Photo Credit: Twitter @NaraHodge
Users of Twitter and Instagram have seen their social feeds flooded with cute animated photos of Donald Trump, Hillary Clinton and a slew of celebrities over the past couple of days, in a quasi photo-editing frenzy occurring on social media. Animated photos, featuring exaggerated sparkling eyes, slimmed chins and airbrushed pinky skin, were all created via Meitu, a killer photo-editing app from China.
The ranking of Meitu on Apple’s App Store free app list soared in just two days from 418 on Jan 17 to 17. It also boosted Meitu’s stock price, contributing to a 7% increase in a week and pushing it to a new record after its IPO in December.
Meitu Inc., the company behind the app, nailed a HKD 4.88 billion(USD 629 million) listing last month on the Hong Kong stock exchange, at a valuation of USD 4.6 billion. Many people were bewildered at how essentially a purveyor of free apps was able to go public without having to first post profits, and many continue to be confounded by the biggest challenge confronting the newly listed company ahead – turning a profit.
To address these concerns, we offer a dissection of Meitu in the following piece, including an analysis of its matrix of products, operating status and how it plans to diversify its business looking into the future.
A company built around solutions for selfie-addicts
Unlike most internet startups that found their homes in Beijing, the most dynamic hub for the internet industry in China, Meitu Inc. is located in the southeastern coastal city of Xiamen, Fujian. It was established in 2008 by two serial entrepreneurs, present CEO Wu Xinhong and Chairman & angel investor Cai Wensheng.
Cai is a legendary grassroots entrepreneur and angel investor in China, who made his name as the domain name trader that sold G.cn to Google. Led by Cai, the company has completed five rounds of fundraising since launch, landing itself USD 501 million in total from famed investors including venture funds IDG Capital China and Sinovation Ventures.
Apart from its glamorous founder and investors, what’s more eye-catching is its eight-year expansion of product line that has landed the company a staggering 110 million registered users (as of last October according to its prospectus), pumping out over 6 billion photos online every month.
It all started with the app Meitu in 2008. The app was originally a desktop photo editor that later became one of the flagship mobile apps for the company. It gained ground quickly by selling itself as a photo editing tool ‘100 times simpler’ than industry standard Adobe Photoshop. Unlike Google’s Photo editing app Snapseed and its standard filter set, the most popular functions for Meitu are touch-up effects: eye-widening, skin-lightening and smoothing, and face-slimming. Super easy-to-use and one-touch beautifying features made the app a darling for millions of users, mostly women, in China.
It’s instant success also inspired the direction of the company, which became to build products around the theme of “beautifying”, targeting young female users. It has since bred 23 products that include a photo-editing application, a short video and live streaming platform and even a mobile gaming app. The following are the six flagship apps of Meitu Inc.
These apps, all focusing on beautifying selfies, typically do well in Asian countries. Not only dominant in the Chinese market, Meitu has seen success winning the favor of overseas users. As of June 2016, Meitu Inc. had over 370 million overseas users derived from several countries. India, Indonesia, Japan, Malaysia and Thailand all see more than 10 million users respectively. Total monthly active users, both inside and outside of China, were at 456 million as of last October.
The slew of apps have been conquering Apple App Store’s ‘Photo & Video’ app category since 2013, according to iOS app tracker App Annie.
Besides its software lineup, Meitu made a breakthrough in May 2013 with its foray into the hardware market launching MeituKiss, a souped-up smartphone specializing in selfies, resembling Casio’s line of selfie cameras. MeituKiss, sold for RMB 1,799(around USD 260), and was a much cheaper alternative to Casio’s selfie cameras priced above RMB 5,000. Since then, the company has introduced selfie smartphones at a pace of two models every year, with its M and V series phones featuring price tags higher than RMB 2,000. The coming T8 model is currently being sold for RMB 5,000 at pre-order, which puts it in the price range of a high-end smartphone.
An app developer that makes 90% of its revenue from selling smartphones
Pumped by ambition to be more than a tool maker, Meitu Inc. has been expanding aggressively. It houses more than 1,000 employees now – ten times the amount it had three years ago – with localization teams on the ground in London, Mexico City, Tokyo, New Delhi and Singapore, etc. However, behind the cover of a fast expanding entity with a mounting user base, is the cold hard fact that Meitu still has not been able to make a profit.
