ByteDance – Billion user club.

ByteDance joins the giants.

• TikTok the short video service owned by ByteDance has announced that it has over 1bn users making it unique as the only Chinese company that has scored real success outside of its home market.
• ByteDance started life as an AI company that has become extremely good at creating algorithms that can categorise video content and match it to people that will enjoy doing viewing that video.
• I have long suspected that ByteDance is better at doing this than even the mighty Google which is why we are seeing figures from TikTok pass 1bn users.
• While this is good news for TikTok in terms of its future growth, it substantially increased regulatory risk for its owner ByteDance.
• China is in the midst of a huge crackdown on the Chinese technology sector and RFM research has highlighted that ByteDance is on the higher end of the risk spectrum (see here).
• This is because of the sensitive nature of what it does as far as the Chinese government is concerned.
• This means that it will be keeping an eye on ByteDance from the point of view of:
  • First, National Security: This refers to keeping world-leading technologies created by China, inside China and not being made available elsewhere.
  • This creates instant problems because it’s the algorithm that makes TikTok great and any state interference at this level could cause the service to degrade.
  • Second, data security: This refers to the state’s increased interest in ensuring that user data is kept safe and not made available to all and sundry.
  • This is a big change as historically, China has been the Wild East from a data perspective which has allowed all sorts of innovations to be tried, most of which failed.
  • ByteDance uses the data of its users to recommend them videos, highlighting another potential problem should the state interfere.
  • Third, Social Stability which relates to any content or speech that runs against what the state sees as appropriate for Chinese society.
  • TikTok’s sister company, Douyin (Chinese TikTok), has already run up against this problem in its early days and took the appropriate action at the time.
  • TikTok is overseas and so less of a concern but this risk remains for any company that hosts large amounts of user-generated content.
• ByteDance has moved early to mitigate these risks by accepting a small investment from state-owned entities but crucially, it gave those entities a board seat.
• This means that for intents and purposes, ByteDance is a state-controlled, company.
• The state has already demonstrated what it is capable of doing to companies that defy its authority or threaten its control (e.g. Didi and Ant Group) and so now everything it does now will have the nod of that board seat before it is put into practice.
• This greatly reduces the risk of state intervention into its business but at the same time, it also creates the risk that TikTok users suddenly decide that they don’t want their data pored over by the CCP.
• ByteDance is supposed to be going forward with an IPO in Hong Kong but I suspect that this is now on hold given the wariness with which investors are looking at Chinese foreign listings at the moment.
• Of all the Chinese technology companies, I still think that Alibaba represents the best reward trading at a quarter of the valuation of its US peer Amazon despite growing much faster.
• Furthermore, I think that the regulatory shadow has already passed over Alibaba and the fact that all the big institutions are panic selling the shares makes the stock look even more attractive.
• I continue to have a position in Alibaba and have increased my holding by 50% in the last week or so.