ByteDance (TikTok) – Full stream ahead.

Video comes for the music stars.

• ByteDance is aiming to extend the popularity of TikTok into the subscription music space but I question whether its algorithms are good enough to compete with Spotify or whether it can beat the market advantage enjoyed by Apple.
• ByteDance is in negotiations with the big labels (Universal, Sony, & Warner) to licence their content for a new streaming service that will help it to further monetise the 1bn users that TikTok has won over to its service.
• In H1 2019, TikTok managed to generate around $0.43 per user per month (see here) which is pretty good going given that the vast majority of its user base is outside of USA.
• Users in the USA currently generate far more advertising revenues than those elsewhere, which implies that its US users could be generating between $1 and $2 per user per month.
• RFM research calculates that with its Digital Life coverage of 42%, its monetisation capacity in developed markets is probably already getting close to capacity.
• Hence, it has to find growth elsewhere explaining its intention to move into a subscription service and cross-sell it to its engaged audience.
• I am pretty sure that the music labels are only too happy to see a new competitor because this will make it more difficult for Apple and Spotify to put downward pressure on licensing costs, given the potential reduction in market power.
• Its two main rivals are Spotify and Apple Music both which represent separate challenges to overcome.
  • Spotify: has achieved its market position as the global leader when it comes to users because it offers the best service.
  • Spotify has gone to great effort to ensure that its music algorithms are the best available meaning that it can ascertain what its users do and do not like.
  • This means that the recommendations that it makes are accurate, thereby improving the quality of the service it offers generating loyalty.
  • This also offers Spotify the opportunity to squeeze out the record labels and offer music directly from artists to their fans (see here).
  • TikTok has made its mark in a very similar way but with short videos rather than music.
  • Music is a very different data set and so there is no guarantee that because it is good at this in videos, it will be able to match Spotify’s quality in music.
  • However, given that Apple’s AI seems to be going backwards, I think ByteDance should be at least as good, if not better than Apple.
  • Apple: has been successful with its streaming service mainly due to its history with iTunes and the iPod as well as its dominant market position in hardware.
  • Apple is now bigger than Spotify in the US largely because Apple Music is the default streaming service on iOS devices which have close to 50% market share in the USA
  • Apple Music comes pre-installed on iOS devices giving Apple a big advantage in terms of enticing the users of its hardware to use its service.
  • This will be a tough nut to crack as even Spotify’s superior service has lost ground within the iOS ecosystem against this advantage.
  • ByteDance is likely to have an even more difficult time.
• ByteDance will also face difficulties with its user base which predominantly young adults and teenagers all of whom tend to have less money to spare for subscription services.
• Hence, I suspect that ByteDance will be looking to use an advertising-funded business model to pay for most its usage which will cause some friction with the labels.
• This is because “free” users generate far less revenue than premium subscribers meaning that the label’s earnings per user are much less.
• However, I suspect that the labels will be keen to see more competition in the market as well as the potential to increase the listening of their content in China.
• Hence, I think that ByteDance will be in a position to launch a service but whether it can make a dent in Apple and Spotify remains to be seen.
• At its current valuation of $78bn, ByteDance looks to be valued at around 5x revenues which is considerably less than the likes of WeWork or Peloton when they went asking.
• I will wait for more detailed figures in a listing document before I pass judgement on the attractiveness of ByteDance as an investment, but I am inclined to be positive.