Caixin
Mar 26, 2020 03:08 PM
BUSINESS & TECH

Inside ByteDance, the $75 Billion Unicorn Behind TikTok

Photo: VCG
Photo: VCG

(Nikkei Asian Review) — Fabian Ouwehand was an early convert to Douyin. While studying Chinese in Shenzhen in 2017, Ouwehand, from Leiden in the Netherlands, saw brash advertisements for the video-sharing social network flooding the city. He was convinced to try it.

As soon as one video finished, the app would suggest another. The recommendations were so effective, he recalled, that time vanished; he clicked and clicked, and could easily lose half an hour at once. “I got hooked after watching it for the first few seconds, and just wanted to know what happened next,” he said.

Three years later, Douyin is not just entertainment, but his business. At 26, Ouwehand is the co-founder of Uplab, an online marketing agency that helps international brands reach Chinese consumers through the now-stunningly popular social network. Each day, 400 million people — the equivalent of the entire population of the U.S. and Canada — watch or create videos on the app, according to its owner, ByteDance. Ouwehand himself plans to ramp up employee numbers from three to 30 this year, looking to piggyback on Douyin’s extraordinary growth.

Douyin’s international version, TikTok, is the third-most downloaded nongame app in the world, behind only WhatsApp and Facebook Messenger. It has suddenly become a global cultural phenomenon; downloaded 1.57 billion times, nearly half of those — 689 million — occurred in 2019. And its privately owned parent, ByteDance, is considered the world’s most valuable startup. CB Insights estimates it is worth more than $75 billion, just over eight years since it was founded in a four-bedroom apartment in Beijing. But for all its size — and its app’s ubiquity — the company remains something of a black box.

Its founder, Zhang Yiming, rarely gives interviews or speaks in public. Few industry analysts have visited the company, and workers are prohibited from speaking with journalists without permission. Violation of the rule would mean dismissal, two employees told the Nikkei Asian Review, before turning down requests for interview.

“There is no benefit to being high-profile,” said Shaun Rein, managing director of China Market Research, a consultancy based in Shanghai. “It is always better to be low-profile in China, especially if you are a tech CEO. ... Being too high-profile attracts the attention of regulators in China and now, with the U.S.-China trade war, the attention of U.S. government officials.”

Yet those attempts to stay low-profile have failed. The combination of ByteDance’s size, reach and opacity have inevitably attracted the attention of regulators around the world. Where the company’s user data goes and who guides its policies on political content are concerning to governments, who worry about the Chinese government’s influence over its global tech giants. The U.S. government has ByteDance in its sights. Whether it can stop the inexorable rise of the Gen-Z phenomenon it operates, however, is a different story altogether.

BBQ and coding

Zhang, a software engineer by training, worked briefly for a string of companies, including Microsoft, before starting his own. One of Zhang’s earlier ventures was Kuxun, a travel and transportation search engine later acquired by Nasdaq-listed TripAdvisor. 99Fang, a property search site founded by Zhang, also attracted funding from the investment arm of U.S. brokerage Susquehanna International Group in 2009.

ByteDance began on the Beijing metro, according to an address Zhang gave to students at Nankai University in 2015. “Back in 2011, I noticed that fewer and fewer people were reading newspapers on subways,” Zhang said. “The sales of smartphones in China also experienced explosive growth in 2011. I thought smartphones would replace newspapers to become the most important medium of information distribution.”

Zhang, who also graduated from Nankai University in Tianjin, told the students that he devoted his college time to coding and reading. He also enjoyed having late-night barbecues with schoolmates after a grueling day of work at the university’s laboratory. Many of those who shared the same passion for coding and BBQ later became the early employees of ByteDance.

Zhang’s big idea was personal recommendations. “Just like Facebook connecting people with people, and Uber connecting people with vehicles,” he said, his product would “connect people with information.”

That meant artificial intelligence. At that point, though, the AI industry was still nascent; neither Zhang nor anyone in his team knew how to build a sophisticated algorithm. With no books available to guide them, they began from first principles, teaching themselves along the way.

The result was Jinri Toutiao, a news app that used Zhang’s algorithm to generate a tailored list of articles and videos based on individual users’ reading habits. In a 2012 seed round, his early backer SIG Asia invested $3 million, giving the company the financial firepower it needed to break out. SIG did not respond to requests for comment.

