Bilibili Marching towards ‘Controlled Expansion’ [2/2]

► Bilibili (BILI:NASDAQ) announced its first-quarter results last May 18. Its stock price hit a record high midday and closed with a 9% increase at USD 33.66.
► By the time this article is published (June 4), its price was USD 33.56.

This is the second part of a series of articles discussing the financial results and the business of Bilibili. Find out more in the previous chapter, which addresses the revenue and loss, as well as the income structure of the company.

First-quarter 2020 key user base figures highlights：

Average Monthly Active Users (MAUs) reached 172.4 million, representing an increase of 70% from the same period in 2019.

The number of official members reached 82 million, representing an increase of 67% from the same period in 2019.

Average Monthly Paying Users (MPUs) reached 13.4 million, a 134% increase from the same period in 2019.

Bilibili, apart from being a game publisher, is also a Chinese mainstream video sharing platform. In this space, it is attempting to race with two types of competitors. One is the three dominant online streaming platforms – iQIYI (IQ:NASDAQ), Youku Tudou, and Tencent Video, who are Netflix-styled media-services providers and producers. Meanwhile, Bilibili's business shares certain similarities with YouTube and Niconico. Although it has been digging deeper into the fields of animation, cartooning and cinematography (one bellwether is the firm’s increasing copyright spending), it is still a platform dominated by Professional User Generated (PUG) videos, which accounted for 90.1% of total videos viewed in 2019. This model is not likely to be changed in the future.

The other is short-form mobile video sharing platforms such as Douyin (the Chinese version of TikTok) and Kuaishou. Compared to these players, the videos on Bilibili have, on average, a longer duration, and in general, are more verticalized and professional.

The size and the growth rate of the user base have always been crucial in assessing the competence of video platforms, as these presumably constitute the most valuable ‘assets’ for them to cash out in the future. However, the underlying driver for user growth has considerable differences. The trend of the content to have the copyright or to be self-produced can be considered the most important element for online streaming platforms; for short-form video platforms, this lies in the preciseness of their distribution algorithms. For Bilibili, its moat is built upon its user experience, and more precisely, its irreplaceable community culture that was established and is maintained jointly by the users and the company.

The community entrance test and punishment mechanisms of Bilibili are probably the strictest among all the mainstream online video platforms in China.

Only through passing the test, which consists of 100 questions covering community etiquette and various topics, can users become the 'official members' and be eligible to access more features like sending more types of 'bullet chats' (a live commenting function that enables content viewers to send comments that fly across the screen like bullets), upload PUG videos, send private messages to other users and comment on videos. This official member system in Bilibili is parallel with its paying user system, which implies people cannot become an official member by paying money to the platform. These functions, to a large extent, controlled the 'ghost followers' issue in the first place and ensure the frequency and quality of interactions.

Apart from this, the rather strict community etiquette rules restrict misconducts like flooding the screen, personal abuse and fabrication. All official members with at least level 4 membership (Bilibili's official member system currently ranges from level 0 to level 6) can volunteer to join the governance committee if they haven't broken the community rules in the past 90 days and have completed the real-name verification, to maintain the community culture of Bilibili together with its employees.

It has to be mentioned that keeping decent community etiquette does not, in fact, contradict the commercialization of Bilibili, especially talking about the long-term. No matter if we speak in terms of advertisement income, synergies with its gaming business, subscription fees, or future initiatives.

However, this has also made hitting a perfect pace of user growth a tricky issue for Bilibili. On the one hand, as a growth stage company, it needs a relatively sharp user expansion to increase its scale, speed up its commercialization process and scale of commercialization and satisfy its investors. On the other hand, if the campaigns that target user growth are overly aggressive, it runs the risk of ruining its sound community culture, which may result in harming long-term interests in exchange for short-term benefits.

In the three-month period ending March 31, 2020, Bilibili witnessed the largest amount of MAU increase in a single quarter (172 million, 70% YoY growth and 32% Quarter on Quarter [QoQ] growth) since it started its operations in 2009. Meanwhile, both MPUs (13.4 million, 135% YoY growth and 52% QoQ growth) and official members (82 million, 67% YoY growth and 21% QoQ growth) increased sharply during the quarter.

We think the major contributions towards the sharp increase in user base (as measured by MAUs) are from two aspects: 1. the lockdown policies during the COVID-19 outbreak increased people’s demand for video platforms; 2. the New Year Eve Gala held by Bilibili on the evening of December 31, 2019, was a great success (we discussed this story in part 1 when talking about its live broadcasting and the associated value-added services). It has been seen by many as a milestone for Bilibili, letting it become known by the majority, not only the young generations.

