Baidu (BIDU 2.27%), Alibaba (BABA -0.82%), and Tencent (TCEHY 0.23%) are traditionally considered the three largest digital advertising platforms in China. Baidu owns the country's leading search engine, Alibaba's Taobao is its largest platform for paid product listings, and Tencent's WeChat is the top mobile messaging app.
However, a recent report from consultancy firm R3 claims that ByteDance -- the Chinese start-up that owns TikTok, Toutiao, and other popular apps -- actually overtook Baidu and Tencent in China's digital advertising market in the first half of the year.
Alibaba still led the market with a 33% share, or 72.1 billion yuan ($10.3 billion), in ad revenue during that period. However, ByteDance's ad revenue surged 113% annually to 50 billion yuan ($7.1 billion) and propelled it to second place with a 23% share.
Baidu ranked third with 36.9 billion yuan ($5.3 billion) and a 17% share, while Tencent ranked fourth with 29.8 billion yuan ($4.2 billion) and a 14% share. Let's see why Baidu and Tencent's investors should be wary of ByteDance's meteoric growth.
How did ByteDance gain 1.5 billion users in seven years?
ByteDance was founded just seven years ago, but the company's family of apps now reaches over 1.5 billion monthly active users (MAUs) and 700 million daily active users (DAUs).
Its biggest app is TikTok, also known as Douyin in China, which surpassed 500 million MAUs last year. Its other apps include the popular news aggregator app Toutiao, the video apps Vigo and Huoshan, the mobile messaging app Flipchat, the video chat service Duoshan, and the enterprise collaboration platform Lark.
ByteDance grew by targeting two main audiences: Gen Z users and users in lower-tier cities across China. It aimed TikTok, which was created from a merger of two similar apps (Douyin and Musical.ly), at Gen Z users who saw Baidu and WeChat as apps for older generations. Its short videos, which encourage users to dance and lip-sync to songs, caught on quickly with younger users in China, the U.S., and other overseas markets.
Meanwhile, Toutiao curated "lighter" news stories -- mainly short-form articles and video content -- based on users' personal preferences and browsing histories. This simplified approach caught fire among China's lower-income users in rural and lower-tier cities, and lured users away from traditional news portals like SINA.
ByteDance then leveraged the popularity of TikTok and Toutiao to expand its ecosystem with additional apps. It also followed Tencent's lead and added mini programs to TikTok, launched a branded smartphone pre-loaded with its family of apps, and is reportedly developing a new music streaming platform.
In short, ByteDance built its empire on Gen Z and lower-income users across China. That's why it overtook Baidu and Tencent in digital ad revenue, and why it was valued at $75 billion after its last funding round in late 2018.
Can Baidu and Tencent stop ByteDance?
Baidu and Tencent are both struggling to grow their ad revenue. Baidu's ad revenue, which accounted for 73% of its top line last quarter, slid 9% annually last quarter. Tencent's ad revenue, which accounted for 19% of its top line, rose just 13% last quarter, which marked a significant slowdown from previous quarters.
Baidu and Tencent both struggled with two major headwinds: the trade war and an economic slowdown that are forcing Chinese companies to cut their ad budgets, and competition from rivals like ByteDance. ByteDance's growth in the first half of the year strongly suggests that companies are pivoting their limited ad budgets toward higher-growth platforms like TikTok and Toutiao instead of mature platforms like Baidu and WeChat.
This trend is also reflected in Bilibili's (BILI 6.54%) latest earnings report. The Gen Z-oriented digital platform for anime, games, and comics grew its advertising revenue 80% annually last quarter, which marked its strongest growth in three quarters. This indicates that China's digital advertising market isn't dying -- it's merely shifting toward fresher players like ByteDance and Bilibili.
Baidu and Tencent are trying to counter ByteDance with new apps and investments. Baidu launched a short video app called Haokan, and Tencent relaunched a similar app called Weishi, but both apps reach fewer users than TikTok. In the curated news market, Tencent launched Tencent News and backed the news aggregator platform Qutoutiao -- but neither app holds a candle to ByteDance's Toutiao.
Baidu and Tencent can't stop ByteDance for the same reason Facebook can't beat Snap -- the disruptive newcomer enjoys a first mover's advantage with younger users. That's why ByteDance is also partnered with the Snapchat maker as part of its aggressive push into overseas markets.
The key takeaway
I own shares of both Baidu and Tencent, but I'm not selling my shares on the latest news about ByteDance's growth -- I think both companies should remain dominant names in Chinese tech for the foreseeable future. Nonetheless, ByteDance's growth could be a significant headwind for both companies' advertising businesses, and it probably won't dissipate anytime soon.