tiktok-business-model

TikTok Business Model Analysis 2022

TikTok is the Chinese creative social media platform driven by short-form video content enabling users to interact and generate content at scale. TikTok primarily makes money through advertising, and it generated $4.6 billion in advertising revenues in 2021, thus making it among the most popular attention-based business models or attention merchants.

Key Facts  
Founder Zhang Yiming
Year & Place Founded September 2016, China
Initial Business Model
Before acquiring Musical.ly, it was a video sharing app
Valuation $100-150 billion
Business Model Change
After acquiring Musical.ly, for about $1 billion, on 2 August 2018, TikTok became a short-form video sharing app with built-in music
Total Revenues in 2021 $4.6 billion (source: BusinessofApps)
Total Downloads in 2021 3.3 billion (source: BusinessofApps)
Who owns TikTok? Bytedance
Who owns Bytedance?
Kohlberg Kravis Roberts, SoftBank Group, Sequoia Capital, General Atlantic, and Hillhouse Capital Group (Source: Reuters)

TikTok short business model breakdown

TikTok is the Chinese creative social media platform primarily driven by short-form video content.

It launches challenges of various types to tap into the creativity of its users and generate engaging (if not addicting content) accessible via an infinite feed.

TikTok primarily makes money through advertising:

We describe the TikTok business model via the VTDF framework developed by FourWeekMBA. 

TikTok Business Model Description
Value Model: Creative AI-Based Social Media.
TikTok’s mission is “to inspire creativity and bring joy.” With a short-video format, a continuous feed can provide content by learning what users like, at scale, with a built-in AI, and hook users around content that can be built based on interactions (things like challenges, duets, and more).
Technological Model: Two-sided network effects.
TikTok works like a two-sided network. For each additional average power user joining (what on the platform is known as “TikToker”), the more the network will become valuable for average users, and the more power users will want to join the platform. As more TikTokers generate content, this content becomes viral, generating many interactions and new user-generated content. That makes the TikTok platform increasingly valuable,
Distribution Model: User-Generated Content, Power Users, Brand, Growth Engine, Fast Product Development, AI-Driven Features.
The main challenge for TikTok is to keep improving its platform at scale, thus making it viable and able to manage a large amount of traffic and interactions. The more features will be added, and the more the platform will enable creators to build content, the more this will make the user-generated content valuable at scale.
Financial Model: Advertising Engine.
TikTok primarily monetizes its business through its advertising machine. As the company managed to monetize the traffic on top of the platform many times over, the more the advertising machine can generate revenues at scale.

AI-based company

TikTok challenges are accompanied by compelling music tracks embellished via effects and filters, and powered by AI algorithms that optimize both content creation, curation, and recommendation.

The company had grown exponentially and reached over 1.2 billion monthly active users in Q4 2021 (according to BusinessofApps).

Facebook has taken notice and might be building its own version, called Lasso, which it launched in Brazil, back in 2018. Yet, now Facebook (rebranded as Meta) is shifting the whole Instagram format based on TikTok’s format. 

Indeed, in May 2022, Adam Mosseri announced the whole change of Instagram feed, which is becoming full screen:

 

The Chinese newcomer in the creative social media space

TikTok might be defined as a creative social media or a content platform that taps into the creativity of its users through a set of challenges of various types, to generate engaging content. TikTok has a few main characteristics:

  • Classic social media platform leveraging on the willingness of people to share their content.
  • Combined with compelling music tracks as the companion to the challenges set on the platform.
  • A set of compelling filters and effects that can be applied to the videos.
  • And an Asystemem as content curation and recommendation.

In short, it is a mixture of Instagram, Facebook, and YouTube powered by AI.

Bytedance has been a unicorn for years now.

Yet, as of 2021, thanks also to the success of TikTok, it has become a multi-billion dollar company, worth anywhere between 100-150 billion dollars! 

What’s so unique about a company that has racked up over half a billion users globally?

Which has become among the most valuable Startups, owned by a Chines tech company?

TikTok business dissected

As pointed out on the TikTok site, “TikTok is a destination for short-form mobile videos. Our mission is to capture and present the world’s creativity, knowledge, and precious life moments, directly from the mobile phone.

TikTok enables everyone to be a creator, and encourages users to share their passion and creative expression through their videos.”

That doesn’t seem to be anything special about it, if not the fact that TikTok’s aim is really to tap into people’s creativity.

Yet to understand why TikTok might be unique, we’ll need to look under the hood, at the company that controls it: ByteDance.

ByteDance, the company behind TikTok

ByteDance was founded by Yiming Zhang, which the ByteDance website defines as “A lifelong entrepreneur before ByteDance Yiming founded several ventures including a real estate search portal.

Previously, he served as the Director of Technology at Kuxun, then the dominant travel and transportation search engine in China, where he led a team of more than 40 engineers. Kuxun was later acquired by TripAdvisor.”

The real-time network calculator from Forbes assigns Yiming Zhang a net worth of $49.5 billion in 2022, making him among the wealthiest Chinese people.

