Social networks in China growing at par with global peers?

In addition to the list in the previous blog, there are many more global platforms like Reddit, Pinterest etc. which are not accessible in China. The list shown in the previous blog is just for representation of reasons which led global social networking companies to exit China. Even the networks originated in China are not spared of the pain because of the regulatory oversight.

Social networking is not an easy business to operate in China. Tightening government regulations, intense competition from domestic players, potentially fixed market size in terms of number of users, and the low growth in market size in terms of the user spending (a result of recent regulations changes) – all these factors have affected the growth of industry which was once flourishing in China.

So how are Chinese social networks faring in comparison to the global networks?

Financial Comparison between global platforms vs networks in China

To analyze the financial performance of the social network industry in China vs global companies, I have considered the following sample sets of companies:

• Global sample set had 11 public companies / players; vs
• Sample set 10 companies with operations mainly in China

(Please refer to the Appendix at the end of the blog for details on the set of companies and the considerations)

Global social networks have shown stellar growth in the past decade

I have considered the largest of all the behemoth global social networking companies – Meta, LinkedIn, Twitter, Pinterest, Tinder etc. in the analysis for the global set. The total revenue for global set reached ~USD 160 bn in 2023. The revenue for this global set has grown at a whopping 30% CAGR in last 10 years.

Despite the size of the Meta platforms, it has been the driving force behind such growth, even in the percentage terms. Revenue for Meta has grown at 33% CAGR over the last decade, which has driven the growth of the set at 29% CAGR. Excluding Meta, the set has grown at considerably lower 20% CAGR.

But these numbers have not been adjusted for entry or exit of players from the set i.e. the revenues from the companies existing in 2013 has been included till their year of closure, which may be anywhere in the analysis period. Similarly, the revenue from the companies which started or became public anywhere during the analysis period of 2013-2023, has also been included in the set. For e.g. Financial numbers for Kiwibox has been included in 2013-2016, when it was discontinued. Similarly, Numbers for Snap Inc have been included from 2015 onwards. Best efforts have been made to discover the data for each company as far as back to 2013. Missing numbers are estimated to be in ballpark where omission does not impact the analysis. Further, such non-adjustment works in favor of highlighting the growth of the industry as whole.

Revenue growth of global set over the years

On the contrary, if we consider the consistent set of companies which have existed in the set from 2017 till 2023, the set of players excluding Meta have shown 30% CAGR growth, whereas Meta’s growth number declined to 23% CAGR.

Meta has been growing at a phenomenal pace but for the first time in 2022 its revenue had shown a dip. This was due to several factors including tough competition from Tiktok, change in iOS permissions settings which made targeted ads difficult and thus reduced ad spend. The ad spending from the customers has also been impacted by the tough macro-economic environment in past couple of years. However, it is still worth noting that the Meta’s growth bounced back to 15% y-o-y in 2023, which is more than a lot of its peers, who are not even profitable and spending a fortune to acquire customers.

Now let’s look at the topline of the Industry in China.

China, though a single country, is not a small market at all

At the outset, it is baffling to note that even after including all the major players globally, total global industry revenue for the set is ~160 bn (2023), while the revenue from China set is not too far behind at 112 bn (2023) – from a single country.

Of course, these numbers may have been impacted by omission of other companies from the set, which are large but privately held. For e.g. ByteDance, TikTok etc. have not been included in either of the sets. Additionally, financial numbers for relevant businesses of some companies are not available. For e.g. I could not reliably estimate the revenue from YouTube (which of course, at first glance seems a notable omission). However, the companies and numbers have been included on the best effort basis. Further, even if I consider the numbers available on the internet, for e.g. an estimated USD 8 bn for YouTube from Ad revenue or USD 16 bn for TikTok - it does not seem a very large omission from the Global set.

On the other hand, the estimated revenue of ByteDance - USD 120 bn, may put the total revenue from set of Chinese companies much higher than Global set of companies considered. This underscores the point that China is a comparable market to the rest of the world in terms of the market size. But this is not all.

Even though the domestic market in China is practically closed to foreign companies, which may create an illusion of healthy business environment, low competition and support from the government. But this also can’t be farther from the truth.

Social network industry in China is more similar than different to the Global industry

China’s social networking industry, even though closed and protected from competition from foreign companies, mimics the broad structure and arrangement of global industry. Drawing broad conclusions from the structure of the set of companies considered (best effort basis, included all the relevant public companies that I could consider under social networking space)

• There are only one major player globally (Meta-83%) as well as in China (Tencent-77%) controlling majority of the market in the respective set
• Caveat here is omission of numbers from the sets for ByteDance, which has been a trailblazer across sub-segments in China and globally
• Inclusion of estimated numbers for ByteDance will reduce the share of Meta in global set to almost half of the stated share

Evolution of market share of companies – Global vs China (Based on the closed set of companies considered)

• Global set has couple of other players which hold ~10% of the revenue and Chinese set has one player with 14% of the revenue
• Products offered in each market are similar, strategies adopted for monetization are also similar and the evolution of the industry has also followed the same path, with one company enjoying the first mover advantage and moving ahead in the curve with acquisitions of promising products, while the remaining follower companies launching different versions of existing products while spending a lot of money on customer acquisition

Growth of Social networking companies in China

For the set of companies in China, I have considered the mix of social networking companies – Tencent, Tian Ge, Weibo, JoYY, Momo, Kuaishou, BiliBili, Douyu etc. in the analysis for the set of Chinese companies. The total revenue from these companies was ~USD 112 bn in 2023. The revenue for this set has grown at 27% CAGR in the last 10 years and most of the companies have seen similar growth in this period.?

