Can ByteDance Breach Alibaba’s Infrastructure Moat and Become An Ecommerce Giant? (Tech Strategy – Podcast 82)


This podcast is about Alibaba’s 2020 earnings and the strategy implications. But it is really about how Alibaba is positioned as a “product / service + commerce infrastructure” business. And whether ByteDance can break into Chinese ecommerce with an “attention + mini programs strategy”. It’s really a cool and important question.

You can listen to this podcast here or at iTunesGoogle Podcasts and Himalaya.

The cited Alibaba presentations are here:

The cited Bloomberg article on ByteDance is here:

The cited quotes from Alibaba are below. I added the highlights.

“During the past fiscal year, we made significant progress on our three key strategies, namely domestic consumption, globalization and cloud computing. Such progress demonstrated the tremendous power of Alibaba’s digital commerce infrastructure as well as our long-term commitment to invest for the future and to create value for our consumers, merchants and partners through innovations. ”

“As the largest digital consumption marketplace in China, the Taobao app will continue to strengthen its comprehensive supply of branded products, value-for-money products, agricultural products, imported products and differentiated long-tail products to meet the diversified demands of our consumers. In underpenetrated categories, such as grocery, real estate, home furnishing and pharmaceuticals, we will redefine the consumer journey and digitalized experience for the sector to enhance its online and New Retail penetration. We will also work on improving the overall consumer experience and engagement in the Taobao app by offering diversified consumer journeys based on different user segmentation and intent.  At the same time, we are improving the tools and enabling capabilities for merchants to enhance their customer engagement and are reviewing our platform policies to lower their operating costs.”

“We believe the key to unlocking the full value of the community marketplace model is not only about the standalone P&L of the business but also about the overall efficiency and servicing capabilities of the entire commerce platform where the business sits, and we believe the latter can generate far greater value than the former. Alibaba has the most sophisticated and efficient commerce infrastructure in China, with the most comprehensive product and service offerings to serve consumers of diverse segmentation and demands.”

My blue diamond chart for Alibaba is below:


Related articles:

From the Concept Library, concepts for this article are:

  • New Retail
  • Online Merge Offline (OMO)
  • Mini Programs

From the Company Library, companies for this article are:

  • Alibaba
  • ByteDance


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

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Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

