(2018-12-07) Chan Outgrowing Advertising Multimodal Business Models As A Product Strategy

Connie Chan: Outgrowing Advertising: Multimodal Business Models as a Product Strategy. Chinese internet companies have adopted business models that are drastically different than what we see here in the States, especially on mobile.

In this post, I will use consumer entertainment apps (books, podcasts, videos, and music) as a lens into the different business models and product strategies of Chinese companies.

Thinking about content consumption in a mobile-first way in China has enabled these new business models, which not only provide diversified revenue streams for businesses, but also allow users to make better, more flexible purchasing decisions.

State of Affairs in the US

in terms of how these hugely successful companies monetize, these companies’ revenue streams are interestingly not very diverse. In fact, they generally fall into one of two buckets: advertising-driven, or (ecommerce) transaction/subscription-driven.

does this lead to the best product for customers?

What do these new business models look like?

There are also very strong reasons for combining the advertising centric world and the transaction world. Imagine if, as an advertising company, all of your ads could become one-click transactions: a win-win for advertisers, users, and the platform. If you are a transaction or subscription company, adding content and finding ways for users to increase time on your site leads to more mindshare and lower customer acquisition costs when expanding business lines.

Largely because many people could not afford a computer, China skipped the PC and the credit card; smartphones were the way many people were exposed to the Internet for the first time.

In part because a mobile ad is much more annoying on a small screen, the emphasis on advertising vs. other revenue streams is very different in China today than it is in the US... ads in WeChat Moments (the equivalent to the FB newsfeed) are limited to just two per day.

This post will address four different content categories, with different consumer app sectors as case studies

EBooks

In China, books are consumed very differently. In addition to their paid subscription service (similar to Kindle Unlimited), there are three main business models for book-selling in QQ Reading:

Social elements and gamification also are combined to create a more enticing user experience.

users compete against their WeChat friends on a weekly leaderboard showing who has read for the most time. It’s not just for bragging rights; users earn credits for every 30 minutes they read to spend on more books.

Search is also a much more complex and refined function in China

users can filter according to male or female readership, physical publications, or audiobooks. Then users can view custom curated lists including top trending, top new, top annual, most searches, free books with the most tips ([[tipjar]), and even according to times read cover-to-cover

Podcasts

The podcast Serial was downloaded 40 million times during its first three-month season in October 2014

Despite being deemed ‘podcasting’s first breakout hit’, revenue couldn’t cover the cost of producing a second season.

The entire podcast market in the US in 2017 was $314 million, all from ads. Estimates for paid podcast in China, on the other hand, are $3-5 billion, and many individual podcasters are multimillionaires. It’s not a difference of talent; it’s a difference in business models.

Some podcasts are part of the platform’s paid subscription service, but users always have the option to pay for podcasts individually.

Just like digital books, free podcasts are monetized in several ways. Some podcasts rely on sponsorships and ads the way we do in the US, but podcast hosts can also receive tips that are split between podcaster and platform.

The audio platform Dedao (“iGetGet”) essentially takes the MOOC format and applies it to podcasts. Below are two economics professors from Peking University. Xue Zhaofeng, the professor on the left, actually resigned after making $8 million in one year with his economics podcast series

There is an expansive expert network that is untapped and not fully monetized in the States, not due to a lack of talent, but because of overly simplistic business models.

Video

Baidu spinoff iQiyi, one of the bigger video players, uses AI and machine learning to figure out what’s happening in the content, and play relevant advertising

advertising is less than 50% of the company’s revenue

This is what the watch screen on iQiyi looks like. There’s live comments, sharing for prizes, GIF creation, and even the ability to top up your mobile data plan.

You could say this is too crowded of a page; you could also argue that this is a more advanced experience, where you can even create content to share on social media. If it’s too busy for you, all you have to do is tap to hide the settings overlay.

For many shows or movies, users can shop related items as they continue to watch; there is no need to stop the video

There’s even a social network component that lives entirely inside iQiyi.

iQiyi’s business model has also extended to the real world with its recent launch of ‘on-demand movie theaters.’ These miniature theatres range from two to ten seats, and are rentable by the hour to watch any content from iQiyi’s library

Music

popular artists often have a limited-time streaming block on new releases. During this time period, users buy or gift virtual albums that provide exclusive access.

turns average fans into superfans, and gives superfans a deeper connection to the artists they adore.

There is also a social network where small or medium artists can post articles, and fans can access news, music videos, and behind the scenes content

If your interest is in live music, Tencent Music apps also have a feature for that. The app strives to be a hub for concerts and events so you can buy concert tickets directly within the app. If you can’t attend concerts in person, you can also watch live streams

But perhaps the biggest difference of all is that the company’s focus is not just listening and consuming music, but also creating content and allowing users to earn money (user-generated content). Anyone can create an online radio station within the music app and curate their own playlist. Hosts tell stories between songs, or give commentary on the lyrics. Good hosts earn tips in the form of digital gifts from listeners and get to keep 30% of the revenue. (Yikes platform keeps 70%?!?)

Lastly, Tencent Music is also taking its business offline. The company is not only selling microphones and headphones, but also opening up hundreds of mini karaoke booths in malls.

The result of such a nuanced business model is a whopping 70% of revenue comes from those live streaming services – tips for radio and karaoke.

Where is the US headed?

As Amazon dives more into content and advertisements, its ability to sell ads against viewer’s past purchases make their ads tremendously valuable. For instance, imagine Coca-Cola now being able to serve ads only to people who purchased Pepsi.

CEO/Founder of Buzzfeed Jonah Peretti (an a16z portfolio company) understands this shift. “We’ve outgrown the ability to build our business on essentially a single, very distinct revenue stream,” Peretti recently said. Buzzfeed — historically a media business that delivers news and makes money from ads — announced their push to diversify in late 2017. They’ve partnered with Walmart and Jet to sell branded kitchenware in a seamless purchase experience.

Their new business model is a 3×3 grid (below) in which Buzzfeed and related brands profit from three core revenue streams: advertising, commerce, and video entertainment.

Going beyond “only”

Will the current set of Internet companies make this leap to more personalized user experiences that are less ad- or transaction-centric? Perhaps, given all of this, FAANG could be more vulnerable than many think.