ByteDance Gorilla Body Slams Top of China’s Ad Market

(Bloomberg Opinion) -- The growing strength of ByteDance Inc. and its popular video and news services is combining with a slowing economy to take a chunk out of advertising revenue for listed Chinese internet companies. What’s tricky for them is weighing up which is the bigger risk.

There’s no question that weaker economic growth is hurting the sector. Alibaba Group Holding Ltd., Baidu Inc. and Tencent Holdings Ltd., the three largest by ad revenue accounting for more than half the market, all posted slowing growth rates during the third quarter a period when China posted its weakest pace of economic expansion in almost three decades.

Bucking the trend, or perhaps exacerbating it, is ByteDance, which is fast turning from upstart to 800-pound gorilla. Its collection of apps, including short-video service Douyin and news aggregator Toutiao, use artificial intelligence to deliver tailored feeds to users. That’s made the company’s content very sticky and captures immense user traffic, helping take a significant share of the advertising market from incumbents. 

Its overseas app, called TikTok, has more than a billion users, which has helped propel ByteDance’s valuation to top the the CB Insights unicorn list at $75 billion while also attracting scrutiny from U.S. lawmakers concerned about potential spying and the security risks of user data stored in China.

ByteDance’s curation strategy, locally and overseas, is the key to its success. Rather than ask what audiences want, it parses hundreds of data points — such as whether a user scrolls back over a piece of content — to build a picture of actual interest. Its initial success was among younger people in China’s largest cities, a lucrative demographic for advertisers.

Popularity has since spread to smaller cities and older audiences while its core remains the under-35 population. That broadening of appeal helped ByteDance take 11.7% of online user time spent in June (second only to Tencent), according to data from QuestMobile, which is why it can take ad revenue from incumbents.

Understanding the impact of ByteDance will be one of the most important areas of analysis for rival executives in coming quarters. If their advertising slowdown is mostly due to the new entrant, then they can fight back by dropping rates or improving their own technology offerings — for example, better targeting tools. These are strategies we’ve seen in the past few quarters.

ByteDance had 50 billion yuan ($7 billion) of ad revenue from China in the first half of this year, up 113% from a year prior, CNBC reported citing marketing consultancy R3. That takes the company to 23% of the digital ad market, leapfrogging Baidu for second spot behind Alibaba, according to the report. 

Since it’s a private company, data for ByteDance’s third quarter isn’t readily available, so I made an estimate based on trends for the first half of this year and the same period in 2018. It’s not a perfect figure, but does help map out the broader picture.

Growth looks strong, but the trend is downward. If you exclude ByteDance, advertising revenue across 10 major internet companies  climbed 18% in the third quarter from a year before. That compares with 20% and 26% in the prior two periods. Include ByteDance,  based on my estimated figure, and growth was around 31%, which is still slower than previous periods. The newcomer may be stealing market share, yet broader economic trends suggest the competition should batten down the hatches and tighten their own spending regardless, as many have done recently.

“With Bytedance's growing online traffic share in China, the oversupply of ad space in the market will likely continue,” Bloomberg Intelligence Senior Analyst Vey-Sern Ling wrote recently. “This would depress ad prices in the medium term.”

Ling estimates that the growth slowdown for China’s online ad industry may have bottomed. That’s great news, if true. Yet incumbents still have to fend off that gorilla.

These aread-specific revenues from Alibaba, Baidu, Tencent, JD.com, Pinduoduo, Meituan, 58.com, iQiyi, Weibo andSina.

JD.com's marketplace and advertising figure isn't available for all periods, yet its contribution as a percentage of revenue is quite stable, allowing me to make a reasonable estimate.

To contact the editor responsible for this story: Patrick McDowell at pmcdowell10@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

©2019 Bloomberg L.P.