—–Transcription Below

Welcome welcome everybody. My name is Jeff Towson and this is Tech Strategy and the question for today Can ByteDance breach Alibaba’s infrastructure moat and become an e-commerce giant? And there’s a lot in that sentence This is kind of a big but I would argue maybe one of if not the most important questions happening right now in sort of Alibaba world and Chinese e-commerce. So let me sort of repeat that. Can ByteDance with its new major initiative on what I would call attention-based commerce, which would be different than traditional e-commerce and different than social commerce, attention-based commerce, can they breach the very formidable moat that is the infrastructure of Alibaba? And… therefore become a new e-commerce giant. And it’s kind of in the news a lot lately, and we had Alibaba’s earnings call and press release and all that stuff last week. So a lot of great data came out of that, and a lot of great management thinking came out of that. I mean, I’ve got just pages and pages of notes. And I’m going to take you through what I think was the most important sort of insights that fell out of that. But yeah, I mean, it’s a ByteDance versus Alibaba. This is sort of a. I don’t know, Batman v Superman. This is sort of fight night in Chinese e-commerce and it’s happening right now and it’s just all about the strategy, which is awesome because that’s kind of my thing. Now for those of you who are subscribers, this is going to kind of build on top of stuff I’ve been sending you over the last month about Sun Art Retail and I’ll put the link in the show notes. But I wrote… a couple pieces about Sun Art Retail, which is a hypermarket in China, one of the big ones. Alibaba took it over, majority control late 2020. A very important deal and they’re running a lot of things through there. I wrote you two big pieces on this, raising the question, okay, this is a public company, you could buy stocks in it. Is this a growth engine for Alibaba? Is it a product and service or is it infrastructure? And I didn’t really have an answer because I didn’t quite know their intentions. Well, they’ve answered that question in the recent comments by Daniel Jang in the week. We know what it is now. This is infrastructure, mostly. And I’ll give you their language on how they talk about SunArt, Cloud, and other things. But that actually was kind of a nice discovery for me because I was struggling with that. So I’ll put the link in the show notes. And The title there was Alibaba Takes Over Sun Art Retail, is it gonna take off or is it infrastructure? Okay, the three companies that we’re gonna cover today, Alibaba, ByteDance, Sun Art Retail, and the big sort of concept in the concept library. I try and tie every talk to some sort of important concept so you can sort of move along in your understanding. So if you click on the concept library, the idea for today is new retail and OMO. which is online merge offline. And that’s really the same thing. New retail is just the first industry to do OMO. But that’s kind of the idea for today. What else? This is also going to build off some information I sent you in the last day or so. This was for subscribers, where I talked about basically the four big risks, in my opinion, with Alibaba. And one of these is what we’re going to talk about today, this sort of. merger of e-commerce into attention-based commerce or entertainment plus commerce. And that was kind of one of the four. So this will tee off what I sent you in the last day or so. Okay and for those of you who are not subscribers, feel free to go over to You can sign up there, free 30-day trial, see what’s going on, don’t miss out on kind of the important stuff, maybe opportunities to make money, maybe you’ll see some things that will help you not lose money. So you can go over there anytime. And with that, let me do my standard disclaimer here. Nothing in this podcast or in my writing or on my website is investment advice. The numbers and information from me and any guests may be incorrect. The views and opinions may be incorrect or no longer relevant or accurate. Investing is risky. This is not investment advice. Do your own research. And with that, let’s get into the topic. Now, as I think you’ve. probably picked up over the years if you’ve been listening to this. I’m all about sort of strategy, I’m all about competitive strength and dynamics or competitive strength and defensibility. That’s what I’m sort of on my way to Mexico in the next day to hide out and write that up as a book. And within that, I have my little pyramid which sort of ranks companies based on their strength and defensibility. And right at the top of the pyramid, there’s a little triangle called competitive dominance. It used to be called winner take all, I’ve kind of changed it. And there’s only a couple types of business models that get you total competitive dominance. One of them is complementary platforms. And there’s only a handful of companies that I would put up there, Alibaba is one of them. They are a competitive fortress unlike anything I can probably point to. I can point to a handful of companies in the world, maybe three to five, that have it like this. But certainly the number that have this type of competitive dominance. in a massive market, it’s actually kind of easier, well it’s a lot easier to get competitive dominance at a local level. You can be the biggest hospital in town in a village and just be the man or be the company, but to have it on this size is very, very rare. Maybe Google has it, maybe Apple has it, just a couple companies have this sort of scale and dominance. So there’s a lot to like there. So massive, almost unprecedented competitive strength. and they get that from what I would characterize as a complimentary platform. If you’re not familiar with that, go to my concept library. I talk a lot about that. Digital physical hybrid, pretty impressive. Okay, that’s great. Other great thing, they are riding the mother of all secular trends, which is the rising wealth of Chinese families, middle class urban families. That’s kind of my north star for longer term investing is. That’s a mega trend. And really, it’s not just Chinese middle class families. It’s increasingly becoming Asian middle class families, so Southeast Asia. That’s kind of where I bet my whole career is on that secular trend. Third thing, if those two weren’t good enough, which they should be, they’ve got a couple major growth initiatives in the pipeline that are also kind of stunningly big. It’s like it’s great to have one really awesome business. They have like two. and three, and they’ve got four and five in the pipeline. So cloud business, huge. I mean, just stunningly big. I can’t even figure out how big it is. And then this sort of ongoing shift from retail, from offline to online, and now from online to OMO, that’s big. And then they’ve got a couple others that are kind of