The value of shares in Scottish Mortgage, and any income from them, can fall as well as rise and investors may not get back the amount invested.
This article originally featured in Baillie Gifford’s Spring 2020 issue of Trust magazine.
TikTok, for many first-time users, seems a baffling cacophony of slapstick jokes, dance moves and vocal acrobatics, set to catchy strains of pop, rap and country music. Yet scratch beneath the surface and the app is powerfully compulsive, offering an experience more joyful and non-competitive than its social media rivals. The videos created on TikTok are usually about 15 seconds. It’s a recipe that is winning over millions of users around the world; the app has been downloaded more than 1.5 billion times globally, according to mobile data researchers Sensor Tower.
That’s an impressive feat for an app that launched internationally barely two years ago, but it’s far more than a teenage fad, says Tom Slater. “TikTok is fun, lighthearted, away from the politics that has infected the other platforms, and there isn’t the pressure to project an image like there is on Instagram. Facebook used to be where you spent time with your friends, but now it’s where everybody is, so TikTok has filled that gap for younger people,” says Slater. “Teenagers are a demographic which is extremely hard to reach through most other media, and therefore TikTok is very valuable.”
Scottish Mortgage invested in TikTok’s parent company ByteDance in May 2019. Zhang Yiming, the company’s founder, presented an ambitious vision for the company in which artificial intelligence (AI) would learn and deliver the most engaging content to users. Slater says ByteDance’s expansion to more than 14 products and an estimated 1.8 billion monthly active users has defied expectations. “This is now the most interesting company in social media. ByteDance has one of the biggest media distribution networks in China, it’s the first Chinese media company to grow an international presence, and it requires only modest capital investment. You can’t invest in anything like that on the open market.”
The Chinese technology market demands that companies are highly competitive and focused on mobile first, Slater explains. Mobile is the biggest segment in the advertising market, and mobile payments accounted for around 83 per cent of all payments in 2018, according to Daxue Consulting.
In August 2012 ByteDance launched its original product, the news app Jinri Toutiao, exploiting the need for news that fitted a mobile screen. Its AI learns from the activity and preferences of its growing audience, and as the volume of user data grows, so does its accuracy. Using the same methodology of recommendation, the company turned its attention to short-form video and launched Douyin, the original Chinese version of TikTok, in September 2016. ByteDance launched TikTok as the international version in September 2017, and then merged it with the teen karaoke app Musical.ly after acquiring it in November 2017.
“Users have lots of choice, but a significant part of the proposition from ByteDance is AI. ByteDance can understand what users are going to be engaged with and interested in, and it can understand the value of that engagement,” says Slater. ByteDance has built an estimated audience of 800 million users in a very short space of time. “This AI-led approach is not about following your friends and what they like. The algorithm uses your prompts to find things interesting to you, and that’s quite different from things being surfaced by your friends.” It’s also quite universal; many videos use music but no specific language, meaning videos are shared between users around the world.
Chinese companies have to compete aggressively in their domestic market. “They’ve been battle hardened by growing up in a ruthlessly competitive market with thousands of copycats, and to achieve scale they’ve had to fight tooth and claw to get there. Look at food delivery: in the US, Grubhub delivers half a million meals a day. In China, Meituan Dianping delivers 20 million meals a day, and has half a million people doing deliveries. That’s an order of magnitude bigger than Grubhub.”
ByteDance has used a bold customer acquisition strategy in the west, advertising on rival sites such as YouTube. This has been an incredibly effective way to reach new users, Slater explains, because TikTok’s AI is very good at predicting the content people are most likely to respond to. TikTok has also made it very easy for people to start using the app, with no account set-up or password needed.
Yet TikTok’s rapid ascendancy has prompted concerns about censorship and security of personal data. The US Government is investigating TikTok as a national security concern, though TikTok has claimed that its user data is stored in the US and not shared with China. And while TikTok has also said it will adopt a more nuanced moderation policy for different countries, it has already faced scrutiny over apparently blocking the accounts of users defending pro-democracy activists in Hong Kong.
Perhaps unsurprisingly for the first truly global Chinese technology company, ByteDance has appeared to scramble for responses to these complex issues. “There are big concerns about how all social media companies handle user data,” says Slater. “Some of these arguments are also very US-centric, and there’s a particular US sensitivity in its relationship to China. But the company does have to get ahead of these arguments and move quickly to reassure the public.”
TikTok’s AI is very good at predicting the content people are most likely to respond to.
Crucially, TikTok’s rampant growth looks set to continue, with plans to launch products across workplace messaging, music streaming, search and even smartphones. “ByteDance has hundreds of millions of users and a very engaged audience that spends over an hour a day on the app, so the opportunities to monetise that are massive. Attention is extremely valuable, and we’ve seen it drive huge valuations on companies we’ve seen in the west,” says Slater. Advertising is likely to continue to be the biggest revenue stream, though there is no rush. “Companies that monetise too quickly have often suffered. Facebook and Amazon have built out services slowly. This is long-term thinking over short-term profit, and we hope and expect ByteDance will do the same.”
ByteDance founder and chief executive officer Zhang Yiming was born in Fujian Province, China, in 1983. He studied microelectronics and software engineering at university, and spent six years working in the technology industry, including at Microsoft, before founding ByteDance. Zhangís vision for the company was clear from the outset, using algorithms to determine the content that users would best engage with: “We are doing very innovative work,” he told Bloomberg in 2017 as he set out his vision for the world’s leading mobile-first AI company. “We are not a copycat of a US company, both in product and technology.”
A serial entrepreneur, Zhang holds a 24 per cent stake in ByteDance (valued at around $75 billion). He is softly spoken, charismatic and extremely driven. His management style is very non-hierarchical and product-focused, encouraging strong communication and close collaboration among the product team. And though Zhang’s early success has been in China, his ambition and vision have always been global. His name refers to a Chinese proverb that means “surprising everyone with a first attempt”.
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Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates. Scottish Mortgage Investment Trust has a significant exposure to unlisted investments. The trust’s risk could be increased as these assets may be more difficult to buy or sell, so changes in their prices may be greater. Investing in emerging markets is only suitable for those investors prepared to accept a higher level of risk. This is because difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment.
The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research. This article was written between November 2019 and January 2020 and approved in February 2020 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
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Tom is Head of the US Equities Team and is a Decision Maker on Long Term Global Growth Portfolios. He joined Baillie Gifford in 2000 and became a Partner of the firm in 2012. After serving as Deputy Manager for five years, Tom was appointed Joint Manager of Scottish Mortgage Investment Trust in 2015. During his time at Baillie Gifford he has also worked in the Developed Asia and UK Equity Teams. Tom’s investment interest is focused on high growth companies both in listed equity markets and as an investor in private companies. He graduated BSc in Computer Science with Mathematics from the University of Edinburgh in 2000.