Kuaishou Technology went public in Hong Kong. From the IPO filing, the basic story is that Kuaishou does short videos and live streaming. It’s a video company. And these were the combined numbers reported at IPO:
- 305M average DAUs, in their apps and mini-programs in China.
- 769M average MAUs, in their apps and mini-programs in China.
- +86 minutes in average daily time spent per DAU.
- 204B RMB in ecommerce GMV (for 9 months in 2020).
The combined financials were:
- Revenue of 41B RMB in the first 9 months of 2020, up from 27B in 2019 (9 months). With rapid growth in revenue for +3
- Gross profit of 38%, which has been relatively stable.
- Operating profit of -8.9B in the first 9 months of 2020, down from +1.7B in 2019 (9 months).
- Note: This decline was mostly from a massive increase in Selling and Marketing Expenses in 2020. It increased from 20% to 49% of revenue year-over-year.
- In 2019, operating margin had recently turned positive and was at about 6%.
So the financials are relatively understandable. But the strategy discussion is confusing. I don’t think it makes much sense. So I’ll just jump to my take on what is going on strategically:
- This is a media / entertainment company competing in the rapidly changing and very difficult game of capturing and retaining the attention of Chinese consumers (on their smartphones).
- Their strategy is to be mostly a fast follower. This is a contrast to the mostly innovator strategy of ByteDance.
- This has been effective at capturing the hottest areas in video right now (live streaming, short video) but leaves them weak strategically.
- WeChat is the wild card.
My argument is below.
1) Ignore their Strategy Discussion. It’s Tech Woo Woo.
There is quite a bit of good operational detail in the filing but the strategy part is muddy. And good luck getting through the first couple of pages. Their Mission is:
“We aim to be the most customer-obsessed company in the world. Our mission is to help people discover their needs and use their talents in order to find their unique brand of happiness.”
“We seek to create a platform that is an authentic lens into the diverse and vibrant world we live in…We believe everyone is unique and want to empower them to express themselves, be appreciated and discover what makes them happy.”
And later on, we have this picture.
Some investment banker spent a lot of time on this graphic. But I don’t know what it means. Like what is that girl with the pompoms doing on the right?
Most of the first couple of pages are just tech woo woo. Lots of words about ecosystems, platforms, users, engagement, social networks and ecommerce. But they don’t make much sense to me.
2) Kuaishou is Doing a Fast Follower Strategy on the Attention Frontier of China. And 2 of their Products Are Lightning in a Bottle.
Kuaishou, like ByteDance and Tencent, is in the media, entertainment and attention business in China. They are all about getting eyeballs on the screens of mobile phones. This used to be called entertainment and media but it is a rapidly evolving into a mixture of entertainment, social media, utility and commerce. There are so many new types of media. So many types of new media technologies. New consumer behaviors. It is constantly changing. And attention is a zero sum game (only 24 hours in a day).
Within this rolling chaos, lighting has struck (at least) twice in the last couple of years. Once in the surging popularity of short video. And once in live streaming (mostly related to ecommerce). You really can’t predict when this will happen to this degree. You just have to be ready for it. You have to closely track the landscape and its players. And you have to move fast. I once heard B2C in digital (such as YouTube, TikTok, Facebook) described as capturing lighting in a bottle. It’s unpredictable. It happens very fast. In contrast, B2B in digital (such as Slack, AWS) is more like mining. It’s slower but more predictable in terms of success. That’s pretty accurate.
One part of the IPO filing that I like is the breakdown of how Chinese consumers spend their time online. And the biggest buckets are messaging, videos and gaming. Within videos, short video and livestreaming are the hottest spaces right now, with short video showing the best growth. In the fight for attention right now, that’s where you want to be.
Recall, the BCG matrix on four types of terrains.
Getting and keeping consumer attention with entertainment in digital China is the far upper right corner. It is an extreme version of Shaping. The terrain is unpredictable but also malleable. New technologies and companies are constantly changing entertainment and media. If you are more in the utilities (like WeChat), then you are closer to the center – but still in shaper terrain.
Kuaishou has caught lighting in a bottle twice. That is really impressive. And they did it more as a fast follower. By closely watching the terrain. When Cheng Yixiao founded Kuaishou in 2011, it was an app for creating and sharing animated pictures (i.e., GIFs). This evolved into UGC-based short video over time. Kuaishou today is a natural extension of their history.
ByteDance is different. They jump between news aggregator, short video, comics, long video and gaming like it is nothing. It wasn’t luck that TikTok ended up focusing on short videos, with dancing and music. They produce new apps every couple of weeks. They systematically test them and iterate to find out what people like most. They arrived at the hot space of short video by constant innovation and rapid experimentation. They saw the popularity of short videos early.
