What did Toutiao’s Buy with its $1B Purchase of Musical.ly?

“I regret not having entered into China’s market earlier. Now, I can hear vibrating sounds everywhere making me uncomfortable,” said Louis Yang, founder of Musical.ly, a social network with short-form videos, on October 10 at the GGV Evolving Lifestyle Conference.

By “vibrating sound” he he was referring Douyin, an app-centered short-video community owned by Toutiao. Yang did not have to wait long before Toutiao extended an olive branch to him one month later.

On November 10, Toutiao announced it bought Musical.ly. After the deal was concluded, Douyin merge with Musical.ly but chose to keep independent brands. Yang Jibin, a senior deputy director at Toutiao, told Huxiu  the acquisition is valued less than $1 billion. But he did not disclose more details .

Why Toutiao, not Tencent?

Musical.ly, also called as “the American version of Kuaishou,” China’s most famous short and live video social network, launched in April 2014. The app is now the most popular short-video social network in North America, yet its founders are Chinese and based in Shanghai. What’s noteworthy is that its spinoff live-streaming product Live.ly, available for download on June 17, came to the top of both “all categories” and the “photography and video” category in the Apple’s app store within 10 days of its launch.

Currently, Musical.ly has 250 million registered users and 20 million active users, among which 6 million are from North America. More than 15 million UGC videos come from this platform.

Musical.ly mainly targets young users: 90 percent of its users are under 21. Similarly, Douyin’s user base is also mainly made up of young consumers, with 85 percent under 24. Douyin exploded in popularitythis year. According to Toutiao, the click rates of videos on Douyin average 100 million times each day in May. In August, the number jumped to 1 billion.

Toutiao launched Tik Tok, Douyin’s overseas version, in August to expand into the overseas market. Initially, Tik Tok entered into the markets in Southeast Asia, South Korea and Japan. But Europe and North America have been major targets in Toutiao’s overseas plan.

Once entering Europe and North America, Musical.ly would be an intimidating rival to Toutiao. Zhang Yiming, founder of Toutiao, worried about missing the opportunity to get more short-video users in the two overseas markets, so acquisition seemed like the most effective measure then.

An insider close to Zhang Yiming and requesting anonymity said, “As far as I am concerned, Zhang purchased Musical.ly for two reasons: First, the market window. Acquisition is an efficient and optimal measure to solve problems within the time window. Zhang has a strong and accurate sense in terms of the market’s window. Second, return on investment (ROI). He chose acquisition over being a major stockholder in Musical.ly after comparing the ROI of these two options.”

“Toutiao’s tailored recommendation technology has helped Musical.ly to make breakthroughs,” Yang said, “Meanwhile, Douyin is similar to our app in many ways and both are successful in the market. After the acquisition, both brands will be better positioned.”

Yang said other companies, such as Kuaishou and Tencent, were very interested in purchasing his company.

Speaking with Huxiu, a source familiar with the deal said, “Toutiao began to engage with Musical.ly in May and began three months of negotiations in July. The process was not smooth, not least because Tencent just joined in the bidding.”

Kuaishou also suffered setbacks in overseas expansion, according to Su Hua, CEO of Kuaishou.

However, Louis Yang dismissed Kuaishou as “not promising” and believed the two brands would not end up well. “The acquisition concluded because of Toutiao’s technological edge and Douyin’s positive brand image,” Yang said.

Later, Tencent spoke to Louis Yang about its intention to be a shareholder. “Tencent hoped to have a short video product to compete with Toutiao abroad. In this way, Tencent could encircle Toutiao both at home and abroad,” the anonymous source said.

The acquisition was possible thanks to Fu Sheng, CEO of Cheetah Mobile, whose investment was the only input that made Yang’s program happen in 2014.

Yang said he has always been grateful for Fu , who is a good friend of Zhang Yiming from Toutiao.

Besides, Tencent did not acquire Musical.ly because its usual investment strategy is to hold stocks rather than buy or become a major stockholder. Tencent’s abundant cash flow doesn’t make it stupid.

Toutiao, apparently with less cash than Tencent, was very generous in spending. The acquisition worth of about $1 billion almost accounts for half of Toutiao’s last round financing. For Musical.ly, Tencent did not have the first-mover advantage that Toutiao does, which might be another reason for Toutiao’s successful acquisition.

Toutiao’s Worries

To promote its international expansion, Toutiao used Zhang Yiming’s words in World Internet Conference in November, “Going global will be a core strategy of Toutiao.”

Toutiao posted its overseas performance report on its WeChat official account today, directly reflecting on its international footprint.

Toutiao has released international versions of its products, such as TopBuzz, Hypstar and Tik Tok.

It bought some companies and became a major stockholder in other. It invested in Dailyhunt, India’s biggest content aggregation platform, and became a holding company of Indonesian BABE. It also acquired the American short-video app Flipagram. Just two days ago, Toutiao invested $50 million in B round funding of Live.me, a subsidiary of Cheetah Mobile, and bought News Republic, Cheetah’s news aggregation platform, for $86 million . And now Toutiao has announced its acquisition of Musical.ly.

Since November 11 is known as the “Singles’ Day” shopping factors, netizens have joked that Zhang Yiming is on a “shopping spree.”

When it comes to overseas expansion and internationalization, Yang Jibin responded in an interview with Huxiu, “The two strategies are a natural business extension. The current Internet companies were born in an era of globalization, so going global is essential.”

He stressed that overseas acquisitions depend on technology and the synergy that both sides can offer.

As he was asked about the difficulties in going global, Yang said, “Toutiao faces challenges on all fronts. Of course, whether in North America or Southeast Asia, American Internet giants pose a great challenge to us. They started earlier and had much more experience in the international market. But we are confident that we have a head start in algorithm development and a lead in data analysis. Plus, our team is growing.”

Toutiao came to the forefront because its recommendation algorithm makes it a strong competitor to Baidu, Alibaba and Tencent in the field of content distribution.

Tencent tried to snipe Toutiao with Daily News and Lingtou Kuaishou. It also put Ren Yuxin, COO of Tencent, in charge of OMG group.

At the 2017 Tencent Global Partner Conference, Ren proposed a new “ten-billion plan,” using 10 billion views, 10 billion yuan cash and industrial resources worth 10 billion yuan to support content creators in cultural innovation and investment incubation.

Tencent is closing in on Toutiao on most fronts.

Under increasingly intense domestic competition, internationalization and overseas acquisition seems like a good way to solve some of Toutiao’s problems.

This article originally appeared in Huxiu and was translated by Pandaily.