Ep. 28: The World’s Most Valuable Startup: Bytedance, Maker of Tik Tok & Toutiao

Transcript

We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network.
We are a new weekly podcast focused on giving you a peek into what’s buzzing within the tech community in China. We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. TechBuzz China is a part of Pandaily.com, a new English language site that tells you “everything about China’s innovation.”

(Y: Ying-Ying Lu; R: Rui Ma;

[00:00] Y: How do you know we are at the top of the AI hype? When China’s Bytedance, the top-funded and top-valued AI company in the world, according to Crunchbase at least, also becomes the highest-valued startup in the world.

R: Well, Yingying, that doesn’t actually mean we are at the top of the AI hype, but it does say something about how trends have shifted from a few years ago when on-demand and the sharing economy was all the rage. Remember that? I mean, Uber has occupied the top perch for most valuable privately-held startup for quite a few years now. But it’s been finally dethroned by none other than a Chinese AI startup.

[00:44] Y: Bytedance, sometimes referred to as Toutiao for its first flagship news app, has just closed on $3Bn of funding led by Softbank, giving it a valuation of $75Bn. That’s just a bit more than Uber’s last announced round of $72Bn or so, which was also enabled by Softbank.
R: SoftBank, so kind to startups everywhere. But are they maybe overly generous? Is Bytedance really more uber than Uber? $75Bn is a lot of money, especially when you consider that only about a year ago Bytedance was only valued at a little over $20Bn.

[01:27] Y: By the way, we do know that some Chinese media refer to Ant Financial as the most valuable privately held startup in the world, but because that was really spun out of Alibaba, we’ll go with the Western ranking, where Bytedance is #1. I mean, either way, China occupies the top spot.
R: But even in China, where tech valuations have been soaring to dizzying heights, there are a lot of people who are uncomfortable with this $75B number, including ourselves. Especially in the context of today’s wonky stock market and global macro uncertainty, how is this six-year-old startup worth more than Baidu and five times as much as Weibo?

[02:10]Y: As per usual, we’re going to tell you a bit about Bytedance’s founding story, then give you a solid snapshot of its key strengths and weaknesses, and let you decide for yourself — is Bytedance poised to be the next internet giant in China, or is its lofty valuation unsustainable and built on FOMO?

[04:40] Y: I’m guessing most of you, especially our old-time Techbuzzers, have heard of Bytedance, because it’s come up in quite a few of our earlier episodes, and it was the focus of our Episode 9, which was on its war with Tencent. In Chinese, Bytedance is often referred to simply as Toutiao, because that’s the name of its first flagship app, 今日头条, or Chinese for “Today’s Headlines.”
R: The parent company though, is known as 字节跳动, literally, the words Byte and dance, and was founded in 2012 “to combine the power of artificial intelligence with the growth of mobile internet to revolutionize the way people consume and receive information.” Nicely played buzzword soup there, whoever came up with that.

[05:32] Y:So as we have emphasized before, Bytedance is just barely six years old. To give you some perspective, that’s one year after Wechat was founded. Since then, it has grown explosively. It might not have a billion users like Wechat does, but its two main apps, news-oriented Toutiao and video-based Tik Tok, have over 260mm and over half a billion monthly active users respectively.
R: Lest you think that Tik Tok is a lot bigger than Toutiao, they are actually fairly comparable in size. Tik Tok’s numbers are a lot larger because Bytedance acquired and officially rebranded the app musical.ly. Musical.ly, if you all remember, is the 15-second lip-syncing short video app, whose 100mm plus users were mostly outside of China. Tik Tok is known as Douyin inside of China, and in China it has about 300mm MAU and half of those are active daily. So 300mm vs 260mm for Toutiao, they’re about the same.