And even within the short videos of TikTok, ByteDance is still constantly testing what is the most popular. They are, as Matthew Brennan says, an “Attention Factory”. They are constantly studying what gets the most attention. At the app level. At the media level. At the individual video level. Even down to the individual viewer level. That is why TikTok is so addictive. They are showing you videos that you individually will want to see.
I think we are seeing two different approaches to this terrain. The innovator and fast follower strategies both have strengths and weaknesses.
3) Kuaishou is 3 Very Different Platform Businesses.
To play this game, you have to capture consumer attention. Without that you are dead in the water. So capturing short video and live streaming views was a great move by Kuaishou. But that is only half the game. You also have to build good business models that can compete and survive long-term. And short video and live streaming are very different businesses.
When I look at Kuaishou, I see three different platform business models being lumped together.
- Livestreaming based on virtual gifting. This is what generated +62% of their revenue (2020, first 9 months). This is a very specific business model. Think Huya and YY.
- Short videos, monetized by advertising. This is the Douyin / TikTok. This is what I think generates most of their traffic and DAU. It is growing in revenue. In 2020, it was up to 32% of revenue from 8% in 2018. But #1 is still the dominant revenue source.
- Livestreaming and other links to ecommerce. This is their newest project, which is somewhere between a business and a feature. Think Taobao Live.
And you can see all three lumped together in their mini-app.
Here is the main page, which is a TikTok / Douyin copy where you flip through short videos:
Here is the second tab, which is a short video where you choose by thumbnail:
Here is the third tab, which is livestreaming. Note: the first time you log in, they basically show you pretty girls.
So this is within one app. But I think short video, livestreaming and ecommerce have different platform business models.
- They have different dynamics on the consumer side. There are very different customer preferences and needs.
- There have different user groups on the content creator side.
- They have different monetization methods.
- They have different competitors, now and long-term.
- Each business is in a different stage of its growth cycle.
- Each business has different economics and attractiveness (now versus long term).
These are the kind of differences that don’t matter as much when a new market is growing fast. But they matter when it matures and the competition intensifies. Kuaishou has been effective at playing fast follower in the best areas of consumer attention. But longer-term, they need to strengthen their strategic position in these businesses against serious competitors.
4) Short Video and Content Matching Is their Best Business. They Need to Move Much Faster.
TikTok / Douyin is the global champion of short video. By attention. By creators. And by cash flow. Nobody else is even close.
And an AI-driven audience-builder platform for short videos is just a really good business. I’ve covered TikTok / Douyin elsewhere so I’m not going to repeat that much here. But what I like about this business is:
- Short videos based on long-tail user generated content (especially with music) is a really powerful consumer product. It just is. Like Coca-Cola. Like Facebook. And cigarettes. It is very addictive and people really, really like it. In every country. It’s lightning in a bottle on the consumer side. Sometimes this happens.
- It is also a great advertising platform. Unlike early Facebook and Google, the business model for TikTok has always been clear. Short videos on smartphone screens are natural advertisements. Douyin, like Instagram, launched with a nice business model that served both consumers and advertisers well immediately.
- It has linear network effects that grow. Based on an audience-builder platform with a long-tail of UGC.
- Other stuff:
- Viewers rapidly convert to content creators (which makes adoption easier but also multihoming).
- It has social and status aspects so people engage and share their videos.
- It’s free. Always important.
Well, Kuaishou is copying this. Being a fast follower makes life a lot easier. Their newest app (one of three) looks just like Douyin. But ByteDance had $+35B in sales in 2020. Which was double 2019. It’s a massive cash machine that dwarfs the $2-3B in advertising revenue for Kuaishou. And when TikTok starts monetizing outside of China, this is going to be even larger.
- Note: From the IPO filing, the online advertising market of China is projected to grow from 545B RMB in 2020 to 1.7T in 2025. And this is up from 99B in 2015. Online advertising is a massive and fast growing market.
Here’s my question: Can Kuaishou compete with ByteDance long-term in short videos?
Plus, ByteDance is not even a short video company. That is just one product. They are an AI-driven matching company. Their matching algorithms are able to personalize and match short videos, news articles, long videos, cartoons and lots of other content types. And they are expanding to casual games, education and other areas.
ByteDance is an AI learning platform across a rapidly increasing spectrum of product and media types. This is what makes it so addictive and difficult to replicate. That’s also why ByteDance is able to catch the next hot sector for consumer attention so quickly. Regardless of where it is. Their AI system enables their innovation (not fast follower) strategy.
5) Gifting-Based Live Streaming is a Profitable But Questionable Business
According to the filing, livestreaming has grown from 7B RMB in China 2015 to 140B in 2020. So it’s big. But a lot smaller than online advertising. The big money in livestreaming is tied to ecommerce. So Taobao Live is huge. As is JD Live. As ecommerce continues to eat into traditional retail, more and more money will flow into this type of livestreaming. And they monetize by a percentage of sales and/or a merchant fee.
