Written by: Puzi Xu

In its third-quarter financial report, Kuaishou continued to reduce costs and increase efficiency, achieving profits for six consecutive quarters, fulfilling its promise of ensuring profits, but growth has been difficult to sustain. To maintain user growth and stabilize its core business, Kuaishou has spent too much money, resulting in rising sales rates. Moreover, the market seems to have a new perspective on Kuaishou's future direction.

In its third-quarter financial report, Kuaishou stated that in terms of user activity, it has become the third-largest short video platform, with the 'dual dominance' of Douyin no longer in effect. Video Accounts have surpassed Kuaishou in daily active users. To some extent, when the market peaks, the top two players in the industry inevitably 'fight' for dominance. However, it is often the third player that falls first: the market share of the third-place player generally becomes the squeeze space when the top two players clear out, and it is also the best target for them to supplement their strength. The situation is not optimistic.

Kuaishou, the third brother in short videos?

Where attention goes, business follows. In the third quarter of 2024, Kuaishou's average monthly active users (MAU) reached 714 million, with a quarter-on-quarter increase of 3.17%, and average daily active users (DAU) reached 408 million, with a quarter-on-quarter increase of 3.29%. User data has reached a new high, but growth has begun to slow. Looking at the longer time horizon, from the first quarter of 2023 to the third quarter of this year, Kuaishou's DAU was 374 million, 376 million, 387 million, 383 million, 394 million, 395 million, and 408 million respectively, indicating slow growth and a gradual peak. Considering that Kuaishou's average daily usage time remained at around 120 minutes this quarter, and this figure was maintained at 120 to 130 minutes in 2023, there has been little change in this core indicator of user stickiness. This also means that Kuaishou's user time has basically peaked, and Kuaishou is transitioning from a traffic growth enterprise. It is not easy to ensure user time while maintaining user growth.

For several quarters, the market had hoped that Kuaishou, with its highly engaged users, would correspondingly reduce its marketing efforts to acquire customers. However, in the third quarter, Kuaishou's sales and marketing expenses reached 10.4 billion yuan, an increase of 15.94% year-on-year, with a growth rate exceeding revenue growth. The proportion of total revenue increased to 33.3%, much higher than the 10%-20% expense range of other platforms. Considering that Kuaishou also needs to face continuous competition from rivals and maintain its current user base, it may have to invest even more.

The good news is that since implementing organizational restructuring and management adjustments in 2021, Kuaishou's strategic focus has shifted from user growth to profit improvement, transitioning from a 'subsidy expansion' model to 'cost reduction and efficiency enhancement'. In the third quarter, Kuaishou reported a net profit of 3.27 billion yuan, a year-on-year increase of 49.9%. From the second quarter of 2023 to the third quarter of this year, Kuaishou has been profitable for six consecutive quarters. Of course, Kuaishou's profit growth is closely related to cost reduction. In the third quarter, Kuaishou continued to 'tighten its belt,' with administrative expenses decreasing by 11.4% year-on-year to 796 million yuan and research and development expenses increasing by 4.5% year-on-year to 3.1 billion yuan. Notably, Kuaishou, which has been tightening its belt in recent years, has achieved good results in controlling its 'three expenses' (sales expenses, administrative expenses, and research and development expenses). In the first three quarters of 2021, Kuaishou's 'three expenses' accounted for 83.61% of operating revenue for the period, but this proportion dropped significantly to 44.35% in the first three quarters of this year.

Although growth has slowed, net profits are steadily rising, and Kuaishou's performance seems decent. However, this fails to fully capture Kuaishou's complex situation: since its market value exceeded 1.7 trillion Hong Kong dollars after its 2021 IPO, it has hovered around 200 billion Hong Kong dollars. Behind Kuaishou's shrinking market value lies a loss of growth potential. Kuaishou's market expectations have long been largely tied to its 'dual dominance' with Douyin: although Douyin's current DAU of around 700 million is comparable to Kuaishou's MAU, the gap between the two is significant. Whether in short videos or other areas, when an industry enters a two-tier competition, a stalemate is the norm. It is almost impossible for the first player to fully absorb the second, and a monopoly is difficult to achieve. At this time, the market still has expectations for the second player.