ByteDance followed up Toutiao with another hit, Douyin, in 2016. This time, it was up against serious competition from fellow startup Kuaishou — which went on to raise money from Tencent Holdings in 2017 — as well as Tencent’s own short video platform Weishi. But its early success brought a great deal more investment than its rivals — more than $1 billion, including prominent investors such as Sequoia Capital.

With firepower and growing prominence, ByteDance began poaching popular video producers from rival apps, paying them to create content exclusively on its platform, according to people who collaborated with Douyin in its early days. That gave the app a kick-start while it built a loyal base of creators through dialogue and technical support, including running video boot camps and sharing free lighting equipment.

“They really value what users think,” said Erin Huang, one of the first video creators recruited by Douyin. Once, Huang pointed out an undesirable app feature and ByteDance engineers worked overnight to fix it, she said. In fact, Douyin — initially named “A.me” — was rebranded based on the suggestion of its users, according to Huang.

Investing in its users created a self-reinforcing cycle; the quality of the videos improved, bringing in more users and making the app a magnet for celebrities. That allowed the company to pull ahead from its rivals in exposure and popularity. The most recent available data, from June 2019, showed that Douyin has 486 million active users, compared to Kuaishou’s 341 million and Weishi’s 105 million, according to market research company MobileQuest.

It is hard to understate how deeply Douyin has become embedded in Chinese internet culture. In a few short years, it has become the primary source of information in the country, and has spread to its most remote regions. In Liquan county, a farming region some 100 kilometers (62 miles) west of the Terracotta Warriors in Shaanxi province, “almost every smartphone user here has a Douyin account,” said Lai Yuping, an apple grower. The 64-year-old herself uses the app everyday.

“In a few short years, [Douyin] has become the primary source of information in the country”

More money followed, and to date, ByteDance has attracted more than $4.6 billion, based on Crunchbase estimates, including investments from SoftBank Group, Kohlberg Kravis Roberts and General Atlantic. Nikkei contacted all three companies, who declined to be interviewed.

The company has invested heavily in its own talent, with a hiring policy that is unusual in the Chinese tech sector. Rather than prioritizing individuals with overseas qualifications and long track records, ByteDance takes chances on atypical recruits. This is, in part, a reflection of its founder’s own journey — Zhang has never studied nor worked overseas.

When ByteDance posted a job opening that required applicants to have at least five years of work experience and proven success in product development, Zhang told the human resources department that he was “very upset” about the requirements.

“A lot of [product managers] in our company, myself included, would not have been able to work here if we followed such criteria,” Zhang wrote in a blog post last year. “We shall hire the right people. ... Educational background, work experience or [job] title are irrelevant.”

The company’s employees — or ByteDancers, as they refer to themselves — are asked to address each other by name, rather than by their job title, as most Chinese companies do. Junior workers are encouraged to challenge senior executives at work, and every two months, Zhang meets employees face-to-face to answer any questions. That has made the company attractive to potential hires, tech sector headhunters told Nikkei.

“If you choose Baidu, Alibaba and Tencent, you will likely become a screw in a giant machine,” one said. “But ByteDance will give a deserved opportunity to anyone smart, ambitious and capable to cope with a fast-changing world.”

“ByteDance probably has more [employee] talent than anyone else in the internet sector,” said Liu Yuan, a managing director of venture capital fund ZhenFund in Beijing. “The company is very good at recruiting talent that has yet to build a track record.”

In return, the company works its employees hard, developing a reputation for being tough and results-driven. The company runs reviews monthly, quarterly and annually to evaluate the performance of products and those managing projects. While most Chinese internet companies embrace so-called 996 culture — a work schedule that derives its name from requiring employees to work from 9 a.m. to 9 p.m., 6 days per week — ByteDance has apparently exceeded even that standard.

“We have to be on call almost every day, even during weekends,” one engineer in Beijing told Nikkei. “And on weekdays, leaving the office at 10 p.m. is an early day for me.”

To help employees cope with long hours, ByteDance provides housing allowances to anyone who lives close to their office.