Although the company has seen expanding revenue in the past three years, Meitu posted losses from 2013 to 2016. Despite revenue growing 224.2% from RMB 180.6 million in the first half of 2015 to RMB 585.5 million for the same period in 2016, the company posted a net loss at June 2016 of RMB 2.2 billion.
Looking closer at its revenue stream, one might find it fair to call this company a hardware company, for as much as 95% of revenue comes from smartphone sales, according to the figures for the first half of 2016. Meitu has sold 1.34 million smartphones in total since its first model debuted in 2013, and the proportion of sales revenue from smartphones increased from 59.3% in 2013 to 95.21% for H1 2016. While other streams of revenue, Internet services, mainly include advertising and value added services (from selling virtual products online through the mobile gaming app and the live streaming platform) were only RMB 34.5 million, 58.2 million, 72.6 million and 25.9 million for 2013, 2014, 2015 and H1 2016.
How do you cash in on all this popularity?
Meitu is representative of the tool category of apps in the mobile internet era. Typical drawbacks for this app category include their high replaceability and the relative difficulty of retaining users on the platform. A common featured shared by tool apps is that although they have huge user bases, monetization often proves to be a problem.
Cai, Chairman of Meitu, however, is very optimistic about company prospects, saying in an interview following Meitu’s IPO that, “for most internet companies, it is a long process to grope a business model. Previously we were focusing on acquiring users and cared much about user experience, but now we will start our commercialization.”
Meitu stated its plans for commercialization in its prospectus.
Firstly, Meitu will continue to launch more smartphones for users that crave high quality selfies. After all, smartphones have proven to be a viable revenue stream for the company. According to its prospectus, the average margin earned on a Meitu smartphone increased from RMB 191 in 2014 to RMB 353 in H1 2016.
But it is worth noting that in three years, Meitu only sold 1.34 million devices, a small amount when compared with China’s major smartphone vendors. Huawei, for instance, sold 140 million smartphones in 2016. One of the reasons for this is phones specializing in selfies are a relatively niche market for the smartphone industry. This market has been crowded out since major smartphones makers all feature phones with greatly optimized cameras at attractive selling points. This does not only impact sales for Meitu smartphones, but also the popularity of its apps.
The company plans to build an ad platform for advertisers. With a primarily female user base, Meitu is attractive to advertisers in the realms of cosmetics, luxuries, and fast moving consumer goods. Nevertheless, time spent on the platform is an important indicator for advertisers considering ad placement. This again raises Meitu’s biggest problem, also a soft point for the whole category — connecting with users and retaining them seems an almost intractable obstacle.
Meitu have tried the social approach, but there is little opportunity to break through from this road.Meitu launched a clone of Snapchat, dubbed Shanliao, in the latter half of 2016, but Shanliao has been largely overlooked, overshadowed by the dominance of major social platforms like WeChat, QQ, Weibo and Momo.
It also lists value added services as a revenue stream, chiefly through selling virtual products online to users. This kind of commercialization method is widely adopted by gaming apps and live streaming platforms in China. Meitu’s live streaming platform Meipai is pivotal for this strategy, but Meipai, according to an earlier report by China Tech Insights, has hundreds of local rivals. The live streaming market is currently dominated by Inke, Douyu, and YY, with Meipai yet to feature in the top category.
It seems none of the methods will come easy for the company, but it may be too early to be pessimistic about its development prospects. Encouraging data has just been released this month, showing that Meitu earned sizable revenue (from online ads, e-commerce and value added services) in December, a 481% increase compared with the monthly average income from the same revenue stream in H1 2016.
Successful precedents established that have seen adaptation from simple tool to huge platform, may boost Meitu’s confidence towards its chances at a future profit. Chinese software developer Cheetah Mobile transformed from being primarily an internet security software developer to a cross-border mobile ad platform. Sogou, which began life as a Chinese character Input Method Editor, is now a huge company with a leading search engine and browser. Alibaba-owned UC browser has branched out solely from browsers to making inroads into the content distribution business, keen to snag a share of the mobile ad market.
Will Meipai be able to pivot to a lucrative new model taking advantage of its considerable user base? 2017 may prove to be a dynamic year for the newly minted public company.