[06:41] Y:However, what is impressive is that Douyin, or Tik Tok, is just a bit over two years old. And at least for the first quarter of this year, it was the most downloaded app in the world. Of course, it had the help of Toutiao to help it grow. Still, it went from 40mm to 100mm MAU (monthly active users) in a record two months. And while it used to be that 85% of its users were under the age of 24, that seems to have gone up a bit, it was reported recently that 40% of its users are now between the ages of 24 and 30. That’s still super young, but maybe more appealing to a wider range of advertisers.
R: And advertising is how it makes money of course. On Toutiao you have the typical digital media advertising, but on Tik Tok it can be a lot more varied. So for example one method is through cooperating with the platform to launch a contest in the form of a hashtag challenge. For instance, today my Tik Tok shows #DisneysNutcracker, as a trending hashtag, it’s about the new movie that’s come out, and I can either view videos about it or possibly contribute my own content towards that hashtag. Another way of monetizing is through livestreaming, where the method of monetization is similar to the other livestreaming apps we have covered before. You can buy virtual gifts basically, to throw at your favorite livestreamer. Literally throw them. I see some “rainbow puke” I can buy for $1, for example.

[08:16] Y: I know that some enterprising Tik Tok celebrities have also turned their accounts into mini stores, because you can buy merchandise directly within the app. So maybe that will be a big thing too, and who knows, maybe that’s why Alibaba unsuccessfully tried to buy Bytedance earlier this year.
R: Well, as we said before, it’s Tencent, not Alibaba who is the one who feels more threatened, since its percentage of total internet usage time went down from June 2017 to June 2018. Almost all of that near 7% decline seems to have gone to Bytedance’s family of apps. And that’s where Bytedance, alone out of all the still private unicorns in China, really stands out. Bytedance has no affiliation with either Tencent or Alibaba, and despite Tencent’s many attempts to destroy it — for example, today you still can’t share Tik Tok videos directly to Wechat — Bytedance seems to have survived, and thrived.

[09:16] Y: Before it raised the latest $3Bn, it had already raised at least $2Bn from the likes of Sequoia, Hillhouse, KKR and General Atlantic and had been rumored to be targeting a 2019 IPO in Hong Kong.
R: It had also publicly announced $4 to $7Bn USD as its revenue target for this year. Not bad, but even if it hits the high end of that range… that’s still more than 10 times current calendar year revenues. But who knows, maybe that’s fine when you are basically tripling from the $2bn or so in revenues from 2017.

Y: Is it fine though? That is a pretty steep growth curve, but does a 3x increase in revenues necessitate a 3x increase in valuation? And who is the guy behind all this? Is he a Jack or Pony Ma level legend?
R: Boy am I so glad you asked that question Yingying, because this is where we get to talk about Zhang Yiming, who is way more of a tour de force than Western media generally gives him credit for. For one, he is only 35 years old.

[10:27] Y:Zhang Yiming is from the southern province of Fujian. Fujian, by the way, is a coastal province long known for its adventurous, seafaring merchants. The stereotype of the Fujian merchant is that he or she is incredibly clever, flexible, and outward-facing, unlike the ethnocentric northerner.
R: Yes, yes we know, these are stereotypes. But they are deeply entrenched ones. And maybe there is some basis for the Fujian openness for adventure. Because People from Fujian are the largest group of Chinese immigrants in the US, despite being actually a pretty small place. You’ll find that there are actually lots of Fujian related groups all over the globe, because to many Chinese people, provincial affiliations count for a lot.

Y: You know what counts even more though? Hometown affiliations. I’m talking about growing up in the same city. Zhang Yiming was born in the city of Longyan 龙岩. You know who else was born in Longyan? Wang Xing of Meituan-Dianping fame. It is actually well known that they are BFFs. I’m sure the hometown affiliation has something to do with it, but they also seem to have genuine mutual admiration for each other. In fact, Wang Xing is rumored to have invested in Bytedance.
R: Some people have all the luck! Anyway, Zhang Yiming went to Nankai University, a top 10 institution in China, and worked as a programmer after college. He worked briefly for Microsoft, decided he hated it, and then went on to work at an internet travel company and a few other young startups, including two he actually co-founded, before starting Bytedance. Zhang Yiming is a geek through and through, and has always focused on the technical side of things.

