With e-commerce blocked, TikTok turns to iQiyi, Youku and Tencent Video

This article introduces the development of TikTok, points out that e-commerce is now blocked, and TikTok has switched to iQiyi, Youku and Tencent Video, and analyzes and introduces TikTok's various new services. This article is suitable for learning about e-commerce platforms.

After successive setbacks in its e-commerce and advertising businesses, TikTok is trying to break out of the growth paradigm of imitating Douyin and find more sources of revenue.

In early October, TikTok was revealed to be testing an ad-free subscription service. Users only need to pay a monthly fee of US$4.99 to browse short videos without ads.

TikTok later confirmed the matter, saying that the service is being tested in a single English market outside the United States. However, TikTok also stated that "a small-scale test does not mean that the product will definitely be released."

This is not the first time TikTok has tried paid subscriptions. In May last year, TikTok launched a LIVE subscription service. Subscribers can get exclusive benefits provided by creators, including exclusive badges, custom expressions, camera control permissions, fan-customized content, etc.

Compared with LIVE subscriptions for creators and fans to interact, TikTok's ad-free subscription service has a much larger potential user base. If this service is promoted on a large scale, TikTok is expected to find a new revenue growth point.

Since its launch, TikTok's commercialization path has mainly been advertising and e-commerce. In particular, the development speed of advertising has far exceeded the industry average, and it has continuously cut into the profit pie of traditional online advertising giants such as Google and Meta.

But over the past two years, TikTok's two cash cows have faced increasing challenges.

Advertising is TikTok's main source of revenue. The company previously expected that this part of revenue could reach US$12 billion to US$14.5 billion in 2022; but in September of that year, TikTok CEO Zhou Shouzi lowered the full-year revenue target by 20% to around US$10 billion. Despite the poor economic situation in the United States and companies tightening their advertising budgets, this move still reflects that the growth momentum of TikTok's advertising business has weakened.

On the other hand, TikTok's e-commerce business in the United States, the United Kingdom, and Southeast Asia has not been developing smoothly recently. In particular, in the Southeast Asian market, which TikTok focuses on cultivating, regulators have already put TikTok's e-commerce on hold.

In Indonesia, a benchmark country for TikTok e-commerce, a decree issued by the local government at the end of September forced TikTok Shop (similar to Douyin Store) to be hastily shut down a week later. Indonesia is the single country market with the best development momentum for TikTok e-commerce, contributing US$2.5 billion in GMV (gross merchandise volume) in 2022, accounting for about 60% of GMV in Southeast Asia.

The heavy hammer of Indonesian regulators has also triggered a chain reaction in neighboring countries. In early October, Vietnam announced the results of its business inspection of TikTok and found that there were multiple violations; Malaysia plans to summon TikTok management to ask for an explanation for the ban on its e-commerce business in Indonesia in order to formulate measures suitable for the country.

Faced with a new business model that is a dimensionality reduction blow to the old business model, the first reaction of many countries is to ban it. Take Uber in the online car-hailing field as an example. After its rise, it was once banned by Germany, France, Australia, South Africa, Belgium, Canada, Thailand, India and other countries. After a long period of mediation, it was gradually lifted. But to this day, Uber, which has a history of 11 years, still cannot enter the door of many countries.

Illegal transportation and infringement of the interests of the taxi industry were common excuses used by various countries to "snipe" Uber. Now, when Indonesia stopped TikTok Shop, it also raised the banner of protecting local physical merchants. Such high-sounding reasons make it difficult for TikTok, a foreign company, to refute and respond.

According to rumors, after the Indonesian government issued a ban signal, Zhou Shouzi flew to the country urgently to mediate. But so far, these efforts have not achieved any actual results. In this case, by testing the ad-free subscription service, TikTok is expected to find a new commercialization path that is not sexy but certain enough.

