What’s up with…? - Part 5: WeChat Channels
Tencent’s progress in the world of short video and livestreams
Things that caught our attention
Things that caught our attention
In March, Temu will open a marketplace for US merchants and later add European merchants (this will be parallel to their 'fully managed model' for Chinese sellers). (source) Read more about Temu’s progress in our recent update about the platform.
On January 24, 2024, Yu Yongfu, chairman of Alibaba Local Life Group and CEO of Ele.me, refuted the rumours of Ele.me being sold to Bytedance to all employees on the company's intranet. (source) To read more about the rumoured acquisition and why Bytedance would be interested in Ele.me, check out our recent update on Douyin Local Service.
Introduction
In this edition of the series of updates on some of our most important topics of 2023, we take a look at how well WeChat Channels fared last year.
In March 2023, we reported how WeChat had finally launched a successful short video app inside WeChat after failed attempts at stand-alone apps. In a speech, Tencent's CEO called WeChat Channels ‘the hope of the whole company’, stressing the importance of the competition for consumers’ app-time spent with Douyin and Kuaishou.
In this article, we will share the latest available data and developments surrounding WeChat Channels, which has grown into a serious new channel for advertising and e-commerce. We will also explore what sets it apart from Douyin and Kuaishou, both in strengths and weaknesses.
This is the last update in our shorter, weekly ‘What’s up with …’ series (for now). Next week, we will return to longer reports and a bi-weekly schedule.
This is also an exclusive post for paid subscribers. With next week’s regular update, we will bring back the preview. If you are not a paid subscriber yet and want to get access to full-length articles and a complete archive of reports, please support us by getting a paid subscription.
Freya Zhang and Ed Sander, Research Editors
Rui Ma, Consulting Editor
(click on the images above for information on the Tech Buzz China team)
WeChat Channels
The follow-up to: WeChat Channels - The Hope of Tencent March 31st 2023
The commercialization of WeChat’s short-video functionality, WeChat Channels, was one of Tencent’s most important strategies last year. It’s Tencent’s fastest-growing business with much revenue potential for the coming years. Pony Ma didn’t call it ‘the hope of the company’ for nothing. Tencent identified it as one of its most essential growth paths, along with AI, SaaS, overseas games and Fintech. The WeChat team has not been given clear growth tasks but has been asked to propose new innovative directions and slowly try and explore. [1]
At the end of 2022, WeChat Channels had about 400 million daily active users (DAU) that used it for 30 minutes on average daily. In December 2023, this had increased to approximately 490 million DAU (based on unique users watching at least one video for at least 15 seconds) and almost 60 minutes of usage time. In 2024, the goal is to reach 550 million DAU and 70 minute usage time.
Currently, only Douyin has more video users than Channels. [1]
Over the next few years, WeChat expects the peak average daily usage time to reach 100 minutes, lower than Kuaishou and Douyin’s current 120 minutes but still very respectable. Channels is unlikely to surpass its two competitors in content quality in the short term as they occupy much of the market because of their first mover advantages.
Before 2023, Channels depended on other parts of the WeChat ecosystem, like Moments, official accounts and mini-programs for new users. Nowadays, improved content quality is bringing most new users. To improve DAU, engagement and retention, WeChat has been increasing the proportion of machine recommendations to offer users more high-quality content.
Channels users are primarily from higher-tier cities and overlap strongly with Douyin’s users. However, they are very different from Kuaishou’s users, as Kuaishou attracts more lower-tier users. Channels users are also relatively older than users of other platforms: 40% are over 41 years old. One of the reasons might be that older user groups already use WeChat but might not use Douyin or Kuaishou. Since Channels is integrated into the WeChat app, it’s easier for them to get exposed to it.
Advertising income
In 2022, Tencent began commercialization of Channels because creators and merchants had a strong need for ways to monetize their Channels accounts. But as we have come to expect from WeChat, it commercialises carefully. The WeChat team of Alan Zhang is strictly limiting the ad load rate to protect user experience. The ad load on Channels is currently only 3-4%, compared to 10% or more with its competitors. [1] In the future, WeChat wants to increase its ad load rate to a maximum of 10%, with one in every ten videos being an advert, comparable to Kuaishou.
