21 August 2019
Tencent-backed Qutoutiao is seeking to raise up to US$300 million in a US initial public offering. Photo: Bloomberg
Tencent-backed Qutoutiao is seeking to raise up to US$300 million in a US initial public offering. Photo: Bloomberg

How Qutoutiao spends millions to lure users

In China, most of the news content is produced by state-owned media companies such as China Central Television, People’s Daily and Xinhua News Agency. The private sector can only participate in the news industry by way of distribution, such as making a smartphone application to distribute official news content.

Since its debut two years ago, Qutoutiao Inc. has emerged as a popular news aggregator app in the country, and is now seeking to raise up to US$300 million in a US initial public offering.

Qutoutiao, which means “fun headline” in Chinese, is backed by technology giant Tencent Holdings Ltd. (00700.HK).

The startup collects news articles and short videos from professional media outlets and freelancers and presents customized feeds to users of its mobile application. It uses an artificial intelligence-based content recommendation engine to display articles and videos based on the user profile.

The company ranks fourth among the news apps in Apple’s Chinese App Store, after Toutiao, Alibaba’s UC Web Browser and Tencent News.

It plans to use the money raised from the IPO to enhance its content offerings, increase monetization opportunities and look for acquisition and investment opportunities.

Growing smartphone penetration in the country has changed the people’s news consumption habits. Smartphone apps like Toutiao have become the most popular channel for Chinese people to access news and information based on their own interests.

Qutoutiao is a comparatively young player in the field with about 17.1 million daily active users who spend about 56 minutes on the app daily, according to its IPO filing. Monthly active users have reached 48.8 million. By comparison, market leader Toutiao has around 120 million daily active users.

Qutoutiao may look like a fast-growing company, but its performance so far is not exactly spectacular. The sequential growth rate of its daily active users, for example, was only 8.8 percent for the three months to June 30 this year, compared with 56 percent for the same period last year.

Its total number of users jumped to 133 million by the end of June, up from 97.9 million by the end of March, after the company spent huge sums of money to lure new users by subsidizing them under a loyalty program.

Qutoutiao is also giving away cash credit for users to refer their friends to the app and boost their engagement with its news content. For example, users get cash credit if they leave a comment on a news story.

The cost of running the loyalty program is booked as sales and marketing expense.

As a result, the company’s sales and marketing expenses, which include the cost of running the loyalty program, increased eight times to 419.6 million yuan (US$61.33 million) last year, from 50.9 million yuan in 2016, and to 611.9 million in the six months to June of this year, from 105.4 million in the same period in 2017.

Such expenses for the first half of the year accounted for more than 80 percent of the company’s revenue.

By the end of June, Qutoutiao has 133 million installed bases and 32.1 million monthly active users. It spent 611.9 million yuan for the loyalty program, which is equivalent to spending around 5 yuan on each installed base or 19 yuan on each monthly active user.

The company’s business model, especially its use of loyalty program, appears to be working quite well in attracting users and bolstering their engagement with the app. However, it remains far behind the market leaders in terms of user base.

Its net revenue jumped to US$108.5 million for the first half of 2018, from US$16.2 million in the same period last year.

As the company continued to focus on growing its user base and improving its services, its net losses widened to US$77.7 million in the first six months of 2018 from US$4.3 million a year earlier, according to the filing.

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EJ Insight writer

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