One of the most incredible aspects of this rise is that ByteDance has been able to get so far, even though it didn’t get money from China’s duopoly Alibaba-Tencent.

ByteDance found itself in a legal battle where it alleged Tencent and Baidu to have unfairly competed against one of its most popular apps in China, called Toutiao.

What is ByteDance’s mission?

As announced on its site, the mission ByteDance:

Our vision is to build global creation and interaction platforms – we aim to not just deliver information but serve as a creative hub, hosting and nurturing creators. This belief guides our strategy in product development. Alongside our flagship product Toutiao, the largest content discovery and creation platform in China, we have also developed a diverse portfolio of products that are popular around the world, most notably musical.ly and TopBuzz.

ByteDance offers a series of products, and in China, its most popular one is called Jinri Toutiao (“Today’s Headlines”), which is a news aggregator.

The company claims that it uses AI to tap into the habits of users and to curate content from publishers. While it’s hard to verify how much AI is really at the core of Toutiao’s success, the company kept growing at and fast pace.

And ByteDance has become among the largest content platforms globally. 

The content hub is powered up by machine learning

One of the main features of social media is the content generated by its users. In short, a large number of users create a vast amount of content for free on the platform:

ByteDance has accumulated a vast amount of content and social media created by people and rich engagement data across our various products. This massive data is fed into our machine learning algorithms, which further refines the quality of users’ content feed and enhances the content experience, which in turn encourages more engagement and generates more data to be fed back into our algorithms. We use this virtuous cycle to optimize every stage of the “content lifecycle”—creation, moderation, curation, recommendation and interaction.

In short, the ByteDance platform claims to use machine learning and AI on both sides of the content spectrum. In terms of consumption things like feeds, channels, apps, and entry points are assessed and assisted by the AI.

In terms of content creation, AI supports the production of articles, images Q&As, videos, and live sessions.

The mechanism is summarized below:

bytedance-ai

Source: bytedance.com/ai

Thus, the AI works on several phased of the content experience lifecycle:

  • Creation.
  • Moderation.
  • And interaction.

TikTok is known in China as Douyin, and it allows users to create unique 15-second short videos, by applying effects that get shared across the world.

TikTok merge with Musical.ly accelerated growth 

In 2018, TikTok merged with Musical.ly, a popular mobile platform for short-form video. When the merge happened this is how Bytedance announced it:
We are delighted to welcome musical.ly to the Bytedance family. Louis, Alex and their team have built a hugely powerful and engaging platform, and we see immediate and exciting opportunities to build on the obvious synergy with our business. y integrating musical.ly’s global reach with Bytedance’s massive user base in China and key Asian markets we are creating a significant global platform for our content creators and brands to engage with new markets. At the same time, our global-leading AI technology will help musical.ly to accelerate their incredible pace of innovation in mobile video creation.

How much is ByteDance worth?

Bytedance made $51 billion in 2021 and it might be worth well in the range of 300-400 billion dollars!

How does TikTok make money?

TikTok makes money through its advertising platform, the TikTok Ads Manager. From there, brands can kick off their branding campaigns over TikTok. While we don’t know for sure how much money TikTok makes.

We know that Bytedance, TikTok’s owner made as much as $51 billion in 2021.

TikTok made instead $4.6 billion in revenue in 2021 (142% increase year-on-year). 

It did that, by creating a whole new category: user-generated hype.

In fact, Hype Houses (the houses where kids get organized, to develop short-form content for TikTok) have become the content farms for the platform: 

A few potential monetization strategies might be:

  • Advertising revenues are generated via targeted ads (similar to YouTube).
  • Allowing content creators to monetize their content as a user-generated platform is critical to the platform’s long-term success.
  • A subscription model for original, more extended form content from the platform that assembles the best short-form content.
  • In 2021, TikTok built its creator fund,  by committing £231 million over a 3 years time frame, devoted to the top creators. 

In the context, of the digital advertising industry, TikTok is becoming a key player:

advertising-industry
The digital advertising industry has become a multi-billion industry dominated by a few key tech players. The industry’s advertising dollars are also fragmented across several small players and publishers across the web. Most of it is consolidated within brands like Google, YouTube, Facebook, Instagram, Amazon, Bing, Twitter, TikTok, which is growing very quickly, and Pinterest.

And we’re seeing exponential growth of its advertising machine, sustained by Bytedance.

tiktok-statistics

Inside TikTok For You Feed?

In an attempt to make its algorithms more transparent (people’s concerns about TikTok being owned by a Chinese company has pushed the company in various directions, among which hiring a US CEO, who was the former Disney’s head of streaming) TikTok shared some details about its For You Feed.

The recommendation system is the tip of the iceberg and a window into how TikTok is redefining social media, into an ultimate meme machine, which power lies outside the social network.

