Thursday, 2024 April 18

2023 was a year speckled with setbacks for ByteDance, but why?

In early December, ByteDance had reportedly initiated a new round of buyback plans, aiming to repurchase about USD 5 billion worth of options from investors at a price of USD 160 per share. This move has propelled ByteDance’s valuation to an estimated USD 268 billion, surpassing Pinduoduo and making it the second largest internet company in China after Tencent. According to partial financial data disclosed by ByteDance, its profits have also exceeded those of Tencent and Alibaba since last year.

Despite potential public offering considerations and internal changes, ByteDance’s success and industry position remain noteworthy. In the midst of challenges and slower growth, ByteDance appears to be adapting to the evolving landscape through strategic maneuvers.

In the turbulent year of 2023, ByteDance experienced setbacks after several ventures failed to gain traction matching that of Douyin (the Chinese equivalent of TikTok). Meanwhile, the battle for dominance against rivals like Alibaba, Tencent, and Meituan remains ongoing, adding complexity to ByteDance’s ambitions of overtaking these incumbents in the Chinese internet market.

A year of aggressive streamlining and retreat

During the 11th anniversary meeting in March, Liang Rubo, CEO of ByteDance, expressed deep concerns about ByteDance’s leadership position. While ByteDance’s revenue growth in the first half of the year reached approximately USD 54 billion, exceeding Tencent’s USD 41 billion in the same period, the growth rate has slowed. Official ByteDance information indicates revenue growth rates of 80% and 38% in the past two years, reaching around 34% in the first quarter of the current year.

For B2C platform-based internet companies, a 30% revenue growth is considered a crucial turning point. ByteDance’s growth rate approaching this threshold prompted Liang’s concern. As the domestic market witnesses a decline in mobile internet traffic dividends, internet companies reaching this turning point must either expand internationally (which ByteDance has accomplished) or penetrate existing markets. Regardless, a strategic shift is imperative, moving from a “profit in exchange for scale, expansion first” approach to prioritizing high-quality growth and sustainable development.

Liang’s statement in March set the tone for ByteDance’s focus in 2023: trim unnecessary projects, reduce costs, consolidate resources, and fully support core businesses. The results show that Liang’s words were not mere rhetoric.

Trimming underperforming projects is common for large companies in 2023. In prosperous times, companies can afford to explore innovative ventures, but in challenging times, cost-cutting becomes standard. Tencent, Alibaba, JD.com, and Baidu have also halted numerous projects this year. ByteDance’s approach to cutting projects has been swift and assertive, diverging from ByteDance founder Zhang Yiming’s “delayed gratification” philosophy, which advocates considerable patience for investments with delayed returns.

In early February, rumors circulated about the closure of online medical consultation platform Xiaohe Health, with its functions to be absorbed by Douyin. ByteDance clarified that the Xiaohe team did not merge with Douyin but aligned its business with Douyin, overseeing Douyin’s medical content operations. Nevertheless, it’s apparent that ByteDance’s support for Xiaohe Health have gradually waned, culminating in the termination of patient groups and official enterprise WeChat accounts on April 28.

Towards the end of the year, ByteDance became more decisive in its actions. In November, Pico, a crucial player in the extended reality and metaverse fields, underwent its most significant adjustment since its establishment, with multiple departments experiencing substantial layoffs, and the development of Pico 5 temporarily halted. Shortly after the Pico restructuring, ByteDance’s games business underwent a significant round of layoffs, with launched projects seeking divestment, and unreleased projects, except for innovation and technical ventures, slated for closure.

The abandoned projects were once highly anticipated. In the eyes of some observers, given ByteDance’s abundant resources in terms of traffic, technology, and creativity, success in the gaming industry should have been attainable. However, things did not unfold as expected.

ByteDance had outlined three primary directions for game development: casual games, medium- to high-intensity games, and international games. Despite expediting the development process by recruiting R&D talents from competitors and acquiring game companies such as Moonton Technology and C4games, ByteDance encountered hurdles in obtaining game licenses, tightened regulations, and user attrition. Massive investments ultimately failed to translate into profits, becoming a financial burden.

By the end of the year, NetEase’s Eggy Party gaming title surpassed 500 million users, emerging as a surprise hit with a relatively small budget. Tencent, prompted by its success, launched Dream Star to compete. When party-themed mobile games with a UGC community core became popular, the shutdown of ByteDance’s Party Island seemed particularly regrettable.

Party Island was introduced by ByteDance in July 2022 as a real-time online activity community. In October 2022, to reduce costs and increase efficiency, ByteDance cut the project team of the social app. Although it was fundamentally different from Eggy Party, it built a similar core around user-generated content (UGC). While Eggy Party achieved great success, ByteDance was unable to replicate its success with Party Island.

