Founded in Shanghai just two years ago, the Chinese music app has exploded among U.S. tweens, attracted mainstream entertainers like Selena Gomez and Ariana Grande and even spawned a roster of Musical.ly stars who pull in millions of followers.
Along the way, Musical.ly has captured the imagination of Wall Street and Silicon Valley. The company has raised more $100 million at about a half -billion-dollar valuation, and has lined up backers including DCM Ventures, GGV Capital and Greylock Partners. Analysts have mentioned Musical.ly as a potential threat to Facebook’s user base, while Mark Zuckerberg dubbed the app a new and “interesting” social platform in the same breath as Snapchat.
Like many mobile phenomena before it, however, Musical.ly is already experiencing the limits of its appeal. While some 40 million people are using the app every month, many aren’t visiting every day. Investors use the ratio between daily active users and monthly active users to ascertain an app’s stickiness. A ratio of 50 percent means the average user is on the app 15 out of 30 days of the month. But based on an analysis of Google Play and Apple iOS data, the average Musical.ly user visits the app just three of 30 days.
Musical.ly co-founder Alex Zhu, 37, is acutely aware that he must transcend the fickle tastes of American tweens to survive long term. In June, he and his team launched Live.ly, a live streaming app that has already attracted 11.5 million users, including such luminaries as billionaire and Shark Tank star Mark Cuban. Other features will follow in the coming weeks.
Ultimately Zhu wants to become more like Facebook or China’s WeChat, which is like Facebook, Spotify, Slack, Uber, PayPal, Yelp, Periscope and more all rolled into one. People use WeChat to talk to companies and friends, livestream, pay rent, invest and book taxi cabs or hair cuts. Having spent time in both Silicon Valley and China, Zhu believes he’s in the perfect position to watch innovations coming from both parts of the world and cherry-pick the best ones. In social media, he says, “you either can become a huge general platform like Instagram or Snapchat, or die. There’s nowhere in between. I believe Musical.ly can become a general social network.”
Zhu, who trained as a civil engineer, got into the tech game in 2000 when he joined China Pages, which created websites and was the first company started by Alibaba founder Jack Ma. Zhu spent the bulk of his career at German software giant SAP, where he worked with business customers. He’d always had an interest in education and in early 2013, Zhu and a former colleague, Luyu Yang, founded a startup called Cicada Education. The idea was to foster a Twitter-like community where experts would create mini courses on any subject via smartphone.
When the app failed to take off, the team settled on one that would let people create and share music videos. During his daily commute while working for SAP in the Bay Area, Zhu had observed the Caltrain full of middle schoolers listening to music, shooting mobile videos and sharing them on social media. Zhu figured an app that combined all three would be popular with kids around the world.
In May 2014, Zhu and Yang rolled out Chinese and English-language versions of Musical.ly. They quickly discovered the app was getting little to no traction in its home market, but was taking off in the U.S. In retrospect, the founders aren’t surprised. In China, kids are consumed with cramming for exams and have little time to indulge their inner pop star. In the U.S., kids have a lot more free time. So Zhu and Yang shut down the Chinese app to focus on America.
Growth was slow at first, with downloads hovering at about 500 a day. The only glimmer of hope was that almost three-quarters of users were coming back for a second day. There was clearly something sticky about the app. People were sharing their Musical.ly videos on social media, but there was no way for users’ followers to know the app behind the creations. It was only when Zhu’s team added the Musical.ly logo to shared videos that downloads rocketed to thousands, then tens of thousands, a day.
Zhu is gratified at how quickly Musical.ly caught on with American tweens but is already getting twitchy. “You have to be paranoid,” he says. “You must always worry about tomorrow. We always have to understand what’s the next selling point and do something.” To find that next selling point, he’s looking to China’s social networks. “The best practices can be borrowed and introduced to the U.S. and the rest of the world.”
In a matter of weeks or less, the startup will release new features that will turn the app into something more like WeChat. The hope is that by turning it into a communication tool, the app can attract older users (presumably less keen than their offspring to broadcast their dance moves), while convincing users to come back to the app again and again to talk to friends, consume and make content. Chinese tech companies like WeChat parent Tencent have combined a plethora of services into one so users never have to leave the app. That’s where Zhu wants to go with Musical.ly.
Zhu and Yang travel to the U.S. about once every two months, but spend the bulk of their time in Shanghai working with Musical.ly’s more than 80 engineers. Zhu is keen to grow the engineering team in Shanghai, where it’s easier to hire talent than in Silicon Valley. An added benefit is that the engineers in China are used to long hours; work weeks at Musical.ly run from at least 9 a.m. to 9 p.m., six days a week, Zhu says.
Also high on Musical.ly’s priority list: cutting more deals with the music industry. The startup has licensing deals with all the major labels and publishers in the U.S., and is looking to do the same around the world in its major markets. Musical.ly will be moving its team of less than 10 people in the Bay Area to Los Angeles to be closer to the action. The startup also wants to establish partnerships with labels to promote their artists and work with content partners to drive traffic to music streaming services.
Zhu says the company is always in discussions with the big U.S. tech companies—including Facebook, Instagram, Twitter and YouTube—on ways to collaborate and learn from each other. Musical.ly could be a potential acquisition target for social media companies looking to attract younger users. After all, Facebook bought Instagram and WhatsApp, in part to eliminate threats to its user base. On the other hand, Facebook tried and failed to acquire Snapchat, opting instead to clone parts of the app. “Most of the big tech companies are having a build versus buy conversation,” says Anthony Pompliano, managing partner at Full Tilt Capital who previously worked at Facebook and Snapchat. “You can always go in and buy a company, but can you also just build it. There’s no IP. The IP is the network—if you can have enough network penetration to stop it.”
Zhu says his company has received no acquisition offers. “In the future there are multiple scenarios,” he says. “Either we continue to grow independently, hopefully, or we don’t exclude the possibility to be part of a bigger platform. Everything is open.”
This article was originally published on Bloomberg.