TikTok (as we’ll see) is mostly interest-driven (both what you like and don’t like) and it has a capacity for customization that is extreme. If Facebook made us live inside filter bubbles, TikTok will make us live inside superbubbles. As TikTok explained:

When you open TikTok and land in your For You feed, you’re presented with a stream of videos curated to your interests, making it easy to find content and creators you love. This feed is powered by a recommendation system that delivers content to each user that is likely to be of interest to that particular user. Part of the magic of TikTok is that there’s no one For You feed – while different people may come upon some of the same standout videos, each person’s feed is unique and tailored to that specific individual.

Therefore, the For You feed reflects preferences unique to each user based on:

  • User interactions (videos you like or share, accounts you follow, comments you post, and content you create).
  • Video information (captions, sounds, and hashtags).
  • Device and account settings (language preference, country setting, and device type).

But if TikTok doesn’t know anything about you, how does it learn? Let’s look at the workflow TikTok uses to go from an un-personalized For You feed to a tailored one, at scale:

  • TikTok starts by offering a generalized feed of popular videos. From there based on the first set of likes, comments, and replays it will learn your tastes and start recommending more.
  • As you enjoy and use the app, TikTok will learn from any interaction happening on the platform. 
  • You can also “long-press” to add a video to your favorites (that indicates clearly what you like), or you can long-press on a video and tap “Not Interested” (which will help the system learn quickly about your tastes).

In such a personalized system, filter bubbles can be a real problem to address the TikTok For You Recommendation system tries to interrupt patterns (by for instance no recommendation by the same creator might be done twice in the same session), by showing videos that are outside your usual preferences, so that the recommendation algorithm can itself adjust to that. 

TikTok growth plan

By 2021, TikTok had passed 1.2 billion monthly active users. For some context, it took Facebook 8 years to pass 1 billion monthly active users.

TikTok passed a billion monthly active users in five years. 

Its growth has been so fast that Facebook has taken notice.

Indeed, Facebook – now Meta – has been building over the last years its own clones of TikTok. 

Given TikTok’s presumably multi-billion firepower, it won’t be easy for Facebook to stop TikTok growth.

As of the time of this writing, TikTok seems to be following users of specific demographics around the web via paid ads. Be it a YouTube, Google, or Facebook ad, TikTok appears to be ubiquitous.

This is blitzscaling in action. In an industry, where a few players like Facebook dominate, having relentless growth is critical to gain enough momentum to survive a possible attack.

As Facebook is also investing in its own creative social media app, it makes sense that TikTok is pushing so much on growth.

However, this strategy is also hazardous, as when fuels start to run over, either the company will be able to get another round of investing and keep better monetizing its products, or it might risk falling.

What’s most important about TikTok is its research lab, what ByteDance calls “AI Lab” which claims expertise in several areas, from natural language processing (NLP), computer vision, machine learning, and more:

bytedance-ai-lab

Source: ailab.bytedance.com/research

For instance, in the NLP areas, ByteDance has created applications like:

  • Byte Translator: the machine translation service for all ByteDance products
  • Xiaomingbot: a robot writer for sports, finance, housing, worlds highlight, etc.
  • Search for Toutiao and Tiktok (Douyin)

Will TikTok be able to sustain its growth to the point of becoming the dominant creative social media?

I heard in the past couple of years people talking about how TikTok was different from this or that app.

However, I would like to remind you that as an evolution to social media TikTok will over time become a competitor to all the entertainment apps and websites (from YouTube to Facebook, Instagram, and also Netflix).

As new generations get used to new formats and content types, what once seemed sticky content formats will be replaced – over time – by something else. 

TikTok’s two-sided network effects

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model’s success.

TikTok is a hype machine. A platform, with native short-form video content, delivered at scale, through an endless feed, powered by AI. 

This feed’s objective not only is to show addicting short-form videos. It’s also to incentivize users to generate other content on top of it. Thus, the two-sided network starts with power users (those generating hype) who by producing engaging/addicting content, publish it on the platform. 

In turn, TikTok amplifies the content through its algorithms and incentivizes other users to create their own version of the same content, thus making the user-generated content scale more easily. 

TikTok combines music, video, and interactions to create a compelling/if not addicting experience, thus bringing validation to another level. Whereas Instagram was about validation by posting filtered pictures.

TikTok is about hyped validation, by posting dances, challenges, and memes. 

Which new content categories can we expect from TikTok? And what sorts of people will be successful on the platform?

  • Dances. 
  • Songs. 
  • Memes.

Based on the above, three categories of people will become the main driver of TikTok’s success: 

  • Entertainers. 
  • Artists. 

Those are the fields TikTokers might disrupt. Just like Instagram created the “influencers” who are power users, which became the gatekeepers in various fields (fashion, cooking, beauty, gaming, and more).

TikTok is creating a new type of influencer, who, through dances, songs, challenges, and memes will become the new gatekeepers for many brands to gain visibility online! 

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Multi-sided Platform Business Model

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A multisided platform business model is a company that leverages multisided network effects (coming from two or more sides of the network). Therefore, when one side of the network grows, this makes the overall platform more valuable for the other side of the network and vice-versa, triggering exponential growth for the platform business.

Attention Merchant

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In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Network Effects

network-effects
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

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