Ep. 9: Online Spat to Lawsuit Spree: Inside Tencent and Toutiao’s Escalating War

Earlier this month, Tencent sued Bytedance, better known as Toutiao, for 1 RMB and Toutiao fought back by suing Tencent for 90 million RMB. What sparked the feud between the David and Goliath of the Chinese tech world? Listen to this week’s episode of TechBuzz China by Pandaily to find out!

TechBuzz China by Pandaily is a weekly technology podcast focused on giving you a peek into what’s buzzing within the tech community in China. It is co-hosted by Ying-Ying Lu and Rui Ma, who are both seasoned China watchers with years of experience working in the technology space in China. They uncover and contextualize unique insights, perspectives, and takeaways on headline tech news that don’t always make it into English language coverage.

This week on TechBuzz China by Pandaily, co-hosts Ying-Ying Lu and Rui Ma explain the fight between Bytedance and Tencent as sparked by the war in short-video apps. They trace it back to the humble beginnings of short-video apps and talk about the major players such as Xiaokaxiu, Musical.ly, and Kuaishou who had their 15 mins of fame along the way.

Currently, the space is dominated by Tencent-backed Kuaishou and Bytedance’s Douyin, while the other two members of BAT, Alibaba and Baidu, both announced that they will be releasing their own short-video apps as well. Who will come out on top in the vie for Chinese netizens’ attentions? Listen to hear what Ying-Ying and Rui have to say!

As always, you can find these stories and more at pandaily.com. Let us know what you think of the show, and don’t forget to follow Pandaily on Twitter at @thepandaily, as well as TechBuzz at @TechBuzzChina!

Transcript

(Y: Ying-Ying Lu; R: Rui Ma)

[0:00] Y: Ugh. We couldn’t avoid it.

R: It’s been hovering on the horizon for a while.

Y: We are totally not cool enough to cover it, Rui.

R: I am not. I am way too old.

Y: What are we even talking about?

R: Short video.

Y: How short?

R: Generally 15-second videos set to music that are then shared.

Y: Mostly into dedicated social networks but you might have seen some on the “traditional social media” as well, I know I get them in Youtube, Facebook, messaging apps …

R: And for the last few weeks, a battle in short video between David and Goliath has been raging on in Chinese internet.

Y: David being Bytedance, a decacorn valued at something like $30Bn, according to Mary Meeker at least, and owner of Douyin 抖音, the hottest short video app right now in China.

R: Goliath being Tencent, the $500Bn giant behind Wechat, League of Legends, and whose story we covered pretty well I think back in Episode 5.

Y: Yeah definitely listen to that if you haven’t, as that was one of my favorite episodes, and might give you some additional color as to the battle that’s raging right now

R: Between Bytedance and Tencent.

Y: Who’ve now both sued each other in court.

R: First Bytedance-owned Douyin sued Tencent last month for 1m rmb or about $150K US dollars.

Y: Then Tencent sues Bytedance for a symbolic 1 RMB or a cool $0.16.

R: Resulting in Toutiao suing Tencent back that same day, June 1, for $14mm.

Y: What were these lawsuits for, you ask?

R: It’s a long story.

Y: So make yourself comfortable and we will tell you how it all came to pass.

[2:01] Y: Hi everyone! We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network!

R: We are a new weekly podcast focused on giving you a peek into what’s buzzing within the tech community in China.

Y: We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage.

R: TechBuzz China is a part of Pandaily.com, a new English language site that tells you “everything about China’s innovation.” I’m one of your two co-hosts, Rui Ma, and I wasted many hours on these short video apps this week so you don’t have to.

Y: And I’m your other co-host, Yingying Lu. We’d like to take a sec give a shoutout to some of our listeners who have written in.

R: A HUGE THANK YOU to— Matt from Chicago, who took the time to write us our very FIRST REVIEW so far on iTunes. Thanks for the five star. And also Joyce Yang from Global Coin Research.

Y: Please write us more reviews! It’s super helpful

[3:05] R: So we already gave you the headline, which is Bytedance and Tencent suing each other.

Y: It’s not quite the 3Q war we talked about back in episode 5, but it’s shaping up to be another epic battle.

R: How did we get here though, to short video apps being the talk of the town?

Y: That’s a long story …

R: I know. But let’s do it. Let’s start from the beginning.

Y: Well, the whole short video thing can be traced back to Meipai, which was the video product to Meitu Xiuxiu 秀秀. Meipai got 100mm users in its 9 months or so, and was even highlighted by Facebook exec Chris Cox as Instagram for video back in 2015.

R: I used it, and it really had most of the features you find in short video apps today. Easy editing, lots and lots of filters and preinstalled effects and transitions, and very important, easily insertable background music.