The ratio of MPUs as a percentage of MAUs has been increasing steadily since Bilibili got listed in the first quarter of 2018 (3.2%) to the first quarter of 2020 (7.8%), suggesting the commercialization capabilities of Bilibili as a video platform have been continuously increasing.

Although it is unlikely that Bilibili will become a comprehensive platform for all kinds of professionally-produced drama and movies as well as self-produced series – as mentioned before – it has been continuously purchasing more copyrights of animations and movies that harmonize well with the flavor of the majority of its users. For example, The Lord of the Rings and Harry Potter. As a result of Bilibili's strict community etiquette controlling rules, the 'bullets chatting' on the platform, in general, has a considerably higher quality compared to that of the alternative platforms. Therefore, Bilibili has its unique competitiveness in attracting people when they are making decisions on which platform to subscribe to for certain professionally produced content, and this can be supported by the steady increase in the MPU/MAU ratio. Apart from this, structural shifts regarding consumer behaviors among the general population in China – for example, the consumption upgradations and the formation of the habit of paying for copyrighted materials – also contribute to the ongoing optimization of Bilibili's paying user structure.

The figure of official members as a percentage of MAUs was 47.6% in the first quarter of 2020, which was a drop compared to 52.2% of the last quarter (the fourth quarter of 2019) and 48.4% of the same period in the prior year (the first quarter of 2019). Considering the significant expansion in the user base during the quarter, the width of this drop can be considered as lying in a reasonable range. However, at the same time, we consider the proportion of official members compared to MAUs as a key ratio to keep an eye on when assessing the performance of Bilibili in the future.

Bilibili's official members tend to have a remarkably high engagement level, historically speaking. The 12-month retention rate of its official members has been continuously above 80% since the company got listed. For a video platform dominated by PUG videos, high user engagement is crucial to attracting and sustaining users, content creators and advertisers. If this percentage decreases to 45% or below – which was the level in the first quarter of 2018, when Bilibili got listed – then it might contribute to negative factor in assessing the long-run performance of the platform.

Talking about the supply side of content creation, as mentioned before, the major advantage of Bilibili in the intense market of online entertainment platforms is the high-quality content produced by the creators – commonly individuals and small studios – and uploaded to its platform.

In the first quarter of 2020, the average number of content creators on Bilibili reached 1.8 million and average monthly video submissions reached 4.9 million. Both figures realized a sharp growth which had almost doubled compared to the prior quarter. As Bilibili only reported these figures in its annual report, we cannot compare this on a YoY basis, and it is fairly logical that the content creators tend to be less active in the fourth quarter, given the majority of them are students. Comparing these figures quarterly to quarterly can thus have a certain bias. However, the slope of growth during the quarter is apparently out of the scope of this seasonal fluctuation, and the lockdown policies during the COVID-19 would be the most significant driver. We expect the two figures are very likely to witness a slight to moderate decrease in the second quarter of 2020, as compared to the numbers in the first quarter.

These PUG videos on Bilibili tend to be much longer, verticalized and professional – they satisfy people with niche hobbies, as compared to short-form video platforms. For example, these include some ‘typical’ contents on Bilibili like Anime Music Videos (AMV), mashups and ACG dance (originated from Japanese video-sharing platform Niconico); besides, with the category expansions of the Chinese video-sharing platform in recent years, classifications like history, finance, lifestyle and beauty have also become popular on the platform for now. Also, the primary reason for a large part of content creators to produce videos and upload on Bilibili is to interact and communicate with people with the same interests and gain more awareness in the field, which is considerably different from those on Douyin and Kuaishou, where a lot of content is incentivized by earnings.

However, at the same time, this does not imply that Bilibili does not have competitors in terms of attracting sustaining content creators. From our perspective, the moat of Bilibili currently lies in three aspects, and whether it can sustain its advantages and enhance them are key points to keep an eye on in the future:

1. Good community etiquette guaranteed by strict rules that punish misbehavior, which provides the creators with a decent environment for communication and interactions;

2. Decentralized content distribution algorithm, which gives regular creators more exposure and more opportunities for their videos to be found by users with similar interests;

3. Incentive plans for creators, where Bilibili will give a small amount of money to creators according to a set of evaluation criteria which includes the number of views, bullet chats and favorites, as well as qualitative standards like the value and level of professionalism of the contents. However, it is worth noting that this can be a mixed blessing, whether Bilibili can prevent data fraud and commercial accounts (accounts that collect specific contents and simply repost in exchange for traffic and profits) from flooding on its platform – just like what has happened with Sina Weibo – is crucial for its further development.