After a long period of following in the footsteps of others, TikTok is accelerating its efforts to break away from the development model of "learning from" Douyin. It no longer copies Douyin's successful experience in the domestic market, but begins to seek a monetization path that is more in line with the consumption habits of overseas users, and gradually moves away from the "overseas version of Douyin" in terms of strategic choices.

01

TikTok was launched a year later than Douyin. With similar product forms and operation methods, it has long been regarded as Douyin's twin brother. In terms of commercialization, TikTok has also been following Douyin's example, focusing on the development of advertising and e-commerce.

As the number of users continues to grow, TikTok has obtained a steady stream of cash flow through the above two methods. However, whether it is selling advertisements or selling goods, TikTok is far from reaching the level of Douyin.

In terms of advertising, despite the lowered target, TikTok still achieved over $10 billion in advertising revenue in 2022, an increase of about 150% over the previous year. Compared with the stagnation of Internet advertising giants such as Meta, TikTok's rapid growth is eye-catching.

But TikTok has been online for seven years and is not a startup; when examining its development status, in addition to growth rate, scale should also be taken into consideration. In this dimension, TikTok's weakness is very obvious: its annual advertising revenue of US$10 billion is only equivalent to 9% of Meta and 4% of the entire US advertising market, making it difficult to be called a major player.

In contrast, Douyin has a much stronger position in the domestic advertising market. According to a recently exposed internal document, Douyin's total revenue in 2022 is about 622 billion yuan, most of which is advertising revenue. According to data from market research company QuestMobile, the scale of the domestic Internet advertising market in 2022 is about 660 billion yuan.

Compared with other advertising platforms, TikTok does not have an advantage in terms of single user advertising value.

In 2022, TikTok had approximately 1.5 billion monthly active users and earned $10 billion in advertising revenue; Meta's user base was about twice that of TikTok, but its advertising revenue was as high as $113.6 billion, more than ten times that of the latter.

TikTok's advertising business has not grown because its users are too young. As of 2022, half of TikTok's users are between 13 and 24 years old, and it is still an online gathering place for teenagers. The low age of users determines that the consumption capacity of users is relatively low. The advertising conversion rate officially disclosed by TikTok is only 0.7% to 3%, which is much lower than Facebook's 9%.

Another source of income for TikTok is its e-commerce business. Compared with advertising, this business started later and is less mature, and the gap with Douyin's e-commerce is greater than that of advertising.

The development path of Douyin e-commerce is very clear: it started with live streaming and started to vigorously develop shelf e-commerce last year, and extended its tentacles to local life and instant retail. It was previously reported that Douyin e-commerce's GMV in 2022 would reach US$208 billion (about RMB 1.4 trillion); Douyin later denied this statement.

TikTok e-commerce is moving forward in uncertainty and is much smaller in size. In the initial stage, it focused on developing TikTok Shop in the UK and Southeast Asia, and tried to divert traffic to third-party e-commerce platforms in the United States, and reached a cooperation with the independent website platform Shopify. It was not until September this year that TikTok Shop was officially launched in the local area, transforming to an in-site closed loop.

Some overseas users and merchants have shown some enthusiasm for TikTok e-commerce, but it is far from enough to truly support this business. In 2022, TikTok e-commerce achieved a GMV of US$4.4 billion in the Southeast Asian market, and the UK and the United States were almost negligible; this is far from the "three trillion in five years" goal set at the beginning of its launch in 2021, and it cannot be compared with Douyin.

Entering 2023, TikTok Shop was determined to be the main form of TikTok's e-commerce, and the supporting full hosting model was also on the verge of being launched. Just at this time, the Indonesian government suddenly hit the head, and TikTok Shop suffered a bottom-up cut, casting a shadow on its development prospects.

In the United States, in addition to the uncertainty of local policies, TikTok is also facing the dual pressure of new and old rivals. Amazon, which has been deeply rooted in North America for many years, is still strong; SHEIN and Temu from China are also wielding the price stick to conquer the market, with the number of monthly independent visitors reaching tens of millions. TikTok has certain disadvantages in terms of brand, pallet, logistics, users, gameplay, and price.