However, a significant change this time is that Kuaishou acknowledged its position as the third player in the industry in its financial report. In the report, Kuaishou stated that user growth has further consolidated the company's leading position as the third-largest app in China (based on average daily active users per quarter). Guohai Securities previously estimated that Video Accounts' daily active users reached 450 million in 2023, exceeding Kuaishou's scale in the third quarter of this year.

To some extent, as the market increments peak, once the top two players in the industry fully engage in competition, it is often the third player that falls first. The market share of the third player often becomes the space that must be squeezed when the top two players clear out, and it is also the best target for them to supplement their strength. At this time, Kuaishou's competitive situation is already not optimistic.

Kuaishou's Xinba dilemma?

In the third quarter, Kuaishou's online marketing services, live streaming, and other services including e-commerce contributed 56.6%, 30.0%, and 13.4% to revenue, respectively. To some extent, Kuaishou has been transforming into an e-commerce company disguised as a short video platform over the years. Currently, Kuaishou has shifted its strategic focus to the e-commerce sector, which, along with online marketing services and live streaming business, forms the three pillars of the company's business. In the third quarter, Kuaishou's core business revenue, including online marketing services and other services (including e-commerce), increased by nearly 20% year-on-year. Kuaishou's strategy of 'left advertising, right e-commerce' is also considered a closed business loop. However, it is worth noting that in addition to facing increasing customer acquisition costs, the growth rate of Kuaishou's e-commerce is also slowing down: in this quarter, Kuaishou's e-commerce GMV was 334.2 billion yuan, an increase of 15.1% from the same period last year, and the growth rate was lower than that of the same period last year.

Moreover, the slowdown in Kuaishou's e-commerce GMV has persisted for many years: from 2019 to 2023, Kuaishou's annual e-commerce GMV was 59.6 billion, 381.2 billion, 680 billion, 901.2 billion, and 1,184.4 billion yuan, respectively. Additionally, as an up-and-coming player in content e-commerce, Kuaishou lags behind Taobao, JD.com, Douyin, and Pinduoduo in GMV volume and growth rate compared to the larger Pinduoduo and Douyin. The decline in GMV growth will continue to impact Kuaishou, which is increasingly reliant on e-commerce, in terms of internal advertising, live streaming business buy-ins, and e-commerce commissions. Moreover, it will adversely affect how the capital market assesses Kuaishou's growth potential and true valuation in the fierce e-commerce battle.

There are multiple reasons for the slowdown in Kuaishou's e-commerce growth. On the one hand, as the penetration rate of e-commerce users within the platform increases slowly and the overall user base growth is sluggish, coupled with the gradual saturation of the e-commerce market, it has become more difficult to acquire new users. Kuaishou's difficulty in acquiring users is increasing linearly, and potential user conversion has become a challenge. On the other hand, although Kuaishou has been striving to 'level the peaks and fill the valleys' in recent years by bringing traffic back to the platform and reducing its reliance on top streamers, the dependence on top streamers, led by Xinba, has not been completely eliminated.

For a long time, content plus e-commerce has been a prominent label for Kuaishou. Top streamers, including the Xinba family, Sanda family, and Erliu family, have been crucial for Kuaishou's content traffic and commercial monetization: at that time, streamers needed the platform to provide traffic and support, while the platform relied on these streamers to attract users and realize commercial monetization. However, during the mutual game, conflicts between streamers and the platform have also emerged. One of them is the struggle for dominance. For example, Xinba has always been building his own brand and supply chain to maintain top-down dominance in live streaming. However, as Kuaishou introduces its own brands, adjusts traffic rules, and weakens the influence of top streamers at various nodes, their restraint has gradually weakened.