percolating. Sineo, Enterprise, their credit and financial services business, which is quite big, but a lot of regulatory uncertainty there. And then sort of great culture and management. They’re really top notch management. So there’s just a lot to like in this company. I try and sort of dial back my enthusiasm because it’s rare to see a picture this attractive. So that’s kind of why I sent you this article in the last couple of days saying, look, okay, let’s put that aside. Let’s talk about the stuff I don’t like. And I laid out four things I really were, these are my biggest four worries about this company. So this is the stuff I don’t like. And that’s important too, because you don’t want to be too enthusiastic. But there certainly is a lot to like. Okay. Now, given that picture, I am always eager when they have their sort of investor day and they release their statements, because they release really good press releases. And Daniel Jang came out and gave talks. And they talk, it’s usually Maggie Wu, the CFO, and Daniel Jang, the CEO. And they really talk with enjoyably precise language. about what they’re doing. Really I pay a lot of attention to the language, the phrasing, and it’s a very well done description of their digital strategy. Better than just about anyone. Maybe C Limited I think is also at this level. Coupang in South Korea I also think speaks with this sort of specificity. But yeah, Alibaba is the king of the platform strategists. So I pay a lot of attention. to that and I’ll talk about some of their language that really got my attention. It really gives you an indication of where their strategy is going and how they’re thinking about it. Okay, for those of you who missed it, the financials, which I’ll just summarize for you briefly, these are just the numbers. They’re China consumer facing business, they’re domestic consumption business, which is how they describe it, domestic consumption. That’s the big engine. Everything follows from that. The numbers they talk about 891 million annual active consumers. So do you measure this on an annual basis, a monthly basis, or a daily basis, which ByteDance does daily, Alibaba talks annual. But 890 million, that’s China consumer facing. And then if you look at their international consumer business, which is really Lazada and AliExpress, they said they hit 240 million. annual active consumers. That’s massive, right? Okay, so that’s your activity level, which is important. The other number was GMV, always important for Alibaba. For those of you who have been following this for years, you know, they’ve talked for a long time about how they wanted to reach $1 trillion US gross merchandise value in a year. That was one of their big trillion. I mean that’s huge. I mean this is bigger than a lot of countries. This is bigger than most countries. So they call that the Alibaba ecosystem. I don’t really use the word ecosystem but okay huge numbers. Out of that big GMV they generate a certain take rate in various forms. What percentage of all that activity are they taking a percentage of? Basically a hundred billion US dollars. So 8% ish. And these numbers are all going up. So one, the numbers are huge. And two, they’re going up huge. If you pull out SunArt retail, because they acquired SunArt retail, so they consolidated those numbers. If you ignore that, they had about a 32% growth year over year. But that also includes cloud and some other things. But then that $100 billion number I gave you, that’s not just e-commerce. That’s their other businesses. But. You know, it’s kind of hard to tease all this out, ecosystem part by ecosystem part, because it all ties together. So anyways, that’s huge. And then they gave a prediction of, you know, they hope to get 930 billion rem and be in 2021. So that’s sort of their guidance, which is, it’s up about 200 billion. So again, more growth, more growth, more growth. They did talk a little bit about the big fine they paid to the Chinese government, $2.8 billion US dollars fine. That put them in a net loss operating position for the first time. But again, that’s really not the same thing. No, they didn’t move into loss making territory. They’re huge. They’re growing fast. Their engagement’s growing. Their GMV’s growing. Their revenue’s growing. cash flow is growing and they paid a fine. But their net cash flow from operating activities was about 35 billion US dollars. So this thing is a cash machine. It’s huge, it’s growing. And domestic consumption is still the major engine, but they’re starting to get more and more coming out of international consumption. And then we’ll talk about some of their all smaller ones, which are those big growth initiatives I mentioned. Overall, nobody has it this good in life. I mean, everyone’s got problems, every business has problems. This is as good as it gets in this world, as far as I can tell. Okay. Now let’s get to the strategy part. So quote from Daniel Jang. He gave a, it’s a talk. You can see it on video, but it’s also a transcript. It’s not very long. I would absolutely read it. It’s concise. It’s very precise about what they’re doing and where they’re going. I’ll give you the takeaway. Quote, during the past fiscal year, we made significant progress on our three key strategies. Red flag, red flag. Namely, domestic consumption, globalization, and cloud computing. So they’re telling you where the big ship is pointed. Such progress, quote, such progress demonstrated the tremendous power of Alibaba digital commerce infrastructure as well as our long-term commitment to invest for the future. Okay. Another key phrase there, digital commerce infrastructure, and that’s kind of the topic for today. They’re using this phrase that they are to a large degree in the commerce infrastructure business now, not just the products and services business. Like Taobao is a product and a service. Community group buying is a product or service. Taobao Live, live streaming is a product and service. They are equally in the products and service and business and in the commerce infrastructure business. And those two things support each other. So that’s another keyword. Continuing on, and to create value for our consumers, merchants, and partners through innovations. And I talked about that previously, about one of the tricks of being a network effects business is you have to continually keep people coming to your platform because if you’re not getting interactions, your platform can collapse, how do you keep doing that? Their answer, Alibaba and Ant Financial, have always said the same answer. We continually create value through our users through innovation. That’s how they keep raising the bar, keeping people coming back and protecting themselves against sort of the reverse network of Xtrap. So that one little two sentence phrase, their key strategies, domestic consumption, globalization, cloud computing. Good. That key phrase, we are in the digital commerce infrastructure