In the second quarter, Combined ‘internal circulation’ advertising in WeChat’s mini-programs, WeChat Channels and public accounts increased 30% YoY and contributed half to WeChat’s total advertising revenue. In Q3 2023, Tencent posted a 20% rise in advertising income, mainly owing to WeChat Channels. [1]
A media manager of a Beijing advertising agency claimed that since WeChat Channels started monetizing, its advertising revenue growth rate has been much stronger than that of Moments (WeChat’s social timeline). Of the Q3 2023 reported 14.7% YoY growth in WeChat’s advertising revenue, WeChat Channels contributed 8%.
WeChat Channels has attracted the attention of many industries, especially in the fields of automobiles, beauty, personal care, food and beverages (especially dairy products), clothing and bags. The growth rate of WeChat Channel advertising in the fourth quarter was expected to reach 45% to 50%, showing that advertisers are gradually shifting their budgets to this relatively new platform.
The main industries advertising on WeChat Channels are e-commerce, games and online services. Tencent’s advertising business is transforming, with more and more consumer spending tilting towards WeChat Channels. Beauty and clothing brands are more inclined to use WeChat Channels because the advertising costs are relatively low compared to Moments (CPC (cost per click) of a Moments ad can cost RMB 40-50).
In 2022, WeChat Channels’ advertising revenue reached RMB 1.3 billion. In 2023, it reached RMB 13.2 billion, and set a target of RMB 24 billion in 2024 (earlier in 2023, these targets were said to be RMB 15 and 37 billion). WeChat hopes to grow its advertising revenue to RMB 38 billion by 2025 and RMB 52 billion by 2026.
Industry experts also expect it to reach RMB 40-50 billion in the coming two to three years, while the upper limit of advertising revenue is estimated to be RMB 70-80 billion. This is comparable to what Kuaishou could reach if it increased its ad rate to 13%-15% (currently 10%).
While showing impressive growth, WeChat Channels’ advertising revenue still pales compared to Kuaishou and Douyin. In Q2 2023, Kuaishou’s advertising revenue was RMB 14.35 billion, almost five times WeChat Channels RMB 3 billion [2]. Douyin’s advertising revenue is estimated to surpass $20 billion in 2023, more than ten times WeChat Channel’s 2023 ad revenue.
ROI performance of WeChat Channels advertising is lower than on Douyin, Alibaba’s platforms and WeChat Moments, resulting in higher customer acquisition costs than alternatives. However, WeChat Channels has a higher repurchase rate (around 55%) than Douyin and Kuaishou (30%) and a potentially higher lifetime value.
While WeChat Moments has a high CPM (costs per 1,000 impressions) of RMB 45, WeChat Channels’ current CPM is RMB 29 (only one RMB higher than the rate at the start of 2023), and lies between Kuaishou’s RMB 20 and Douyin’s RMB 35-40.
Douyin mainly services leading brands, while Kuaishou serves small and medium businesses. WeChat Channels currently has many merchants that are comparable to Kuaishou’s, but it wants to move into leading brands. The CPM of Channels is expected to remain at RMB 29 in 2024 but increase to RMB 30-35 in 2025 and 2026 but will stay under Douyin’s CPM.
Advertising on Channels should help merchants direct more traffic to their mini-programs and build private traffic. If the sales conversion of ads on Channels can be higher, Tencent will also be able to ask for a higher price. [1]
Depending on their strategies, advertisers will spread their budget over Douyin, Kuaishou, WeChat Channels, and Moments. Channels account for about 20% of the budget of large advertisers, who might invest double in Douyin, which does allow direct transactions. Small and medium-sized companies might put more budget in Channels. Since advertisers have not increased their total budgets, WeChat Channels’ growth means they are spending less on other platforms.
e-Commerce
WeChat Channels has become one of China's seven leading e-commerce platforms, together with Taobao/Tmall (Alibaba), JD.com, Pinduoduo, Douyin, Kuaishou and Xiaohongshu. The market share of Alibaba has been strongly declining, especially in the clothing and beauty categories, with the arrival of content-based e-commerce, of which Channels is a new one.