However, Kuaishou users' preference for top streamers is difficult to eliminate overnight. Especially for Xinba and Kuaishou, their numerous 'confrontations' have almost become a complex landscape in the history of live streaming. Despite various statistical data indicating that Kuaishou's e-commerce GMV's dependence on Xinba has decreased year by year, after several bans, Xinba has always been 'unsurprisingly' unbanned and made a high-profile appearance.

During the previous Kuaishou '818 E-commerce Festival,' Xinba live-streamed for 14 hours from 10 am to midnight, achieving sales of nearly 2.8 billion yuan, more than 100 times that of the second-place streamer on that day. Even after the live stream, Xinba talked about his victory in a high-profile manner: 'I, Xin Youzhi, have remained strong for seven years. The era of Xin Youzhi has passed, but the outdated Xin Youzhi standing here is still a god in your eyes. As long as I want to, I am the god of the internet!' It's hard to imagine how Kuaishou's executives felt about his remarks, but it is undeniable that Kuaishou's e-commerce business still relies on this 'Number One on Kuaishou.' In the repeated entanglements of going viral, being suppressed, and being unbanned, Xinba, the Number One on Kuaishou, has not only suffered no substantial damage but has also grown stronger. This has almost become an insurmountable obstacle for Kuaishou.

Kuaishou's transition still needs time

This year, e-commerce competition has intensified, with low prices across the network, optimized recommendation algorithms, and traffic subsidies provided by merchants becoming various chips for e-commerce platforms to compete for user resources. Over the years, compared to other platforms' brand live streaming, influencer-driven sales, and mall channels, Kuaishou's 'arsenal' for e-commerce has not been rich. Especially considering that Kuaishou's e-commerce has still been relatively dependent on influencer-driven sales, as the overall market growth slows down, reducing the influence of top streamers, supporting brand store live streaming, and expanding e-commerce channels have become the focus of Kuaishou's efforts.

At the 2023 Kuaishou Gravity Conference, Cheng Yixiao first proposed the concept of Kuaishou's universal shelf. The 'universal shelf' emphasized by Kuaishou does not refer to the traditional shelf e-commerce mall but includes multiple scenarios and entry points such as recommendations, malls, searches, and stores, with the core being consumption outside live streaming rooms. As an important supplement to the live e-commerce content field, the universal shelf has received great attention from Kuaishou in the past two years. In the first quarter of 2024, Cheng Yixiao mentioned that Kuaishou's universal shelf field, as one of the engines driving e-commerce growth, achieved a year-on-year growth rate exceeding 50% in the first quarter of 2024. In the second quarter, Kuaishou's universal shelf continued to grow, surpassing the overall GMV growth rate. The GMV of the universal shelf field currently accounts for more than 25% of Kuaishou's total e-commerce GMV. In the third quarter, the universal shelf accounted for nearly 20% of Kuaishou's overall e-commerce GMV.

Moreover, during this year's Double 11, Kuaishou began to concentrate its efforts, continuously emphasizing and focusing on the universal shelf and brand live streaming, including opening the top-level mall entry on the APP during Double 11. Data shows that during Double 11, mall GMV accounted for about 10% of overall GMV. However, compared to Douyin, which began building its mall in 2020 and placed the mall on the homepage entry in May 2022, Kuaishou seems to be more cautious and slower in building its mall. For example, after Double 11, Kuaishou chose to re-close the top-level mall entry for users who were not in the grayscale test. Since its foray into e-commerce in 2018, Kuaishou's e-commerce strategy has shifted from 'trust e-commerce' to 'low-priced quality products' and then to 'user-first,' always adapting to changing consumer trends. However, its strategic positioning seems to have been fluctuating. In the future, with less room for trial and error and facing increasingly complex competition, the speed and determination of Kuaishou's transition to the universal shelf will also be worth observing.