ByteDance's Toutiao news app, left, is one of a number of headaches for Chinese tech giant Baidu, right (iFeng).
China's tech scene has long been dominated by a triumvirate of giant firms – Baidu, Alibaba and Tencent. Known by their collective acronym "BAT", they are the Chinese equivalent of America's FAANG stocks (Facebook, Amazon, Apple, Netflix and Alphabet's Google), a grouping of companies that are uniquely valuable both for stock market investors and consumers. Now there are signs that the BAT as we know it may be ending, possibly to be replaced by a new hierarchy.
Put simply, Baidu has not been having a good time of late. Obituaries for its 'big three' status first appeared in May this year, when the firm recorded a loss of around $50 million, its first negative quarter since IPO over 14 years ago. This week, the company dropped out of the top five most valuable Chinese tech firms by market cap, and analyst confidence has weakened significantly. The firm's New York-listed shares are down over 60% from their all-time highs of last year, and over 40% this calendar year.
Such a drop is much greater than anything experienced by the other two members of China's top tech trio, Alibaba and Tencent. Their share prices have also seen dramatic falls over the past 12 months – thanks mostly to a mixture of domestic regulatory risks and macro economic concerns – but are currently positive or neutral for 2019. Most importantly, analysts appear much more confident in the long-term futures of Alibaba and Tencent, while consumers in China remain increasingly reliant on their ever-expanding portfolio of products and services.
So what has determined these contrasting fortunes among the BAT? A key part of the story is business diversification, of lack thereof in Baidu's case. Despite some exciting R&D projects including AI-based content curation and autonomous driving technology, the firm has so far produced few tangible offerings to rival those of Alibaba, Tencent and other players. Baidu remains very reliant on its flagship search product, and is still the China market leader. But even this core business has been losing ground to other more specialised apps or in-app search functions, especially as the quality of Baidu's search results and hosted ads has come under scrutiny. The firm has also been shaken up by departures of key senior talent, including from its AI lab.
Adding to those commercial and personnel challenges, Baidu has had to navigate a number of tricky regulatory hurdles. New restrictions have hit its advertising revenues, while a tighter political climate has put extra pressure on Baidu to censor its content. Complying with Chinese information laws has been one of the major reasons for the company's success in a market where Google refused to play ball, but it also brings limitations. For example, Baidu is now effectively required to pin official media reports at the top of its mobile homepage (as apparently are all online portal sites), severely limiting the way it can creatively use that space to engage users and generate revenue streams.
The homepages of Baidu and ByteDance's Toutiao on 15 August, each displaying the same required official news stories (one about building Chinese cultural strength, another about children receiving a reply from "Grandpa" Xi Jinping).
To make matters worse, Baidu is being threatened by a move into its content-focused territory from a new competitor, ByteDance. The firm owns a number of very successful apps including the Toutiao news aggregator and TikTok short-video sharing platform. Like Baidu, the nature of its business makes ByteDance vulnerable to China's sensitive environment for media and information access. But unlike its neighbour in the Beijing hi-tech zone, ByteDance has so far managed to navigate those regulatory risks much more skilfully. It has done this through a mix of creative compliance measures and dynamic content diversification.
In cruelly ironic fashion, much of ByteDance's success is down to its own AI and machine learning innovation, areas that Baidu itself has tried to dominate and poured investment into. One such example is ByteDance's Direct Push technology, which has changed the game for content delivery in China, intelligently curating articles for users based on their interests. Another is its Lingquan tool for identifying inappropriate content, which has helped ByteDance meet the strict censorship demands of Chinese regulators.
The firm has also capitalised on advances in cellular 4G technology to enable high-quality video viewing in its TikTok app, an area where Baidu has so far struggled with its subscription-based iQiyi streaming service. The imminent development of 5G networks looks set to bring a further boost to ByteDance's booming, video-focused offerings. With TikTok, ByteDance has even managed to break into overseas markets including India and Indonesia, something that has so far evaded Baidu and other major Chinese tech firms.
So is this the end of the BAT as we know it? Baidu has certainly taken a hit, and to continue lumping it together with Alibaba and Tencent suggests a relationship of equals that is simply not accurate. But it's far too early to rule out Baidu altogether. The company remains dominant in China's online search market, and some of Baidu's new business developments could yet have a transformative effect on its long-term fortunes. For now, however, the momentum appears to be with ByteDance. Some media analysts are already talking about a new normal of BATB, and even anticipating a revised BAT triumvirate where the "B" one day stands for ByteDance, not Baidu.
What does this all mean for businesses and brand communications in China? My own takeaway is that the rise of ByteDance and its TikTok app heralds a significant re-calibration of China's media and information landscape towards video, live-streaming and in-app search functionality. It also serves as a reminder of how quickly China's environment for media and content sharing can change, with platforms rising and falling at a much faster pace than we tend to see in the US or Europe.
Above all, this shift demonstrates China's unique commercial and political conditions for media and communications activities. These can create difficult challenges (as experienced by Baidu), but also golden opportunities (like those leveraged by ByteDance). To maximize success, China-focused businesses must actively monitor such developments and adapt in real time, not passively sit back and react to changes after they occur.
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