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Behind the TikTok phenomenon: ByteDance and its AI-based content platform 

18th June 2020

Over the past year a young internet startup from China, ByteDance, took the world by surprise after launching an addictive and incredibly successful short-video platform – TikTok – that became the most downloaded app on the internet in Q1 2020. Some say it is the most valuable startup in the world with an estimated value of over USD 100bn and a bright future ahead, others think it is an overhyped craze that will be short lived. Either way ByteDance has managed to get the attention of people all over the world and we feel that, although it isn’t listed yet, it is worth looking into what the company does and how it is impacting the mobile economy in China and abroad.

I. What is ByteDance?  

ByteDance was founded in 2012 by a young software engineer, Yiming Zhang. The company was not his first attempt at entrepreneurship, he had tried other concepts before including 99fang, an online real estate search engine, but none had the success ByteDance has. The company has developed three successful apps: Toutiao, Xigua Video and TikTok (called Douyin in China).

A.      Toutiao

Toutiao, also called Jinri Toutiao (Today’s Headline News), was ByteDance first app: a newsfeed mobile platform. Toutiao was able to win a huge market share as it was the first mover with AI-recommended news feed service (“AI” stands for Artificial Intelligence) to capture the smartphone news app market in China. Most of the traditional players were providing the same news service for mobile as they did for desktops. However, in the mobile era, as screens are smaller, the content needs to be formatted and search engines simplified. Contents curation and recommendation are paramount and Toutiao offered a very advanced AI-powered news recommendation system which shows news content based on what the viewer has read before and what members of his/her peer group have read.

This approach made Toutiao the leading news website in China with 360m Monthly Average Users (or MAU) followed by Tencent News which has 280m MAU. From a commercial point of view Toutiao generates revenue through advertising and subscriptions.

B.      Xigua Video

In March 2016, ByteDance launched Toutiao Video, which was later rebranded Xigua video. Xigua Video is a short video platform that host a variety of video clips that last 2 to 5 minutes long. Xigua is probably most comparable with Youtube from the format of the videos, type of contents and even business model point of view. Xigua generates revenue like Youtube via advertising and subscriptions. Xigua content is accessible through the Toutiao app and through its own stand-alone app.

Toutiao Main Page
Toutiao Main Page
Source: Screenshots of the application
Xigua Video Platform
Xigua Video Platform
Toutiao Premium Membership

C.      TikTok

TikTok allows users to share 15-seconds short-form videos. The most common content was and still is dancing or lip-sinking over a trendy music although a more diverse range of contents can be seen nowadays such as sports or politics. For both content creators and viewers, the entry barrier is low. Creation is made easy with ready-to-use music content and a wide array of editing tools. For viewers, moving through clips is easy with simple swipe commands.

TikTok is rather difficult to compare to other popular apps as it shares features with many of them but never fully overlaps. For instance, TikTok is similar to Instagram in the sense that user-created contents are shared, but the content on TikTok is “friendlier” than that of Instagram. The main intention of creators on TikTok is to share funny videos and get more likes while Instagram is probably more “lifestyle and status” oriented. TikTok also shares features with Youtube in the sense that both platforms offer personalized content recommendation based on AI algorithms. But Youtube has more information-sharing videos while TikTok is more fun-based and the length and format of videos are very different. Like Snapshat, TikTok does not give the viewer much choice as to what they will watch and the two apps have similar types of content and curation methods. But Snapchat is more about sharing videos among friends while TikTok is to share content with the general public. While Snapchat posts expire and disappear after 24 hours, one can download and keep forever the contents posted on TikTok. 

TikTok has a global user base which is a unique feature for a Chinese app. Surprisingly the largest number of downloads is coming from India, which is responsible for 30% of all downloads, followed by China (10%), and the US (8%). This is a key difference with WeChat – the Tencent messaging platform which also has a huge user base. Before TikTok, there was a big prejudice that Chinese social network platforms couldn’t be internationally used because of the language barrier or cultural differences. TikTok’s instinctive dancing and singing videos broke this barrier showing the universality of some contents. TikTok’s MAU reached 800m in Jan 2020 (of which 440m were from China). It has already surpassed QQ (the instant messaging platform of Tencent) and Weibo (the Chinese equivalent of Twitter). It is slightly less than Instagram’s 1 bn MAU and Wechat’s 1.15bn MAU.

