This year marks the 100th anniversary of the bankruptcy of Laugh-O-Gram Films, a film studio in Kansas City. Not many investors will celebrate this event.
That is a pity. Laugh-O-Gram Films was founded by Walt Disney in 1921, who was then a struggling cartoonist. The studio was housed in a red brick building. It was here that Disney conceived of Mickey Mouse, the famous cartoon character.
Disney had raised US$15,000 (about US$268,000 today) in equity capital. However, the young man had to close the venture. The film distributors let Disney down. Disney had to live in the office and bathe in the nearby train station.
Disney went on to become one of the greatest creative geniuses. He pioneered cartoon animation. In 1923, he closed the Kansas studio and went to Hollywood. He started Disney & Co, now known as The Walt Disney company. Shifting to the capital of entertainment was an inspired move.
He never looked back. Today, the company that bears his name has a market cap of US$148 billion ($202 billion). It has produced a total return of 45% in the last decade.
It is forgotten that success is built on the pillar of failure. There is a modern parallel to Disney’s path. At US$250 billion, ByteDance is the world’s most valuable private company. Its global headquarters are located in Shenton Way.
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ByteDance is the company behind TikTok, a video sharing social network. It was started by Zhang Yiming, a Chinese software engineer with poor social skills and an aversion to dancing.
Zhang’s awkwardness has not hampered his company’s ascent. TikTok now has over a billion users, which is about one-eighth of the world population. About a third of its users are in the US, Indonesia and Brazil.
TikTok was first released in September 2016. It was initially planned as a video alternative to Facebook and Instagram, which were banned in China.
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Its rise has been meteoric even by the standards of the tech industry. Its immense following reflects the switch from desktop to mobile. It also reflects the shortening of the human attention span. A typical video is only 15 seconds long.
The accounts of ByteDance’s success ignore its roots in failure. Like Walt Disney’s struggles in Kansas, ByteDance had tough times. In November 2017, ByteDance acquired another social media platform — Musical.ly. The latter had mastered 15-second lip-sync videos. In August 2018, ByteDance launched the global version of TikTok.
TikTok has an algorithm that pinpoints user preferences. If one has been searching for videos of Bali, the algorithm will prompt holiday options.
Like Disney’s efforts at cartoon films in Kansas, Musical.ly had an awesome product, but was in the wrong place. Alex Zhu and Luyu Yang created it as an education video provider in China. Students shared videos on science and mathematics. The content providers had a tough time creating videos within the 3–5 minute timeframe.
The education platform was ignored by creators and users. The company had exhausted over 90% of its cash reserves by mid-July 2014. Closure was staring them in the face.
The founders then figured out the need to change the format. It was rebranded as a music and dance video sharing app. The video length was reduced to 15 seconds. The algorithm that Bytedance later used was conceived. Musical.ly added a watermark to the videos to drive repeat content. Soon, a vast community of video sharers were hooked on the app. It was this formula that Bytedance acquired and mastered.
ByteDance has faced challenges in the last few years. TikTok was banned in India in 2021. The Trump administration imposed restrictions, because of national security fears.
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Despite these travails, TikTok is trading at an EV/Sales multiple of 3x. This is cheaper than Nvidia and Tencent. By staying private, TikTok has avoided the ravages of the Tech rout. Its China-focused rival Kuaishou is down 84% from its 2011 peak. TikTok’s valuation is about US$220–250 billion, according to recent trades. This is just half the US$500 billion peak that it reached in the glory days of 2021.
This week, there were reports that TikTok’s e-commerce business would be banned in Indonesia. If so, it is unlikely to dent ByteDance’s prospects. It has a vice-like grip on the youth. Even Disney did not have such a passionate following.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column. This column does not constitute investment advice of any kind
Amendment note:
The reference to Kuaishou in the last sentence of the second last paragraph has been corrected to TikTok as originally intended.