However, after shedding the burden, ByteDance became more focused and accelerated its pace in areas of strength and high-potential tracks, adhering to the “delayed gratification” philosophy and expanding rapidly.

E-commerce takes the main stage

ByteDance has evolved multiple times. From the original Jinri Toutiao to ByteDance and eventually TikTok and Douyin, text-based applications have made way for short video content to take the spotlight. Today, ByteDance revolves around TikTok and Douyin, sustaining its vibrancy under the influence of supercharged traffic. While advertising remains a crucial revenue stream, its ceiling is becoming apparent. Thus, ByteDance is directing its main focus toward e-commerce and local lifestyle services, both essentially under the e-commerce umbrella.

Douyin’s double-pronged approach to e-commerce

In January this year, reports from The Information suggested that Douyin’s e-commerce gross merchandise volume (GMV) reached RMB 1.41 trillion (USD 208 billion) last year, marking a 76% growth from 2021. Though ByteDance refuted this claim, the figures were compelling enough to shake up the industry. Internationally, TikTok Shop is rapidly expanding, making its official debut in the US while concurrently establishing a presence in Southeast Asia.

TikTok Shop, still in its early stages globally, represents an innovative model of livestream e-commerce, potentially posing a threat to giants like Amazon. According to Bloomberg, TikTok’s e-commerce GMV target for this year is approximately USD 20 billion—four times that of the previous year. Following its successful entry into the US market and the strategic acquisition of Tokopedia for reentry into Indonesia, TikTok Shop’s future appears promising.

On the domestic front, Douyin’s e-commerce faces intense competition, with Alibaba, JD.com, and Pinduoduo. Douyin’s e-commerce has two primary objectives for 2023: leveraging its traffic advantage to seamlessly integrate consumption behavior and internal traffic referral across various domains under ByteDance such as livestreaming and search, and addressing gaps in merchant services, customer support, and infrastructure for payments and logistics.

Regarding the first point, Douyin’s president of e-commerce, Wei Wenwen, elaborated extensively on the strategy during this year’s Douyin e-commerce summit. The biggest challenge for an e-commerce platform is typically acquiring traffic, which Douyin has in abundance. Data indicates that Douyin’s e-commerce witnesses a daily average of 2.9 billion livestream sessions, with an increasing number of users preferring to shop on livestreams. Douyin’s objective is to keep users engaged, guiding them from the high-traffic livestreaming scenarios toward the shopping and search functions to revitalize the entire platform.

As for the latter, it is often said that Douyin’s e-commerce is increasingly resembling traditional e-commerce platforms like Taobao. This similarity arises not only from Douyin’s considerable effort into building a mall, but also because its intrinsic operational logic is converging toward a comprehensive e-commerce platform—content e-commerce is driven by traffic, interest-based e-commerce is algorithm-driven, and comprehensive e-commerce is operations-driven.

In May this year, Douyin’s e-commerce department reportedly underwent a round of organizational restructuring. The original industry operations group and the merchant development center were entirely disbanded and reorganized into two workgroups, A and B. These were tasked with handling the merchant recruitment and operations for brand and non-brand merchants respectively. Workgroups A and B were led by Mu Qing, Douyin’s vice president of e-commerce and head of operations, and Zhao Rui, who had recently transferred from the ByteDance business department. Both Mu and Zhao report directly to Wei.

Following the restructuring, the roles of the two workgroups became more defined. There was no longer a concern about excessive focus on brand merchants, as was the case with the previous merchant center, neglecting support for small and individual businesses. Additionally, the workgroups could provide targeted services based on the specific requirements of different merchant groups. For instance, small and medium businesses might need assistance with operations and marketing exposure, while brand merchants with stronger independent operational capabilities might focus primarily on GMV.

Douyin’s e-commerce business once drew criticism for relying on traffic and neglecting the fundamentals. The A/B dual-thread strategy for 2023 seemingly addresses the fundamental issues, resolving the root problem for Douyin’s e-commerce business to advance its growth.

Doubling down on local lifestyle services

Local lifestyle and e-commerce services essentially belong to the retail or consumer category, both serving as connectors between businesses and users, relying on order accumulation for GMV. Nowadays, with the popularity of instant retail, the boundaries between the two are gradually blurring.

In 2023, Douyin faced a dilemma between at-home and in-store services, eventually leaning towards the latter after several adjustments.

As the core of the at-home business, Douyin’s food delivery service had a tumultuous year. In June, Douyin local lifestyle unit refuted rumors of the full-scale launch of its food delivery business. It was later revealed that the company dropped its target of GMV of RMB 100 billion  (USD 14 billion) amidst disappointing sales, shifting its main focus to trying various methods to streamline business processes. Subsequently, it narrowed its focus to meal packages priced at RMB 60 (USD 8.4) and above.

