Tech: Why Facebook and Google are afraid of ByteDance

This article first appeared in The Edge Malaysia Weekly, on November 4, 2019 - November 10, 2019.

Zhang’s ByteDance is the world’s most valuable venture capital-funded start-up. Photo by Bloomberg

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LATE last week, Facebook founder and CEO Mark Zuckerberg went on stage at The Paley Center for Media in New York to launch a new News Tab for the giant social media platform. Instead of relying on fake news or Russian bots, Facebook will begin offering its 2.4 billion monthly active users news from The Wall Street Journal, USA Today as well as extreme right-wing website Breitbart via the Tab.

Curated by a team of human editors in a fashion similar to the one Apple takes for its own news app, Facebook will pay some, though not all, of the media companies for the use of their headlines and links to their websites. You would still need to subscribe to paywalled websites to read the entire stories. “Every internet platform has a responsibility to fund and form partnerships to help news,” Zuckerberg, the man who has been blamed for crippling the media industry over the past decade, told assembled journalists.

If you believe the News Tab is yet another clever PR trick by Facebook to spruce up its image after it allowed Russian bots to allegedly rig the 2016 US election, catapulting Donald Trump to the White House, you are only partially right. Indeed, Zucker­berg actually alluded to another motive just days earlier in a speech at Washington’s Georgetown University, when he attacked Beijing ByteDance Technology, the company behind 15-second video clip app Douyin (lite­rally “shaking sound”), news app Jinri Toutiao (“Today’s Headlines”) and their Western versions, TopBuzz, a news aggregation app for Americans, and TikTok, the international short video version of Douyin. “While our services like WhatsApp are used by protesters and activists everywhere due to strong encryption and privacy protections, on TikTok, mentions of these protests are censored, even in the US,” the Facebook founder said.

Zuckerberg has reason to be concerned with the rise and rise of ByteDance, which has emerged as the most formidable competitor to Facebook in years. ByteDance is the world’s most valuable venture capital-funded start-up. At its last funding round a year ago when it raised US$3 billion, investors such as Japan’s SoftBank Group, which forked out US$1.8 billion, valued Byte­dance at more than US$75 billion.

ByteDance, which uses sophisticated modelling and machine learning to deliver a stream of tailored content such as jokes, news stories and short, silly video clips, has 1.5 billion monthly active users and 700 million daily active users across its platforms, including TikTok, Toutiao, mobile messaging app Flipchat, video chat service Duoshan and enterprise collaboration platform Lark (Tencent Holdings’ Super App WeChat has 1.13 billion monthly active users). TikTok, which uses a machine-learning algorithm to present content tailored to each user, has exploded in North America and around the world over the past two years and is considered an existential threat to Facebook.

Now, ByteDance is reportedly readying an IPO early next year, which could be the biggest listing of an internet firm since Chinese e-commerce behemoth Alibaba Group Holding, which raised US$24 billion on the New York Stock Exchange five years ago. ByteDance has denied that a Hong Kong listing was imminent, but analysts say an IPO next year is on the cards if market conditions remain favourable.

In the aftermath of the recent botched IPO of beleaguered co-working giant WeWork and poor performance of new listings such as Uber Technologies and Lyft, tech companies such as ByteDance and Airbnb, a homestay site, are keen to list early next year, before the window shuts ahead of what is likely to be a boisterous US election year. One reason the owner of Toutiao and TikTok is eager to list is that its key shareholder SoftBank, keen to prove that not all of its investments are overvalued, has begun nudging some of the more successful companies to seek public listing.

SoftBank and its Vision Fund, which were recently forced to write down US$5 billion (S$6.8 billion) on their investments in WeWork as well as ride-hailing firm Uber, are under pressure to write down more of their overvalued investments, including other ride-hailing firms such as China’s Didi Chuxing and Singapore’s Grab. A successful ByteDance listing could ease that pressure and help SoftBank raise money for Vision Fund 2. Unlike WeWork, Uber or Lyft, which lose money and have challenging business models, ByteDance is profitable. It had revenues of nearly US$8 billion in the first half of this year, up from S$7.2 billion for all of 2018. It is projected to chalk up annual revenues of US$17.1 billion for the current year, or more than the projected revenues of China’s one-time advertising leader Baidu this year. In comparison, Facebook is forecast to report US$68 billion in revenues this year.

 

Thinking global, staying local

Moreover, unlike Alibaba, which was just a Chinese e-commerce giant when it sought a listing in September 2014 and has since expanded in Southeast Asia and India, Byte­Dance is a truly global player with a formidable US presence. Globally, TikTok has more than 300 million monthly active users. ByteDance also owns Helo, an Indian social media app, and BaBe, a fast-growing Indonesian news and content app. According to Sensor Tower, a US research firm, TikTok was the most downloaded app on Apple’s App Store in the first nine months of this year as well as on Google Play’s store for Android Apps. In India, TikTok is the top-selling app on Google Play, and among the top in Vietnam, Indonesia and Thailand.

