On the hunt

It wasn’t the first Chinese company to be interested in selling to overseas markets. But it was perhaps the first to focus on an outward-looking strategy from the outset.

Founded in 2010, Cheetah Mobile was originally a cyber security unit under Kingsoft, one of China’s oldest software developers. The unit was subsequently merged with younger rival Conew, a deal that brought in Sheng Fu, who had started Conew after a stint at Beijing-based Qihoo360.

Resolving to focus on anti-virus software, Cheetah decided to carve out a niche in overseas markets starting from 2012. Through its mobile utility products (such as Clean Master and Cheetah Keyboard) and entertainment apps, its global mobile monthly active users reached 470 million as of the end of last year. And in a further reflection of its overseas footprint, Google is now its biggest business partner, accounting for 14% of its sales last year.

Today, Cheetah also owns LiveMe, a popular livestreaming platform, and it was one of the earliest investors in Musical.ly, which was later rebranded as TikTok, the international version of Bytedance’s short video app Douyin.

The company’s rapid expansion prompted parent Kingsoft to spin off Cheetah in New York five years ago, although Kingsoft has stayed on as its largest shareholder with a 47.1% stake, followed by Tencent which holds 16.4%.

Cheetah Mobile now sees much of its future growth coming from the artificial intelligence (AI) sector. That’s according to Xiao Jie, a senior vice president who sits on Cheetah’s board. She spoke with WiC on why Cheetah is diversifying into AI and robotics from its more consumer-facing games, utilities and social media businesses.

About 72% of your monthly active users are from abroad. Why does Cheetah Mobile focus on foreign markets given the huge potential at home?

It has much to do with competition. Chinese players of our age might find it hard to compete with the existing juggernauts, as we had no competitive advantages in talent and capital. However, we felt that we could be a more disruptive force abroad. Back in 2012 and 2013 we noticed that the personal computer era had produced quite a large number of first-rate software developers in China and yet the country’s labour costs were still relatively low compared to developed economies. Chinese firms had also pioneered successful business models that were absent in overseas markets. So we felt there was an opportunity, even though at the time we had very few people on our team that spoke English and we had no overseas experience whatsoever.

Which market did you target initially?

As opposed to targeting just one or a handful of markets, we were looking for a global audience. And the fact that our core offerings were all utilities for mobile technology means that little cultural barriers existed for our products. Think knives or some other kinds of tools, which are universal. Since 2016 the US has been our biggest overseas market by revenue, delivering 35% of our annual income totalling Rmb4.98 billion ($724.56 million) in 2018. Ireland came second with 6%.

Why did Cheetah begin with utility products?

We spotted that “tools” as a Google Play application category was very popular, as the keyword “clean” was frequently searched. That suggested a lot of people felt that their Android phones were slow and that they would like to unclutter their operating systems. We then came up with Clean Master, an optimisation tool designed for freeing up space and memory on phones, as well as fending off viruses. We did not need to do much to indigenise the app, except for ensuring that it was available in many languages.

Another reason for us to try our foreign foray via such a product was the lack of competition. We saw there were some rivals, but their scale tended to be small versus us as a 400-person company.

How did Cheetah go from “utility” to “content” product offerings?

Making security tools gave us some technical advantages in developing different kinds of apps. A security product sounds simple, but it actually involves a lot of analytics, with the many apps being launched and updated every day. Our computer scientists need to analyse all of them and their iterations to learn what kind of “rubbish” a specific app creates, where it is stored and what to delete. That helps build our technical competence.

But the bigger push came from changing user demand. We launched Clean Master in 2012, when Google’s app ecosystem was still immature. As Android is an open source operating system, a lot of original equipment manufacturers [smartphone makers] created their own Android versions, which weren’t always that great. And because these phones didn’t target the premium segment of the market, they were often cheap with limited random-access memory (RAM). This gave rise to the demand for tools like Clean Master, which was meant to enhance the performance of Android phones. But as these handsets got better (think of the little difference today between the latest Huawei Mate series and Apple’s iPhone) consumers moved on to other needs. They began to desire applications that were more content-oriented. That’s basically a shift from practicality to entertainment. And we try our best to cater to user demand.

Last year utility products made up 63% of your revenue and mobile entertainment accounted for 36%. The gap between the two segments has narrowed compared to two years ago. Do you expect the trend to continue?

Actually we’ve been producing gaming products for quite a long time, but the segment only started to take off in 2016 and 2017 after we launched the music game Piano Tiles 2 in 2015. It has remained one of our most popular games to date with a fan base of over a billion.

