In this series of articles on Chinese social networks, we have explored till now how social networking companies have evolved in China and how ‘censorship’ in China has a been a boon for local players. But in the last decade, many players have expanded their portfolio of offerings and new players have also entered the market with blockbuster products. Thus, the competition has increased immensely in the social networking space and these companies are fighting for their share of limited number of internet users, limited amount of user time and spending.
Operational profits of the Chinese players which once were higher as compared to the global counterparts, have gravitated to similar or even lower levels. And CAC (Cyberspace Administration of China) has only made the business environment worse.
Increasing Regulatory scrutiny adding to the pressure from the competition, especially for the smaller players
The companies in China have been trying their best to stay ahead of the competition as described in the last article (Rise of Douyin (China's Tiktok) and how did other players respond?).
However, the regulatory landscape in the country has been changing very fast around and against them. The regulator in the country has been releasing a series of regulations, which has limited the market size, ticket size and the monetization avenues available to the industry players. In addition, companies must invest to upgrade technical infrastructure to maintain compliance with the regulations on data security and privacy.
All the strategies adopted by the companies, relating to product, content and competition, have not been enough to maintain operational profitability. Thus, the industry has seen quite a lot of M&A to keep up the business growth, user acquisition and/or to keep the business structure lean & sustainable as per strength and focus of each company. Following are some of the notable deals:
- Hello Group (Momo Inc, at the time) acquired TanTan app in 2018, to move into the dating segment and to grow the business by leveraging its existing user base
- Weibo acquired Yizhibo live streaming in 2018 to partake in the explosive growth of the segment. Yizhibo was sold by Yixia Technology as the app started losing its users. However, Weibo made this acquisition with a strategy to leverage its existing user base to revive the user growth on Yizhibo platform
- JOYY acquired BIGO Live, a live streaming platform, in 2019. At the time, BIGO had presence in South-Eastern Asia, Southern Asia, the Middle East and America. This move was made when China continued to tighten the noose of regulations on the local Social Media & Gaming industry?
- Weibo also acquired WUTA beauty camera app from Tian Ge in 2021 to integrate with its platform. Already a struggling player, Tian Ge sold WUTA to generate cash for its operations (unconfirmed).
- Tencent invested in the Gaming streaming company, Douyu.
- Tencent acquired major shareholding and voting rights in live streaming platform - Huya from JOYY in 2020. Tencent had made some investment in the live streaming platform, HUYA earlier as well. The acquisition of HUYA was done to combine with the games published by Tencent.
- JOYY sold HUYA to Tencent to gain cash which it required to divest out of China. This move was made as a part of the global expansion strategy of JOYY as it expected the competition and regulatory environment to get worse.
- Tencent has also continued its M&A activities mostly in Gaming sector outside of China as well
- In November 2021, BiliBili acquired equity interests in a comics distribution company to improve content offerings.
- In February 2022, BiliBili acquired a game company to expand self-developed capacity in game development.
- Tencent sold animation and comics businesses to digital publisher Yuewen Group amid cost-cutting efforts in 2023
- HUYA acquired application service provider from Tencent in 2023 to expand their business in the international market. Tencent was keen to sell to keep the structure nimble amidst tightening gaming regulations
Apart from the transactions listed above, there could have been many deals which involved smaller acquisitions to enter different businesses.
Although, this list shows that the players are keen on M&A opportunities to keep their businesses viable. However, it is also noteworthy that the regulators in China have been blocking some big M&A proposals between the major players as part of crackdown on the industry to prevent it from becoming too big to control.
Chinese regulators slowing down the growth of market size....
... and at the same time preventing cost reduction measures by the players jeopardizing their operational feasibility. As noted earlier in this series of blogs, the regulators in China have tightened their noose on social media and the broader technology sector, which deal with data on the country and its citizens. Some of the regulations directly impacting social media sector include the limits on - spending by the under-age users, time spent on the apps and games, number of times logged in, expression of content, advertisement content, and the data collected by the social media companies (which was used to improve the efficiency of marketing campaigns). These regulations directly reduce or slow down the growth of the total size of the market in China.
