The TikTok problem
Gengis Kahn is back!
Cemeteries are full of companies that didn’t understand the power game.
From TechCrunch (October 2, 2019):
“It’s almost like the Explore Tab that we have on Instagram,” said Facebook CEO Mark Zuckerberg in leaked audio of him describing TikTok during an all-hands meeting. But it’s not. TikTok represents a new form of social entertainment that’s vastly different from the lifelogging of Instagram where you can just take a selfie, show something pretty or pan around what you’re up to. TikToks are premeditated, storyboarded and vastly different than the haphazard Stories on Insta.
That’s why Zuckerberg’s comments cast a dark shadow over the future of the Facebook family of apps. How can it beat what it doesn’t understand? He certainly can’t ignore it. Facebook’s copycat Lasso has been installed just 425,000 times since it launched in November, while TikTok has 640 million installs in the same period outside of China. Oh, and TikTok has 1.4 billion total installs beyond China to date.
If Marc Zuckerberg doesn't seem to believe in a serious threat (or pretend not to believe it), another Internet giant reacts, Facebook's main competitor. From WSJ (October 4, 2019):
Google has held discussions about acquiring a video-sharing startup that could help it counter fast-growing TikTok, people familiar with the matter say.
Google is weighing a deal for Firework, a free smartphone app for users to share 30-second homemade videos with strangers. Like TikTok, Firework tries to surface viral, edited videos from unlikely sources, though Firework aims for an older audience than its better-known competitor out of China that is big among teens.
Firework, based in Redwood City, Calif., was valued at more than $100 million in a fundraising round earlier this year, and any acquisition would come at a premium. Google and Firework haven’t yet discussed pricing, the people say. The discussions may not lead to a deal and also include conversations about other ways to partner.
But what is this TikTok app that seems to be stirring up Silicon Valley? TikTok is a Chinese application created by Bytedance, a Peking-based company founded by Zhang Yiming in 2012. The originality of ByteDance's applications is to use artificial intelligence to offer, either news (Toutiao) or, in the case of TikTok, videos of up to 60 s featuring TikTok users. The application was launched in 2016, merged with an acquisition of Bytedance called Musical.ly and, with 1.5 billion installations, has 700 million daily users (source Bytedance July 2019). Musical.ly had only 60 million users when it was acquired by Bytedance. Bytedance valuation is about $75 Billion.
Three interesting elements can be drawn from this success:
TikTok is a Chinese application that rivals Google and Facebook: a first
Tiktok has a confusing business model for an American company and Facebook seems particularly powerless
Google/YouTube seems to have the means to better resist
Chinese internet/ US internet
Let us look at these three elements again. Until now, the big North American and Chinese Internet companies shared the digital pie: the West for US companies, China for Chinese companies with a common ground: emerging markets. Each US company had its Chinese counterpart: Amazon/Alibaba, Google/Baidu, Facebook/Tencent. Economic models were different, matching each country’s local culture and economic structure:
Amazon was customer-centric, Alibaba focused on small business to help it sell better.
Facebook wanted to offer a little distraction around one’s friends while WeChat (Tencent) wanted to use social buzz to promote third-party applications.
Finally Baidu, which initially had a common core with Google (the respective founders having worked on the Infoseek page indexing engine), has become a platform to promote content from sites owned by Baidu. Google has remained user-centric.
In all three cases, the economic model reflects the different maturity of the US and Chinese economies. In the United States, the consumer is overwhelmed: retail sales area per capita is 23.5 square feet. In China, the sales area per inhabitant is only 2.8 square feet, 88% less! Also the problem of the American consumer is the choice among an overabundance of offers of all kinds: Amazon, Facebook, Google help the consumer to sort out the abundance. In short, the United States is a consumer society and the major American Internet companies are on the side of the consumer, capturing power to direct and even exploit the supply. They are called by Ben Thompson aggregators. In China, the opposite is true: goods have difficulty accessing the end consumer, there are few retail chains, distances are large and difficult to travel. This is why Chinese Internet companies are looking more to help companies access the consumer with a platform model. Power is on the supply side and Internet companies go where power is to capture it.
