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Text | Hong Kong Stock Research Society

“In the Internet age, big fish may not necessarily eat small fish, but fast fish will eventually eat slow fish.”

Whenever talking about the replacement among major Internet companies, Cisco CEO Chambers' "fast fish eat slow fish" theory is always mentioned repeatedly.

How do you understand this sentence?

Unlike the industrial era, in the Internet era, what is important is not only the scale, but also the growth rate. The scale determines the present, while the growth rate determines the future, and the two together support the valuation of the enterprise.

Looking at China's major Internet companies, according to the latest second quarter financial report, Alibaba's revenue was 243.236 billion yuan, a year-on-year increase of 4%; Tencent's revenue was 161.17 billion yuan, a year-on-year increase of 8%. Objectively speaking, such revenue scale and growth rate are indeed good results at the moment.

However, according to Bloomberg, ByteDance, also a major Internet company, had achieved revenue of US$29 billion in the second quarter of 2023, equivalent to RMB 207.8 billion, and maintained a year-on-year growth rate of 40%.

In other words, whether from the perspective of scale or growth rate, ByteDance has already surpassed Tencent. As the "new king" and "old king" of Internet companies, how big is the gap between them now? With the same scale of hundreds of billions, why can ByteDance still maintain high growth? With Tencent and ByteDance as representatives, what will the future development pattern of China's Internet be like?

The distance between Tencent and ByteDance is the distance between "China's No. 1" and "World's No. 1"

On August 14, Tencent released its second quarter financial report for 2024. In the second quarter, Tencent's revenue was 161.117 billion yuan, an increase of 8% year-on-year, and its operating profit was 58.443 billion yuan, an increase of 27% year-on-year. While revenue grew steadily, profit growth was also impressive.

Looking at the first half of 2024, Tencent's net profit reached 91.017 billion yuan, a year-on-year increase of more than 70%.At least, in terms of profitability alone, Tencent is still the strongest among Chinese Internet companies.

However, from the perspective of revenue growth, Tencent's revenue growth rate has been gradually declining, from about 50% in 2016-2017 to less than 10% today.

The reason lies in the two basic areas of games and social networking.

In terms of games, before 2018, "Honor of Kings" was the main growth point of Tencent's revenue. In 2019, Tencent created the hit game "Peace Elite". However, with the launch of MiHoYo's "Genshin Impact" in 2020, Tencent did not hand over a two-dimensional game that could match it.

Subsequently, the domestic game licenses shrank and the game market fell into a downturn. In 2022, Tencent's game revenue in the domestic market declined. It was not until Q1 2023 that Tencent's game revenue in the domestic market recovered from the decline and achieved a year-on-year growth of 6%.

Today, it has been 8 years since the release of "Honor of Kings" and more than 4 years since the release of "Game for Peace", but Tencent has still not been able to make the next hit game of the same level.

At the same time, in the social field, Tencent is facing a growth bottleneck.

According to the 2024 China Internet Semi-annual Report released by QuestMobile, as of June 2024, the number of active users on the entire network will reach 1.235 billion, while the monthly active coverage of WeChat's platform has reached 1.053 billion, making it difficult to find incremental users. The related advertising revenue and mobile payment revenue of WeChat's ecosystem have been affected by the user ceiling.

Therefore, in order to find incremental markets, Tencent has also tried to explore overseas markets.

Previously, Tencent had focused on building the overseas version of WeChat, but WeChat did not gain an advantage in the competition with WhatsApp, Facebook and other products. As of now, WhatsApp has about 2 billion monthly active users, far exceeding the overseas version of WeChat.

In contrast, TikTok is growing faster. According to Data.ai, as of October 1, 2023, TikTok is the most downloaded app in the world, surpassing Meta (Facebook). In addition, according to estimates by analysis agencies, the number of TikTok users may exceed 2.25 billion in 2027.

Moreover, like Douyin, TikTok relies on rewards, advertising and e-commerce for monetization. At present, TikTok is still in the early stages of commercialization in terms of advertising. Public research data shows that 49% of mainstream brands have not yet placed advertisements on TikTok. Once these brands start to place advertisements on Tiktok, it means that Tiktok's revenue will further increase.

Therefore, ByteDance’s opponent is no longer Tencent, but Meta.According to overseas mediaThe InformationAccording to reports, ByteDance's revenue for the full year 2023 is $120 billion, while Meta's revenue is $134.9 billion.If nothing unexpected happens, ByteDance will completely surpass Meta in 2024.

From this perspective, ByteDance has moved onto a larger battlefield. Its goal is no longer to be at the top of China's Internet rankings, but to compete with global Internet giants such as Meta.

How does ByteDance maintain its high growth rate by pursuing efficiency internally and cross-border integration externally?

To achieve such rapid growth, ByteDance cannot do without its development strategy of “bold hypothesis and careful verification”.