China’s emerging tech giants such as Byte­Dance are no longer copycats or imitators, but innovators that US giants such as Facebook, Google, Snapchat and others want to copy. Founded by Zhang Yiming, 36, as a news aggregation website in 2012, Byte­Dance expanded four years later to 15-second video clip apps. Zhang, a Fujian-born software engineer who briefly worked for Microsoft, had noticed the popularity of the now-defunct Vine, a short-video app that Twitter used to own but eventually shuttered, as well as karaoke clips on apps such as Kuaishou and US lip-sync video app Musical.ly. Although Zhang did not copy Vine, he took inspiration from it and made the app a whole lot better. Now, ironically, Douyin and TikTok are being copied by US internet giants. Facebook earlier this year launched Lasso, its own short-video app. Even Instagram Stories has its own 15-second short videos now. And Google is reportedly looking to buy a short-form video app called Firework.

ByteDance and its copycats — Facebook, Google, Snapchat and others — are riding the crest of a wave of the short-video phenomenon. China’s short-video app market is forecast to top US$14.1 billion next year. The global short-video market is set to grow dramatically over the next five years. Former The Walt Disney Co and Dreamworks CEO Jefferey Katzenberg recently teamed up with Meg Whitman, a former CEO of eBay and Hewlett Packard Enterprise to set up Quibi, a mobile-centric, short-form streaming-video platform. Quibi has already raised US$1 billion and expects to raise at least US$1 billion more in the coming months.

ByteDance launched TikTok in the US two years ago after merging it with Musical.ly, which it had acquired in 2017 for more than US$800 million. TikTok has since burgeoned as brands such as Ralph Lauren and Chipotle began advertising on the platform. Unlike Facebook, which has a maturing audience, TikTok, like Snapchat, has a younger audience, a demographic prized by advertisers. Sixty-nine per cent of its users are from Generation Z (aged 16 to 24), while 25% are aged at least 25. TikTok also has a heavier female audience, or nearly 60%, and its 30 million monthly active users in the US spend an average of 46 minutes on the app every day.

That has helped catapult ByteDance into  becoming a major player in the Chinese advertising market alongside Alibaba and Tencent and ahead of Baidu. Advertisers love ByteDance apps not just for their great demographics but also for their ability to carefully target audiences so that ad dollars get converted into sales. David Dai, internet analyst for Bernstein & Co in Hong Kong, says short-video apps run by ByteDance and Kuaishou have taken big chunks of advertising market share from incumbents, particularly Baidu. Also, even though their market share gains are slowing, he notes their monetisation continues to accelerate in both ad load increase and what they charge for ads. “ByteDance continues to have an aggressive growth target, and both ad load and price have room to increase,” Dai notes.

 

Political risks

Among ByteDance’s biggest potential risks are rising domestic competition and slower growth and Beijing’s notoriously sensitive censors. Earlier this year, ByteDance was forced to shut down Neihan Duanzhi, a popular joke-sharing app that had helped launch its brand seven years ago. It was also ordered to temporarily remove its Toutiao app from app stores, only to be told later that it could put the news app back in the app stores. ByteDance has also been under pressure in India as well, where TikTok has been accused of spreading pornography and inciting racial and religious hatred.

ByteDance’s relationship with Beijing has come under close scrutiny in Washington, which fears that the Chinese government is using all the images that Americans upload on TikTok in some large-scale artificial intelligence-based facial recognition database. Last week, two US senators — Democratic Minority Leader Chuck Schumer and Arizona Republican Tom Cotton — called on intelligence officials to investigate TikTok because it poses national security risks with its growing use. Another senator, Republican Marco Rubio of Florida, has cited Toutiao moderators’ removal of references to Tiananmen Square, the Falungung religious group as well as Taiwanese independence and Hong Kong protests as evidence that Beijing calls the shots on what goes into the TopBuzz news app. ByteDance denies it censors overseas content at the behest of the Chinese government. Aware that the US news app could be a huge distraction, Byte­Dance plans to sell its US news app TopBuzz, which has 36 million monthly active users, ahead of its listing early next year.

Zuckerberg may have won some brownie points by creating Facebook’s News Tab and paying newspapers some money after years of destroying the media industry, but Byte­Dance’s listing will make it an even more formidable competitor. Painting it as an enemy of free speech will not make it go away. Indeed, it will draw more attention to Facebook’s own attacks on democracy.

 

Assif Shameen is a technology writer based in North America

 

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