Y: The filters were great. But that was expected, because parent company Meitu’s claim to fame is a selfie app that makes you beautiful with all sorts of filters and special effects.

R: We are talking aboutFace whitening, face thinning, leg lengthening, auto-applying makeup …

Y: Their mission was “to make the world a more beautiful place.”

R: And it was successful. Almost no one in China posts photos without beautifying them first in Meitu or a similar app.

Y: If you want to know more about it, it’s a public company in Hong Kong now, so there’s a lot of info online. But back to Meipai …

R: We think that because Meipai grew out of a company that was great at making tools, which is what the Meitu selfie app is, and not content …

Y: It was never really able to shift away from its original mission of “beautifying life”
R: Its content was mostly beautiful people.

Y: Whether they were naturally or artificially so.

R: Sharing beautiful moments that they were having in the world.

[4:57] Y: Now step in a company called 小咖秀, which literally means, Supporting Cast Show.

R: Within just two months, Xiao Ka Xiu hits the #1 spot for free downloads in China.

Y: It basically worked very much like the app Dubsmash.

R: An app which allowed you to dub over popular soundtracks with your own video and send it to your friends.

Y: The Xiao Ka Xiu team used a lot of celebrity and KOL (aka influencer) marketing in the beginning.

R: Which helped a lot with initial traction, but didn’t work well in the long run, because it was just too difficult for the average Joe to compete against real stars doing dubs.

Y: Kind of ironic, given the app’s name, but something we are highlighting here because it’s relevant to their successors, especially Kuaishou, which plays a prominent part later in this story.

R: Anyway, there was a huge opportunity here, and one that was especially obvious after Meipai, Xiao Ka Xiu, and a few others rush to the top of the app charts but fall back down.

Y: As Lei Jun would say:

R: Even a pig can fly if it can find a place in the eye of a storm.

Y: And this was definitely some storm!

R: Although for most of 2016 and the first half of 2017, this wasn’t the storm most pigs were rushing into because the bigger storm was in.

Y: Tada! Livestreaming! Mobile livestreaming!

R: Which we went over in detail in Episode 7, so please go back and listen to that, because that’s super interesting.

Y: Can I just say that I really love telling listeners to go back to prior episodes, feels like we have like, a whole body of work already .

R: Totally. Me too.

Y: Yay.

[6:33] R: OK, but back to livestreaming. While that was heating up the Chinese market and taking up the free time of Chinese youth in 2016 and 2017 …

Y: US teens were all over this app called Musical.ly. Which was, very ironically, made by a team of grownups in Shanghai, who had failed at their first edtech product, and by chance stumbled upon the idea of a video app for people to make music videos lipsyncing to their favorite music.

R: Aha! Short videos. Kinda like that app we mention earlier? Dubsmash.

Y:Actually, pretty much the same, Wired even called musically the new dubsmash.

R: Although that’s not to take away from musically’s innovations, because the two definitely had differences.

Y: Musically was a social network from the get go while dubsmash began as more of a messenger. But the biggest difference, Rui?

R: Musically got to 200mm users first and was bought for around a billion dollars at the end of last year.

Y: By none other than Bytedance AKA Toutiao.

R: That’s because Bytedance, being the growth hungry company that it is, wasn’t satisfied with the dominance of its flagship news product, Toutiao. It wanted other amazing products in its portfolio.

Y: Bytedance, by the way, constantly experiments with new products, including longer form professionally made videos, as well as livestreaming quiz shows, HQ style.

R: The core theme here being that Bytedance is really good at building content-driven social platforms.

Y: It’s also really good at monetizing them, usually through advertising, and had something like $2.5Bn USD in revenues last year.

R: And so, one full year before it acquired Musical.ly, in Sept 2016, it had launched Douyin, which was very similar, but targeted at the domestic market.

Y: It basically cloned Musical.ly, before buying it.

R: Those of you outside of China might know it by a different name, Tik Tok. But in China it’s known as Douyin.

Y: Douyin, by the way, literally means trill, you know, like the musical term.

[8:29] R: But we can’t talk about Douyin without talking about Kuaishou, its nemesis.
Y: Not its only nemesis for sure, but a main one. An archrival.

R: Because like anything in China, no good opportunity goes unobserved.

Y: And back in 2013, Kuaishou, which means quick hand, had already launched and gotten popular in Tier 3 and 4 and even 5 cities in China.

R: I think those are just villages and farms at that point, not cities.

Y: Well whatever, an ex-Googler saw the opportunity for short, very short, video content to entertain these villagers.

R: He was so successful that in the summer of 2015, a famous marketer said that when he was visiting Foxconn factories, he saw that many factory workers only had 3 apps installed on their phones, and Kuaishou was one of them.

Y: Unfortunately for Kuaishou, their user base was not well liked by most brands.
R: And not least because the users tended to favor certain types of content.