Evidently, Douyin’s food delivery was not adequately prepared to compete head-on with the likes of Meituan and Ele.me. After all, food delivery is not a traffic-driven business, and Douyin lacks end-to-end delivery capabilities. Moreover, it isn’t intrinsic for Douyin users to actively order food on the app, turning an aggressive expansion of its food delivery business into an uphill battle.

Instead, the in-store business, centered around group buying, allows Douyin to leverage its advantage in aggregating traffic on livestreams. Douyin users accustomed to “stockpiling” can naturally accumulate group buying vouchers. In essence, livestreaming sales is fundamentally a new form of group buying, and Douyin’s advantages via in-store referrals are evident.

Starting from the second quarter, the battle between Douyin local lifestyle services and Meituan in in-store scenarios intensified, with both learning to adopt each other’s tactics. Douyin doubled down on subsidies, while Meituan banked on livestreaming.

Meituan achieved notable success in the livestream group buying vertical. Since launching a fixed livestreaming button on the app’s homepage and introducing multiple coupon festival livestreams in July, revenue saw a boost and the number of transacting users rebounded from the first half of the year. Meituan’s local business commission income surged nearly 30% to RMB 21 billion (USD 2.93 billion) in the third quarter. Douyin’s investments also paid off, with increased merchant participation and a surge in GMV, slowly encroaching on Meituan’s territory in in-store businesses.

The showdown in local lifestyle services is a marathon, with Meituan winning the first half by outlasting multiple opponents, proving its ability to wage a prolonged battle. Refined operations and high-quality growth—concepts coveted by today’s giants—are attributes that Meituan has long possessed as its soft power. In the local lifestyle sector, Douyin may seize some in-store market share but it will struggle to challenge Meituan’s stronghold in at-home services. For this, Meituan is making efforts to reshape an instant retail model, creating a hyper localized version of Taobao.

Cautious optimism toward AI

Amidst the significant involvement in e-commerce and local life services, ByteDance, facing a decline in revenue growth, needs to rigorously control costs and its returns on investment. The company is becoming more cautious about chasing trends.

On February 9, ByteDance AI Lab denied engaging in the development of generative AI products similar to ChatGPT, emphasizing that its primary focus was to support Pico. However, by the end of February, ByteDance was reported to have mobilized researchers from the search and innovation departments, led by Zhu Wenjia, head of product technology at TikTok, to develop two large models for languages and images.

Furthermore, ByteDance did not follow the path of Alibaba and Baidu, aggressively implementing large models in both B2B and B2C scenarios, claiming to use AI to redefine all businesses. Instead, it selectively focused on conversational AI products. In August, ByteDance’s first AI dialogue product, Doubao, was introduced for limited testing. Multiple media reports indicated that Doubao’s performance paled in comparison to other large model B2C products, reflecting ByteDance’s measured approach.

In reality, ByteDance is a full-fledged AI company, even though it has never explicitly emphasized this point. As a pioneer in personalized content delivery, ByteDance has built a gargantuan content ecosystem based on AI algorithms, and it is the global leader in intelligent recommendation technology. Judging by the results, ByteDance is one of the biggest beneficiaries of recent advancements in AI technology. Large model technology is a new implementation of AI technology after deep learning, and it is impossible for ByteDance to ignore its significance. Rather, because ByteDance has chosen to internalize the technology deeply into its business, not wanting to be overly flashy is therefore an understandable strategy.

The deliberate low-key approach to large model technology is related to ByteDance’s lack of a high-profile motive. Currently, those who are vocal about large models are either players trying to raise their stock prices or those that want to sell their technology to other businesses. However, ByteDance’s business is concentrated on the consumer end, and while it has businesses like Volcano Engine and Feishu (also known as Lark) in the B2B sector, they do not compete on the same level as Alibaba, Tencent, Meta, Google, and others.

By trimming down certain businesses that could have become new growth frontiers, ByteDance is becoming less “sexy.” To surpass its counterparts like Tencent, Alibaba, and potentially foreign giants like Meta and Google, ByteDance’s latest business direction may seem somewhat monotonous. However, when viewed dialectically, it may also be a form of focus. In the current era where Pinduoduo has surpassed Alibaba, focus is a precious quality that large companies should possess, and ByteDance seems to understand this better than anyone else.

This article was adapted based on a feature originally written by Hernanderz and published on Leitech (WeChat ID: leitech). 36Kr Global is authorized to translate, adapt, and publish its contents.

KrASIA Connection
KrASIA Connection
KrASIA Connection features translated and adapted high-quality insights published on 36Kr.com, the largest and most influential technology portal in Chinese language with over 150 million readers across the globe.
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