business and we create value through our consumers and merchants. Those are their two user groups and partners, which is kind of vague, through innovation. That’s a lot of their strategy in two sentences. Very good. So I’m going to talk about those two big strategic directions, domestic consumption, cloud computing. And then what they mean by infrastructure, because that turns out in my opinion to be the key question of bite dance versus Alibaba is can bite dance overcome the commerce infrastructure that Alibaba is building. That’s their biggest strategic mode. So then they go on and they talk about their domestic consumption business and this is just an outstanding summary. I mean it’s so good. I’m going to paste this whole quote into the show notes. But I’ll read it to you and then I’ll go through and kind of point out like the language is fantastic. Here’s quote, as the largest digital consumption marketplace in China, the Taobao app will continue to strengthen, here’s the important part, its comprehensive supply of branded products, value for money products, agriculture products, imported products, and differentiated long tail products to meet the diversified demands of our consumers. They are basically telling you where their e-commerce business is going in very specific language. A comprehensive supply of branded products. That’s the Walmart effect, right? That’s the we’re the biggest marketplace. It’s our breadth of offering that is compelling. Then they go value for money products, cheap, frugal. That’s very good in fifth and fourth tier cities in China. Agricultural products. So they’re going into groceries, perishables. that’s the cross-border business, and here’s the phrase I love, and differentiated long-tail products to meet the diversified demands of our consumers. They’re basically citing long-tail. Like, I mean, this is, we carry all the crazy little stuff no one’s ever had, something that your supermarket could never have. I mean, that’s just a great summary. Okay, they continue on. Quote, in under-penetrated categories, such as grocery, real estate, home furnishing and pharmaceuticals, we will redefine the consumer journey and digitized experience for the sector to enhance its online and new retail penetration. That’s this question of, okay, online is very good for books, but where has online struggled? And they’ve basically identified the four categories where e-commerce has continued to have low penetration, grocery, real estate, home furnishing, pharmaceuticals. That’s what they’re going. They’re expanding online into traditional retail. And what are they gonna do? They’re going to quote, redefine the consumer journey and digitalized experience. How are they gonna do that? To enhance quote, it’s online and new retail penetration. So they’re telling you they’re going after these sectors and they’re doing it with an online strategy and a new retail OMO strategy. I mean, this is great. I just love this stuff. Okay. How do you, so let’s say that’s their strategy. Okay, you’ve gotta sell that to two primary user groups, your merchants and your consumers. You’ve gotta make it good for both of them and if you get both of them happy, they both come, the interactions happen. You always have to win on both sides of the platform. What is their pitch to each side? Well, they go on to tell you that. Quote, we will also work on improving the overall consumer experience and engagement in the Taobao app by offering, here it is. Diversified consumer journeys based on different user segmentation and intent. Diversified consumer journeys based on different user segmentation and intent. They are customizing the user experience. That’s what they’re seeing is how are we going to create more and more value to consumers. We are going to customize the user experience user segment by user segment and user intent. So they’re doing real personalization and customization, not just on demographics, but on what the consumer’s thinking and their behavior and their intent. That’s how they see they’re gonna increase value more and more on the consumer side. They continue on, and this is the last sentence, I’m almost done. Quote, at the same time, we are improving the tools and enabling capabilities for merchants to enhance their customer engagement and are reviewing our platform policies to lower their operating costs. So this is what they’re offering to merchants to keep them more and more value, more innovation, more value. What is it? To improve the tools and enabling capabilities for merchants so that they can enhance their customer engagement. So that’s delivery, web, marketing tools, all of that stuff. So that’s what they’re pitching to the merchants. And then they put this little tagline on the end which was and we are reviewing our platform policies to lower their operating costs. That’s, they’re speaking to the fine. They’re saying, you know, we’ve got to have our policies to make, one they want to make it cheaper, that’s important, but that’s a little bit of a sort of a hat tip to the fine they just paid. Anyways, that’s a really good summary of their e-commerce domestic Taobao business. It’s really got most of what they’re doing in there. I’m impressed by how much they have packed into a very small number of words. Anyways, I’m putting that whole quote as the previous one as well into the show notes. It’s really worth looking at that and reading it. So they go on and as part of this they start talking about new retail and Sun Art. I’m not gonna give you the quote, I think that was enough of that. But they basically. kind of tell you what they’re doing in new retail and the ones they highlight are Grocery, Fresh Produce, FMCG products and we kinda already knew that because we can read the SunArt numbers and that’s where they’re going. Not a big surprise. What’s the value of this physical infrastructure? All these stores near people’s houses? Well, you can pull a couple big levers by having hypermarkets near everyone’s house. You can… sort of digitize and improve the consumer experience because now you’re walking in the store and it’s online meets offline and that’s important. But probably the biggest lever is rapid delivery. You can do on-demand delivery, same-day delivery, and that tends to be most powerful in products that you buy frequently. You don’t really need one hour same-day delivery for buying books. But if you’re buying groceries, if you’re buying fresh produce, if you’re buying FMCG, that delivery and frequency piece is important. So you can see them sort of levering the hypermarkets, the new retail into that. And that’s also where they’re building out their community marketplaces. This is group buying, basically, which I’ve talked about in the past. Group buying is that stuff where you buy it frequently and the delivery costs are high, but it staples like milk you’re buying every week. Community group buying is levering into that. And Alibaba is