China's internet giant Tencent Holdings and rising challenger ByteDance are fighting an all-out war with escalating turf battles and legal tussles even as the country's regulators toughen scrutiny of big tech's market power.
The pair are clashing across multiple business arenas as they fight for control of traffic, the backbone of internet companies' growth. Tencent, the gaming and social media behemoth, has amassed more than 1 billion users on its popular messaging app WeChat, which connects with a wide range of services offered by Tencent and partners. But ByteDance is catching up as its short-video platform Douyin, the domestic version of TikTok, has attracted more than 600 million daily active users.
The latest faceoff took place in early February when ByteDance sued Tencent in a Beijing court alleging that Tencent violated antitrust laws by blocking access to content from Douyin on WeChat and its QQ instant messaging app. ByteDance sought a modest 90 million yuan ($14 million) in compensation. Tencent responded by saying ByteDance's accusation was "malicious framing" and pledged to countersue.
The lawsuit extended a running feud between the two companies dating back at least three years. The companies have sued each other hundreds of times in disputes over copyrights, infringement and unfair competition. This was the first suit that alleged antitrust violations. Analysts said the case might serve as an important example for antitrust enforcement in China's tech sector as regulators shift to tighter control after years of laissez-faire policies.
Chinese leaders have been drumming up anti-monopoly legislation and regulations since last year, targeting big internet platforms that leverage their market dominance to curb rivals.
Douyin's latest legal attack also escalated the companies' growing rivalry as each encroaches on the other's turf. Before the legal action, Douyin won the sponsorship rights for this year's Spring Festival Gala aired by state broadcaster China Central Television (CCTV) and pledged to give away 1.2 billion yuan in virtual red packets on its app during the event in a major campaign to lure new users.
Tencent initiated the red packet feature in 2015 in a partnership with the Spring Festival Gala. Since then, the annual event, the world's most-watched TV show, has become an important promotional battlefield for China's tech giants seeking a bigger share of online traffic during the Lunar New Year holiday. E-commerce giant Alibaba Group Holding and search engine Baidu were also previous event partners.
Douyin's showcase on this year's show highlighted the rise of short-video platforms in China's internet landscape.
"The CCTV Spring Festival Gala is the real industry weathercock, and short-video (platforms) are going to grab everyone's business," said a source from e-commerce upstart Pinduoduo, which lost the sponsorship bidding to Douyin.
Short-video has become the second-most popular internet application after instant messaging, according to China Netcasting Services Association. Chinese net users devoted an average of 2 hours every day to watching short videos, data showed.
At the end of 2020, Chinese internet users spent an average of 27.3% of their online time on short videos, surpassing the 21% they spent on instant messaging, according to a survey by Aurora Mobile.
Tencent has sensed the market shift. WeChat last year launched a short-video feed within its super app in a direct attack on Douyin's turf. The new feature garnered more than 200 million daily active users in three months.
Douyin, in its part, launched a new social media feed similar to WeChat's Moment function, which allows users to interact and share content with friends. Douyin made its push into social media under pressure from business obstacles thrown up by WeChat, according to Zhang Nan, CEO of Douyin's Beijing operation.
In the name of antitrust
Business clashes and legal wrangling between Tencent and ByteDance date at least to early 2018, when Tencent's WeChat and QQ blocked links to short-video content from the ByteDance services Douyin, Xigua Video and news app Jinri Toutiao. That year, Douyin and Jinri Toutiao jumped into the list of top five most-downloaded apps among iPhone users, challenging WeChat's dominance.
Following Tencent's move, Zhang Yiming, founder of ByteDance, and Ma Huateng, founder of Tencent, targeted each other in scathing posts on social media. Zhang in May 2018 claimed that Weishi, Tencent's short-video platform, was a copycat of Douyin. The war had officially started.
One month later, Tencent terminated all partnerships with ByteDance's units and sued the company for defamation. ByteDance countersued Tencent for blocking user access to its platforms.
The first round of legal fighting ended with reconciliation as both sides agreed to withdraw litigation, Caixin learned. But the two have since launched more attacks, and Tencent's ban on links from ByteDance remains. Today, Tencent users have to jump through hoops to share Douyin videos, downloading them locally before uploading to their desired Tencent platform.
The dispute came to a head in February when Douyin sued Tencent in Beijing's Intellectual Property Court, claiming Tencent was abusing its market dominance and contravening Article 17 of China's Anti-Monopoly Law.
The last time a legal battle between tech companies was initiated on antitrust grounds was in 2010 when internet security firm Beijing Qihoo Technology brought Tencent to court on allegations of anti-competitive practices. But the Supreme People's Court ruled against Qihoo's claim, citing its inability to define Tencent's dominant market status under the Anti-Monopoly Law. Since then, antitrust allegations have rarely been made in the tech sector.