[12:18] Y: He’s known for being extremely rational, performing experiments on himself, with the goal of finding his most productive state. For him, in case you’re curious, he is at his best when he is in a neutral mood, between “just a little sad” and “just a little excited,” and oh, with plenty of sleep. I assume that’s what keeps him able to practice his favorite skill, which is “delayed gratification.” It’s probably also why, in his talks, you’ll notice that he comes across as fairly even-keeled, with none of the dramatic storytelling flair of say a Jack Ma.
R: But even-keeled Zhang Yiming is also fiercely independent and incredibly ambitious. From very early on, he decided that he didn’t want to work for Jack or Pony, he wanted to be their peer. So one story that’s often told in media is that back in 2016, there were rumors that Tencent was going to acquire Bytedance. Whether or not that’s actually true we don’t know, but what we do know is that Zhang Yiming has said that when the rumor came out, one of his executives came to him and said that, “Hey, I didn’t join Bytedance to become a Tencent employee.” Zhang Yiming then coolly replied, “I didn’t found Bytedance to become a Tencent executive.” That’s something he proudly repeats to this day. So I think that’s a hint to you, Pony Ma, probably not going to be joining the Tencent family any time soon.

[13:50] Y: He is also said, that less than a year after founding Toutiao, he received a lucrative investment offer from one of the internet giants. After struggling with this offer for a week, he ultimately decided to forego the opportunity. While it certainly would have brought many benefits, he understood that it would also have meant he’d have to cede control, and that’s something he didn’t want to do. You know what kept him going right? That’s right, he credits it all to his practice of delayed gratification.
R: All good stories, but obviously just strong self-discipline doesn’t get you to multi-billionaire status. Besides having great luck and having stumbled upon a great product, one thing that Bytedance also has going for it is that it’s been really smart about hiring and managing. So far, anyway, at least relative to many of its Chinese peers.

[14:45] Y: Right, at Bytedance, similarly as at Alibaba, HR has a pronounced role and is very much a key area of focus. However, on many things Bytedance differs radically from other Chinese companies. For one, they disregard your prior salary history and give you a package based on current market conditions, whereas most companies are lazy and just give you a bump up from your last position. That’s probably what’s behind the headlines that have said that top performers at Bytedance can get up to $3MM, which is basically unheard of in China, everyone is all about cheaper salaries and throwing people at the problem.
R: The story goes that, at Bytedance, Zhang Yiming is not trying to get a bargain out of you by giving you the lowest salary. He’s trying to figure out what is the best way to incentivize you so that you can give him the best ROI or return on investment. That, by the way, can include an annual cash bonus up to more than 8 times your base salary. That’s right, Zhang Yiming has said in public that at Bytedance, there is a chance, a small chance, but none the less a chance, for you to get a bonus of 100 months of your salary! That’s so crazy I thought it was a typo .

[16:06] Y: I don’t know anyone who’s received that kind of bonus yet, but on Glassdoor, where Chinese companies have notoriously awful scores, Bytedance has a 4.4 out of 5, with 90% of reviewers expressing approval of Zhang Yiming and 91% saying that they’d recommend working there to a friend.
R: That’s honestly really good. And there is another aspect of Bytedance that is quite different from other Chinese companies. The company is notoriously flat. I say notoriously, because that hasn’t always been covered with positivity in China. State-owned media Xinhua, for example, criticized the fact that there are only “3 or 4 layers” between the lowest level employee and CEO Zhang Yiming. Contrast this, by the way, with Alibaba which has no less than 14 levels for individual contributors and 10 levels for management.

[17:05] Y:The fact that Bytedance employees weren’t well-versed on company hierarchy and couldn’t rattle off the names of senior management was considered a strike against the company. I mean, who doesn’t know the full executive ranks of their place of employment? By the way, if it’s not obvious, we are being sarcastic. But it is true that being flat is uncommon in China.
R: Another way that this flat corporate culture manifests itself is in the way employees address each other. In China, it’s rare to address someone directly without including their title in their name somehow. Not the full title, but usually a “zong” 总 for executive, so if they are a manager of some sort. Or maybe a “laoshi” 老师 for teacher, which some people by the way use on people who have ever taught them anything, even if it’s a one hour-long workshop. So yeah, in China, teachers are respected, which is why Jack Ma insists on being called Ma Laoshi.

