Why Would a News App Potentially Worth As Much As USD 22b Set Off Alarm Bells for China's BATs?
Dannie Li
/SOURCE : China Tech Insights
Why Would a News App Potentially Worth As Much As USD 22b Set Off Alarm Bells for China's BATs?

(Yicai Global) Aug. 21 -- Earlier media reports have it that the news app Toutiao, one of the tech unicorns in China is raising around USD 2 billion at a valuation of over USD 22 billion, and U.S.-based private equity firm General Atlantic is among potential new investors. A valuation of USD 22 billion for a news app- that is really something, if it is compared with the search engine giant Baidu(market cap USD 76 billion as of July) and social media giant Weibo (market cap USD 20 billion as of August).

Looking back at its rising history, one might be astonished with how the company's valuation has been scaling up over the past several years.

Then people wonder why its sudden surge of valuation, or say why are investors betting so big on its future?  The answer is, the rising of Toutiao in essence is the rise of a new generation content distribution platform. Looking at its growth rate in the past several years, no matter in terms of the number of users or digital advertising revenues, the dark horse has revealed great potential in snapping up more market shares and revenues from other content distribution platforms, news portals, and search engines to social media.

A news aggregator that rivals with news apps, social media, mobile browsers and search engine...

In a narrow sense, Toutiao is a news aggregator, thus it is always deemed as merely competing with existing news products, including mobile news apps and news portals. However in a broader sense, it is rivaling the likes of Weibo, WeChat (its Official Account platform), UC Browser(owned by Alibaba and also has a news feed function popular among its users) and Baidu, because they are all content distribution platforms, though of different kinds and with different types of content. In the value chain of the content industry, there are four main components, including content creators, content(which varies from text, pics, videos to live streams) , content distribution platforms and users.

Forms of content distribution platforms are evolving, as the time changes.

Prior to the internet era, the content distribution media was mainly print media, radios, TVs, etc. However with the emergence and popularity of computers and smartphones, the distribution media changed, leading to the change of mainstream content distribution platforms. From news portals, search engines to social media and news apps, they are all creations of the internet era. But the differences are, on news portals, resembling the newspaper era, it is the editors who decide what you read which limits your access to information; on search engines, you decide what to read by inputting keyword in the search bar. On social media, you mainly access information by scrolling down the feeds created, liked or shared by friends' accounts you followed, or KOL accounts you subscribed.

Lastly, the trending content distribution mechanism pursed crazily by major content platforms, even including major social media, is dubbed algorithmic mobile newsfeeds with personalization. These platforms adopt an algorithm-based recommendation scheme, making every effort to ensure you stroll to content of your taste, based on user data and reading behaviors they have collected. Using the domestic initiator, the biggest beneficiary of the trend is Toutiao. Although different platforms distribute content in varied ways, they share one thing in common that, for them, the dominating stream of income is ad revenues (paid content business in China is just in its cradle). Thus in the wrestling of taking a bigger slice from the huge pie of China's advertising market, Toutiao is competing toe-to-toe with the likes of Weibo and Baidu.

Number speaks: how Toutiao is edging ahead of its rivals

Putting aside elements including effective operations, strategies, advantage in algorithms of the company, the success of Toutiao actually represents the threat that an advanced content distribution model poses to outdated ones. For instance, compared with news portals, Toutiao is more of a darling to both readers and advertisers in many ways.

First, users have access to more content on Toutiao than on a certain news site. News portals have their reporters and editors to produce news, while Toutiao uses technology to drag and collect content from online. This method is tricky in that it guarantees endless supply of content while at the same time, it costs much less. For users, if it is possible to read news from five news portals on one platform, why bother downloading five news apps? Second, instead of making readers read what editors have picked for them, personalized news aggregators claim that their technology helps provide users with recommendations based on their interests. Imagine that you cannot just stop scrolling down on the news feed page, on which more and more news recommendations of the related topics just popping up. This scheme not only brings Toutiao a surging number of users ,but they also spend a longer time on the platform.

Apart from users, advertisers are buying it. For advertisers, a huge audience and accuracy in pitching ads to their target users are metrics that weigh heavily in choosing which platform to deliver advertisements. As claimed by Toutiao, its activated users upped 84% year-over-year to 700 million for the year 2016, compared with the combined users of Weixin and WeChat, the most popular social network in China, of 889 million as of 2016 year end. The more users it has and the longer the time spent on the platform, the more user behaviors it can track and the more specific it can tag its users, which leads to the more accurate pitching of advertisements to advertisers' target audience. In the end, it means real money coming in from advertisers. Toutiao initiated monetization since mid-2014 through advertising. To make the most out of its traffic, it has been emphasizing that ads' content is interesting and acceptable for users, in the end to put as much ads in the news feed as possible.

Its ad revenue soared from RMB 300 million in 2014, to RMB 1.5 billion in 2015 to around RMB 8 billion in 2016. And its goal of ad sales for 2017 is between RMB 15 billion to 20 billion, according to Chinese media reports. Compare the online ad revenues of the established tech companies in 2016 and one might find Toutiao's profiting capability astonishing.

Well-armed for the harsh battle ahead: social, search, short video, and of course, globalization

If sales numbers are enough to convince the market, it is prepared with new strategies, or stories, which will try to demonstrate that it is making up for its soft spots (like its vulnerability in content copyrights), that it is building up relation chains on its platform (a social platform definitely has more potential than just a news app), that it is catching up with the latest trend (yes, videos, short ones), and that it ventures overseas. Below is a summary of key strategic changes it has made in the past year and planned for the coming year.

Now you see why Toutiao could potentially worth as much as USD 22 billion? The answer is, its business model built upon the algorithmic mobile newsfeeds has proven effective, and it has also demonstrated its competitiveness against established rivals and looks promising to snap up a big portion out of China's advertising market. Media reports have it that the CEO of Toutiao Zhang Yiming has set its online ad revenues goal at USD 10 billion and 20% market share of China's advertising industry. To get ready for that goal, the company is set to scale up its team from 3000 to around at least 7000, among which the sales team will account for 70% to 80%.

This article was originally published on China Tech Insights.

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Keywords: Toutiao , MEDIA