One obvious fact is that if TikTok continues to follow the path of Douyin and tries to replicate the success of Douyin's advertising and e-commerce, then under the constraints of multiple unfavorable factors, its commercialization bottleneck will become increasingly serious. TikTok has reached a fork in the road to breaking the old thinking and finding a new path.

02

The launch of an ad-free subscription service is TikTok's latest attempt to stop copying Douyin's business path and try to get closer to the habits of overseas users.

In China, charging subscription fees to users has always been a thankless business for video platforms. Under the heavy pressure of years of losses, long video websites such as iQiyi and Tencent Video have vigorously promoted the membership fee model, but have paid the price of losing a large number of users; short video platforms such as Douyin and Kuaishou have never taken this step.

However, in the European and American Internet, subscription services are very common, and users have long been accustomed to paying for content. This unique habit can be traced back to the various paid sports channels in the TV era; in the Internet era, after Amazon, Disney, Netflix, Apple and other companies entered the video field, they also launched paid membership systems early and erected paywalls for the copyrighted content that they had invested heavily in.

For platforms with relatively scarce copyrighted content, the main selling point of subscription services is "no advertising."

Take YouTube as an example. It launched the paid subscription service YouTube Premium in 2018. It initially tried to win with exclusive original series, but failed due to limited production capabilities. Now it has abandoned the platform's own content; the main reason for users to purchase this service is to avoid video interstitial ads.

X, renamed from Twitter, is also focusing on no ads. In January this year, after Musk took over Twitter, he announced that he would launch a more expensive ad-free subscription service; earlier this month, X's premium subscription service was first exposed, and only the most expensive Plus version can completely eliminate ads.

Even Meta, which is highly dependent on advertising revenue, has also announced an ad-free subscription plan. According to market rumors, Meta is testing a new service that allows users in some EU countries to turn off Facebook and Instagram ads by paying $14 per month.

It is foreseeable that after years of user education by large companies, TikTok's introduction of an ad-free option as a paid feature in the European and American markets will not cause a large number of users to be disgusted.

The potential revenue of this business is also mouth-watering. In 2018, YouTube Premium had about 10 million paying users; in 2022, it increased to 80 million, generating $11 billion in revenue. If TikTok can achieve a similar scale for its own ad-free subscription service, its commercialization problems will be alleviated, and it will have more room to cope with the multiple challenges of the e-commerce business.

TikTok has been testing the LIVE subscription service for more than a year. In June this year, TikTok expanded the LIVE subscription function, allowing creators to customize exclusive videos for fans, which is expected to boost users' willingness to pay.

Another attempt by TikTok to build a subscription model is TikTok Music. In July, TikTok launched this online music service in Indonesia and Brazil, with copyrighted content provided by the three major record companies Universal, Sony and Warner.

TikTok Music only offers a one-month free trial, after which users need to pay a monthly fee of $3. This fee is slightly lower than that of music streaming giant Spotify; but compared with Resso, another free ByteDance online music service, TikTok Music's attitude towards the paid route is very clear.

TikTok LIVE and Music are respectively aimed at fan interaction and music listening, and are applicable to a limited number of people. However, the launch of these two subscription services shows that TikTok has a deeper understanding of the consumption culture of overseas netizens and has actively adjusted its service form to cater to their habits and preferences.

The ad-free service being tested is a key step for TikTok towards paid subscriptions. Compared with the above two more vertical subscription services, ad-free subscriptions are applicable to a wider range of people and scenarios, with much lower operating difficulty and cost, and there is a lot of room for imagination in the potential market and profit scale.

However, TikTok focuses on information flow advertising, which is inserted between ordinary short video content, and the disturbance to users is less than that of YouTube-style patch ads. When users can skip ads with a simple swipe, how many users are willing to pay a monthly fee of several dollars to avoid ads remains to be tested by the market.

03

A new change for TikTok this year is that it is no longer highly consistent with Douyin in terms of commercialization.