building that on their fresh hippo, Hema, and SunArt platform. And the way they describe that is, quote, we believe new retail is a multi-format commerce infrastructure. A multi-format commerce infrastructure of which the community marketplace model is one of the essential ways to serve price conscious consumers. This model can help us acquire new users in lower tier cities and rural areas and further increase our users’ consumption frequency and stickiness. So this whole new retail thing, this is where infrastructure merges with product. And now we’ll get to the sort of point of today, which is, okay, Alibaba has traditionally been a series of products and services. Taobao, Tmall. And underneath that you have supporting infrastructure. I’ve called this capabilities. And I’m going to put my slide in the show notes, my blue diamond slide, which basically maps them out on demand side scale and supply side scale. But you could have called supply side scale infrastructure. We get demand by enabling interactions between merchants and consumers. But to do that, we need to create enabling infrastructure or enabling capabilities like IT servers, a lot of web stuff, logistics, warehouses, delivery, and payment was part of that and increasingly it’s included retail stores. So you’ve had them operating at two levels and you can see them in that chart, I’ve mapped it out that way. And that’s kind of been how you break it down. Well, this whole new retail thing, it’s kind of like it’s merging those two because the new retail formats, these new stores. Yes, they are infrastructure, but they are also a new type of user journey. So they’re kind of a product and infrastructure at the same time. The warehouses were never that. The warehouses were just infrastructure. All those servers they bought, that was infrastructure. And the mobile app was the user experience and the product. Well, this is kind of merging them together. So let me give you arguably the key quote from Daniel Jang in this. And this is the one that got me standing up at the desk, which is weird, I know. Okay, we believe the key to unlocking the full value of the community marketplace model is not only about the standalone P&L of the business, but also about the overall efficiency and servicing capabilities. of the entire commerce platform where the business sits. And we believe the latter can generate far greater value than the former. That to me is like their key strategy. Okay, this community marketplace model is their latest product that they’re sitting on their infrastructure. And they say the value of the community marketplace model is not just about the standalone P&L of the business, but also about the overall efficiency and servicing capabilities of the entire e-commerce platform. So they’re saying this creates value as a product, but also as the infrastructure. And here’s the key phrase, quote, we believe the latter can generate far greater value than the former. They’re telling you the infrastructure is more important than any product, or at least that particular product. So is Alibaba a product company? How about T-Mall, community buying? Or isn’t it? commerce infrastructure company. And as far as I can tell, they’re saying the big money is in being infrastructure. They go on, Alibaba has the most sophisticated and efficient commerce infrastructure in China with the most comprehensive product and service offerings to serve consumers of diverse segmentation and channels. It looks to me like they see the future as infrastructure first. And then once they have that, they can tee up lots of different products and services for lots of different types of users as the business continues to evolve. Now I’m going to switch over to ByteDance versus Alibaba here in a minute, but to me, that’s the key distinction. Alibaba is an infrastructure plus products and services company. ByteDance is a products and services company without that infrastructure, commerce infrastructure. So how do those two compete and can ByteDance overcome that? Because if they can, they’re very, very strong on the product service side, but more in terms of attention than, you know, buying stuff. And I’ll give you one last quote. What is digital infrastructure? Here’s how they describe it. Quote, our digital infrastructure such as smart logistics and cloud computing, which enables and underpins our platforms to serve our major e-commerce. local services and entertainment businesses. So it’s kind of everything. But the three they point to are smart logistics, cloud computing, and I would argue new retail. Those are the three big components of the infrastructure. They’re commerce infrastructure for China. Now in my chart I will, if you look at my blue diamond chart you can basically see I’ve put the infrastructure at the bottom and I’ve cited those three and then I’ve put the products and services and the digital platforms at the top. Now a couple brief notes about their infrastructure because they did comment this on this in the earnings round. So Tainiao, their logistics and fulfillment infrastructure, that’s one of them. They’re basically doing that as infrastructure for Alibaba’s products and services as well as providing external services. So they’re externalizing this capability, they’re selling it to the market, this is the exact same thing JD Logistics is doing. And they’re kind of offering a similar integrated logistics business, which is not clear what that is. But they describe it a little differently. If you go back to my JD Logistics notes, you’ll see that JD Logistics is focused on certain furniture, cold chain, where they think an integrated service is a compelling solution that they can sell to the market. Well, tiny, I was kind of doing the same thing, but they have a little different strategy which is worth noting. They say they’re focused on first mile, not last mile, first mile, so that’s from the factory to the first warehouse, fulfillment from factory consumer, so that’s integrated all the way from the factory to the consumer, and then cross border. JD Logistics didn’t talk about cross-border, but they talked about the other two. And they pointed out that their external customers, which is i.e. not Alibaba, is now 70% of the Tsao Niao network revenue. So that’s higher than JD Logistics. They were about at 50%, but it’s increasing. So both of these businesses are becoming external service businesses, as well as supporting infrastructure for the e-commerce players. So that’s interesting. Cloud, that’s another part of their infrastructure. This is a big deal. I’ve written about this. Alibaba Cloud is absolutely huge, depending what numbers you think about. It’s number one in China for sure, and it’s arguably number three in the world after Microsoft and Amazon. So this is a big, big potential business going forward. Their cloud computing revenue grew 50% year over year. reached 60 billion rem and Bs, so that’s about nine