Source: www.wearesocial.com

Monetization: TikTok’s Chinese version has developed three monetization methods so far. The first one is coin sales which can be used for tipping the creators of some videos. This is mainly used when creators perform live broadcasting. It is similar to Huya’s or YY’s business models (two other Chinese social media/content sharing apps). The second one is advertising. There are several banners or app-download links shared on screen. The third one is e-commerce. This is a recently developed business model where creators advertise products in their videos and the viewers can buy them from a linked merchandising page which can be either TikTok’s own platform or a third party’s like Taobao (Alibaba) or JD.com .

TikTok’s international platform is not fully monetized yet. There are no e-commerce or creator-tipping function on TikTok’s global version. Advertising is also very limited for the time being. Individual creators can deliver advertising content indirectly, but it doesn’t usually go to ByteDance’s revenue stream. Once this part of the business gets monetized, it will generate a significant revenue and profit jump.

Banana drop Challenge
Source: Screenshots of the application
Advertising of sundries
Tipping the creator
Live e-commerce

II. How did ByteDance become such a success? 

The reason for the remarkable growth of ByteDance stems in its AI-based personalized content curation capability. Through big data analysis the platform has been able to provide better personalized content leading to an increased usage. Alibaba used a similar strategy in e-commerce, managing to identify and display the products users were most likely to be interested in which increased the transaction and repeat business probability. ByteDance has successfully done the exact same thing in news and fun video applications.

ByteDance has an advanced AI lab which researches natural language processing, machine learning, data mining, augmented reality graphics, security, etc… Based on its AI algorithm and big data from viewers’ historical behavioral data and personal data, the ByteDance’s apps manage to provide an improved and some say “addictive” experience to users. Such a recipe can be replicated in other areas allowing the services provided by ByteDance to venture outside news and video.

The success of ByteDance is visible in the screen time data of Chinese users and mobile advertising market share. ByteDance apps have already surpassed Alibaba and Baidu (the most popular search engine of China) and are only second to Tencent in terms of screen time, while ByteDance has taken a 23% market share in online advertising (with a triple digit progression since 2017), greater than Baidu or Tencent and only second to Alibaba.

Source: www.QuestMobile.com
Source: R3 Research

The other measure of ByteDance’s success is its financials. The company is already generating profit three years after the launch of the apps, which is rather unique among internet unicorns. In 2019 the company has recorded USD 17bn in sales with USD 3bn in net profit. Based on this strong financial performance it is estimated that the market value of the company will be around USD 100bn.

ByteDance Financial Performance
Source: Internal Research
ByteDance Quoted Value (USD Bn)

III. Challenges and Opportunities 

Although TikTok is globally a very successful platform, in the Chinese market it is facing fierce competition from KuaiShou, a Tencent-backed live-streaming platform. In terms of e-commerce monetization, KuaiShou seems to do better than TikTok. At the same time Xigua and Toutiao are challenged by Bilibili. Among the younger generation in particular, it is considered to be more fun to use Bilibili than Xigua.

However, ByteDance has a growth strategy that consists in expanding in the gaming and education segments. In gaming the company recently acquired Mokun, a Chinese mobile game company. Using its AI personalized recommendation technology and with the upcoming fast 5G networks, ByteDance will be able to develop a cloud gaming business model similar to Google’s Stadia. ByteDance may even do better by delivering the game which users want to play, just like what they have done for news and videos. In education the company launched an AI English tutor app called GuaGuaLong English in April which should be the start of its expansion in the sector.

ByteDance’s services are young and fun. Some call them vulgar sometimes but no one can question how highly “addictive” they are. This is thanks to the company’s strong high-end technical research and the strength of its AI algorithm which will also be the reason why the company likely has a bright future in the 5G era.

The information contained herein is issued by JK Capital Management Limited. To the best of its knowledge and belief, JK Capital Management Limited considers the information contained herein is accurate as at the date of publication. However, no warranty is given on the accuracy, adequacy or completeness of the information. Neither JK Capital Management Limited, nor its affiliates, directors and employees assumes any liabilities (including any third party liability) in respect of any errors or omissions on this report. Under no circumstances should this information or any part of it be copied, reproduced or redistributed. 

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