Until 2019, revenue for Social Media companies in our China set (refer appendix), grew at 40-60% per year. But this growth slowed significantly to sub-20% till 2021, negative in 2022 and modest 5% in 2023. This fall in industry growth was a direct result of the consecutive announcements and implementations of regulations impacting the sector since 2019. But the roots of these announcements and regulations are connected to internet censorship which has always existed in the region. As the industry gradually expanded with significant reach to the masses, Chinese administration tightened its grip on the broader technology sector
- Passed in 2016 and enhanced in 2017, China’s Cybersecurity law required companies to store select data in China instead of foreign servers, and allow spot checks by the government on the compliance
- Regulations on algorithms to target consumers and data collection regulations
- Passed in 2013, China started to pick up 1% ‘Golden Stake’ in most of the tech companies to oversee the implementation of its policies, whereby the government installs one board member of its choice to help in the cause. These shares come with some voting powers, and veto powers on some important business decisions like Content.
- Restriction on time spent by minors on games
- Social media companies to scrutinize the content posted by its users for vulgarity, false news, anti-national comments etc
- Not allowing new publishing licenses on games for some time in 2021-2022
- Ban on live streaming of unofficial video games
- New security review for platform companies which collect users’ data, before listing shares overseas
- Oversight of VIEs now in picture, which were used to bring in foreign investment into sensitive industries like Telecom and media industry of China
- Expanded State Secrets Law which compels social media firms - to act if users post sensitive information. However, the definition of ‘State secrets’ has not been made clear
- Under China's 2017 National Intelligence Law, all citizens and businesses are required to assist in intelligence gathering and must share any data with Beijing if requested
- In 2021, Chinese state administration released Code of Conduct for Online Anchors stating the regulations for live streaming, and continued releasing further notices in 2022, enhancing the scope of this regulation. Salient pointers include prohibition of serving live streaming of content to children younger than 16 years, prohibition of topics and ways content can be served, qualification of anchors necessary to comment on certain topics, and other minute details, which if not followed can invite government attention and monetary fines to the company and to the content creators.
- In the same year, a regulation was released stating that a company with data of over a million citizens, needs a clearance from Cyberspace Administration of China before listing on the foreign stock exchange
- In 2023, China released "The Outbound Data Transfer Security Assessment Measures” which requires a company to apply for security assessment with the Cyberspace Administration of China before providing important data or personal information to overseas recipients
Under the increasingly adverse conditions, social media companies have taken all the measures explained earlier in the previous article, to stay ahead of the competition. In addition, they have also looked at joining forces to beat the costs. However, regulators have put a check on this activity too, leaving the companies destitute and desperate.
Blocked M&As chocking the profitability and indicating to players to fall in line
Some of the blocked M&A and other associated events as a part of tightening the regulatory environment including technology sub-segments other than social media:
- Baidu offered to acquire YY Live from JOYY in November 2020, in a bid to enter live streaming space. The deal was under consideration and later blocked by the local regulators in 2023. The regulators blocked the deal as a part of the crackdown on the gaming industry, which intensified in 2021.
- Proposed merger of Douyu and Huya was blocked by the regulators on anti-monopoly grounds that Tencent would have majority control over the merged entity
- Merger of JD Sports and Footasylum was blocked to maintain “competitive market for shoppers and maintain level playing field for other businesses” and were fined almost ￡4.7m after breaching the rules around an attempted merger
- Chinese administration forced delisting of 25 apps of Didi Chuxing on the charges of unlawfully collecting the data on Chinese nationals. These charges came soon after company’s US listing and when the SEC forced the company to increase disclosures
- Little Red Book (Xiaohongshu), a content sharing platform, took a note of these events and shelved its IPO in USA
Official reasons stated while blocking the mergers could have been worded differently each time, and may have revolved around Protection of the national data, social benefit and protection of culture. However, it can be easily argued that the real reasons behind these actions were more about intimidating corporates to adopt the 'guidance' of the administration over content and other policies. And by doing this, China may want to have:
- Total control of the public content in the media
- Maintain control over the national policies without public opposition
- Protecting the political control of the Chinese Communist Party (CCP)
Of course, these are just high level pointers. More on this in later articles!!