In March 2023, WeChat shared that the average product sold was priced at RMB 200, and for autumn and winter clothing and beauty products, RMB 300. This is above the industry average.
Comparison of e-commerce channels.
There is still a long way to go for Tencent’s e-commerce. However, WeChat Channels shows more promise compared to the failed early self-operated e-commerce initiatives Tencent sold to JD.com in 2014 before investing in third-party platforms like JD, VipShop and Pinduoduo. [1]
Channels saw RMB 105 billion GMV in 2022. GMV of live commerce on WeChat Channels in Q2 2023 grew by 150%. [2] Total GMV in 2023 was expected to grow to RMB 320 billion.
By comparison, WeChat mini-programs were expected to generate more than RMB 4 trillion in GMV in 2023 and grow to RMB 5 trillion in 2024. Much of that involved offline service transactions in popular mini-programs of JD, Meituan and Didi. E-commerce of physical goods in mini-programs was only a few hundred billion yuan.
The strong expected growth is ascribed to the influence of Channels, which offers a new entry point for mini-programs. Consumers purchase, on average, at least 30 times per year in various mini-programs they use. Despite this, the mini-program monetisation for Tencent is relatively low, consisting of some advertising revenue (merchants advertising on WeChat) and payment fees.
Annual Channels users have exceeded 900 million, and the buyer penetration rate reached 17%.
By comparison, in 2024, Douyin’s buyer penetration rate is expected to grow to 40%-50% in 2024 and Kuaishou’s to 36%.
WeChat Channels’ GMV does, however, include 32% returns and 10% unpaid orders. The actual paid GMV of Channels is about RMB 108 billion. This is comparable to other video platforms and reflects common challenges in the industry. Kuaishou’s paid GMV was 40% and Douyin’s 45%.
The expectation is that the GMV payment conversion rate of video platforms will gradually increase.
The main source of GMV, accounting for 96%, is livestreams. The rest comes from short videos. Short videos on WeChat Channels are mainly positioned for brand exposure and not primarily for transactions. WeChat wants to protect the user experience by not allowing short videos to use direct sales methods like shopping links or group buying coupons. Merchants need to attract traffic indirectly, using the comments area (see ‘Creators Wanted’). Users can, however, purchase goods directly while watching livestreams.
In 3 to 5 years, WeChat Channels’ conversion rate should reach that of Douyin. Channels currently have 2 million merchants; this should grow to 5 million in 3 to 5 years.
On Channels, about half of the GMV (52%) is generated by white-label products, while the other half (48%) comes from brands. WeChat wants to increase the proportion of white-label GMV.
In the first quarter of 2023, Channels started generating income through commissions. Tencent charges a 2% technical services fee. The publicly stated technical service fees on video platforms range from 1% to 5%, but 2% is the actual industry average and can be as low as 1% during holidays and promotions. Douyin, for instance, charges a technical service fee of 5% for the food and beverage category but a 0.6% basic service fee for advertising traffic orders. Overall, Douyin’s technical fee is about 3%.
WeChat Channels revenue from e-commerce is estimated to be about RMB 9.8 billion in 2023. Besides the e-commerce GMV, WeChat also gained about RMB 7.6 billion in revenue target from virtual gifts (tips) in entertainment livestreaming and wants to increase this to RMB 10 billion in 2024.
According to a former WeChat Channels manager, the gross profit of WeChat Channels is 2% higher than that of Douyin and Kuaishou, while the net profit is 5% - 10% higher. The e-commerce department of Channels has about 500 employees.
In mid-2023, most merchants were still experimenting with WeChat Channels. Only about 10% was achieving net profits through livestreaming. 95% of livestreaming service providers also were losing money. The ROI of live commerce fluctuated around 100%.
‘Experts’ refers to livestream hosts. ‘Alliances’ refer to orders from WeChat Channels' preferred partners.
Strength in Integration
Tencent doesn’t want to develop e-commerce on Channels separately but wants to plug it into other parts of the ecosystem, like mini-programs, WeChat Pay and WeCom (WeChat enterprise). In WeChat, content on Channels already has many different entry points: menu items like livestreams and search on the Discovery page, shares in chats and on Moments, posts by official accounts, and more.
