Zhihu IPO: China’s ‘giant online cafe’ struggles to find monetisation model amid rapid growth
- By the end of last year, Zhihu had more than 43.1 million cumulative content creators who contributed 315.3 million questions and answers
- However, efforts to diversify its revenue streams through new functions, from live-streaming to content e-commerce, have not been very effective
“If Google is like a borderless virtual library, and Facebook is like a never-ending school reunion, then Zhihu is like a massive cafe where millions of people pass through and exchange their views and experiences.”
That was how Zhihu founder Zhou Yuan explained the Quora-like Chinese platform back in 2014.
Fast forward to today and Zhihu – meaning “do you know” in classical Chinese – has become the largest online question-and-answer community in the country. Last week, the Beijing-based company filed an initial public offering application on the New York Stock Exchange.
The Tencent-backed company has ambitions to become much more than a text-based content platform. It has embraced popular multimedia functions such as live streaming and other video content, introduced paid content and membership programmes, and it even offers an online education and e-commerce service.
“Zhihu has gone through many transformations and left Quora far behind,” Kai-fu Lee, a partner at Sinovation Ventures, which owns 13.1 per cent of the Chinese company, wrote on the platform as part of a user discussion ahead of its US listing. “It has the potential to be a super app platform.”
Zhihu is an example of how an elite community can expand into a universal website by attracting users with “fancy tastes” without commercialisation in the initial stage, said Ding Daoshi, director of research at Beijing internet consultancy Sootoo. In the fourth quarter of last year, the company attracted about 75.7 million average monthly active users, a 33 per cent increase from a year earlier.
Jiayi Sun, who works at a Beijing-based internet company, started using the platform in 2013 when she was in high school. Her teacher had recommended it as a place to find explanations for scientific topics.
“I remember that I couldn’t understand anything written on Zhihu. It was all about computer science and mathematics. The topics back then were particularly in-depth, and the users were apparently well- educated,” said Sun.
By the end of last year, Zhihu had more than 43.1 million cumulative content creators who contributed 315.3 million questions and answers, according to its prospectus. For long-time users like Sun, the community on Zhihu is now more diverse, and the content has become more popular than before.
“Many times I see people asking which kind of girls are more appealing to boys, and the trending topics are filled with gossip and entertainment,” said Sun. “It’s hard to believe that so many people are seriously commenting on these questions.”
In 2013 – three years after it was formed – Zhihu opened its platform to the general public, instead of restricting it to membership that required a user registration code. The number of users skyrocketed tenfold to 4 million in less than a year.
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“This is a normal path for an internet platform to grow [by] lowering its threshold to attract more users with diverse backgrounds,” said Ding, adding that the strategy inevitably leads to a degradation of content quality.
“This is an unsolvable problem. You have to sacrifice one to boost the other,” he said.
Despite the significant growth in users, Zhihu has struggled to profit from its traffic. Although revenue doubled year on year to 1.35 billion yuan (US$207 million) in 2020, the company is still in the red but it narrowed its net loss from 1 billion yuan in 2019 to 500 million yuan last year.
“Zhihu’s narrow appeal as a largely text-based content platform could limit its monetisation to online advertising and paid memberships in the medium-term,” said Vey-Sern Ling, a senior analyst at Bloomberg Intelligence. “While such monetisation generally provides healthy gross margins, any attempt to broaden its user and content base could require substantial investments which will keep the company loss-making at the operating level,” said Ling.
Advertising accounted for more than 62 per cent of Zhihu’s revenue last year compared with 86 per cent in 2019. According to its prospectus, Zhihu currently has 2.4 million average monthly paying members, representing 3.4 per cent of its monthly active users. Paid memberships were the second-largest revenue source, contributing 23.7 per cent last year.
Efforts to diversify its revenue stream through new functions, from live-streaming to content e-commerce, have not been very effective. Last year, the platform added a video section and said it would recruit video influencers to compete with other popular Chinese video apps such as Bilibili and Douyin, which had 54 million and 600 million daily active users, respectively, in 2020.
“To enrich its media is the only way to go for Zhihu,” said Wang Hua, managing partner at Sinovation Ventures, during the online discussion ahead of its US listing. “Zhihu’s video can still inherit the characteristics of the original content community and form a unique product in the video market.”
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However, for many users, Zhihu’s text-based content is its biggest attraction. Zhang Shufan, a Shanghai-based film director who has used the platform for about eight years, is a so-called outstanding answer provider on Zhihu with more than 234,000 followers. For him, it is the “go-to” website when he is curious about hobbyist opinions. Zhang is not enthusiastic about the new functions on the platform, such as live-streaming and paid content.
“The characteristics of a platform are very hard to change. What it relied on in the beginning is likely to be its main advantage,” said Zhang.
Kipling Zheng, co-founder of game company Gamer Boom Tech who has more than 230,000 followers on Zhihu, said it is a unique platform where in-depth conversations about the gaming industry can be found. “There are a lot of gamers with respected pedigrees active on the platform. Whenever these people are asking questions or providing answers, they usually put forward rather cutting-edge ideas. This is something you don’t get to see on other platforms,” he said.
However, Zheng said consistent and loyal content creators on Zhihu were still hard to come by. “The tech industry is so competitive, so people who are willing to talk openly on the platform tend to come and go. Older users are often replaced by new ones once their products or their companies have flopped,” he said.