billion US dollars. So it’s not as big as their core e-commerce business, but it’s getting pretty big. And here’s the quote, quote, I am, this is Daniel Jang, I am very excited about the massive potential of our cloud computing business as the post pandemic world is facing a massive opportunity for industrial digitization. Cloud infrastructure will eventually replace IT infrastructure, empowering enterprises to achieve digital operations. When a CEO describes their business as massive potential, you don’t see the word massive very often in annual reports. But they basically argue, one, it’s a big idea in its own right, no doubt. But China Asia has a couple sort of secular trends that… leads you to think that cloud is going to be bigger in Asia than a lot of parts of the world and the two things they have are they’re direct to consumer initiatives, that you have a massive consumer base here. So that’s going to be a big tailwind for cloud and then they also have smart manufacturing industrial because most of the world’s manufacturing is done in Asia. So they’ve got sort of two tailwinds here in cloud in Asia, particularly China that we don’t see in other parts of the world. So I think it’s going to be particularly big here. Anyways, they go into that. I’m not going to go into that. But of the three pieces of their smart, let’s say their commerce infrastructure, smart logistics, cloud, new retail, slash online merge offline. Those are the three. OK, with that, let’s go over to Alibaba and see if we can take apart this question. So there was a good Bloomberg article a couple days ago called, I’ll put the link in the show notes, but By Dance Eyes, a New 185 Billion Business of Head of Mega IPO. It’s written by Coco Leo and Je Ping Huang. Coco, if you’re listening, hi. How are you doing? That was a good article. It asks, I mean, this is maybe the most important question. going on in China e-commerce is can ByteDance break in to the e-commerce business that has long been dominated by Alibaba JD and now Pinduoduo broken. And Jiang Yimin, the founder of ByteDance, I mean this dude’s the real thing. He really is. He has built multiple impressive businesses. Obviously, Toe Tiao, which is the headlines business, and then they have the video business and there was a cartoon one, and then Douyin, which is the short video business, and then they took it global with TikTok, which is a huge success. Number one downloaded app in the world, and they didn’t just, I mean, they took on Facebook in their own backyard and they won. I mean, Facebook tried to copy them. They came up with Reels, which is a copy of TikTok, which sucked, and they beat them. I mean he has a history of identifying the biggest opportunities even if they have big entrenched competitors and breaking in. So they’ve done this and what’s his biggest target according to this article? Well the next big target in his sights is China’s 1.7 trillion US dollar e-commerce business with its entrenched incumbents Alibaba and JD and he’s going after it. And if anyone else says this you think eh. but he’s done it before. Now that said, Alibaba and JD are much more ferocious competitors than Facebook. They really are. I mean, Facebook uses its money and heft to beat you, but they can’t out-innovate anyone as far as I can tell. No offense to anyone. I know we have some listeners at Facebook. I don’t mean to bag on the company. Obviously it’s an awesome company. If I was working in Silicon Valley, I’d work there too because it’s a great career move. But, you know, they’re not rolling out new incredible mobile apps every 18 months that everyone’s like, oh my god, that’s great. That just doesn’t happen that much. ByteDance does that. Alibaba does that. They’re very fast on their feet for these massive companies. Okay, now in the article, I’m quoting the Bloomberg article, they refer to it as 38 year old AI coding genius. I’m not sure he’s a coding genius. I’m not sure how you assert that in an article. But he says he’s searching for ByteDance’s next big act and has set his sights on China’s 1.7 trillion USD e-commerce arena. Okay now in 2020, Douyin, TikTok, and this is mostly Douyin which is the domestic version that’s doing e-commerce at this point, they sold $26 billion worth of makeup, clothing and other merchandise in 2020, which was third of their first year jumping into e-commerce. They’re shooting for $185 billion in the next year or two. Per year, GMV, that would be big. Okay. Now, they’ve also sort of been doing a little bit of, looks like experimentation to me, internationally. TikTok has been working a bit with Shopify and has been working a bit with Walmart. So you can see they’ve kind of got a foot in that camp. And they’ve been hiring like crazy. They’ve been poaching people. They’re bringing in customer staff. You’ve got to bring in people to fight the counterfeits, which is actually kind of a big thing. If you’re going to get into the content business, like short video, you end up hiring a ton of people to do content moderation. If you’re going to be in the hotel reservation business, like Ctrip, you end up hiring a ton of people to do customer service. If you’re going to jump into e-commerce, you’re going to end up hiring a lot of people to do customer service support. fighting counterfeits because that’s a big deal, because that can sort of crater your platform. And then maybe you start to get into infrastructure. But you got it. All of these attractive businesses, they all have problems and you have to hire a lot of people to solve the problems. It’s like, you know, the people who built swimming pools, public pools for a long time did really well. And then eventually they realized they had to hire lifeguards. And it was just the cost of this business. Well, each of these. companies has that sort of cost of business. If you’re in financial services and payment you have to hire a ton of people to check for fraud. Hotels you have to hire people to handle calls when reservations get lost and if you’re going to do e-commerce you got to hire a lot of counterfeit goods people. Anyway so they’ve hired 1900 people according to this article. Another 900 people to support other types of the business so they’re you know they’re moving. Okay and the question is can they break in? And this is where I kind of look at the product side. Now, TikTok, ByteDance, they don’t have that infrastructure piece I just talked about. They have the product services side, they have the demand side. And they’re very, very good at getting this sort of attention. And the book I like is the Matthew Brennan book who called this the Attention Factory. That’s what ByteDance says. They create apps that are very good at getting attention. And you can almost put this into three buckets. Let’s say Alibaba’s traditional business, is they’re a consumption business. You go on to Taobao the same way you go to Walmart. It’s all about buying stuff. That’s