[18:07] Y: In Bytedance, however, titles are forbidden. Everyone is to address each other by their full name. This just goes against the grain of good social graces in China, and it makes some people very uncomfortable, because it kind of feels rude, like in the US if you started addressing everyone with “hey you!” And so Zhang Yiming has been questioned on this rule a lot. However, anecdotally what I’ve heard from friends who work at Bytedance is that it makes internal, in particularly cross-team collaboration go a lot smoother.
R: This is in contrast with other Chinese internet giants where it is usually extremely difficult to get information from another team, and in fact many teams might be in competition with each other to create the same product, that doesn’t happen at Bytedance. Bytedance employees tell us that no matter their level, they feel empowered to reach out and ask for help from anyone else in the organization. I know some Chinese media seem to think this is problematic, but I think this is one of Zhang Yiming’s secret weapons.

[19:16] Y: Especially with the younger generation, they don’t like all these formalities — it creates friction and distance. I mean, I don’t believe any company failed because it wasn’t hierarchical enough. And with Bytedance continuing to launch new products that build upon the successes of prior ones, this kind of collaborative mentality is key.
R: OK, so those are Bytedance’s organizational strengths. And we already know from some of its public KPIs that its products are incredibly popular and — you’ll just have to take our word for it since we can’t actually show you — that they are actually well designed. But what are some of Bytedance’s weaknesses?
Y: Well, the elephant in the room is, of course, that it’s at least partly a content business. And especially in China, that’s risky.
R: Is it a content business though? Isn’t it just a distribution channel? Bytedance doesn’t make the content, it just provides the platform, right?

[20:25] Y: I know you’re just playing Devil’s advocate, Rui, because in the case of Bytedance in China, the question has been settled, pretty clearly. It doesn’t matter what Zhang Yiming calls Bytedance — media or publisher — the Chinese government doesn’t care. Either way, he’s going to have to take responsibility for what goes on his platform, or suffer the consequences.
R: Yup, I am just trying to hit the point home here. President Xi Jinping said in April 2016 very explicitly that “those in ecommerce have to be vigilant of fakes, those who operate social media platforms cannot engage in spreading rumors, and those who make search engines cannot just give away clicks to the highest bidder.” Notice guys that he had something to say for the key business models for all 3 of the BAT. Baidu’s search, Tencent’s social, and Alibaba’s ecommerce. So in China you are responsible for what goes on your platform, you are not protected from the government’s wrath just because you are not the actual seller, advertiser, or rumor-maker. If you touch it, you’re gonna have to take responsibility.

[21:42] Y: Zhang Yiming didn’t take the President’s words as seriously as he should have though, because he still made the assertion that Toutiao is not a media, but a technology platform for media. Doesn’t that sound familiar? It’s not unlike what Zuckerbergs’ stance has been about Facebook, right? But while maybe it took election and national security scandals to get Facebook to get serious about moderating its content more carefully, far less was needed for Zhang Yiming to pay attention.
R: Yeah, as we all know, he changed his tune pretty quickly when the government shut down one of Bytedance’s most popular apps, Neihanduanzi, for vulgar content, that action has a special significance for us, because that was the very first story we ever featured on Techbuzz when we started earlier this year.

[22:35] Y: And Toutiao itself has been taken down from appstores at the request of the government for a few weeks at a time. The chief complaint? Vulgar content. 低俗内容. And by the way, its video apps are not immune either, with one of its apps, Huoshan 火山, having to suspend video updates, again due to questionable content choices.
R: But, you guys might be wondering, what does vulgar mean? Well, let me show you! For example, you might open up Toutiao expecting to see important headlines of the day, right? I mean since that’s what the words 今日头条 literally means. Instead you see an article pushed to you that says “Is it true that girls pee standing up in the shower?” I’m not joking here, this is an actual example a well-known blogger gave of what he sees in his daily Toutiao feed. And I have been a user of Toutiao, I would agree that’s true. So guys, do you think this qualifies as headline news? The Chinese government certainly didn’t think so. Even for clickbait I think it’s pretty lowbrow.