ByteDance has turned a punishing work culture and access to talent into a moneymaking machine. The company sells ads directly on Jinri Toutiao and Douyin, but it has also begun to blur the line between e-commerce and content. Users can watch videos of apple harvesting, then click to buy fruit directly from the video’s creator; talk shows can be leveraged to sell merchandise or movie tickets. On Douyin, viewers can buy virtual gifts for their favorite livestreamers, tapping the valuable and growing “fan economy.” Last year, Douyin and TikTok together grossed nearly $177 million in in-app spending, based on Sensor Tower’s estimates.

The company does not disclose its financial performance, but in September last year, Reuters, citing unnamed sources, reported that the company logged revenue of 50 billion yuan to 60 billion yuan (around $7 billion to $8.5 billion) over the first half of 2019, mostly through online ad sales in China.

ByteDance’s scale in China is not unique. The country’s enormous market and rapid growth has created domestic giants in familiar sectors, from ride-hailing to microblogging. However, those companies have often foundered in their attempts to break out overseas; Baidu’s attempt to conquer the Japanese search engine market fell flat, while Tencent’s messaging app WeChat, hugely popular in China, has lagged far behind WhatsApp in India and Southeast Asia.

What sets ByteDance apart is TikTok, which, since its launch in 2017, has become an international sensation.

“Chinese giants all want to be global giants now,” said one venture capitalist specializing in the Chinese tech sector. “ByteDance seems to have outflown them.”

Going global

In 2017, ByteDance acquired Musical.ly, a three-year-old startup with offices in Shanghai and Santa Monica, California. The company’s app allowed users to create 15 to 60 second videos while lip-syncing to music, and by the time ByteDance bought in it was 200 million users strong, many of whom were young and in the U.S.

ByteDance had been operating TikTok since May 2017, but the following August, it merged the two platforms and relaunched under the TikTok brand. The growth was dramatic. Within months, it was being mentioned in the same breath as Facebook and Twitter, and topping app download charts around the world. Its short-form videos seemed to match the demands of Gen-Z users who have grown up in a fragmented media landscape.

“I’ve been on and off TikTok for at least two years. I found out about this app when my high school friends showed me some really funny videos on it, and we just got hooked immediately,” said Lauren He, a 19-year-old born and raised in San Francisco and now a freshman at the University of Chicago.

“Unlike YouTube or other platforms — where you have to sit through a 20 to 30 minute long video, and then regret wasting your time watching such boring stuff — TikTok videos are short. You can tell whether you like the content or not in seconds, and swipe away if you don’t like what you see,” said He.

TikTok is now available across 150 markets and in 75 languages, and has become nearly as ubiquitous as its Silicon Valley equivalents.

“There is not a single day that I do not use TikTok,” Rosalie Jansen, a 20-year-old marketing student in Amsterdam, told Nikkei. “Whenever I’m bored, I find myself scrolling down the app.”

Cracking overseas markets is important to China’s tech giants, which are starting to hit the limits of a saturated domestic one. Zhang himself has talked about the importance of taking the company out of China. “Chinese companies, like their American counterparts, are born to be global,” he told a room of business school students at Tsinghua University in 2018. “If you can’t position yourself globally, you won’t be able to take advantage of global resources.”

ByteDance now has 230 offices across over 30 countries. Foreign employees made up 10% of the company’s talent pool in 2018, and Zhang aims to increase that figure to 50% by 2021.

ByteDance is also in the midst of a global shopping spree. It acquired a stake in India’s news app Dailyhunt in October 2016, followed by another investment in Indonesian news aggregator Babe two months later. In early 2017, ByteDance bought U.S. video-sharing app Flipagram, which was then rebranded as Vigo Video. The company’s go-global strategy is not limited to its core business. In January 2020, Singapore’s Business Times reported that ByteDance had applied for a digital banking license in the city-state.

Perhaps inevitably, the platform’s expansion has attracted the attention of governments, particularly in the U.S., where the administration of President Donald Trump has been cracking down on Chinese technology companies, denying them access to American suppliers and clients. The White House has led a global campaign against Huawei Technologies, another among the small band of Chinese tech companies with a real global presence.

The U.S. government — and others — have long been concerned about the possibility of data from American users being transferred to China, and at the potential national security implications of military and government employees using Chinese platforms. Chinese law demands that telecoms and technology companies should support the government in cases of national security.

