Monetizing Short Videos

tl;dr

Livestreaming tipping and advertising are two major revenue streams in monetizing short videos, with e-commerce — currently under the advertising revenue umbrella — being a key driver of growth.

• The success of China's short video platforms, particularly Douyin/TikTok, can be attributed to their effective monetization strategies. Douyin's Average Revenue Per User (ARPU) has exceeded that of Meta's global figures.
• Livestreaming tipping, often underappreciated, offers a stable cash flow, resilience during economic downturns, and shows promising results in emerging markets.
• Alibaba made a strategic mistake that allow new comers to encroach on its e-commerce market share. Alibaba's foray into livestreaming e-commerce, while not creating exclusive barriers, inadvertently became an educational tool for merchants and creators. This has enabled platforms like Douyin/TikTok and Kuaishou to adopt these strategies and gradually outpaced Alibaba.
• Douyin/TikTok implemented an internal competition model and simultaneously made bets on e-commerce, local business, and gaming.

Monetization as a Key Competency

In the previous discussion, I highlighted that monetization is a critcal step in the growth flywheel. The revenues can be directly converted into capital for acquiring new users. While Douyin/TikTok borrowed lots of designs from Musical.ly and Kuaishou, it pioneered many innovative monetization strategies, building a robust direct sales team and venturing into novel monetization approaches. This forward-thinking and dedicated approach has been instrumental in Douyin/TikTok's rapid scaling and overall success.

Current status

Let’s use Kuaishou’s financial data to gain insights of the short video business. There is a notable mutually learning between Douyin/TikTok and Kuaishou, with each platform adopting successful features from the other. This dynamic leads to a certain level of similarity in their business, while Douyin/TikTok often operates on a larger scale. To sum it up:

• Revenue growth has surpassed the growth in DAU and overall time spent on the platform, resulting a notable increase of 6.9% yoy.
• Livestreaming tipping is a significant revenue generator, contributing 36% to the total revenues.
• Advertising remains the largest revenue stream, accounting for 54% of total revenues. This figure includes the revenue generated from e-commerce advertising.
• The GMV from e-commerce has seen a yoy growth of 35%, outpacing the growth rates of both Livestreaming tipping at 8.6% year-over-year, and the overall revenue increase, which stands at 26% yoy

ARPU Analysis Comparison

Douyin, predominantly operating in China, appears to have an Average Revenue Per User (ARPU) that exceeds Meta's global figures. This is notable considering Facebook and Instagram's substantial active user base in developed markets. The exceptional monetization efficiency of China's short video platforms can be attributed to several factors, including a diverse array of revenue streams, the aggregation of value chains, and a commitment to continuous innovation.

Unified and Simple User Experience

TikTok/Douyin is well known for its streamlined and consistant user experience. The primary interaction is just a simple swipe-up action, with the algorithm handling the rest. This simplicity extends to the platform's approach to monetization. Brand advertisements are seamlessly integrated within these short videos. Impressions are valued not just based on the bidding price but also on quality, as determined by engagements and completion rates.

The principles of minimalism are also applied in the design of monetization features. The highlighted "live frame" acts as a key gateway, facilitating a seamless transition for users from engaging with short videos to immersing themselves in livestreaming content.This design effectively bridges the gap between short-form content and the multi-billion dollar livestreaming business (including both tipping and e-commerce) with a single, intuitive interface

Livestreaming Tipping: An Underestimated Business

Livestreaming tipping is often an overlooked aspect of digital platforms. It presents a stable cash flow, contributing over 1/3 to Kuaishou's total earnings. It is also notably countercyclical: Kuaishou's livestreaming tipping revenue increased in Q3 2022, as other revenue streams dipped. This segment's lesser reliance on broader ecosystems makes it particularly effective in emerging markets, where such ecosystems are still developing.

While neither Kuaishou nor Douyin were pioneers in livestreaming, they have adeptly adopted best practices from industry leaders in managing creators, content, and community culture.

Livestreaming is predominantly driven by a few whale payers, with a handful of top users accounting for a substantial share of revenues. Now, algorithms are employed to predict users' willingness to pay, presenting tailored content and product entry points. This strategic approach has kept the business relatively under the radar for many analysts, further contributing to its underestimation.

The documentary "People's Republic of Desires" delves into the phenomenon and ecosystem surrounding livestreaming industry in China.

Interesting Anecdotes in the Livestreaming Sphere:

• In Baidu's recent attempt to emulate ByteDance, it not only built its own news feed and short video products, but also offered US$3.6 billion to acquire JOYY's China domestic livestreaming business. This underscored the complementary nature of livestreaming to short video platforms. However, to everyone's surprise, this deal collapsed due to regulatory concerns.
• JOYY's financials reveal that the gross margin for livestreaming is around 37%, lower than margin of advertising, but the platforms normally have more bargaining power due to its closed-loop nature.
• The appointment of Shangyou Han, previously head of Douyin's livestreaming division, as Douyin's new president, signifies the increasing importance of livestreaming. Rumors suggest that Douyin's livestreaming revenues far outpaces Kuaishou's, illustrating the significance of this business.

The Next Big Thing

Challenges in Expanding External Advertising

As Douyin experienced growth in its advertising revenue, it encountered limitations in total addressable market (TAM) of advertising. It's likely that Douyin employed an analytical method to estimate sizes of different markets, identifying three key drivers: e-commerce, local business, and gaming. It's worth to note that e-commerce and gaming categores have consistently been among the top advertisers.

