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Major Internet Companies Financial Reports Interpretation

群邑智库 · 公众号 · · 2021-04-07 18:00

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Recently, major Internet companies have successively announced their Q4 and full-year financial reports, marking an end to the special year 2020. In this issue of Media Express, we will analyze the development of the Internet advertising market from the aspects of financial data of each company.

Key takeaways are as below:

Internet companies will face the dual pressure of tightening policies and negative changes in user mentality for a long time: As the penetration rate is almost saturated, Internet companies capture personal data to further improve marketing efficiency. However, data abuse and unfair competition have undermined the healthy development of the industry and infringed on the legitimate rights and interests of consumers. As a result, consumer’s emotion toward platforms has changed, and higher demand for privacy protection and personal rights has been raised. Therefore, starting from H2 2020, the government has successively issued policies and regulations related to anti-monopoly and privacy protection, strengthening anti-monopoly and preventing disorderly expansion of capital.

As the traffic structure highly overlaps and increment for existing business pattern is difficult to find, Internet companies are looking for new growth opportunities through product iteration and content optimization on the premise of consolidating their core advantages. In addition to improving contract performance and shopping experience, eCommerce platforms have begun to increase content supply, seeking for longer usage duration inside their ‘ecosystem’. While besides improving content quality and user experience, non-eCommerce platforms have begun to increase e-commerce functions to achieve diversified traffic monetization.

Traffic in the lower-tier cities determines the monetization efficiency: Internet companies that obtains higher traffic growth in lower-tier cities tend to have a higher growth rate in terms of advertising revenue in 2020. This trend is likely to continue in 2021, and Internet companies will continue to expand toward lower-tier cities.

Finding invariants in a dynamic market is important to marketers: No matter how media, content, consumer’s media usage and consumption habits change, consumer’s pursuit of ‘more, better, faster and worthier’ remains constant. Therefore, marketers should learn how to deeply understand consumers through data, cluster similar consumers together and dig out their shared needs, comprehend their different ways to use various platforms, and formulate different communication and conversion strategies.

From Q4 2020, the government has continuously strengthened the regulation on Internet companies and clarified the direction, namely ‘strengthening anti-monopoly and preventing disorderly expansion of capital’. Google and Apple also announced to strengthen the protection of user privacy. Under the dual pressure of policies and channels, that Internet companies following actions needs further attention.

Whereas the construction of digital economy and domestic circulation will help Internet companies expand their businesses and may help them find new increments.

Competition in usage duration intensified due to the increasing media demand and decreasing usage duration

Due to effective prevention and domestic circulation strategy, China economy has showed a strong recovery since Q3 2020. Despite the restriction of homecoming, total retail sales of consumer goods in Jan and Feb 2021 nominally increased by 33.8% and 6.4% respectively compared with that during the same period in 2020 and 2019.

Media demand is related to economic prosperity. For example, in 2020, the total consumption and media spending show a highly correlated trend, with the correlation coefficient of 0.87. With further consumption recovery, media demand will be greater.

The average weekly net citizen duration in December (26.2h) has decreased by 4.6 hours and is even shorter than that before the epidemic, showing that the traffic dividend has come to an end. In addition, 2021 is the beginning of 14th five-year plan and the 100th anniversary of the foundation of CPC, hence a relatively stricter content control. Therefore, competition in usage duration will intensify due to the increasing media demand and decreasing usage duration.

Consumer’s emotion toward platforms has changed, requiring for a better image of platforms

Due to a series of vicious incidents such as rental department, P2P and data abuse, consumer’s emotion towards Internet companies gradually turns negative. In the past year, Delivery Riders, Stuck in the System, eCommerce platforms set varied prices for same product on different consumers and other news make consumers notice that abuse of algorithms and big data will eventually hurt everyone more or less. These incidents and social buzz indirectly led to the tightening regulations on Internet companies.

To clearly show how Internet companies conduct their business in the complex macro environment in 2020, we divide the major Internet companies into four categories: Star, Unicorns, Cash Cow and Pressed.

**Meituan is currently entering a new investment cycle. When analyzing it, we split its core business from the other businesses to avoid misjudgment of the overall value of Meituan

Stars are of high market share and high growth rate, including Alibaba-eCommerce, Pinduoduo (PDD) and Tencent’s social parts. In 2020, Alibaba’s revenue grew primarily due to robust growth in new monetization formats, such as recommendation feeds and search. PDD achieved a leap in Q4 2020, with monetization rate increased by 0.6% YoY. Tencent’s social parts integrated their advertising platforms, strengthening own properties and mobile advertising network.

Unicorns still enjoy the dividends brought by traffic and market growth, including Kuaishou, Bilibili and Meituan’s food delivery part. Since 2020, these platforms have launched or upgraded online marketing platforms, such as Bilibili’s Huahuo to attract advertisers with a more mature advertising system and a more refined data management.

Relying on well-established advertising system, Cash Cows occupy a relatively high market share, including Jingdong (JD) and Baidu. Advertising revenues serve as financial support for other promising businesses, such as Baidu's car manufacturing and AI research, and JD's logistics, hence improving the overall business growth.

