ByteDance, the Chinese company that became the world's most valuable start-up in just seven years, could be developing its own smartphone, according to The Financial Times. The report claims that ByteDance could launch a phone that comes preinstalled with TikTok, Jinri Toutitao, and its other popular apps.

This announcement isn't surprising, since it complements the expansion of ByteDance's ecosystem in the shadow of China's "BAT" tech giants: Baidu (NASDAQ:BIDU), Alibaba (NYSE:BABA), and Tencent (OTC:TCEHY). Will a ByteDance-powered phone threaten the BAT leaders? Or is China's smartphone market already too saturated for another challenger to make a mark?

A young woman taking a selfie on top of a building.

Image source: Getty Images.

How ByteDance threatens the BAT companies

ByteDance's flagship apps have large followings, especially among China's Gen Z users. TikTok, which was created from the merger of the short video apps Douyin and Musical.ly, has over 500 million monthly active users (MAUs). Jinri Toutiao, also known as TopBuzz overseas, has 120 million daily active users (DAUs). It also owns the short video platform Xigua and the international news aggregator platform News Republic.

ByteDance is leveraging the strength of TikTok and Toutiao to expand into adjacent markets with its work collaboration tool Lark, a music streaming app, the video chat app Duoshan, and the messaging app Flipchat (known as Feiliao in China).

These moves threaten Baidu and Tencent. Baidu could lose its search users to ByteDance's news aggregator apps, while its iQiyi streaming video platform could lose viewers to its video apps. Tencent, which owns China's top mobile messaging app WeChat, could lose younger users to ByteDance's Flipchat. It could also lose streaming music and video users to ByteDance's apps.

Alibaba, which owns China's two biggest e-commerce marketplaces, is less exposed to ByteDance's growth. Alipay, which is backed by Alibaba, actually provides payment services for ByteDance's Flipchat -- which could widen its moat against Tencent's WeChat Pay.

However, ByteDance's growth still threatens Alibaba's money-losing digital media and entertainment unit, which houses its streaming media, movie production, online search, and web browser businesses. Alibaba's streaming media platforms are much smaller than Baidu's and Tencent's platforms, so the growth of ByteDance's video apps could make it even tougher for Alibaba to keep up.

How the BAT companies are fighting back

Baidu, Alibaba, and Tencent are all taking steps to hold ByteDance at bay. Baidu launched its own short video app, Haokan, which hit 22 million DAUs last quarter. It's also locking users into its core Baidu app, which has 174 million DAUs, with in-app mini-programs for games, deliveries, ridesharing, ticket bookings, and other services.

Alibaba and Tencent also own similar mini program platforms. AliPay, which topped 230 million DAUs earlier this year, locks users into its payment app with over 12 million mini programs. Alibaba also recently launched mini programs for its Taobao e-commerce app.

A digital depiction of mobile apps hovering above a tablet.

Image source: Getty Images.

Tencent, which started the mini program revolution on WeChat two years ago, said that 200 million DAUs were using over a million of its mini apps last November. Tencent also launched several short video apps (including Hotpot Video and Weishi) and backed other short video apps (like Kuaishou) to counter TikTok.

Tencent and Alibaba are also investing in companies that appeal to Gen Z users. Both companies recently invested in Bilibili, which offers online anime, games, and comics to China's Gen Z users.

Earlier this year, Tencent was even reportedly considering the development of a gaming smartphone with preinstalled apps and games. Neither Baidu nor Alibaba launched a smartphone before -- likely due to the saturated state of China's smartphone market.

Why a ByteDance smartphone would likely flop

China's smartphone shipments tumbled 14% last year, according to Canalys, due to the saturation of the market and longer upgrade cycles. Only two companies -- Huawei and Vivo -- grew their smartphone shipments last year.

Tossing a new phone into this crowded market would be foolish, since ByteDance's apps are already installed across a wide range of iOS and Android devices. The failures of Amazon's Fire Phone and selfie app maker Meitu's phones clearly demonstrate the difficulty of converting software users into hardware ones.

Instead, ByteDance should focus on strengthening its own mini programs. It started testing out mini programs in Toutiao and TikTok last year, but they haven't gained as much momentum as the BAT triumvirate's mini programs yet.

Expanding that in-app ecosystem makes more sense than launching a branded smartphone, since it helps ByteDance build a mobile ecosystem without owning a major mobile OS like iOS or Android. Therefore, investors should take the buzz about a ByteDance smartphone with a grain of salt and focus on the core ecosystem conflicts between the feisty start-up and its bigger BAT rivals.