Y: Ones that involved eating weird things, dancing weirdly … or just other stuff considered “unsophisticated” and “low” by city dwellers.

R: But were super popular anyway.

Y: And if you remember from our episode 7, this audience —

R: comprised of well over half of China’s population not living in tier 1 and 2 cities —

Y: really likes livestreaming. A lot. So while Kuaishou’s high growth comes from the
short videos, its revenues mostly come from livestreaming, some gaming, and a little bit of ads.

R: Despite its low-end user base though, Kuaishou itself has some great pedigree.

Y: It’s seed invested by Morningside, one of the best VCs in China, and followed on by Sequoia, DCM, Shunwei2, Baidu, Lightspeed.

R: Its latest round was $1bn led by Tencent at a supposed $18Bn valuation in January of 2018.

Y: And it just bought animation and video streaming platform A-C-fun, like, yesterday.

R: So things are going good, but Kuaishou should still be very very worried.

Y: About Douyin.

R: Yes, because despite starting a full three years later, Douyin is catching up, super fast.

Y: A year ago, when Kuaishou was already at 40mm DAUs, Douyin only had a few hundred K.

R: Fast forward to this April, Kuaishou’s MAU was 220mm, and Douyin’s really not very far behind at 160mm.

Y: And Douyin’s audience is generally regarded as more upscale, i.e. simply richer.

R: The saying goes, northerners watch Kuaishou, and southerners douyin 北快手,南抖音, because there is this longstanding stereotype that northerners are less sophisticated whereas southerners are into lifestyle and finer things.

Y: Northerners chomp on raw garlic, and southerners sip on lattes.

R: Ridiculous stereotypes, but you get our point regarding the different user bases.

Y: Douyin was also really smart to seize the branding opportunity from sponsoring the wildly popular TV show competition The Rap of China last year, which many credit for their initial rise.

R: It has also created a lot more memes than Kuaishou. When I was in Xi’an last month, for example, everyone was telling me to go to this particular restaurant where after you drink rice wine, you smash the bowl it was held in.

Y: Like in old school kung fu movies.

R: Yeah, totally stupid, but totally viral.

[11:51] Y: How does it make money though?

R: When it reached a billion views a day last August, it began to collect advertising revenues.

Y: Besides the normal types of ads you would expect, it also put in some native video ads from hip brands such as Adidas and Airbnb.

R: And it does this contest concept, where brands can start a video contest.

Y: A popular one involving the hot pot chain Haidilao resulted in orders of one particular ingredient to spike 17%.

R: Kuaishou, as we’ve said before, is not so good at this.

Y: But what both companies seem to recognize is the need for more and better content.

R: Douyin already works with agencies that go out and “discover” talent, and have revenue splits in place with what they’re calling “multi channel networks,” or basically groups that have at least 25 talents and monthly views of 80mm and more.

Y: These groups are run very professionally, and some of their top talents are seeing 10mm new fans a month.

R: And with Douyin already integrating ecommerce functions into its videos, that could mean we may see some serious revenues real soon

Y: Kuaishou is also trying to find good content, although it insists that it wants to give everyone an equal chance, not just the popular or beautiful people.

R: It’s trying to stay more grassroots, more egalitarian.

Y: According to an employee, Kuaishou wants even someone uploading themselves just quote unquote slapping the ground to get views for their content.

R: I think that’s Chinese for “booooring.”

Y: The person even referred to this as decreasing the Gini coefficient within their ecosystem.

R: Kind of a liberal application of economic concepts there I think, but I get their point.

Y: Hmm, we’ll see if that translates into good business.

R: So yeah … people are spending lots of time watching others lip sync, break bowls, eat hot pot, or maybe just slapping the ground …

Y: A whopping 50 minutes per day apparently.

R: Out of the 4 hours on average that mobile internet users are spending online in China.

[13:48] Y: And that, listeners, is what has everyone in the Chinese internet ecosystem very very worried.

R: There’s Baidu and Alibaba …

Y: Who both recently announced that they will release short video apps, with Ali’s to be focused on ecommerce, of course.

R: But really, out of BAT, Tencent is the one who may have the most to lose.

Y: As the owner of QQ, Wechat and of course with all its really profitable gaming properties, Tencent will probably feel the most pain if users shift entertainment time from its products to short video.

R: So, no wonder that tensions have been high.

Y: No surprise there– Douyin has had a long history of conflict.

R: Back in March, Douyin users noted that sharing content to Weibo didn’t work.

Y: Like they could share the link but no one else could see it. So they suspected Weibo was blocking douyin content.

R: Users also complained of the same on WeChat.

