynamic will continue. Even though Douyin is competing with Taobao in livestream e-commerce, it still has a deep interdependence with the e-commerce platform for its classic short video business. 

Douyin is both an advertising distribution platform that sells its traffic to Taobao, and a content platform that sells products directly. Alibaba is a major client of Douyin, representing around a quarter of Douyin’s annual ad revenue. which was estimated to be RMB 80 billion in 2019, a source close to Alibaba told local media. 

Douyin’s blocking of referral links does not apply to short video posts, only livestreams. In 2019, Douyin and Taobao signed a RMB 7 billion cooperation agreement that covers RMB 6 billion ad revenue and RMB 1 billion e-commerce commission revenue. On Aug. 21, just a week before the livestream link block, the two companies renewed their advertising and commission agreement, reportedly almost tripling the deal’s value (in Chinese) to RMB 20 billion in 2020.

Zhuang thinks it’s too early to say whether Douyin will take a step further to block referral to short videos. “It still depends on how well the market responds to its e-commerce business and growth of revenues.”

“Douyin’s move, in the long run, will facilitate the development of the e-commerce sector, especially in the area of creating curated content to engage consumers. In the context of [the] rising cost of customer acquisition, platforms who are able to deliver content that drives conversion will win,” Coresight’s Huang said.