Triple crown

Owning your enemies: Didi has taken over a number of archrivals

When Amazon started life as an online bookseller in 1994 few envisaged it would become the world’s biggest retailer and its founder Jeff Bezos the richest man ever (Bloomberg reported this month that he was worth $105 billion after Amazon’s share price hit an all-time high).

China’s BAT trio all began life as minnows too and also initially had a straightforward business focus. Baidu was a search engine, Alibaba an online marketplace and Tencent had a messaging software (known as QQ). As they then diversified and grew into internet giants they found themselves competing with each other in everything from food delivery to AI.

It follows that in the fast-changing tech world, smart investors are always looking out for the next source of disruption and the next super unicorn. In Chinese private equity circles, the question that’s top of mind is to identify companies which could one day rival the BAT, or even displace them.

There have been high-profile contenders (such as JD.com and Xiaomi, see WiC305) and pretenders (most notably LeEco, see WiC392). But a trio of hungry newcomers has now garnered so much attention that they have formed a new league of their own. Step forward TMD, which stands for Toutiao, Meituan Dianping and Didi Chuxing.

The new acronym, which is also an abbreviation for a widely used Chinese swear word, could sound a little rude to Chinese internet users. But there is no room for politeness in this cruelly competitive industry. Take SSN, or Sina, Sohu and NetEase. They were China’s BAT equivalent two decades ago but both Sina and Sohu have been struggling to stay relevant these days.

Founded in 2010, Meituan is already the oldest among the TMD trio, each of them being the survivor of brutal competition (as well as M&A activity) to become the last man standing in their own sector. For instance, Didi combined with local rival Kuaidi before taking over Uber’s China division. Meituan became the country’s undisputed leader in food delivery and online cinema ticketing after merging with Dianping.

Just like the BAT before them, the TMD’s breakneck expansion is likely to see them venturing into each other’s territory. For instance, Meituan recently announced it will launch its own car-hailing app service to take on Didi’s near monopoly in the sector. Toutiao, the go-to app for 700 million Chinese users to read and share news, is trying to seize the crown of China’s content king – and is expected to use that as a bridgehead to attack other content or o2o service sectors.

According to Huxiu, a portal focused on tech news, Toutiao has already refused investment from Tencent and Baidu – in a signal it wants to go it alone outside their respective ecosystems and forge an empire all its own. Indeed, when speculation began to spread a few months ago that Baidu had offered to take over Toutiao, the new media firm’s founder Zhang Yiming wittily suggested to reporters that some of their reports had mistaken the buyer for the seller.

Many investors share Zhang’s confidence in Toutiao. When we first profiled the company in July 2014, it was valued at a mere $500 million (see WiC244). In its latest fundraising in mid-2017, Toutiao’s parent company Bytedance had set its sights on surpassing a $30 billion valuation, which according to Tech in Asia, would make the 6 year-old firm 10 times as valuable as the New York Times, which was founded in 1851.

The TMD still has a lot of catching-up to do, mind you. Baidu, the weakest link in the BAT (and which seems to be betting its future less on search than driverless cars and AI), is trading at an $88 billion market cap. Combine Tencent’s and Alibaba’s stock market value and it’s around $1 trillion.

In fact, tech observers in China believe the BAT has such an unassailable lead (particularly the ‘AT’ bit) that it might already be too late for the TMD to challenge them at home.

That means expanding overseas. Take Toutiao. The news aggregator generated some news headlines of its own in the international media last month when it launched three overseas takeovers in as many days. The biggest purchase in that buying spree was a $1 billion investment in Musical.ly, a popular lip-synching video platform that has wooed American teens.

Foreign shores may be appealing given the company has found itself running into more difficulties at home. On the first day of 2018, state censors shut down Toutiao’s service for 24 hours on allegations of spreading “pornographic and vulgar content”. In response, Toutiao said it will hire 2,000 “content review officers” (alongside its artificial intelligence software which sends customised content to readers) to clean up its act.

According to Huxiu, the BAT have been successful in fending off foreign rivals over the years such as Google, Amazon and Microsoft Messenger (Chinese regulations have helped) but their strategy could only be classified as “defensive”. On the contrary, the TMD trinity is likely to take a more “offensive” approach as they aggressively push into the global market.

“The BAT is three high mountains in China and they have been working hard to prevent the emergence of another heavyweight,” Huxiu noted, adding that this may in turn mean “the overseas market could become the TMD’s shortcut for growth”.

Didi has already started to expand in foreign markets via its strategic alliance with Uber. Meituan has also set up a new overseas unit recently to cooperate with foreign hotel operators.

If Toutiao continues with its expansionist strategy, some analysts think it might attempt to buy a major foreign media firm. Coincidentally TIME and Fortune magazines might be on the block (in the wake of Meredith’s recent $1.8 billion purchase of TIME Inc), though in the current fractious political climate WiC suspects that a purchase of these iconic titles would struggle to get US government approval (for more on this topic, see WiC393).

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