Douyin strategically implemented an internal competition model to foster the growth of its new businesses. The company’s bold decision to simultaneously pursue developments in e-commerce, local business, and gaming demonstrated its commitment to breakthroughs. Resources were dynamically allocated, with performance metrics guiding the distribution. In contrast, Kuaishou chose a more reactive strategy, focusing on sectors where users have experimented with new business spontaneously. This approach led to the launch of services such as recruitment and apartment renovation, which, while innovative, cater to comparatively smaller market segments.

This difference in approach highlights a fundamental divergence in business philosophies. ByteDance, Douyin’s parent company, perceives scale as a key competitive edge in the short video market. This perspective drives its willingness to invest heavily in both user acquisition and monetization, reflecting an aggressive growth-oriented mindset.

E-commerce

E-commerce livestreaming, initially pioneered by Alibaba, offered a brand new shopping experience:

• It allowed customers to view products from multiple angles, mitigating the risk of misleading, photoshopped images.
• Livestream hosts provide real-time customer service. For instance, I once requested a host to try on sunglasses for me.
• Hosts negotiated deals with merchants, offering a low price guarantee on livestreamed shopping, which in turn spurred impulse buying.

The most recent data from Alibaba, as reported in its 20F form, covered the twelve-month period ending March 31, 2021. This report revealed that Taobao Live's GMV surged by over 90% year-over-year, exceeding RMB 500 billion (US$76.3 billion). Subsequent to this period, Alibaba stopped disclosing Taobao Live's data, coinciding with the rise of new competitors in the market.

Although the core experience of livestreaming shopping remained unchanged, platforms like Douyin and Kuaishou refined the entry point, making the shopping experience more seamless and personalized.

I believe Alibaba made a costly mistake in livestreaming e-commerce. The livestreming e-commerce could canibalize its conventional e-commerce business and it failed to build enough barriers to defend against new comers. Alibaba's approach to livestreaming e-commerce inadvertently became a blueprint for others. It ended up educating merchants and sharing strategies with the broader industry. Consequently, platforms like Douyin/TikTok and Kuaishou have leveraged this playbook to gradually encroach on Alibaba's market share. In 2023, Douyin's GMV would hit 3 trillion RMB, with Kuaishou on a trajectory to reach 1 trillion RMB .

While Taobao depends largely on its established merchants and top hosts, Douyin is focusing on attracting more merchants by showcasing success stories. Douyin's algorithm-driven traffic policy allows for the rapid emergence of these success cases. Notable examples like 东方甄选, 张兰, and 刘畊宏 gained further exposure through traditional media, drawing in even more merchants to this new platform. The COVID-19 pandemic provided additional momentum for Douyin, as more merchants turned to it amid the downturn in physical goods transactions caused by strict quarantine measures. However, the reliance on algorithm-controlled traffic presents challenges, as it suppresses organic reach and necessitates ongoing investment in Douyin ads, creating an opportunity for WeChat's short video platform.

Douyin's substantial investment in e-commerce includes hiring a significant number of operational staff to oversee various aspects, from scripting and product selection to merchant relations and customer service. Collaborations with MCNs (creator agencies) and TPs (merchant agencies) have been crucial in educating both parties and expanding the business. Additionally, Douyin has developed key infrastructure components, such as payment systems, return policies, and delivery services. Overall, much of Douyin's success in this arena can be attributed to the foundation laid and the playbook developed by Alibaba.

Local business

Meituan, ranked as the third-largest internet company by market capitalization, imposes a 30% commission on its food delivery services. Douyin, leveraging its extensive GPS-based user data, reached a remarkable 77 billion in local service GMV in 2022. There are rumors that Douyin has assembled a team of 5,000, primarily focused on sales and operations, to expand into local business sectors.

A major hurdle in penetrating local business is the development and maintenance of an accurate and current Points of Interest (POI) database. Despite this, Douyin swiftly overcame these challenges. Its rise has notably affected Meituan's stock price, which has seen a 55% decline in the past year. In contrast, Kuaishou has formed a partnership with Meituan, directing traffic to it for monetization.

While Douyin and Kuaishou excel in generating viral content and hits, the limited capacity of local restaurants poses a challenge, making it difficult to align with their hit-driven business model. Recently, TikTok has shifted its strategy, reducing its focus on local businesses and lowering its GMV target for 2024.

Mobile gaming

Initially, ByteDance’s gaming strategy was marked by a diverse game portfolio, an aggressive hiring approach, and an ambition to penetrate both domestic and international markets. Rather than limiting itself to casual games, ByteDance diversified into mid-core and hardcore gaming genres, aiming to appeal to a wider audience and reduce dependence on any single game category.

ByteDance has seen some progresses. In 2022, its portfolio of mobile games collectively garnered over $1 billion in global player spending via the App Store and Google Play. However, in October 2023, ByteDance announced a restructure of its gaming division. This includes winding down its gaming brand Nuverse and ceasing development on unreleased games, as well as exploring options to divest from its already launched titles.

ByteDance's struggles in gaming are not unique. Alibaba, over the past 15 years, made several attempts to penetrate the gaming sector but only gained traction recently. Similarly, Bilibili, a Chinese video platform, was unsuccessful in establishing its own gaming business. On a global scale, Amazon's well-documented inability to make a significant impact in the gaming industry despite substantial investments is another example. Although gaming shares similarities with software development, it is a distinctively different business, demanding a unique approach and mindset.

Summary

Douyin/TikTok values scale as a crucial advantage in the short video sector, leading to substantial investments in user acquisition and monetization. In addition to livestreaming tipping and advertising, it ambitiously expanded into e-commerce, local businesses, and gaming. Kuaishou followed Douyin/TikTok. However, this strategy's dependence on algorithm-driven traffic can limit organic reach and demand continuous investment in ads, offering an opening for WeChat's short video platform. In the next post, we'll delve into "WeChat Act2" and its short video business.