China’s livestreaming farmers are powering the biggest Internet IPO since Uber

February 4, 2021, 6:45 AM UTC

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A gray-haired woman in a purple sweater sifts through swaths of bright orange sweet potato stems drying in the sun, the craggy green mountains of China’s Zhejiang province looming behind her. Chickens cluck and birds chirp in the background. 

“The tastes of my childhood,” says the caption. At the bottom of the video is a small yellow shopping cart icon and the words, “farmhouse sweet potato stems 500g.” One click later, viewers can purchase half a kilo of the delicacy displayed in the video for $3. They can also buy a packet of green tea for $13, or, for $21, a jar of homemade loquat honey.

This is “Wang Wei’s miscellanies of mountain living,” an account run by a man who goes by Wang Wei and documents the rural idyll of his family’s village near the city of Lishui in Zhejiang. The account has 445,000 followers on Kuaishou, a Chinese short-video app gearing up for a $5.4 billion IPO in Hong Kong on Friday that is expected to earn the 10-year-old app a valuation of around $60 billion.

Kuaishou is popular with users in rural areas and lower-tier cities, offering small merchants like Wang a platform to share their daily routines and sell their wares. Wang has sold 769 items on his store and uses Kuaishou to promote mountain tours and village homestay experiences.

Kuaishou’s penetration outside of China’s biggest metropolises is a draw for investors; so is the potential to convert more of its 300 million daily users into active consumers. But a lingering unknown is how Kuaishou can rake in more revenue from the billions of dollars of goods livestreamers like Wang sell.

Short stories

In 2011, Cheng Yixiao, a former engineer at HP, created an app tailor-made for sharing GIFs—the short, animated images that dominated the Internet in the early 2010s. Cheng called the app GIF Kuaishou, or “fast hand” in English. But in 2013, former Google engineer Su Hua joined the venture and helped refashion Kuaishou as a short-video app, and the GIF aspect disappeared from Kuaishou’s name and its platform.

The company draws a straight line between its earliest iteration and its current form, claiming in its Hong Kong stock exchange filing application that GIFs “are in essence, the earliest form of short videos.” Naturally then, long-form videos followed short videos, and in 2016, Kuaishou introduced livestreaming to its content lineup.

Livestreaming opened a new revenue channel for Kuaishou. The app started selling users virtual gifts—icons and emojis—that they could then send to their favorite individual livestreamers as a “tip.” When a viewer tips a broadcaster, the icon is displayed across the screen and the broadcaster often responds by name-checking the fan who sent it.

In Wang’s most recent livestream, which ran for nearly five hours, he wanders around his village, alternately chatting to passersby and responding to livestream viewers’ questions and comments. “Thanks for your support, friends!” he says as he ascends a set of stone steps. At another point, in front of a copse of trees, he laughs while reading one comment telling him to show himself in the livestream and refuses to do so, protesting, “I’m not good-looking!”

In a Kuaishou video, a woman inspects drying sweet potato stems in rural Zhejiang province. Clicking the yellow shopping cart icon takes viewers to a page where they can purchase the snack.

In 2017, Kuaishou made over 90% of its revenue from selling tips, and, according to the company prospectus, “virtual gifting” is still the app’s greatest revenue generator, accounting for 62% of revenue earned in the first nine months of 2020. Kuaishou’s second-largest moneymaker is advertising, accounting for 33% of company revenues in the same period.

E-commerce is a less prominent line on Kuaishou’s books, contributing just 5% of revenue in the first nine months of 2020, or roughly $315 million. But that doesn’t mean Kuaishou is a small player in China’s booming livestream e-commerce scene. In fact, since Kuaishou launched its e-commerce service in 2018, the gross merchandise value (GMV) of goods sold through the app has ballooned from $9 billion in 2019 to $50 billion in 2020, making Kuaishou the second-largest livestream e-commerce platform in China by GMV. What’s keeping livestreaming e-commerce from contributing more to Kuaishou’s bottom line is the app’s ultralow service fees.