Tencent, which is the largest player in the set, has 77% share in revenue in 2023. The revenue for Tencent has grown at 24% CAGR between 2013 to 2023. This is a very decent growth rate given the size of the company.

Tencent’s growth seems more commendable when it is noted that other players like Weibo and JOYY, which are just 4% of the revenue share together, have also grown at similar rates during past 10 years. There are also laggard players like Tian Ge, which has seen falling revenues at -19% CAGR in the period and RenRen, which has closed its shop due to the intense competition.

Set of Chinese companies also consist of players which became significant somewhere after the start of the analysis period. These include Zhihu, BiliBili, Douyu and Kuaishou. Like in the case of Global set of companies, consistent set of numbers of Chinese companies are available from 2017-2023, which consists of Tencent, Weibo, Tian Ge, JOYY, Momo, Zhihu, Douyu, BiliBili and Kuaishou. The industry total has grown at 18% CAGR since 2017 and this number is impacted by the size of Tencent, which alone has grown at 16% CAGR.

If we exclude the dominant player, the total of other players has grown at 27% CAGR. We see the exacerbation of dichotomy in growth rates among other players as well. During the past 6 years, smaller but well-known networks have grown at mid to high double-digit rates – Kuaishou (53% CAGR), BiliBili (43% CAGR) and Douyu (18% CAGR). However, there are companies who have shown lackluster growth as per industry standards – Tian Ge (-35% CAGR), Weibo (7% CAGR), JOYY (5% CAGR) and Momo (4% CAGR).

Although, it is tempting to attribute the dichotomy seen above to the base effects of different sizes of companies. For e.g. Momo which has grown at just 4% CAGR was 4 times in size in 2017 as compared to Douyu (18% CAGR). But this is not the absolute conclusion to derive. Even the companies of the same size have grown at very different rates. For e.g. Kuaishou, which was already a larger company than JOYY, Weibo & Momo in 2017 has grown at a significantly higher rate. Thus, it is not the base effect at play for this dichotomy. Successful and high growth companies have consistently found the ways to combat competition and adopted efficient strategies to grow in the highly regulated and competitive business environment in China.

Growth rates of companies like Kuaishou, Zhihu, Douyu and Bilibili might seem good for now but the competition in China is brutal and has claimed many businesses. Some companies like RenRen, which were household names, have succumbed to the competition within last 10 years. Similarly, Tian Ge which operated couple of popular live video community platforms, saw its downfall starting in 2017, right about when ByteDance products (Douyin) started to become popular. Momo, another popular name, has seen the revenue grow at 87% CAGR during last 10 years. However, if we drill down, the growth has stalled at 4% CAGR in the last six years due to popular products launched by the competitors.

Till now, we have covered the evolution of social network industry in China due to protectionism and the resulting comparable growth of topline of Chinese social network vis-a-vis the global networks. We have also briefly mentioned the competition within China.

But how intense is the competition, what has it meant for the operational profitability of Chinese companies and how has the regulatory landscape changed the terms of business for the industry in China? These are the topics for upcoming articles.

Thanks for reading.

Next blog: Are Chinese social networks more profitable due to protectionism?

Appendix

Notes regarding the 2 sets:

• Since Tiktok or any Bytedance companies are not public, I could not consider them as part of this analysis. This also implies that certain apps, websites and companies which are private are not considered. Also, since profitability numbers for YouTube business alone are not available in Alphabet financials, thus, it has not been included.
• Meta Platforms which is the largest player in the global set, has 83% weight by revenue share in the set. Similarly, the largest player in China - Tencent has 77% weight by revenue share in the respective set
• Excluding the largest players in the each set, distribution of remaining players in each set is fairly even with:

a.??????only one player in each sample set having approx. revenue share of 10-15%

b.????? Rest all the players have less than 0.3% - 5% share

• I have considered a mix of companies with slightly different offerings in social networking segments – messaging boards, picture and videos sharing, Q&A, social gaming, professional networking, dating and micro-blogging

a.??????only related segments from these companies have been considered which are aided by social networking platform business of the company.

b.????? For e.g. Facebook and Tencent generate revenue from ads & fintech and they have used their social network to find the customers. LinkedIn, which has been leveraged for recruitment has been included in the analysis. However, companies like Adecco, Manpower – which can be considered as competitors of LinkedIn, have not been considered because their business operations are not based on social networking platforms

c.?????? Common theme for selection for combining this seemingly disparate activities is that any social network can leverage the users to enter into any of the business stated here, if it collects the right set of data – Fintech, ads, ecommerce etc.

• Most companies in the global set originate from the USA and have expanded operations globally with some acquisitions and expansions. But operations for majority of these companies are restricted in China.