[23:47] Y: But Bytedance hasn’t just gotten in trouble with the government for bad content. Another major sin has been scammy advertising, particularly in medicine. If you listened to our Episode 18 on Baidu’s problematic medical treatment advertising, you will understand that Chinese netizens have been battling scammers and spammers in this area for a long time. In fact, the sector is so abusive that Zhang Yiming publicly swore off all ads for medical treatments.
R: However, as they say in China, when there is a will, there is a way. Such advertisers found a workaround by using what’s called a “two-jump” or 二跳 scheme.

Y: Instead of advertising for the medical treatment directly, an ad is instead purchased for a legitimate over-the-counter drug, like maybe a well-known supplement for better cognitive function. The ad itself looks harmless enough, with some marketing copy on its benefits and maybe a list of detailed ingredients, but there is no link to purchase. Instead, the only available link is one that says “get more details,” which, after you click on it, directs you to … a page offering shady medical treatments.
R: Exactly, the scammers are two jumps or two clicks away, which means that at first glance, it seems that Toutiao doesn’t have any such advertisers on its platform, but actually, it was exposed that Toutiao employees, in a hurry to reach the company’s aggressive sales targets, were in fact colluding with these scammy advertisers to bypass the rules.

[25:30] Y: Depending on whether or not you believe Zhang Yiming was aware of this practice, you may fault him a little or a lot for this oversight. But still, given the big promises he made of *never* accepting medical treatment ads, I do think that they should have done more to ensure it wasn’t happening, even at “two clicks” away. I mean, it was super embarrassing to be called out on CCTV’s economics channel for failing to protect consumer interests.
R: Not just embarrassing! They incurred the wrath of the Party. People’s Daily published a scathing opinion piece on this exact topic. They claimed that for Toutiao ad salespeople, if you’re willing to spend a certain amount, they will proactively help you fake the necessary credentials to get past whatever systems were in place to check. Given the sensitive nature of these scams — these are medical treatments after all — where actual patients lives were at stake — and if you guys remember the ferocious backlash against Baidu, when they did this. The public in China really turned on Bytedance, and began calling it yet another company without a conscience.

[26:44] Y: Which explains why the recent wave of PR is all about Zhang Yiming and Bytedance’s newfound conscience. That is, “responsibility to society” has become a huge area of focus for them. Being “good,” not just “don’t be evil” like Google’s old motto, but overtly good, is something Zhang Yiming has been highlighting as of late.
R: What about when the law is unclear or incomplete? Well, Zhang Yiming’s outward stance, at least right now, is that Bytedance’s own standards will be even more stringent than what the Chinese law says. So he’s said, “Sometimes even what the law says is OK, or where there are no regulations, we at Bytedance will determine our own regulations.” I think that’s him trying to signal to the Chinese government that he’s learned his lesson and that Bytedance will be much more proactive about making sure that they are fully aligned with the government and the people’s interests, AKA responsibility to society.

[27:52] Y: Do I believe that Zhang Yiming suddenly grew a conscience? Not at all. Not after so many years of him saying that Toutiao is just a product, and that what’s on there is not a reflection of his own or Bytedance’s corporate values. He’s also on the record multiple times for explaining that he doesn’t make decisions out of a sense of moral obligation. To him, everything is a simple business decision. He doesn’t care about consumer interests because he believes it’s not his responsibility to protect them — he cares because doing so increases the trustworthiness of his products, which in turn increases traffic and revenues.
R: Bytedance has been called China’s Buzzfeed with Brains, which I think is inaccurate on two levels. It’s not particularly brainy, which we have already explained, and while it might have been somewhat comparable to Buzzfeed before, when it was just the Toutiao headline news app, now with video app Tik Tok being such a huge part of its business, it’s much more than a Buzzfeed. I think it’s more like Facebook, without the social network. Well, Facebook and Instagram together. Let me explain. Once you remove the social connections, all of these products, what they have in common are user-generated content publishing platform that thrives on sharing and algorithmic recommendations at scale.

