Chinese social networks adapted strategies to survive the regulatory pressures and the competition

(Views are my own)

This is a continuation in the series of blogs exploring operational and financial aspects of Chinese social networking industry.

As noted in the previous articles that the social networking revenue of the companies in China, grew at 40-60% per year until 2019. This included established companies like Tencent, Weibo and JOYY. Smaller companies like Momo, TanTan, Douyu and Kuaishou were growing even at 1.5-2x each year. Some of the companies in the nascent stage were able to achieve these growth rates as their foothold grew while the other players relied on the M&A. But this incredible growth at the topline slowed down significantly to sub-20% till 2021, negative in 2022 and modest 5% in 2023.

The above change of pace in the growth of the companies was due to increasing competition and tightening regulations. In the last decade, Operating margins of the companies grew between 2013 to 2017, but started declining as the competition got fierce with the entry and/or growing popularity of products like Douyin, Zhihu and Douyu.

During this period, a lot of companies have closed or winded down due to financial unviability. Revenue declined for most of the companies in the examined set. However, there are other players which have adapted their strategies to weather this rough patch, focus on core strengths, align to sustainable growth, and even turn profitable in some cases. Following are the few examples of each measure:

• Focusing on core strengths: Tencent has sold non-core businesses like Comic and Animation business to bring the focus back to Fintech and Games, which contributed towards the revenue and margin growth. Margins from VAS and Advertisements also improved as the company exercised cost control containing the general and administrative expenses. The company was able to increase its revenue by 5% y-o-y and regained operating margin of 5% in 2023 after posting loss of (28.1%) in 2022.
• Focus on turning profitable: Kuaishou focused on growing and retaining the users uptil 2022. Its revenue increased by 10 times between 2017 to 2021 while the regulations tightened. Amidst stagnancy in the market due to government regulations, it changed its focus on turning profitable by reducing the S&M costs for customer acquisition drastically and in 2023, it posted 12% EBITDA margin reversing a 3-year streak of operating losses. It still managed to increase its revenue by 27% between 2021 – 2023 as it focused on improving the content on Live streaming platform.
• Aligning to sustainable growth under the tight regulations: Hello group has been working on structural shift in company’s revenue strategy where it has suspended the spammer accounts, even if they are paying users. This has helped the company in two ways: to avoid the regulatory penalties for allowing malcontent on the websites, and to change the branding of the platform to a clean & safe place for users. This has cost the company the revenue growth since 2019. Revenue for the company has declined 45% between 2019 – 2023. However, the company has been able to reduce the S&M as well as labor costs to achieve 20% operating margins in 2023, which are at the same level of 2019.

To stay ahead of the regulatory hassles, Douyu, Kuaishou and many other companies have also been seeking quality content creators, which has increased the cost for some of the players. Platforms like Douyu have also tweaked their features to discourage excessive user consumption in accordance with the regulations. Due to regulatory pressures, these companies have also changed the subscription renewal feature and had to launch shorter duration subscription to avoid the charges of exploitation.

• Fail fast, fail often, customer feedback: Companies like Zhihu, ByteDance have stayed ahead of the competition by trying new things fast, simultaneously and by incorporating the lessons from the failures. When Zhihu started advertisements for monetization in 2016, it received feedback of clutter on screen, which it dealt with optimizing the ad content. In addition, it explored various monetization strategies like content-commerce solutions, and other services such as online education and e-commerce related services. However, it was the clean interface under the paid membership version of Zhihu which has fueled its growth. Similarly, Bytedance learned conducted a thorough review of the peers’ apps before launching Douyin and Tiktok.
• Spotting the trend: BiliBili was first launched as a video sharing platform mostly focused on ACG (Anime, Comics and Games). However, the company has been quick to read the pulse of the market with the launch of the mobile application as early as 2012, launching mobile games in 2014, launching live streaming in 2015 and short videos in the mobile app in 2016. In retrospect, these timelines for the launches align perfectly to the start of new trends, which the company has utilized for its phenomenal growth. The company has also faced the slowdown in the topline growth due to lower games revenue due to government crackdown. However, the company has narrowed its operating losses by containing R&D costs and S&M costs.
• Expanding in other geographies: Since the companies do not have many options to protect themselves from the harsh regulatory environment of China, some of them have expanded their operations in other geographies. A few companies like JOYY and Tian Ge have even or are considering winding down operations in China completely.
• Company specific strategies: The common monetization strategies for a social network are a mix of Advertising, Premium subscriptions, In-app purchases, e-commerce integration and data monetization. However, the players who have survived in China, have formed their own niche depending on platform and type of operations. Tencent has integrated payment system into Wechat, Tencent is also leveraging its user base to provide portfolio management services, Zhihu has ventured into education and vocational training to leverage its user base, ByteDance is following in the footsteps of Meta and ventured into Metaverse by acquiring PoliQ to build a base for future monetization.

China recently eased monetary policy and announced policies promoting growth in sectors like housing and biotechnology. But the technology sector has been kept wanting. China Security Regulatory Commission emphasized, through a press release in Sep 2024, its commitment to support M&A activities in China. However, the reversal in trend of blocked deals in tech sector is yet to be seen.

Will more companies succumb to the competition & regulations or will the government provide a timely breather to the players who are fighting tooth and nail to survive?