The respective structure of the Chinese and North American economies explains why Internet giants were not really competing in their respective areas (Politicians also had their share). Emerging markets were more favourable to Alibaba and Tencent because the maturity of their economies is more similar. This economic Yalta satisfied the parties. TikTok arrives and the balance of power is suddenly upset. Like Genghis Kahn, the app leaves the Chinese steppes to invade the West. Marc Zuckerberg can't believe his eyes and minimizes the TikTok threat:
I think we have time to learn and understand and get ahead of the trend. It is growing, but they’re spending a huge amount of money promoting it. What we’ve found is that their retention is actually not that strong after they stop advertising. So the space is still fairly nascent, and there’s time for us to kind of figure out what we want to do here.
As the saying goes: when you want to kill your dog, you say it has rabies. Nevertheless, precisely because it starts from a different angle than American Internet companies, TikTok is even more dangerous. Let us now analyse this angle of attack.
The respective business models of TikTok and Facebook
Traditionally, like any self-respecting Chinese internet company, TikTok has always been at the service of the video producer first. The goal of the app is to enable him to express his creativity on the world stage in a maximum of 60 seconds. To do this, TikTok offers this producer a very easy interface to use interface that allows him to mix, use filters, etc. TikTok ensures distribution, i.e. finding the best audience for it. It is artificial intelligence that will make it possible to find this best audience by iteration. Represented in diagram form, TikTok's business model is as follows:
It is therefore TikTok's artificial intelligence that will define the social graph or at least seriously guide it, looking for the users most likely to appreciate a type of video. This business model is the opposite of Facebook, Instagram, WhatsApp, which serve the user as a member of a community defined by himself. Facebook's role is to strengthen the links between members, to make them express themselves; the videos serve only that purpose and don’t intend to put forward the producer. Facebook runs its algorithms and will present the user with the video that will strengthen his social connections. The social graph for Facebook is the origin and the end, the vector that will allow to maximize advertising revenue. Facebook's business model could be represented as follows:
Facebook's business model is user-centric, TikTok's business model is producer-centric. Being in the classical pattern observed above, everyone should stay at home: in the United States, the consumer society, in China, the production society. But wait: TikTok has left Chinese territory to invade the West, which Alibaba or Tencent could not do.
Actually TikTok is also one step ahead on the user side. American Internet companies, in a first phase, sought to bring abundance to their users, eliminating friction, i.e. transaction and distribution costs. The mission of these companies was to help the user sort through this abundance. Amazon thus presents a series of products corresponding to the request of its users, Google a series of sites, Netflix a series of films, Facebook a series of people or groups, etc. This abundance was a big plus compared to the world before, where demand was constrained by available supply. But it also has its limits. Barry Schwartz explains in The paradox of choice that excess choice ends up undermining us psychologically: abundance pushes us to find exactly what we want, rather than what is sufficient, makes us lose time that we could have spent with our loved ones in a vain quest for perfection. One solution is to let a company make the default choice for ourselves. This is the way to cope with too much abundance: Google now presents an adapted answer framed at the top of the page which is supposed to be sufficient and Alexa answers the questions directly without giving any choice. First, artificial intelligence was used to guide users' choice, and then it will give them a sufficient response by default. Stitch Fix for example was founded on this concept: this clothing company delivers to its subscribers on a periodicity to define clothes chosen by a mix of stylists and artificial intelligence. Subscribers then decide what they keep and send the rest back. Gradually, artificial intelligence becomes more efficient with the accumulation of data and the more relevant choices of Stitch Fix. Amazon, which today aims for one-day delivery anywhere in the world, is working on a delivery project before ordering (artificial intelligence anticipating users' choices). For the moment the delivery would remain in a hub close to the user. But Amazon will then be able to adopt the Stitch Fix model for some packages. Google is increasingly using its AI to respond directly to people's requests through its various applications (Waze, Lens, etc.). The next step is to act before the request, even if it means adjusting afterwards.