Previously, ByteDance had six business segments: Douyin, Dali Education, Lark, Volcano Engine, Lightyear and TikTok.

Among them, ByteDance has invested heavily in Chaoxi Guangnian and Feishu, as ByteDance's layout in the two major fields of games and SaaS.

However, due to the fact that revenue growth was lower than expected and the introduction of the "Online Game Management Measures" at the end of 2023, the retreat of game stocks made ByteDance sense the crisis in the game track. In the end, ByteDance chose to withdraw and stop losses in time, and sold its game business to Tencent.

At the same time, due to the overall cooling of the SaaS (enterprise software services) market in 2023, ByteDance has streamlined the Feishu team. On March 26, 2024, Feishu CEO Xie Xin issued a letter to all employees, saying that the company's organization was "bloated" and inefficient. He also announced adjustments to streamline the team size.

From this, we can see that ByteDance is ruthless in taking action against itself for its internal inefficiencies.

However, just like the Rothschild family in "Currency Wars" who simultaneously laid out markets in various European countries, ByteDance's investments are not always successful, but there will always be an arrow that will fly in the expected direction.

TikTok is one of them.

According to a report by mobile data research organization data.ai, TikTok's global user spending in 2023 will exceed $3.8 billion, and its cumulative annual user spending will exceed $10 billion, making it the only non-game app to achieve this feat. This is enough to show TikTok's strong ability to attract money in overseas markets.

At the same time, in the domestic market, e-commerce has become the next growth point for Douyin after advertising and live streaming. According to the power plant, in 2021, the GMV of Douyin's e-commerce was 880 billion yuan, and the overall user penetration rate reached 26%. By 2022, the GMV of Douyin's e-commerce reached 1.38 trillion yuan, and the overall user penetration rate reached 45%. According to LatePost, in the first ten months of 2023 alone, the GMV of Douyin's e-commerce reached 2 trillion yuan, with a year-on-year growth rate of nearly 60%.

In addition, Douyin has also entered into many business branches such as local life, medical care, social networking, search, etc., challenging Meituan, Tencent, and Baidu.

In summary, Douyin is responsible for domestic information and service business, while TikTok is responsible for overseas platform business, while supporting the development of overseas e-commerce and other extended businesses. The two, one inside and one outside, can be regarded as the two wings of ByteDance's traffic ecology. The strong algorithm distribution model, extremely high traffic conversion efficiency, and the exploration and attempt of "cross-border cooperation" on this basis have supported the rapid growth in operation and iteration.

The battle between the “new and old kings” has ended, where is the future of China’s Internet?

However, even the fast-growing ByteDance felt the crisis in 2024.

“We must strengthen our sense of crisis, always be entrepreneurial, and escape the gravity of mediocrity.”

This was the speech delivered by ByteDance CEO Liang Rubo at the 2024 annual meeting. Entrepreneurship was listed as the first priority goal, and the OKR system that was proud of in the past was adjusted.

At the same time, at Tencent's annual meeting on January 29, Ma Huateng emphasized the need to "let old trees sprout new buds" and find new growth points from existing evergreen businesses.

It is not difficult to see that, as the "old king" and the "new king" of China's Internet, although there have been disputes and confrontations between them in the past, now the smoke of war is dissipating at a speed visible to the naked eye. The positions of the offensive and defensive sides between the two are gradually shifting, and the top opponents are no longer each other. Finding new opportunities for each other in the cycle has become a common topic for both parties in the next stage.

For ByteDance, on February 7, Zhang Nan announced his resignation as CEO of Douyin Group and began to focus on "Jianying" and explore AI-assisted creation. At the same time, according to Baijing Chuhai, ByteDance has launched 11 independent products for C-end users, covering five categories including platform, chat, education, interactive plot, and photo editing, hoping to create the next Douyin-level "killer application" in the AI ​​era.

For Tencent, around the "old tree" of WeChat, video accounts, financial management + credit, and mini games + search have sprouted "new shoots". Tencent will do the following by further exploring the consumption capacity of existing users, implementing the concept of "high-profit platform products", and protecting the existing platform ecology.

From this perspective, Tencent and ByteDance may become two role models for Chinese Internet companies: one type pays more attention to steady progress, emphasizes ecology and long-termism, focuses on the integration of new technologies and old businesses, and seeks progress in a stable manner. The other type cares more about speed and passion, and hopes to continuously seek growth on a global platform through innovation and international vision.

Although the growth rate of the former has slowed down, it is mature and stable, and the harvest is stable happiness. Although the latter can maintain faster growth in a short period of time, it also needs to face risks and sanctions from the global market.

There is no difference between the two, nor is there any difference between right and wrong. The future of China's Internet requires both companies like ByteDance that dare to attack American companies like Meta, and companies like Tencent that focus on product development to defend well. Only by "both offensive and defensive" can we be invincible in the global competition.