[29:23] Y: For all of these businesses — their model is knowing as much about you as possible, and showing you the most relevant advertising possible. And as we explained above, at least in China, Bytedance’s products will be hampered by the government’s close oversight of its content, and unlike in the US, it can be shut down unilaterally and suddenly. So that’s a real existential risk. Although we do have to mention here that for some investors, this also presents a high barrier to entry. Bytedance is supposed to have 10,000 staff working on monitoring content by the end of this year. That amount of investment and infrastructure is not going to be easy to leapfrog, definitely not for a startup starting from scratch.
R: But before we throw up our hands and say the valuation of Bytedance is impossible to answer because there are so many unknowns, there is actually some simple math we can do. Because, you see, we’re lucky, we have a sort of market price for the standalone Tik Tok China business. If you remember from our earlier episode, there is a competing app called Kuaishou that by most measures, is either a little behind or about the same as Tik Tok China. And guess what? Kuaishou doesn’t want to be shut out of this fundraising party so it’s currently raising at a $25Bn valuation. So what do you think, I think it’s pretty reasonable to estimate that Tik Tok China, by itself, would also be worth about $25Bn.

[31:02] Y: Which is honestly crazy, if you ask me, for a market that iResearch thinks is only going to be worth $4.5Bn in total domestically in 2020. But let’s do some quick math here. That means Toutiao, plus Tik Tok’s overseas business, as well as an assortment of other apps which we didn’t talk about today because well, they aren’t very big, will have to be able to pick up the slack. $75Bn minus $25Bn … that’s $50Bn worth of slack.
R: OK, $50Bn. Let’s see, even if we give Toutiao a $25Bn valuation, which would be sooo generous, in my opinion, that means the overseas business of the rest of Bytedance, will have to fill up the remaining $25Bn! Now Bytedance has repeatedly stressed its strengths overseas — but has it really been all that successful?

Y: Sure, so Tik Tok continues to do well, but what about Zhang Yiming’s effort to “internationalize” Toutiao? That app, called TopBuzz, by the way, nooo relation to Techbuzz, has not been performing too well. The latest App Annie report shows them as barely cracking the top 10 in News apps on Google Play, and top 15 on iOS. There are also numerous complaints of poor IP protection and monetization by folks who have agreed to distribute on the platform.
R: The number one complaint about Topbuzz is spam or clickbait. But at least TopBuzz is honest about its mission — its description clearly says that it’s a Breaking News, Videos & Funny GIFs app — which of course discourages serious content creators from signing up on the platform. How long will this current cycle of clickbait and so-called viral content last? I don’t know, but I’m certainly not a fan, and it doesn’t look like enough non-Chinese are fans either. By the way, these exact same complaints plague Tik Tok, with lots of headlines proclaiming to be just uncool spam and clickbait.

[33:20] Y: But maybe their India investment Dailyhunt, or Indonesian app BABE can save them? They’ve also made two other major acquisitions besides musical.ly, Flipagram for one, and News Republic from Cheetah Mobile, although neither of these are very sizeable in terms of traffic.
R: So yes, it is true that Bytedance has already made plays for markets in Japan, India, Brazil, North America and Southeast Asia. But are they any good? I think it’s too early to tell. Too early, certainly, to warrant one third of the $75Bn valuation. But hey, what do I know? Maybe all the data flowing through Bytedance is making its AI so good that soon, the company will know us so well, it’s going to be able to recommend us anything and everything at all — not just articles to read but music to listen to, food to eat, places to go, and people to date!

[34:21] Y: Rui, you clearly haven’t heard of that joke where Toutiao’s algorithm was so precise that if you were on a date, all you had to do was look at what kind of headlines your date’s Toutiao app was pushing to them to understand what kind of partner they were likely to be.
R: Wow, we are getting into Black Mirror territory here. But OK, even if that’s the end goal, Bytedance is going to have plenty of competition getting there. Whatever happens next though, Zhang Yiming is already the closest to toppling the two Mas of Chinese internet as anyone’s gotten in the last five or maybe even ten years.
Y: Who knows! Maybe the BAT acronym is here to stay, but this time, the B won’t be Baidu, but Bytedance.

TechBuzz China by Pandaily is powered by the Sinica Podcast Network. Pandaily.com is a new English language site that tells you “everything about China’s innovation.” You can find us on twitter at @techbuzzchina and @thepandaily, or reach out to Rui and Ying-Ying at @ruima and @ginyginy. Our producers are Bonnie Zhang, Shaw Wan and Kaiser Kuo. Our intern is Wang Menglu.