In September 2021, a mother started posting daily conversations with her two daughters on the Douyin platform (a sister app to TikTok, a ByteDance company). These included funny arguments and real conflicts, in the tone of conversations between a mother and a princess in the harem of an ancient Chinese emperor. (You can get there via WeChat — channels — search for account Wuli瑜的琳姐).
The videos resonated with so many parents and children that they quickly amassed a lot of followers (now 2.5M on Douyin). They were contacted by tea merchants, and they began selling tea on live streams, with the “buy” click right at the bottom of the screen. The tea was inexpensive, they could interact and communicate, and their fans liked to buy it despite the fact that the tea had nothing to do with the content of their short videos.
As a result of these kinds of impulse buys, Douyin has in just two years gone from nothing to a gross merchandise value (GMV) of 1.2 trillion RMB by 2022, with an annual growth rate of 75%, while a similar app, Kuaishou, has reached a GMV of 0.7 trillion RMB in 2022. These numbers contrast starkly with results at “traditional” platforms such as Alibaba and Jingdong (JD.com), where GMV declined by 1.1% and 8.8%, respectively, in 2022. Moreover, in the livestream content e-retailing segment, Douyin and Kuaishou have already captured two-thirds of the market in 2021 and will reach an even larger share.
User Behavior Is Changing
The big incumbent platforms are worried. Alibaba co-founder Jack Ma warned at a recent internal meeting that Alibaba’s core e-commerce group is facing very severe competition and that without innovative measures it may now be like Nokia on the eve of its mobile phone collapse. And the company is in the throes of a radical restructuring, reorganizing into six independent business units, each with its own CEOs and boards of directors. Its traditional rival, JD.com, has recently replaced its top team (including the CEO), flattened its organizational structure, and reshaped its strategy to focus on price, quality, and service.
Alibaba and JD are right to be worried, because the likes of Douyin are offering something new. In the traditional shelf-based e-commerce model, users only log on to e-commerce platforms such as Alibaba and JD.com when they have an active shopping need, search for the desired product in the search box, and get product recommendations in order to complete the order.
However, in the content-based model of short-video platforms such as Douyin and Kuaishou, the provider produces a large amount of interesting video content while hanging the relevant SKUs on the little yellow cart below the content. Interacting with the content, users experience resonance and build emotional attachments, which feel like friendship or even love, generating a motivation to buy. In this approach, customers buy for engagement and fun rather than to fulfill a need — because the product resonates with the content they are viewing or because they are fans of certain influencers. And if they realize after the purchase that the item is not something they actually need, they still feel satisfied by the experience.
What’s more, people only have a fixed amount of time to spend online each day, and they are spending more and more of it on short videos/live streaming. According to a new data.ai survey, people spend on average four to five hours on content browsing of this kind, with TikTok taking up half of this time. The necessary consequence is that they spend less and less time browsing and buying products on traditional e-commerce platforms.
Going Beyond Network Effects
In some respects, the economics of the two models is identical. In both cases, user traffic is the basis for conversion into actual transactions, and to some extent, it determines market size and growth potential. But the similarities end there.
On traditional shelf-based platforms, the fundamental power source for the platform provider is network effects: basically, its ability to connect many providers and many consumers. Success mainly depends on how many providers do business on the platform and the number and types of goods offered, which itself is influenced by the number of consumers showing up. This largely explains why the big platforms were also the early movers.
In the new content-based e-retailing model, however, platforms take on an active role in generating user curiosity and interest through providing attractive, creative, and emotional content. Almost all this content is produced by individuals or SMEs, some of whom become influential by accident and whose success is hard to predict (and may wane). In most cases, the new commercial platforms did not foresee that this influencer content business model would emerge.
To be sure, platforms have always made money from advertising. But advertising has limits; too many ads can make users feel uncomfortable and prompt them to leave. Their success only took off after influencers started to become product ambassadors, turning the emotional relationships they have with their followers into direct revenues for the companies they represent.
This revenue potential is very large. Take the case of New Oriental Education, which had long been China’s largest English-language training school, serving students studying abroad for qualifying exams and improving their language skills. Two years ago, the school laid off 60,000 employees and saw its operating revenue plummet by 80% when the Chinese government banned for-profit tutoring.
In order to survive, founder Yu Minhong started selling agricultural products on Douyin, but as his sales staff were all former English teachers who knew little about agricultural products, the venture looked doomed from the outset.
But Yu soon realized that one thing his staff could do was tell stories, and one of them, Dong Yuhui, has turned out to be an online star. He appears in the live-stream room sharing nuggets of history and reciting his favorite poems, offering short reflections and homilies on daily life. (He can be seen also on YouTube). Users love it.They chat with him on the platform and eagerly buy the products he recommends. With daily turnover ranging up to 35 million RMB, the new venture has been a huge success, and has become a separately listed company (HK.1797) called East Buy Holdings, with a current market cap of US$5 billion.
How the New Platforms Compete
As the new sector matures, smart platforms are finding ways to help their influencers succeed, most basically by providing the sales process, (i.e., the shopping basket). More important, though, is the potential for leveraging AI to channel content of interest to individual users, thereby increasing users’ time spent on the platform.
A case in point is provided by TikTok’s short video content, which stores second-by-second updates of what users watched, clicked on, how long they stayed on which content, and how many screens they visited. This enables it to precisely predict what users will want to watch next. AI-based platform support can also help the influencer sharpen his or her recommendations.
By leveraging tools like this, content-based platforms can significantly increase their commission and advertising revenues, as the influencers on their sites draw more and more traffic away from the traditional online marketplaces. But sustaining success with this model in the long run will require the content-based platform to evolve further. Rather than representing just an intermediary for many providers and consumers, platforms must learn to manage the relationship between influencers and their followers. This will involve making fast transitions from waning influencers to new upcoming ones without letting revenues dip in between.
Not everyone will succeed in evolving, and as the sector matures, we can expect many sites to disappear and new ones to emerge. And while the jury is still out, there are also legitimate concerns about the the effect of these new business models on the health of the general population, which may lead to stricter regulation of their use.
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What Douyin is doing in China, other platforms will likely introduce in the U.S. — although the consumers in the two countries are not identical, there is nothing that says that the new emotional relationship between consumers and influencers cannot lead to direct sales in the U.S. as well. The question is: Will U.S. e-commerce platforms ignore the threat or find ways to embrace this new model?