Chinese news aggregator Toutiao recently severed all content-sharing ties with Chinese social network Weibo (NASDAQ:WB). The spat between the companies started in August, after Weibo's parent company, SINA (NASDAQ:SINA), accused Toutiao of reposting Weibo content without its permission.

In the past, Weibo users could authorize Toutiao to republish their posts. That won't be possible following Toutiao's decision, but it's unclear if that decision is permanent. This clash might seem like a minor event, but Toutiao is actually one of China's hottest start-ups, which means it could hurt SINA and Weibo by cutting them off from its ecosystem.

A businessman and businesswoman read the newspaper.

Image source: Getty Images.

What is Toutiao?

Toutiao, which means "headlines" in Chinese, is a personalized news app that taps the reader's preferences and an AI algorithm to aggregate stories from various sources. The app was launched in 2012, and it now reaches 120 million daily active users (DAUs) who reportedly spend an average of 76 minutes per day on the platform.

The stickiness of that massive user base made Toutiao one of the most valuable start-ups in China. Its latest funding round, led by American private equity firm General Atlantic, raised $2 billion and gave the company a post-money valuation of $22 billion. Toutiao has also expanded overseas with the acquisition of U.S.-based video-sharing platform Flipagram and an investment in Indian news aggregator Dailyhunt.

Toutiao's ad revenue reportedly surged 400% from 300 million yuan in 2014 to 1.5 billion yuan in 2015, and it rose another 433% to 8 billion yuan ($1.2 billion) in 2016. Analysts are expecting 88% to 150% sales growth this year. By comparison, SINA generated $1.03 billion in revenues last year, and analysts expect 46% growth this year.

Toutiao's stunning growth indicates that it's potentially displacing online portals like SINA as a leading platform for online news. Shaun Rein, who is managing director of market consulting firm CMR China, recently told The Financial Times that users "were going straight to Toutiao rather than SINA, which threatens SINA's advertising business."

Broad reach

If Toutiao repositions itself as a direct competitor to SINA, the former could have an edge over the latter. SINA's online portals, which are similar to Yahoo!'s family of portals, arguably look dated in comparison to Toutiao's customized news stories.

SINA's portal business is still growing, albeit at a glacial pace. The business's total revenue rose 5% annually during the first half of 2017, as non-advertising revenue offset softer advertising revenue.

However, SINA's portal business only accounted for 29% of its total revenue during that period. The rest came from Weibo, which posted 70% sales growth and lifted SINA's total revenue by 47%.

Three phone screens showing Weibo's mobile app.

Weibo's mobile app. Image source: Google Play.

SINA's main site receives nearly 20 million unique visitors daily, so it actually has a smaller audience than Toutiao. But Weibo's DAUs rose 26% annually to 159 million last quarter, giving it a slight edge against Toutiao.

The unknown variable is the number of Toutiao DAUs who use Weibo, and vice versa. If that overlap is high, Toutiao could potentially reduce daily visits to Weibo by eliminating links to Weibo-hosted stories. That could take a bite out of Weibo's user growth and ad revenues and give Toutiao the upper hand in future content negotiations.

But if that figure is low, or users concurrently use Toutiao and Weibo for news and social media purposes, the impact might be minimal.

Toutiao's growth is also likely raising concerns at Baidu, Alibaba, and Tencent -- the "BAT triumvirate" that currently dominates the Chinese internet market.

Toutiao's growth and its decision to cut ties with SINA are troubling for SINA, but investors shouldn't panic. The two companies might renegotiate content-sharing terms and allow users to cross-post content again, or the divorce might barely impact Weibo's ad revenue.

Either way, Weibo and SINA investors should keep a close eye on Toutiao's growth, which probably won't slow down anytime soon.

Leo Sun owns shares of BIDU and SINA. The Motley Fool owns shares of and recommends BIDU. The Motley Fool recommends SINA and WB. The Motley Fool has a disclosure policy.