Livestreaming based on gifting (not ecommerce) is a smaller and stranger market. YY and Huya do this in gaming. It’s a strange type of video that came out of anime, singing, acting and (to be honest) a lot of pretty girls being entertaining and getting donations (mostly from men). The business model for livestreaming is very different than for short videos. The platform business models have different dynamics.
- Viewers really like the interactive nature of livestreaming. You can chat in real-time with other viewers and with the person you follow. It is more social.
- It is live. It is more immersive and engaging than just flipping through videos.
- It is “either or” live shows. If I’m watching one person live, I cannot watch another person. That is limiting.
- There are fewer content creators (thus far).
- Monetization by gifting means you don’t need a massive viewership to get advertising money. It is monetizable with a small audience. However, the money and attention is prone to focus on a few popular livestreamers. Following tends to follow a power law. Douyin has been very effective at using AI to more evenly distribute attention.
- Short video has a much bigger long-tail of content.
- Short video is better for small increments of time. You watch a few videos here and there, on the subway or at work.
- Short videos are high frequency and that gets you a lot of data to improve matching. Live-streaming is not about better and better matching over time. It is more about following certain people.
Live streaming gets a lot of attention. But it is just an entirely different business. I see no reason why one app should have both. The business models, strategies and competitors are different.
Also, long-term, it is unclear to me whether gifting-based livestreaming will be a viable standalone business. Or whether it will have to be a full suite of live-streaming genres (gaming, anime, crafts, performance, live events, etc.). Or whether this will just be a standard feature on all platforms (ecommerce, entertainment, etc.).
6) Livestreaming and Other Links to Ecommerce Are Really Attractive. But Difficult.
Which brings us to Kuaishou’s newest business (at 6% of revenue), which is connecting their traffic to the major ecommerce platforms and doing transactions. Product links in the livestreams and short videos(?) mean viewers can click and buy goods. Then Kuaishou takes a cut.
Yes, content and ecommerce are merging. Consumers and merchants both love this. It gets better and more authentic engagement from consumers. And merchants have an opportunity to better tell their story.
But this merger is happening in one direction. Commerce is moving into content. Not the other way. It is very difficult to go from an audience-builder platform to a major marketplace. And to do all the logistics and such. This is why JD Live and Taobao Live dominate this space.
So this is some nice extra cash for Kuaishou. But beyond that? I’m not sure. Unless we talk about my last point.
Last Point: Kuaishou’s Future Is a Lot About WeChat. Think SoGou.
Yes, short videos are awesome. And Kuaishou is #2. That’s amazing.
But how will they compete with ByteDance long-term? Is this a winner take all or winner take most market? Can they just be a fast follower to Douyin?
Livestreaming is also great for attention. But if they monetize by ecommerce, how can they compete with Alibaba?
My last point is that the answers to these questions changes depending on what WeChat does.
Tencent owns 21% of Kuaishou. And they have agreements for marketing and technology. Kuaishou’s connected companies include Tencent, Tencent Music, Sogou and Huya. They have done deals with JD (a partner of Tencent). And, most importantly, Kuaishou is nicely embedded within WeChat.
In Podcast 42, I spoke about how Sogou, the #2 search engine in China nobody talks about, is being taken private by Tencent. Sogou has long been a company that can search within the walled garden of WeChat. Today, that is mostly public accounts but increasingly it will be about growing Mini Programs. That is a fantastic place to be. And it positions Sogou to be the search engine both inside and outside of WeChat. Note: Sogou is doing search but so is / was WeChat Search.
Kuaishou looks to be in a similar situation to Sogou. WeChat head Allen Zhang has spoken openly about live streaming and short video being the future of WeChat. He thinks text is not how we are going to communicate. And like with Sogou and search, WeChat has an internal and external approach to both short video and live streaming. Tencent invested in Kuaishou and are letting them into WeChat. But they are also developing their own short video and live streaming functions in WeChat (launched in beta in 2020).
What does the competition for short video look like when it is ByteDance vs. Kuaishou + WeChat?
That’s a really interesting question.
Note: Tencent is in the attention business and they are the ultimate fast follower. By virtue of their ecosystem, they can see which apps are getting traction with consumers. Then they invest in them and help them.
One last idea.
For competing against Taobao Live, does that change if Kuaishou is integrated into WeChat Mini Programs? Mini programs recently announced they had +240B in GMV in 2020. That makes them a large and rising ecommerce player in China.
Just a thought.
Anyways, that is my thinking thus far. I hope that is helpful.
I write, speak and consult about digital strategy and transformation.
My book Moats and Marathons details how to measure competitive advantage in digital businesses.
I also host Tech Strategy, a podcast and subscription newsletter on the strategies of the best digital companies in the US, China and Asia.
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.