In October 2019, Marco Rubio, a Republican senator from Florida, called on the Committee on Foreign Investment in the United States, to investigate ByteDance’s 2017 acquisition of Musical.ly. Two months later, a class-action lawsuit was opened by a California teenager, alleging that the company had sent data to China without users’ consent. In January, the U.S. Army ordered military personnel to immediately remove TikTok from government-issued devices, noting that the social network “poses a potential national security risk” through its ability to collect personal information from a user’s phone.

ByteDance says that it stores all U.S. user data in the U.S., and that its American operation does not fall under Chinese jurisdiction.

The worries “are legitimate,” said Ross Darrell Feingold, a Taipei-based lawyer and political risk analyst who advises multinational corporations on China-U.S. relations. “One concern — common around the world — is the safety of users’ personal data. TikTok can make the best effort to prove that there is a wall, and American consumers’ data will not go to China. But it is going to be very difficult to convince American politicians and regulators that the wall is strong.”

The company has faced other regulatory headwinds. In India, where TikTok has had nearly 467 million installs, the app was temporarily shut down last April as a state court ruling said it was spreading pornography. Indonesia also slapped a brief ban on TikTok in 2018 for similar reasons. And since February last year, the government in the U.K. has been investigating whether the app has deployed proper measures to protect children against pedophiles and how their private data is collected. But it is in the U.S. where the threat to its growth is greatest.

“If ByteDance fails to address the national security concerns, it could be banned from doing business in the U.S.,” said Shi Jingyuan, a partner specializing in cross-border investments at international law firm Simmons & Simmons. “This could be a serious problem.”

In March, Chinese gaming company Beijing Kunlun Tech, the majority shareholder of the popular U.S. gay dating app Grindr, sold its stake in Grindr to an American entity for roughly $608.5 million. The deal came one year after CFIUS launched an investigation into Grindr’s Chinese ownership, citing worries that the personal data of millions of gay American users could be transferred overseas and used by Beijing for blackmail.

Under political pressure, ByteDance has stepped up lobbying efforts in Washington, D.C. It spent $270,000 on lobbyists for the second half of 2019, according to related regulatory filings.

The company is also reportedly seeking a new chief executive officer for its TikTok business to navigate the team through the turbulence, according to Bloomberg. ByteDance declined to comment. But earlier this month, the company appointed two executives to oversee its China operations, a move that will allow Zhang to “focus on leading and developing ByteDance’s global strategy,” according to a statement emailed to Nikkei.

Losing access to the U.S. advertising market, which currently makes up a tiny portion in ByteDance’s revenue but has huge potential, would be a blow for the company as it searches for new vehicles to maintain momentum. Growth in smartphone users in China has peaked, and even though ByteDance has moved into search, e-commerce and online gaming, those sectors are dominated by the previous generation of Chinese tech giants — Baidu, Alibaba Group Holding and Tencent, respectively.

ByteDance’s success — or failure — in the international market would set the pace for the go-global strategies of other Chinese internet companies. If ByteDance, as a front-runner in the industry, cannot overcome the challenge, “others might think twice before going abroad — and even put their overseas expansion plans on hold,” said David Dai, an analyst at Bernstein Research in Hong Kong.

Dai said that he does not think regulatory action will be enough to kill off TikTok’s momentum. “TikTok is not just a disruptive product in China but in the West, too. No Western company comes close as its competitor. It is too pessimistic to think regulatory concerns could easily change that,” he said.

That seems to be bearing out. Despite the stream of criticism leveled against it, the app added 3.2 million new users in the U.S. in December. “Concerns are still relatively high-level within the government,” said Randy Nelson, an analyst at Sensor Tower. “The potential implications have not become clear to average users.”

At Uplab, Ouwehand shrugged off the security concerns. This year, he plans to expand his business from Douyin to TikTok, and target European consumers. He recently hosted the first-ever TikTok Europe Influencer Summit in Amsterdam and plans to sponsor two European users to fly to Shanghai to learn how to produce better videos.

“TikTok in Europe is like Douyin two years ago. It is growing very fast,” he said. “[Security concerns] will always be there. But even in Europe, people continue using Huawei phones.”

Additional reporting by Rurika Imahashi in Tokyo and Skylar Li in Hong Kong.

This story was originally published by Nikkei Asian Review

Contact editor Yang Ge (geyang@caixin.com)

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