Y: Then in April, Tencent announced that it was going to put in 3bn rmb or 470mm usd in the next 4 months into subsidies for short video content creators for its own platform, Weishi.微视

R: Coincidentally, at the same time, Bytedance CEO Zhang Yiming noted in his Wechat Moments that “someone is systematically writing bad stuff about Douyin.”

Y: He posted proof that over 400 WeChat accounts were sending out negative news on Douyin.

R: These were all #fakenews.

Y: The clickbaity articles basically said that Douyin was ruining people’s lives.

R: One Wechat article in particular said that it was ruining children’s lives and was titled “Douyin, please let our children go!

Y: That article focused on children replicating dangerous stunts from online, which Douyin claimed were not from their platform

R: And although the article wasn’t from Tencent but from a third party with a WeChat official account

Y: Douyin sued Tencent anyway for 1mm rmb

R: Things then became even more heated when late May, Douyin wrote this official open letter titled “Friends of Douyin, We are Sorry

Y: The letter basically had screenshots that showed how Douyin’s videos had been censored on WeChat and given an inappropriate content warning.

R: But it got really truly crazy when Bytedance, through its Toutiao news app, pushed a headline that said “How many documents — which in this case they are referring to policies and regulations — will it take before Tencent stops?”

Y: Stops what?

R: Exactly. Weird title right? Well, that’s because the original title was actually – “How many documents will it take to rein in the damage that online gaming is doing to our youth?” A mouthful certainly. Not “Before Tencent stops”

Y: It was an article written by xinhuanet, an affiliate of China’s state owned news agency, and it really was quite a scathing essay on Tencent’s addictive games and their horrible effects on youth

R: But it was also true that it did not have Tencent in the title!

Y: In Toutiao’s defense, it does look as if Baidu might have changed it in their news app first, both the title, and attributing it to the state owned agency instead of the affiliate.

R: Given that Baidu and Tencent are definitely not friends, that’s not super surprising.

Y: But unfortunately for Toutiao, they’re the #1 leader in news, and so when they pushed out the article with Tencent in the title, it did way more damage, and really pissed off Tencent.

R: Really pissed. because earlier this week in Beijing, Tencent sued Bytedance for 1RMB or 16 cents, specifically mentioning article and also the letter earlier, alleging defamation and asking for an apology.

Y: But waaaait, it gets better! Because that same day, June 1, Bytedance fought right back with a 90mm rmb or 14mm usd suit for anti-competitive practices.

R: Which as we know, if you go back to Episode 5, is not the first time Tencent has been sued for such.

Y: Whew. But now at least, we are finally all caught up on the story.

R: Yeah. Finally. But what will happen next?

Y: It’s really hard to say. We haven’t seen Tencent be this aggressive for a while with anyone not named Alibaba or owned by Alibaba, so who knows what they will do.

R: And because it’s content, and because the content rules in China are incomplete and censorship is very real, I think it’s not gonna be that difficult for Tencent to screw over Bytedance if it wants to.

Y: Yeah, content is really, really tricky.

R: Bytedance knows that really well, too, because one of its other content apps NeihanDuanzi got shut down earlier this year, which is a story we covered way back in *episode one*

Y: So long ago!

R: I know! So long ago. But that means with Toutiao the news app pretty much saturated in China, Douyin is carrying the burden of Bytedance’s growth at this point, so I think it has no choice but to fight back.

Y: Against Tencent, the Goliath.

R: Remember it’s not just Tencent, but Tencent-invested Kuaishou, and all the other internet giants we mentioned who are launching their own short video apps.

Y: There is a potentially large revenue opportunity in short video that Douyin and Kuaishou are just scratching the surface of.

R: And which still seems up for grabs.

Y: If you think video is the future, which I certainly do.

R: Then you should pay attention to this fight.

Y: Who will win?

R: Well for my part, I hope none, because I think watching lipsyncing videos is a waste of life.

[19:13] Y: We’d like to give a shoutout to our partners at SupChina. In addition to our podcast here with Pandaily, they publish the excellent Sinica podcast, a weekly discussion of current affairs on China with journalists, writers, academics, policy makers, and business people.

R: So while we only focus on tech, they really give you the entire overview. SupChina, hand in hand with GGV, also publishes the GGV 996 podcast, which interviews top tech leaders in China tech and investment.

R: OK, that’s all for this week folks! Thanks for listening. We really enjoyed putting this together, and are always open to any comments or suggestions. You can find us on twitter @thepandaily, THEPANDAILY, and my personal Twitter account is @ruima, that’s spelled RUIMA.

Y: And my twitter is spelled @GINYGINY. We’ll be back here same time next week!

R: TechBuzz China by Pandaily is powered by the Sinica Podcast Network. Pandaily.com is a new English language site that tells you “everything about China’s innovation.” Our producers are Carol Yin and Kaiser Kuo.