To bulk up our content-based offerings, we launched livestreaming platform LiveMe the following year, which, as you might be aware, has been immensely popular in the US, Europe and India.

Other assets that we bought to drive our content business include Shanghai-based lip-synching app Musical.ly, French news aggregator News Republic [sold to Bytedance for $86.6 million in November 2017], game studios and a number of gaming titles such as Trade Town and SkidStorm.

How many companies has Cheetah Mobile invested in so far? And what’s your investment strategy?

In the past three years, we have spent approximately Rmb1.7 billion on investments and acquisitions that provide strategic value to us or help support our organic growth.

We target promising, early-stage companies as we are always on the lookout for first-mover advantages. Our investment in Musical.ly is a good example.

We also invested in a fintech upstart called SuperAtom in hope of tapping into the huge unbanked population in Southeast Asia, in particular Indonesia where Cheetah Mobile has deep penetration. The country’s GDP per capita was close to $4,000 in 2018, roughly China’s level in 2009. We are positive that it is going to follow China’s trajectory in terms of economic growth, and hence their rising demand for financial services.

Do you consider backing Musical.ly as one of your best bets?

Yes, the deal was rather successful. We invested in social entertainment app Musical.ly during its early rounds of financing in 2015 and eventually sold it to Bytedance in 2017. The deal enabled a return of about Rmb953 million.

Musical.ly struggled to attract investor attention at the beginning partly due to its seemingly unrealistic goal: that is, to create a social entertainment platform that targeted users in the US.

But we believed in them as we ourselves have been exposed to overseas markets – way earlier than most players in China and therefore we had less fear.

Additionally, the two young founders Alex Zhu and Luyu Yang were both visionary and capable. Management teams are what you invest in when it comes to venture capitalism.

Cheetah Mobile sold it stake in Musical.ly when it was merged with Bytedance’s TikTok in November 2017. Bytedance also invested $50 million in LiveMe. So what’s the relationship between Cheetah and Bytedance?

We sold a certain portion of our equity in Bytedance last November.

It’s an external party that we work with when the right circumstances arise.

When do you expect your mobile entertainment segment to become profitable?

We are making progress in this area. Our three core gaming offerings, namely Piano Tiles 2, Rolling Sky, and Dancing Line recorded 200% growth in consolidated operating profit in 2018 compared to a year earlier, as margins widened by 9 percentage points to 23%.

Our income from this segment is mainly derived from advertising and in-game purchases made by users. Going forward we will launch new products to optimise the economic returns of our entertainment portfolio.

Why is Cheetah moving into AI?

One important factor is the slowing growth of the mobile market worldwide, except for various pockets of emerging markets such as Southeast Asia. Cheetah Mobile feels the need to do some pivoting. The next frontier will be the ‘Industrial Internet’, broadly understood as the integration of Big Data, analytical tools and wireless networks with physical, industrial equipment – a trend that is accelerated by the advent of 5G technology, which enables simultaneous connection between multiple machines.

The shift will see us building robots applicable to different industries and scenarios, and selling auxiliary services to companies that are incapable of developing AI themselves.

In one case, our robots work as smart drink vendors in a railway station in Shanghai, for instance. They can recognise the gender of the customers right away and recommend drinks to them.

As for auxilliary services, we can, for instance, sell our speech recognition technology to manufacturers who are making interactive TVs. Our hardware products are mainly manufactured in the Internet-of-Things hub of Shenzhen.

What gave Cheetah Mobile the confidence to compete in the increasingly crowded realm of AI?

We have made significant investments in artificial intelligence and machine-learning technologies with our affiliate Beijing OrionStar since 2016, partly because we wished to optimise our flagship products.

For instance, we use image recognition technologies to monitor livestreaming videos broadcast on LiveMe to filter out obscene content. Over that time we’ve developed capabilities in next-generation technology such as voice recognition, natural language processing and text-to-speech. That enabled us to launch our own AI-driven smart speaker, Cheetah Voicepod; an AI-driven voice translation device, CM Translator; and Cheetah GreetBot, a reception robot that focuses on the business-to-business market in various customer locations.

The portable Cheetah Translator will also be available in the US and Japan.

What’s the major challenge facing Cheetah Mobile?

The shift to AI and the ‘Industrial Internet’ means that our business model is set to change from consumer-facing towards business-facing. It’s this adjustment that we need to make that presents challenges to us.

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