the primary activity that goes there. And you don’t go there 20 times a day. You go there with your list of goods. That’s where they started. They were a traditional consumption business. Pinduoduo comes out of left field and they say, we’re not a consumption business. We’re an engagement business. Our goal is to get people… to come here and engage and spend their days and open the app nine times a day because there’s fun things to do and in the process of having fun and being engaged you will probably buy stuff along the way. So their primary metric is not GMV, their primary metric is DAU, daily activity. You notice how Alibaba talks about annual active consumers. Companies like Pinduoduo and ByteDance, they’re focused on daily active users. They want your daily engagement. and then you will, at least for Pinduoduo, you will buy stuff along the way. Now this was called social commerce. I don’t really think that was the right thing. People called Pinduoduo social commerce because they had a group buying model based on being partnered with WeChat. I think that was an artifact, I think it was a growth hack. I don’t think that’s their core business. I think Alibaba is consumption e-commerce, and Pinduoduo and probably ByteDance are attention e-commerce. They’re about getting, and that’s sort of two ends of the spectrum. And the consumption business like Alibaba is moving in their direction by doing things like live streaming and short video. And the attention e-commerce people are kind of moving the other direction, trying to get into more basic goods and purchasing. So they’re kind of starting at different extremes, but they seem to be moving towards the middle. But they have different strengths. And I have long argued that it’s easier to go from consumption e-commerce into the attention business than vice versa. because of the infrastructure piece. You can start launching live streaming and short videos and all those things, because that’s just coding. But to go the other direction, do you have to build all those warehouses? Do you have to build smart logistics? Do you have to build a cloud business? Do you have to replicate the 800 plus physical locations that Alibaba is building across China? Going from consumption to attention, it’s easier than going from attention to consumption because of infrastructure. Hence my question, can ByteDance break into that and break through Alibaba’s infrastructure mode. Now the second factor is, okay, if your primary strength is your demand side scale and your secondary strength is your infrastructure, not all demand side scale is equal. And as I’ve kind of said many times, I like the consumption business because it’s more stable and predictable. This is people buying detergent, socks, t-shirts, milk. Buying consumer goods staples, the necessary staples of life, that’s a very stable trend. And that’s where Alibaba and Taobao and Tmall live. Consumers don’t jump from company to company. They don’t jump from your Taobao app to another app so quickly. But that is what happens on the attention business. It’s much harder. Yes, short video is really hot right now. but it wasn’t hot three years ago and it probably won’t be hot three years from now. Something else will come up. People’s attention seems to jump from video to live streaming to blogging to tweeting to YouTube to Facebook to social to sharing to Instagram to Pinterest. It is very hard to keep people’s attention long term and most companies can’t do it. Most companies get lucky. They catch lightning in a bottle and they rock it up like Quaishow. They happen to be very close to live streaming and short video because they started out building a gift sharing business. They were in the right place at the right time. Short video and live streaming took off. They grabbed it. Lightning in a bottle. Huge numbers. Most businesses don’t replicate that and as attention moves from one sector to another, they don’t tend to capture that. ByteTance seems to be an exception. for continually and systematically testing attention and capturing it. This is why they don’t create one app a year. They create hundreds of mobile apps per year. And they test them. What is getting attention, what is not. And within each of those apps, it’s usually about sharing types of content. So within the apps, they are also testing what is the most popular every minute of the day. That’s what their algorithm’s all about. They are the world’s smartest company at… testing, measuring, and capturing user attention on a minute by minute basis. Actually 15 second by 15 second basis. So in that sense, I generally shy away from the attention business because I think it’s so difficult and I like the consumer business. Look, everyone needs milk, everyone needs underwear. Fine. Taobao’s got that. That’s not going to change five years from now. ByteDance seemed to be able to stay on the top of the wave. And as every wave passes by of new hot attention, they seem to catch that one. It’s very impressive. But think of what ByteDance versus Alibaba has to keep doing to win in the attention commerce business. Well, Alibaba has just said, our biggest opportunity strength is our infrastructure. Based on having the infrastructure, we can launch product and service after product and service. And when community group buying popped up a year ago and became the hot thing, they very quickly launched it and they stuck it on their infrastructure, which was their SunArts hypermarkets. They’re betting we have infrastructure, we have core consumer stable demand, which is basic e-commerce, and as various types of attention pop up, we can just keep throwing those on top of our infrastructure and do well as well, which is their live streaming business. That’s a pretty good argument. The counter argument from ByteDance is we are incredibly good at catching each new wave. We have got to monetize that in e-commerce and maybe we have to build out some degree of infrastructure and some degree of core Chinese consumption that’s more stable. So they’ve got to go the other direction. Or maybe they don’t go all the way. Maybe they just get very good at capturing every new wave and monetizing it with some e-commerce and that’s their play. That might well be the truth and that might be their strategy. And from what I can read about what they’re doing is they don’t look like they’re building infrastructure yet. They don’t look like they are selling merchandise yet. They look like they are monetizing their traffic. They are offering ads to merchants and brands. And if you want to come and put your ads on their site, you can do that. but what they are not doing is they are not allowing those merchants to link to Alibaba anymore. So if L’Oreal wants to put ads on Dowin, which they absolutely do because short video is amazing for makeup ads, they don’t let them put a link there. They say you can monetize, you can show your brand, and if you want to do e-commerce