This is precisely what TikTok does: it imposes a 30s video on the user, the user watches or zaps (enriching the AI algorithm), TikTok then proposes another video and so on. We are no longer in the choice business but in the matching business. Facebook's Watch application works the old-fashioned way: the user scrolls through videos and clicks on the one he likes: Facebook suggests, TikTok imposes. Instagram and IGTV work like Facebook: choice first. TikTok is spreading in a viral way and can be a real threat to Facebook:
the job to be done by both applications is the same: distract a few moments between two tasks
TikTok video producers are much more motivated than Facebook ones because they can reach enthusiasts all over the world, and not to be used to promote a social graph
users finally appreciate to have the choice made for them, knowing that the cost of zapping is negligible. TikTok users spend an average of 52 minutes on the app. The average time spent on Facebook would be 38 minutes. The time spent on TikTok is advertising that Facebook will not have
There is therefore a feedback loop between engaged users and motivated video producers (they even receive tips) that can ultimately pose a serious threat to Facebook, locked in its social graph. Facebook will not be able to get rid of the TikTok threat as it did with Snapchat, which shared the same type of social graph as Facebook.
How Google reacts
Google's reaction is interesting. TikTok is essentially a threat for YouTube. YouTube's business model is similar to TikTok's: YouTube lowers friction to encourage video producers to publish, remunerates them and disseminates their content worldwide using its recommendation algorithm. The objective is to maximize engagement through hours of video viewed (main metric) and then to monetize through advertising. :
There are differences:
YouTube videos are longer (the algorithm favours 10-minute videos to maximize engagement)
They are recommended and not imposed by default: a social graph is required and created through AI
They can be used for entertainment, but the format encourages training. As a result, the recommendation algorithm is difficult to displace by a competitor: training courses are often the result of research. How to use a drill?, etc. TikTok is not a training tool
YouTube is an engagement’s monster: 500 million videos are posted every minute and 5 billion videos are viewed every day (the billion mark was reached in 2016). The average time spent on YouTube is 3 and a half hours a day! Yet YouTube, like TikTok, does not earn money because it invests in content and infrastructure to maximize fluidity and commitment.
Therefore, TikTok is a threat because it bites into engagement (there are only 24 hours a day) and therefore the potential future advertising revenue of YouTube.
YouTube has another problem: as a good American company, it tends to gradually become the representative of the user, the one who brings in advertising revenue, rather than the producer. Maximizing engagement involves focusing more on the social graph to suggest videos. People are grouped by interests that can be good or bad (racism, etc.). As a result, videos with offensive content are circulating (same thing on Facebook) that YouTube can hardly control given their number. YouTube's reaction is to focus more on professional videos, to limit the partner program and small creators, in short to become more mainstream. This is a flaw that TikTok, a still young company, can exploit, attracting disgusted creators or expelled from YouTube. Google's reaction is to acquire a small competitor of TikTok, called Firework, and make it grow. Google can use the YouTube social graph, structurally similar to that of TikTok, to increase the number of views of video creators. The application, which will initially remain on a human scale, will be easy to control by the teams already in place on YouTube. Firework will beat TikTok on two key points:
the distribution power of videos
the control of illegal content
Google has every chance of facing the TikTok threat with its acquisition strategy.
Fortunately, Uncle Sam is here.
It is still the American state that could be the most effective in countering the TikTok threat. Why is it that Google is banned in China, Facebook cannot access the Chinese market, Apple is seriously limited and yet TikTok can break into the United States? There is the matter to rebel for the American state and to ban TikTok from the American space. Two arguments could be raised to hinder the application:
Tiktok spreads Chinese propaganda (on Hong Kong, Falun Gong, etc.)
Musical.ly was an American company that was purchased without CFIUS supervision. This is an anomaly given the 1.
Marco Rubio's last tweet is a sign:
Finally Marc Zuckerberg may be right not to worry about the TikTok threat. Thank you, Uncle Sam!