(Yicai) Oct. 25 -- ByteDance suffered a decline in revenue growth and a drop in profits margin in the first three quarters of the year, tech website 36Kr reported yesterday, citing a source close to the Chinese owner of TikTok.

The source did not provide further details, but recent Chinese media reports have noted three major challenges facing the Beijing-based tech giant.

The biggest problem is that its domestic advertising income engine is slowing down. There have also been challenges to TikTok's business in some overseas markets, and the company is spending a lot on developing its artificial intelligence capabilities, with the returns not yet sufficient to compensate.

Ad income from the Chinese market has been a key foundation of privately owned ByteDance's revenues. But according to a recent report from LatePost, ad income growth slowed to less than 17 percent in the three quarters ended Sept. 30, down from about 40 percent in the same period of last year. Internal goals have also not been achieved in past two quarters, the report said.

The reason for the decline of domestic advertising revenue is a slowdown in e-commerce business at Douyin, the Chinese version of TikTok, and the life services segment has weaker-than-expected in encouraging merchants to spend on advertising.

TikTok's commercial prospects have been a key force driving ByteDance's valuation but the short video app has been hit by various geopolitical problems, causing it to miss global revenue targets in the first nine months. TikTok has faced legal challenges and a potential ban in the United States. It was also probed by Australia’s privacy watchdog earlier this year and was banned from UK government devices last year.

TikTok's e-commerce business, which ByteDance has pinned high hopes on, has missed gross merchandise volume targets for months in a row, 36Kr reported, and has had only modest success in European and American markets.

Another problem is a decline in profit margins, which started to grow in 2022. This is partly because the firm has had to offer more promotions to sellers and users, and spending on developing its Doubao large language model and the related AI business.

The LLM sector both in China and abroad is burning through cash, with firms investing heavily in anticipation of future profits. Leading player OpenAI is expected to run up total operating costs of USD8.5 billion this year, media reports have said, and will rack up a loss of about USD5 billion. Spending on Doubao is also expected to be a further drag on ByteDance's profitability.

Chief Executive Liang Rubo said at a recent company meeting that ByteDance has been too slow to develop new technologies compared with some smaller rivals. As a result, the firm will continue to invest in AI, even if it contributes to profit strains in the short run, amid slower growth of ad income and TikTok's uncertain future in the US.

Editor: Tom Litting