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Tencent's Attempt to Counter ByteDance Hits a Brick Wall

By Leo Sun – Updated Apr 22, 2019 at 11:28PM

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Chinese regulators pillory Tencent's news app amid a purge of "vulgar" sites and apps.

Chinese regulators recently shut down over 700 websites and 9,300 mobile apps in a bid to stop the spread of "vulgar" content. The initiative, which started on Jan. 3, is the government's latest attempt to tighten its grip on the country's booming internet market.

Some of Baidu's and's news services were suspended as part of the purge within the first week. This time, the Cyberspace Administration of China singled out Tencent's (TCEHY 3.69%) Tian Tian Kuai Bao for spreading "vulgar and lowbrow content," which was "harmful" to internet users.

An unplugged ethernet cable with a Chinese flag in the background.

Image source: Getty Images.

Tian Tian Kuai Bao, which has about 45 million monthly active users (MAUs), is a news aggregator app that curates stories based on a user's preferences and reading history. It primarily competes against ByteDance's Jinri Toutiao, which leads the custom news app market with over 260 million MAUs.

It's unclear if Tian Tian Kuai Bao will be permanently banned, but this is a big setback in Tencent's efforts to counter ByteDance -- which has been gaining ground with younger users with its family of Gen Z-oriented apps.

How ByteDance is disrupting Tencent's business

ByteDance's first hit app was Jinri Toutiao. It pulled users away from traditional news platforms like Tencent News, which still has nearly 290 million MAUs. Jinri Toutiao's emphasis on AI-curated viral content made it popular with younger users, and it leveraged that popularity to launch Douyin, a lip-syncing short video app. ByteDance subsequently acquired its Douyin's rival app and merged the two platforms into a new app called TikTok, which now reaches over 500 million MAUs.

ByteDance is now leveraging TikTok's popularity to launch Duoshan, a new mobile messaging app that's integrated into its other apps. This new app clearly targets Tencent's WeChat, the top mobile messaging app in China with 1.08 billion MAUs. ByteDance is also expanding its ecosystem with newer apps like the video app Xigua and the content creation platform Huoshan.

A group of young adults take a selfie.

Image source: Getty Images.

How Tencent is fighting back

Tencent clearly realizes that ByteDance is evolving into a dangerous rival. To counter Jinri Toutiao, Tencent launched Tian Tian Kuai Bao and invested in another news aggregating app, Qutoutiao (QTT 30.54%), which had 21 million daily active users (DAUs) last quarter.

To counter TikTok, Tencent rebooted its Weishi short video app, which had 45 million active users, as a TikTok clone last year. It also launched nearly a dozen new short video apps in a scattered attempt to attract younger users, and invested in Kuaishou, a short video app with over 150 million DAUs.

Tencent also invested in the Gen Z-oriented digital content platform Bilibili (BILI 16.57%) and restructured its business units to prioritize the growth of its digital platforms. It's also expanding WeChat into an all-in-one platform through mini-programs. Tencent also blocks WeChat users from sharing download links to several of its competing apps, including Duoshan.

Will regulators derail Tencent's strategy?

The government's latest crackdown could cripple Tencent's ability to counter Jinri Toutiao's growth. However, the regulators are also aggressively targeting ByteDance's apps. Last April, Jinri Toutiao, Tian Tian Kuai Bao, and two other news apps were temporarily suspended over "vulgar" posts. ByteDance's joke and meme app, Pipixia, was also suspended, along with one of Huoshan's content creation channels. A few months later, regulators suspended Jinri Toutiao again for hosting "pornographic" content.

Simply put, ByteDance's viral content platforms seem more exposed to China's censors than Tencent's core WeChat platform. Tencent is also trying to appease regulators by self-censoring its content -- it recently stated that its campaign to fight fake news reached nearly 300 million WeChat users last year.

However, the more Tencent chases ByteDance with viral content apps aimed at younger users, the more exposed it could be to regulatory crackdowns. This could make it tough for Tencent to catch up to ByteDance -- which might also suffer setbacks but probably won't lose its lead among Gen Z users anytime soon.

Check out the latest Tencent earnings call transcript.

Leo Sun owns shares of Baidu and Tencent Holdings. The Motley Fool owns shares of and recommends Baidu and Tencent Holdings. The Motley Fool recommends Bilibili, and The Motley Fool has a disclosure policy.

Stocks Mentioned

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$0.69 (30.54%) $0.16

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