This is the core advantage of advertising on WeChat Channels through short videos or livestreams: companies can lead users from Channels to subscribe to their Official Accounts or communities. It can also drive traffic for livestreams in the opposite direction if they already have many followers on Offical Accounts.
Merchants can also acquire customers on Channels and complete transactions in mini-programs (the main source of merchants using Channels). Moreover, they can open a store on Channels and add customer service through WeChat or draw customers into groups and maintain customer relationships. As it has always been, WeChat remains a good tool for CRM. While Douyin sees a low repurchase rate because of its algorithm-driven ‘interest-based commerce’, as mentioned, Channels has the potential for a higher lifetime value. While Douyin focuses on public domain traffic, WeChat focuses on private domain traffic.
As we mentioned in our recent update on Douyin’s Local Service, at the end of March, WeChat Channels has been testing functionality to sell coupons.[1] It formally launched them in May, with leading merchant brands like Burger King, KFC and McDonald's rolling out group-buying coupons on WeChat Channels livestreams. In the example of Burger King, customers could buy in-store coupons or deals for home delivery (RMB 6-7 delivery fee, 30-minute delivery time). WeChat Channels promote local services in two ways: through coupons in short videos and livestreams. This is comparable to what you’ll find on Douyin. WeChat Channels only charged a 1% commission during the initial launch stage. [3]
Creators wanted
A week after we published our March article on WeChat Channels, Tencent announced an ad incentive plan for creators. Creators can earn advertising revenue by displaying adverts in the comments section beneath their videos. Creators needed to meet several requirements, including having over 100 effective followers, complying with content rules, and being a ‘high-quality’ original creator. From one day after the advert is displayed, creators can transfer earnings to their WeChat wallets. [4]
Source: WeChat
Judging from the required number of followers, this really is an affiliate program for relatively small potatoes. But what WeChat Channels really needs is some big names… On Douyin 3% of the top anchors contribute 97% of the GMV. The top anchors on WeChat Channels currently are mid-sized anchors on Douyin and Kuaishou.
Indeed, performance in selling goods through livestreams is relatively poor because of the lack of influential hosts that can attract large audiences and sales. Many brands are looking for creators who have WeChat Channels accounts to place ads. It’s not that these anchors can’t be found on WeChat, but top anchors like Li Jiaqi (Austin Li) prefer to use the WeChat app to build private domain traffic rather than doing livestreams on Channels. Because of the shortage of anchors, there are no short-term plans to promote livestreams on Channels heavily.
It’s a bit of a catch-22: because the ROI of Channels is not ideal, few merchants are willing to invest in Channels, which has led to a lack of high-quality content creators. Creators are currently highly concentrated on platforms like Douyin, Kuaishou, Weibo, Bilibili, and Xiaohongshu, especially on the first two short video apps.
The proportion of creators that came to WeChat Channels from Douyin and Kuaishou is already almost half of all new creators and is expected to grow to 55%. 157 million creators have published content on WeChat Channels; in December, 18.3 million are publishing daily.
The average number of daily published videos on WeChat Channels has reached 21 million. The chart below shows that this is still significantly lower than Douyin and Kuaishou.
Since 2020, WeChat has invested cash in the recruitment of creators, but it does not pay for content creation. Instead, it supports creators with traffic. In 2022, it provided creators with 5 billion visits in traffic support and doubled this in 2023. Another traffic driver is entertainment content like music, comedy, games, and drama shows.
In 2023, WeChat started allowing content creators to charge their audience for watching videos. Creators with 10,000 followers or more can also create members-only areas with content for paid subscribers. [5]
Tencent does want to expand its live commerce headcount, widen product categories and facilitate online payments through WeChat Pay. [1] It currently does not have a dedicated content creation team for Channels, but relies on the distribution of content of Douyin experts. WeChat is encouraging Official Account owners to switch to using Channels accounts and is actively inviting MCN organisations (Multi Channel Networks; livestream agencies/incubators) to cooperate. However, its support to content service providers is relatively weak and Channels is said to lack transparency about how MCNs fit into the ecosystem.
