Does longevity of a company ensure its profitability? and which player is gonna fold soon?

We discussed the evolution of Chinese social networking industry and its financial performance at operating level in the previous articles:

• Social networking in China – a world within
• Social networks in China growing at par with global peers?
• Are Chinese social networks more profitable due to protectionism?

Following the trail of exploration, we arrived at an interesting observation in the last article, that operating margins in Chinese social networking industry have converged to global industry. We also noted that this convergence is more likely due to regulatory issues dampening the performance of Chinese players. But we should look at the empirical proof as well to establish that the constituent players of the industry do not converge on profitability, simply due to maturity of the business or its longevity.

Does longevity ensure profitability?

It is plausible to think that when a new company launches its product, it would go through the phase where they spend a lot on customer acquisition. If it survives long enough, that means people are using the product but not just enough to bring profitability yet. And if this continues for a few more years, the company will surely start making a profit, at least at operating level.

As a fleeting thought and a cursory observation, the above statement might seem right. However, this might not be true. The following table helps to understand this:

It can be observed from the above table that the companies like Kuaishou, Bytedance, Momo which have existed only for 12-13 years have been able to maintain profit. But, on the other hand, companies like Kiwibox, Moko Social, Renren, Reddit - who had / have been in business for similar period or even much longer (19 years), have either closed the operations or continue to report operating losses.

A company may survive for years due to slow development, low and periodical investments, small innovations – just to keep it out of trouble or it may have been a first mover – who had more time but could not monetize the growth in the customer base. But, all these factors and more time, can’t ensure the profitability of a company.

The profitability of the company is a culmination of macro-factors like business & economic environment, as well as idiosyncratic factors like first-mover advantage, segment niche, company strategy, monetization strategy, implementation, periodic innovation and equally important - corporate governance.?Following are the three examples of how a company fails due to lack of one or more factors:

1. Renren, which was once dubbed as Facebook of China, failed due to lack of executives’ focus on its own business - while using the IPO money to invest in other startups for personal gain. Despite being the early movers in China, the company was unable to gauge the trend of migration of users from PC to mobile. The mismanagement and lack of attention was so much that the company stated in one of the annual reports that it is unable to even define the metrics to track the users for the purpose of online advertising. Company sold its interest in 56.com and its gaming business to “invest in more profitable opportunities”. The executives and the firm were sued by its shareholders for diverting the funds.
2. Moko social media was a company which built customized social networking groups for highly niche closed groups till 2012. Post 2012, it started working on three classes of social media networks, which were open but still niche categories like student groups, active lifestyle groups and political discussion groups. These apps gained some traction at the start but eventually failed as they were too niche and such targeted markets were already being covered by other social media platforms with the feature to make closed groups. Company’s ADR offering mentioned that its auditors have stated doubts about company’s ability to generate cash flows and its going concern. However, the ADRs were pushed to unsuspecting investors with the help of broking firms. The firm went into administration and restructuring within a year of issuance of its ADRs
3. Kiwibox was a blog form network launched with some other features to connect within communities. It was successfully in operation even before the launch of Facebook, but the innovation at the platform was always too little too late. It ended up playing a game of catch up with Tinder and Facebook. It spent a lot in marketing but could not maintain monetization and ended up obsolete eventually.

Some of the failed global social networks, which were once highly popular include Orkut, Friendster, Myspace, Vine etc. These networks failed due to myriad of reasons including Tech issues where the websites were frequently down / overloaded, early monetization efforts in haphazard manner which led to cluttering on screens and made them unappealing, and high competition from the better versions like Facebook, Twitter and Instagram which learned from the mistakes made by their peers and predecessors.

On the other side of the globe, the list of failed popular Chinese social networks includes Tianya (blog and photo sharing, 1999-2023), Maopu (news-based BBS system, 1997-2021), Jiepang (Check-ins, photo sharing, 2010-2016), Baidu Space (Blogging, 2006-2015).

Tianya failed as the management did not have a clear path defined to grow and could not cope with the up-and-coming platforms. It ran into financial troubles, amassed a huge debt, tried to raise money through crowd funding but even the event was not planned well and management failed to show that it had even planned the path reprisal well.

Other websites also closed due to similar, though not same reasons. Some were not moderated properly or had too many ill-placed ads or were too niche in the face of newer and better, wholesome products.

And that is not all. Many existing products / companies in China might join the defunct list soon.

• Baidu Tieba: Once a popular destination for social interaction with over a billion users, this website lost its users as it did not migrate to smartphone version at the appropriate time. Also, when it did, the resulting application was unattractive & cluttered interface as compared to its peers. It could not manage migrating its content and categories in a user-friendly manner. Tieba has now ended up losing majority of its users due to interface issues, lack of known content creators, deteriorating content quality and loss of its anonymity feature for posts (due to regulatory compliance).
• YY Live: Launched in 2012, YY Live has been one of the most popular Live streaming networks with active user base of over 41 million in 2019. At that time, there were allegations put forward by Muddy Waters Research , after a year-long investigation, that the platform had been fudging the number of users and revenue. During the same time, JOYY announced sale of YY Live to Baidu. The sale was, however, not approved by the anti-trust regulator and collapsed in 2024, three years after the announcement. JOYY has effectively moved out of China with the launch and acquisition of other platforms in various geographies. But after the cancellation of the deal, the company is now stuck with the business it does not want. It has been trying to revive the deal and might also be looking for other buyers. But this is unlikely given the regulator has not been giving approvals to large mergers; and even buyers outside China are also unlikely to enter when the live streaming has become the regulatory hotbed.
• Tian Ge, who wants to move away from China due to bad regulatory environment, has already begun the process to suspend its live streaming services in China, and it has claimed to be now focused on other geographies.

All these sites and apps had a huge number of users at a time but these all succumbed to the intense competition in China. We had also noted at the end of the revenue comparison section in one of the previous blogs that the competition is intense in China. But how intense exactly is the competition? Read on in the next blog post.