from that you have to link to your own store, not to the store within Alibaba. and then they will take a percentage of that business. And this gets me to sort of my final point. It may ultimately all be about mini programs. Because what is ByteDance doing? They’re doing the same thing WeChat is doing. They are building mini programs within their app where brands and merchants can set up their own little stores and they can do the transaction there. That looks like the play. It looks like, okay, we’ve got a lot of traffic, we’re incredibly good at getting and keeping user attention that is very rich. I mean, it’s very interesting to spend your time on these companies. The brands and merchants will spend advertising to get user attention, we will take that money. And then when they link to do a purchase, we will take a percentage of the purchase, but the purchase has to be done within the mini program, the store they have built within ByteDance. So that’s kind of the number I’m watching. So here I’ll give you my answer, my working answer to the question. Can ByteDance break in to the e-commerce business as a major e-commerce giant? I am watching for how many brands and merchants are setting up stores, mini programs, within ByteDance’s ecosystem. And those mini program stores will serve ToeTiao, they’ll serve TikTok, they’ll serve Doen, and all the new hot apps that they do. That’s what they’ll do I’m not sort of watching for how many warehouses they’re doing. I think they’re gonna contract all I’m gonna think all the Merchants and brands are gonna take care of that piece So the strategy question is okay Alibaba infrastructure plus all their products and services versus bite dances attention factory plus all These stores and many programs that brands have merchants have built within their ecosystem and how do those two systems compete against each other and who wins. And I think it’ll come down to sector by sector. In certain areas like makeup, I would think the bite dance model might be fairly powerful. When it turns out to do groceries, I think the Alibaba system will trump them. I mean, because it’s high frequency deliveries, I need it today. So you can kind of map it down e-commerce sector by sector and say we have a bite dance model and we have a… Alibaba model and one of those may be much stronger depending what segment we’re talking about. Fashion, makeup, I think ByteDance has a pretty powerful play. Groceries, delivery, things like that, no Alibaba. That’s kind of how I’m thinking about it right now. But I’m watching closely how many merchants and brands are setting up mini program stores within the ByteDance ecosystem and then I’m seeing sort of how the GMV numbers are going to move. Not overall, everyone talks about these $200 billion numbers, but sector by sector, within fashion, within makeup, within things like that. That’s kind of how I’m tracking it to see what’s gonna happen. And I think that is more than enough content for today. This was kind of a lot. I had an awesome time going through this. This is literally as happy as I get in life is going through all these statements by these companies. And this one’s right just sort of at ground zero of e-commerce competition in China. kind of my favorite thing but I think that’s more than enough for today. I’ll put all these quotes and other things in the show notes. The two concepts for today I started out with one I’ve just changed it. Just so you can sort of keep track about learning this stuff. Number one for today think about new retail and online merge offline. It’s big, we’re in the early days of it. Alibaba is definitely on the frontier. The other one I guess I should have mentioned was mini programs. Because that’s really what this competition looks like to me. Alibaba versus ByteDance to me looks like new retail versus mini programs. That’s the simplest way to look at any of this. And those are the two concepts for today. New retail and mini programs. As for me, I’m still in Northern California, East Bay, which is kind of where I grew up. It’s great here, hanging out with the family, seeing my brother, his family, all of that. It’s really pleasant here. And we went up to Napa. which is unbelievable. And Sonoma, if you’ve ever been to Sonoma, that’s just a beautiful town. As I’m just sort of going around, it’s like, man, there’s a lot of money here. Like, there is so much money coming out of Silicon Valley. And you see it when you go to the sort of nicer areas like Napa Valley up on the coast, and there is just, all the restaurants have become ridiculous. Like, you sit down at a restaurant and… It’s the most complicated advanced menu I’ve ever seen. It’s like, we got Wagyu, fusion, blah, blah, blah. It’s like, dude, I just wanted a salad. I didn’t want to study Asian cuisine and everything. The prices are crazy and the complexity. I’ve never seen so much money and wealth put to the task of living luxuriously. The cars, the streets, the… every type of little fashion store you can find, every type of restaurant, it’s crazy. It’s great, but at the end of the day, I honestly prefer hanging out in Bangkok and Shanghai and walking down to the local night market with someone sitting on their cart selling you mangoes. That’s kind of more my speed, but it is pretty impressive. Anyways, it’s great here. I’ll be here another day. I’m flying out to… I got to go back down to New Mexico to get my second COVID vaccine shot. But there’s a little trick with, if you’re sort of a global nomad, I’m kind of a nomad capitalist which is a good term for that. You always have to worry about tax implications of staying in any one geography beyond a certain point because then you trigger tax residency. So I can only stay in the US a certain number of days before I have issues. So I’ve got to cross over the border for a while. So I’m going to be in Juarez, which is… If you’ve ever watched Sicario, that’s Juarez. It’s not that bad. That’s just movie stuff, it’s fine. Well, certain parts of town are totally fine. Starbucks and all that stuff, but other parts of town, okay, yeah. I unfortunately mentioned that to my mom. And she was like, what, you’re going to Juarez? And she’s been worrying about that for days. It’s not that bad. I’ll take some photos from Juarez and then get the shot. Probably down to Mexico City and I’ve got to crank out these books So that’s my plan, but it’s been pretty awesome It was having fun. Anyways, I guess that’s it for me. I hope this was helpful A lot of thinking today. I mean this is kind of the culmination of like, you know I don’t know how many podcasts and articles I’ve written over the last year But it all kind of came together a lot of it came together So I hope that’s kind of exciting or interesting. Anyways, that’s it. I hope everyone is doing well Cheers from Northern California, and I will talk to you next week. Bye bye.



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