TikTok's previous development of advertising and e-commerce, although partly based on its own exploration, was generally aligned with Douyin. For example, TikTok Shop is almost an overseas replica of Douyin's store; TikTok's shift from semi-closed loop to fully closed loop e-commerce is also similar to Douyin's decision to cut off external links.

But since the middle of this year, TikTok has begun to test the waters in areas that Douyin has never entered. In the e-commerce sector, it has begun to introduce the "full trusteeship model" that has been very popular in cross-border e-commerce in recent years. Merchants are only responsible for production and supply, and the platform undertakes all aspects from marketing, sales to logistics, customs clearance, and distribution. This model helps to control product quality and improve the shopping experience, but it will also bring greater operating costs to the platform.

The all-inclusive self-operated e-commerce model makes the difference between TikTok and Douyin e-commerce more obvious. Although the latter is larger, it still follows the past route: promoting live streaming and developing shelf e-commerce. The full-hosting model originated from cross-border e-commerce will not be implemented in the domestic e-commerce field in the short term.

TikTok's proactive pursuit of change will help reduce its reliance on local experience such as live streaming and shelf e-commerce, making its business model more adaptable to the overseas market environment.

Many overseas merchants have previously told wujicaijing that there are huge differences between the overseas and domestic e-commerce markets. Take live streaming as an example. Domestic anchors are used to extremely high work intensity, broadcasting for six or seven hours a day and still working hard in the live streaming room in the early morning; but foreign anchors are not interested in this and it is almost impossible for them to work overtime for performance. In addition, most overseas consumers prefer to shop from large e-commerce platforms and brand official websites, and live streaming e-commerce is not the preferred channel.

As for shelf e-commerce, the concentration of the US e-commerce market is significantly lower than that of China, with the top five platforms such as Amazon accounting for a total of 57% of the market share; in China, the figure is 96%. This means that more than 40% of American consumers tend to consume in various small e-commerce and independent websites; if TikTok follows the example of Douyin and launches a centralized self-operated mall, even if it injects a large amount of traffic, it is likely to get half the result with twice the effort.

In contrast, TikTok Shop, which relies on a fully managed model, is closer to the shopping habits of overseas users, prompting TikTok to make it a development priority. After its launch in the United States in September this year, TikTok has paired it with a series of auxiliary tools, including the "Alliance Program" that connects merchants and creators, the "TikTok Fulfillment Program" that helps merchants with warehousing and distribution, and a secure payment system developed in cooperation with third parties. However, TikTok Shop inevitably touches on the interests of the traditional retail industry, and the pressure from regulators can be imagined. Just as Uber suffered a blow in many countries around the world, TikTok is facing similar challenges.

In the United States, Montana issued a ban in May this year, prohibiting the download of TikTok from 2024; in Indonesia, despite Zhou Shouzhi's promise to invest billions of dollars in the Southeast Asian market including this country, he was still not exempted from the "eviction order" at the end of October.

The United States and Indonesia are the two countries with the largest number of TikTok users, with approximately 150 million and 110 million monthly active users respectively. Once TikTok encounters unpredictable risks in the two major markets, even if the situation is eventually reversed, it will inevitably drag down the development of the entire company.

Thus, TikTok's ad-free subscription service was launched. Compared with advertising, e-commerce and other businesses, the subscription service is only charged to platform users, and there is basically no suspicion of grabbing other people's cake, nor will it impact other formats. This allows it to provide TikTok with stable income without taking unnecessary risks.

This is a way to make money that Douyin has never tried before, but it has also been verified by many overseas Internet giants. It may not seem "sexy" enough, but it is also a safe, simple, and sufficiently broad commercialization path.

TikTok is no longer "learning from" Douyin, but is instead learning how to make money from other companies. This also indicates that this company, which was born out of ByteDance, is further removing the mark of the "overseas version of Douyin". After demarcating its personnel and organizational structure from ByteDance, TikTok is experiencing a deeper "decoupling".

Author: Yan Fei WeChat public account: Alphabet list