WeChat still lacks an effective mechanism to link and attract creators, a good infrastructure behind Channels and does not yet have a clear revenue model. Its advertising tools are relatively backward compared to its competitors, relying on a unified backend of Tencent Advertising Company. As a result, the monetization capability of Channels remains relatively weak compared to more mature platforms like WeChat Official Accounts. If Tencent can solve these problems, Channels could have enormous potential. For now, traffic and user time seem to be the main focus of WeChat Channels.
Outlook
At the annual WeChat conference, which took place on January 11th 2024, Tencent shared some new data about WeChat Channels. [6]
In 2023, the GMV of livestreams tripled compared to that of 2022. The order quantity increased by 244%, so the AOV also increased. GPM, the order value per 1,000 viewers in a livestream, exceeded RMB 900.
In the second half of 2023, WeChat Channels strengthened the supervision over white-label and non-standard products.
There still are relatively few brand merchants on WeChat Channels. In 2024, WeChat is expected to focus on supporting brand owners. By comparison, Douyin’s share of brands in GMV increased from 10% in 2018 to almost 60% in 2021.
78% of WeChat Channels buyers are women. Consumers from (new) first-tier and second-tier cities account for more than half.
So, what are the expectations towards the future? While WeChat Channels still has its limitations, most industry experts seem pretty bullish about the platform's potential.
A former Bytedance Senior Operations Expert said that while Douyin currently has 800 million DAU, WeChat’s social attributes could very well enable it to reach the same number. The views per user might be lower than on Douyin, though. Douyin currently has 280 billion views per day and Kuaishou 100 billion. Channels should be able to reach the same number of views as Kuaishou.
WeChat Channels is expecting the annual number of purchases to exceed 15 in 3-5 years.
WeChat is developing an internal traffic delivery tool specifically for WeChat Channels, which should improve the commercialisation potential. It hopes to launch this in 2024. In 2025 or 2026, it plans to launch a delivery tool for the entire WeChat ecosystem, further enhancing its advertising capabilities. Compared to the famous ‘China speed’, this seems really slow and probably illustrates WeChat’s famous low priority of advertising revenue compared to user experience.
According to a former Kuaishou e-commerce manager, WeChat Channels’ accuracy of traffic was not very high. Merchants tried it but found that traffic did not convert into actual orders. He was convinced, though, that if platforms like Channels and Xiaohongshu would further develop their e-commerce capabilities, it would be another blow to Alibaba’s Taobao.
Key Takeaways
The number of users of WeChat Channels has grown significantly during 2023 (to 490 million DAU), but its average daily usage time (60 minutes) is still only half that of Douyin and Kuaishou.
WeChat Channels’ ad load is only 3%-4%, compared to 10% or more with its competitors. In true WeChat style, it wants to protect the user experience.
Advertising revenue grew from RMB 1.3 billion in 2022 to RMB 13.2 billion in 2023. It was only an estimated 1/5th of Kuaishou’s and 1/10th of Douyin’s.
While having a lower direct ROI, advertising on Channels shows a higher repurchase rate than Douyin and Kuaishou.
GMV from live commerce on WeChat Channels grew from RMB 105 billion in 2022 to RMB 320 billion in 2023. Note that the actual paid GMV of all platforms is substantially lower (only 35-45% of total GMV).
For advertising, WeChat Channels wants to move from small and medium-sized companies to leading brands. For e-commerce, it wants to increase the proportion of white-label products.
Almost all e-commerce GMV on Channels originates in livestreams, as WeChat limits the direct transaction options in short videos to protect the user experience.
WeChat Channels revenue from e-commerce is estimated to be almost RMB 10 billion in 2023.
WeChat Channels is weak in influential livestream hosts. WeChat does not subsidize cash for content creation, only traffic. There is a lack of backend systems that enable creators to monetize their Channels accounts.
Sources
Six Degrees Intelligence, a leading global expert network/quantitative research firm that operates in China. Augmented with information from the articles below:
[1] 晚点LatePost 2023-12-11 [2] 晚点LatePost 2023-08-17 [3] Tech星球 2023-05-25 [4] 微信公开课 2023-04-07 [5] Technode 2024-01-12 [6] 36氪未来消费 2024-01-13
Images taken from keynotes by Tech Buzz China’s Ed Sander unless stated otherwise. These images may not be reproduced without prior consent by Tech Buzz China.