"Tech giants often cite antitrust to attack competitors, but when antitrust regulators make moves, they argue that the policies are too strict and choke business growth," a former legal department employee at Tencent said.
The regulatory winds are changing. In February, China issued formal guidelines aimed at reining in anti-competitive behavior by internet platform operators, fleshing out existing regulatory powers. Meanwhile, the country is conducting a major overhaul of antitrust law in a bid to make the statute better fit the internet sector.
But the new guidelines fail to provide a powerful tool for regulators to more easily define tech giants' dominant status. Legal experts said it has always been difficult to specify a particular market when trying to prove monopolistic behavior, especially in cases involving internet platforms, which use their power to force partners to work exclusively with them. In recent years, several high-profile antitrust investigations in China collapsed because regulators were unable to define the market in which such platforms operate.
Turf wars in music and games
Behind the intensifying legal tussles are the companies' expanding forays into each other's turf.
Music streaming is one of the most hotly contested business segments between Tencent and ByteDance, reflecting Tencent's overwhelming control of music copyrights.
Tencent's music unit controls rights to more than 20 million songs from more than 200 music companies worldwide, including exclusive rights from Universal Music Group, Sony Music and Warner Music Group in China. That means a large amount of content generated by users on ByteDance's platforms may violate copyrights because they lack Tencent's authorization.
Since 2018, Tencent has filed 214 suits against ByteDance's units, seeking more than 20 million yuan in compensation for music copyright violations.
A ByteDance source said negotiations with Tencent Music for copyright authorization have always been tough because of the high prices Tencent demanded.
But the balance of power is changing with the growing influence of Douyin. A person close to the video site said music companies increasingly opt to offer special rights to Douyin when they discuss authorizations with Tencent Music.
"If the song can't be promoted on Douyin, it is unlikely to become a hit," the person said. Tencent Music has found Douyin an increasingly important channel for distributing music, this person said.
People with knowledge of the matter said Tencent Music and Douyin reached an undisclosed partnership in late 2019 under which Tencent Music agreed to drop all lawsuits against Douyin.
But Douyin has bigger ambitions. Since April 2020, Douyin has approached music companies seeking exclusive rights, although music companies remained cautious, several industry sources said.
ByteDance also moved to tap into Tencent's most profitable business of online gaming after a series of legal battles initiated by Tencent targeting game-related video content on ByteDance's platforms.
Since mid-2018, Tencent has filed 23 suits against Xigua Video and Douyin and requested the removal of user-generated video content about Tencent games, such as League of Legends and Honor of Kings. In November 2020, a district court in Shenzhen, where Tencent is based, ordered Douyin to pay Tencent 550,000 yuan in compensation in one of the cases. Douyin said it would appeal.
A former ByteDance employee said the company decided to develop its own games after being ordered to remove content related to Tencent's games.
ByteDance has made investments in some 20 game developers, according to a company source. But the company faces fierce competition from Tencent, which races to offer higher prices to take partners away from ByteDance, the source said.
The heated competition reflects the companies' efforts to beef up game-related advertising revenue. ByteDance's revenue from game advertisements has surpassed Tencent's since 2018. In 2020, ByteDance became China's biggest advertising platform with revenue of 150 billion yuan, compared with less than 100 billion yuan generated by Tencent.
Moving into each other's territory
In the face of rising competition from ByteDance, Tencent has moved to tap its massive WeChat user base to develop its own short-video service. The new video segment on the WeChat app started trial operations in January 2020. By the end of the year, the section had 280 million daily active users who spent an average of 9.5 hours on the site each month, according to a research firm.
WeChat founder Allen Zhang said in January that videos will be the king of social media for the next decade. And Tencent has used all of its channels to steer traffic to the new video section.
According to the China Internet Network Information Center, 85.6% of China's netizens, or 773 million, were short-video platform users as of March 2020, up from 125 million at the end of 2018. China's short-video viewers spent an average of 34 hours watching videos in March 2020, up from 22 hours a year earlier, according to Quest Mobile.
Douyin is also seeking to expand its business range through its video services. Douyin's Zhang Nan said she hopes Douyin "could become the video encyclopedia for human civilization," with "video search as the gateway to finding answers."
In another move to challenge WeChat, ByteDance in 2019 launched Duoshan, a stand-alone video-messaging app, allowing users to record and send each other short videos that disappear after 72 hours. But Duoshan was quickly blocked by WeChat and QQ and became embroiled in a legal dispute as Tencent accused ByteDance of using avatars and nicknames of WeChat users in its products.
ByteDance is eagerly searching for new growth sources as Douyin nears its peak in user growth, analysts said. By developing social media functions, Douyin will transform from a content platform into a social media platform, allowing its business to be sustainable even as traffic growth slows, a business expert said.
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Caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Nikkei agreed with the company to exchange articles in English.