Buy buy buy

Alibaba-owned shopping website Taobao became the first platform in China to offer livestream e-commerce—in which Internet influencers use their clout to promote brands and sell merchandise through livestream broadcasts—when it launched Taobao Live in 2016. Kuaishou and Douyin, TikTok’s sister app in China, jumped on the trend two years later, but livestream e-commerce in China had its breakout moment in 2019 when Alibaba integrated the model into its massive Singles Day shopping festival.

According to Chinese e-commerce research firm 100EC, Taobao Live remains the dominant player in livestream e-commerce, accounting for over half of the roughly $158 billion in GMV sold through livestream e-commerce in 2020. Kuaishou is the second-largest platform, accounting for 21% of total GMV. 

“[M]onetizing their user base is kind of turning [Kuaishou] into a real social-commerce platform, and it’s exceptional,” says Alexander Shapiro, head of strategy for Beijing-based branding agency PBB Creative. According to tech research firm EqualOcean, which is also based in Beijing, Kuaishou has the most active users and the highest user retention rate in China’s competitive short-video industry, making Kuaishou perhaps the most “social” e-commerce app among its competitors.

But Kuaishou ranks lower than its rivals when it comes to the service fees it charges for goods sold on its platform.

Kuaishou made it easier for small-scale sellers to operate on the platform by lowering service fees for farmers at the start of the pandemic. It also implemented a decentralized content algorithm that pushes less popular user videos onto featured pages for more exposure. 

Those tactics have helped Kuaishou gain traction in China’s smaller cities and rural regions, which have become e-commerce battlegrounds since they are less saturated than top-tier hubs like Shanghai and Beijing. In fact, over 85% of Kuaishou’s user base live in lower-tier cities, according to Eliam Huang, a Hong Kong–based researcher at retail analyst Coresight Research.

But reduced service fees mean “Kuaishou’s take rate—or the amount of commission it charges merchants for selling through its app—is quite low compared to the other platforms,” says Michael Norris, research and strategy manager at market analyst Agency China.

The app receives less than 1% of the total GMV sold through its app, but, with livestream e-commerce still a young and competitive market, Kuaishou seems more focused on building a broad user base than on making money.

Norris says it’s likely Kuaishou’s take rates will increase over time, just as other tech companies have raised fees after achieving scale. “Investors who see upside in Kuaishou’s e-commerce offering will be looking for a similar pattern,” Norris says.

Bottom line

Diversifying its revenue streams could also help Kuaishou guard its business against sudden regulation. Regular livestreaming—the medium through which Kuaishou makes most of its revenue, by selling virtual “tips”—is susceptible to frequent crackdowns as Beijing polices what it considers “vulgar” content. 

In the past, Beijing has banned ASMR videos, where broadcasters whisper or make light crinkling noises close to the microphones. The soft noises are supposed to elicit a tingling sensation among listeners, but Beijing deemed the practice too risqué for China, where pornography is illegal.

More recently, Beijing discouraged mukbang livestreams, where viewers watch livestreamers eat. Authorities began to criticize mukbang videos last year, lamenting that the binge-eating streams encouraged food waste—a scourge Chinese President Xi Jinping has campaigned against. Kuaishou reportedly responded by adding warning labels under mukbang videos, encouraging consumers to “save food, eat properly.”

But regulatory scrutiny of livestream e-commerce is increasing, too, as “a number of unscrupulous practices have emerged in the industry,” says Norris, citing influencers who inflate sales figures.

Livestreaming has other pitfalls to contend with too.

On Monday, the China Audio-Video Copyright Association (CAVCA)—a state-backed organization that represents artists—threatened to sue Kuaishou for copyright infringement, claiming the app hosts over 150 million videos that feature unlicensed songs. 

The criticism from the state-affiliated organization has echoes of the fate that befell fintech firm Ant Group last year, when regulators forced the Alibaba affiliate to scrap its IPO days before launch, citing “regulatory” issues. 

Retail investors seem unperturbed by the crackdowns, however, and have poured $302 billion into Kuaishou’s share subscriptions—leaving its IPO allotment for retail investors 1,200 times oversubscribed.

Had the Ant IPO gone through, the firm would have likely raised $34.5 billion. But with the Ant IPO scrapped, Kuaishou’s $5.4 billion IPO Friday is now in line to be the biggest Internet sector IPO since Uber went public in 2019.