Toutiao Musical.ly

Bytedance-Musical.ly Merger Ushers in New Age for Content Companies

Written in collaboration with Zara Zhang

Last month, the Chinese content giant Bytedance announced that it has signed an agreement for short-form video app Musical.ly to merge with Bytedance. The deal was closed last week.

As one of the major investors in Musical.ly, GGV Capital co-led the company’s Series B and C. I have been a board member of Musical.ly since 2015. Upon the closing of this merger, GGV Capital has become a shareholder of Bytedance.

My colleagues at GGV and I have all known Bytedance’s founder Zhang Yiming for years. I remember first having a conversation with Yiming in 2015 about international expansion opportunities for Bytedance. We both felt that Chinese business models in consumer mobile Internet should have relevance beyond China and can be exported, if localized correctly.

Yiming and the Musical.ly co-founders have also known one another for years. Yiming admired Musical.ly’s product innovation and grasp of users’ needs and tastes in the Western markets, while the Musical.ly’s Alex and Louis were impressed by Bytedance’s efficient recommendation engine, monetization track record, and global vision. Yiming suggested ways to collaborate this spring, and I further encouraged him to continue this discussion with the Musical.ly co-founders over the summer.

Bytedance, whose its flagship product is Jinri Toutiao, is now reportedly valued at over $30 billion. Toutiao uses machine learning algorithms to recommend news and other content to readers. The key to Toutiao’s strong monetization capabilities is its ability to accurately match both content and advertising with potentially interested users. The average user spends 74 minutes per day on the app. The high-quality matching between user and content is partly because Bytedance has been able to recruit top talents in artificial intelligence and machine learning algorithms.

“Toutiao has always aimed to be ‘the platform that understands you the most,’ using AI algorithms to recommend content to potential followers,” said Bytedance’s founder and CEO Zhang Yiming. “We also collect data on how content creators and their followers interact. Over time, this matching has become increasingly accurate, allowing influencers to increase their follower base.”

Yiming has understood early on that short-form videos are key to the next generation of content platforms. Bytedance owns 4 out of the top 6 short video apps in China. Tik Tok, Bytedance’s short video app inspired by Musical.ly, has seen tremendous success in China.

Musical.ly, founded by Alex Zhu and Louis Yang, is the first app built by a Chinese team that has gone mainstream in Western markets. With over 200 million users, Musical.ly is a top-ranking short video app in many countries. Most of the American and European teens using Musical.ly have no idea that the app is developed by a Chinese team and headquartered in Shanghai.

In my opinion, Bytedance and Musical.ly are a natural fit. Combining the strengths of these two companies – innovative products, global reach, technological capabilities, and monetization model – could help create an unprecedented global digital media company.

For a variety of reasons, no content company in the world has been able to succeed both inside and outside of China. Bytedance’s state-of-the-art recommendation algorithms, their momentum in various Asian markets, coupled with Musical.ly’s intimate understanding of user behavior in many markets around the world, will ensure that the sum of the two companies is greater than its parts. Bytedance is now equipped with a multicultural DNA that gives it a unique advantage in the global arena. It is a veteran of China’s brutal startup battlefield, yet also knows how to design products that can go viral outside of China.

While the reality is that most Chinese tech companies are still locally focused, more and more Chinese companies are trying to go global by developing cross-border teams and acquiring assets. The globalization effort of Alibaba and Tencent are well-documented. Cheetah Mobile has produced many top-ranking utility apps outside of China. Xiaomi has become the No. 1 smartphone brand in India. Apus’ utility apps have experienced rapid growth worldwide. Garena (NYSE: SE), the highest-valued publicly traded Internet company in Southeast Asia, was founded a China-born entrepreneur and took inspirations from Tencent. Wish, the No. 2 shopping app in the US, was co-founded by China-born engineer who adapted a model partially inspired by Alibaba’s Taobao to the US and other markets.

By using a mixed strategy of producing, acquiring, and investing in overseas products, Bytedance now has an impressive portfolio of global media platforms that are changing the way millions (soon-to-be billions) of people consume content. In our opinion, Bytedance will be leading a new wave of Chinese companies expanding overseas in nontraditional ways, a phenomenon that can be understood as “Outbound 2.0.”

Bytedance's global short video empire

We at GGV Capital firmly believe that this is the age for Chinese companies to go global. With the synergy created by this deal, Bytedance and Musical.ly are headed to an even more exciting future.

 

I recently interviewed Yiming at a GGV conference in Beijing. Read our conversation here.

GGV is an investor in Wish and Alibaba. I am an early investor and former board member of Xiaomi.

Sign up for 996, a weekly email newsletter on China’s tech trends curated by Hans and Zara, at 996.ggvc.com.

Hans Tung is a Managing Partner at GGV Capital. A five-time Forbes Midas Lister, he has been a US/China investor for more than a decade. He was among the first Silicon Valley VCs to move to China full time, betting on the rise of the Chinese consumer internet market with companies like Xiaomi where he was an early investor and board member. His portfolio includes 3 of the top 5 shopping apps in the App Store – Wish, Poshmark and OfferUp – with Ibotta growing fast at #12. Other companies in his geographically diverse portfolio include: Airbnb, Bowery Farming, Bustle, Dirty Lemon, Function of Beauty, Giphy, LimeBike, Lively, musical.ly, Peloton, Slack, Smartmi, Xiaohongshu (aka Red), Yamibuy, and more. Read his blog at hans.vc.

Zara Zhang is an analyst at GGV Capital. She has written for The Information, The Harvard Crimson, Harvard Magazine, among other publications. Read her blog at zarazhang.com.

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