Pressed platforms ’ main business focus on either content or offline business, whose advertising revenue were negatively affected by the epidemic. These companies all strengthened their ability to monetize with ToC business. For example, while expanding its membership scale, iQIYI was also seeking for higher ARPU and more increments through high-quality content. As the market returns to normal, content production ability of these platforms will also recover. Therefore, it is expected that they will achieve growth in the advertising through more in-depth consumer insights and refined user operation.

Traffic in lower-tier cities often determines an app’s monetization efficiency

App’s growth in advertising revenue is highly related to its media traffic: Unicorns, enjoying the greatest growth in advertising revenue, have a higher MAU growth, especially among lower-tier cities with 20+% MAU growth.

Stars , saturated in users, gained growth in MAU, through multiple apps in their ecosystems and matured commercial mode on advertising, by capturing users’ urgent needs on social and consumption: WeChat provides various features for contacting friends in elsewhere; both Taobao and PDD provide a full package of supply chain to meet consumer’s demand on fresh products and solve farmer’s problem of selling the produce.

However, though the Cash Cows (Baidu and JD) did have an increment on MAU, they gained less YoY growth in advertising revenue than the Stars did due to the different user’s requirements. People needed the latest news on Covid-19 during the epidemic, making traffic increment for Baidu apps. So, we can see that Baidu had 28% YoY growth in DAU in Q1 2020 but its revenue from online marketing services decreased. While JD transformed the traffic more into its product revenues (of its total net revenues: 86%, YoY+28%) and logistics and other service revenues (of its total net revenues: 6.5%, YoY+95%), not into marketplace and advertising revenues (of its total revenues: 7.8%, YoY+30%), differing from other eCommerce platforms.

Internet companies are looking for new growth opportunities through product iteration and content optimization on the premise of consolidating their core advantages

Sales and marketing expenses of Stars and Cash Cows with eCommerce features have seasonal changes in Q2 and Q4 due to 618 and Double-11. Although these 4 companies show a similar trend, their business strategies are different. Alibaba increased its holdings in Sun Art Retail to further improve its new retail strategy; JD still focused on logistics and continued to decrease its inventory turnover days; PDD relied on market in lower-tier cities and its mini-program on WeChat to sell products at a better price and gain exposure to the emerging consumers in 2020; Meituan strengthened its consumer/ merchant base and delivery network to generate powerful network effects to achieve growth.

Other Star (Tencent) and Cash Cow (Baidu) remained high research and development expenses in 2020 to bring better using experience and more vertical content to users. Baidu used AI to help ads in BJH, Smart Mini Program and Managed Page better engage with users. Tencent added Top Stories and Live Streams to enrich the forms and ways of sharing one’s life and interests among friends and people.

Unicorns and Pressed platforms increased expenses both on R&D and content to give all-round using experience to users (improving app’s UI/ functions such as watching while buying) and lift the monetization efficiency. Self-made programs on iQiyi allow it to optimize the content expenses and increase its membership services revenue (ARPPU +0.3 yuan/ month) . Bilibili increased its investment in encouraging content creators to produce more qualified videos.

Similarly, the effectiveness of business optimization of these Internet companies can also be seen from the comparison of MAU between Jan & Feb 2021 and Jan & Feb 2019 (to reduce the impact of epidemic, the MAU in 2019 is used for comparison).

Except pressed platforms, other platforms, especially Cash Cows and unicorns have made greater efforts in diving into lower-tier cities for higher marker share.

Finding invariants in a dynamic market is important to marketing

Rapid development of short video in 2019 and eCommerce live streaming in 2020 indicates that media forms and business modes change constantly. In this circumstance, brands and marketers are required to not only rapidly adjust to new marketing method, but also raise performance under the pressure from tightening policies and facing consumers who are more sensitive to their rights. In 2021 and future, difficulty and complexity of marketing will grow exponentially.

Therefore, except for chasing social buzzes and using emerging media to achieve wider user coverage, how to find invariants in a dynamic market has become a topic worth careful consideration for marketers. No matter in the era of traditional media or Internet, the prior goal of marketing is to make consumers know the brand, purchase and repurchase products. Therefore, marketers should learn how to deeply understand consumers through data, cluster similar consumers together and dig out their shared needs, comprehend their different ways to use various platforms, and formulate different communication and conversion strategies.

Shan Hai Jin is a large-scale consumer insight program developed and managed in-house by GroupM. The study experienced the changes of time – from the era of print, TV, internet 1.0, mobile internet to today’s era of social, providing advertisers with data and insights on consumer behaviors and media consumption situation in China for the fifteenth year in succession. 2021 NEW Shan Hai Jin kicks off with a comprehensive upgrade from many aspects. It will cover 800+ cities and reach out to 100,000+ interviewees a year.

Data Source:

PUblic Information, National Bureau of statistics, CNNIC, Sina Finance, Major internet companies' financial reports, QuestMobile

Major Internet Companies Financial Reports Interpretation

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