Case Study: Clock on TikTok Is Ticking… But That Won’t Stop Its Growth

Original post on rosejia.com.

Hear the clashes of Gen Z'ers with US government Baby Boomers and Gen X'ers? That's right, they're fighting over the China-owned short-video entertainment app: TikTok. But, as all celebrities know, any news is good news... right?

How did TikTok get so big that they're now in the cross-hairs of the US government? What can we learn from their explosive growth the last 2-3 years? And, how can they continue to grow in spite of all the political turmoil?

TikTok's explosive growth comes from its discovery flywheel between creators, viewers, and advertisers. The next growth frontiers (if it continues in the US) will be expanding user adoption by the Millennial cohort and developing monetization features for its creators.

TikToking Time Bomb

In the last several weeks, TikTok has been in the news quite a bit—all not in great light. TikTok has been in one debacle after another: accused of sending packets of data when the app wasn't being used, copying clipboard data every 1-3 keystrokes, glitching likes and views, Amazon almost banning the app for its employees, and Wells Fargo actually banning the app on company-owned devices. TikTok is getting as much heat as Facebook did during its famous face-slaps by the government and news media over Cambridge Analytica and moderation policy backlash.

Rewind to the Beginning

Who is TikTok?

According to TikTok's About page, it is "the leading destination for short-form mobile video." Wikipedia says it's a "video-sharing social networking service." I think of it as a "bite-sized entertainment rabbit hole." Content tend to be light, funny, and entertaining. Imagine lots of memes, silly dances, and reaction videos. (See my favorites at rosejia.com)

Here's a quick summary of its history: TikTok, owned by private Chinese tech company ByteDance (valued at $110Bn), started in China in 2016 and named Douyin (literal translation: "vibrating musical note"), and then rebranded as TikTok outside of China. TikTok entered the US market in 2018 when it merged with Muiscal.ly (a competing entertainment platform known for its lip-syncing shenanigans). Musical.ly already had a strong youth following and when it merged with TikTok, it brought the Gen Z'ers to the new TikTok platform. By October 2018, TikTok was the #1 most downloaded app in the US. Throughout 2019, it continued to build dominance, daring US big brands to build imitations (Facebook's Lasso—defunct—and now Instagram's Reels).

In January 2020, TikTok became the #1 non-game app download worldwide, ahead of Facebook's family of apps (Whatsapp, Facebook, Instagram, Messenger) and other social and entertainment apps (Snapchat, YouTube, Netflix).

Forecasts from February 2020 showed TikTok in the US growing +7.4% CAGR from 2020 to 2024, with 80% headroom in driving internet user adoption.

The app is so sticky, featuring 15-second looping content from celebrities and regular folks, doing absurdly simple and yet highly entertaining dances, lip-syncing to music or previously recorded conversations. It even propelled Lil NasX's "Old Country Road" into the top Billboard charts!

But, still, it was just a place for "the kids." 63.5% of TikTokers in the US in January of this year were under the age of 30. TikTok had 37M US users in 2019, which meant 23M youngsters (or 27% of the 10-29 year olds) were on the app. That's almost a third of the next generation... on a single app!

Until...

COVID-19 changed everything. Suddenly, everyone was stuck indoors. Many generations forced together under one roof. Youngsters were bored. Parents were bored. Grandparents were bored. Even pets were bored.

And, what do people do when they're bored? Binge content. TV, social media, video content all skyrocketed during COVID.

Because of COVID-19, many Millennials and Gen-X'ers downloaded TikTok, helping it reach 2 billion downloads worldwide by April 2020 (middle of the COVID-19 pandemic).

In particular, Millennials (ages 25-34) were the fastest growing cohort on TikTok during COVID peak.

So, that leads us to the present day when TikTok dominates news cycles but also many Gen Z'ers and Millennials' share of eyeballs. What made it so special?

Growth Secret Sauce: "Discovery Flywheel"

Ben Thompson and James Allworth from Exponent Podcast said it best: (paraphrasing) TikTok is an entertainment vehicle, not really a social networking platform. Yes, there are components of social media, similar to that of Facebook, Instagram, Snapchat, and Twitter, but its centerpiece is it's 15-second entertainment videos. Keyword there is "entertainment."

Let's be honest, when we watch videos for entertainment purposes, we aren't looking through our family and friends' feeds for that content. More likely, we're watching well-produced content (as seen on Netflix or YouTube) or memes (as found in specific parts of Instagram and Reddit).

TikTok combined all aspects of virality: short, video, and funny... and brought us the next generation of entertainment media. Just like how we moved from radio entertainment to TV to streaming, the next step in entertainment evolution is TikTok's user-generated short-form video. Thus, TikTok is now the fastest growing social platform, reaching 1 billion users 1.5X faster than Instagram.

The Exponents guys also called out specifically how Tiktok's discovery engine (or machine learning algorithm) basically acts like a crowdsourcing mechanism to show hundreds to thousands of “pilots” to viewers to determine what content works, and then shows the "winning pilots" to a bigger audience. This purposeful mechanism is one driver of TikTok's explosive growth in the last 2-3 years. The rest can be explained in the their discovery flywheel.

What's the Discovery Flywheel?

"Flywheel" is a term used by many business and tech folks. Essentially, a flywheel encompasses the start of a business that builds momentum over time which then drives the business further which in turn creates more momentum. Thus, a flywheel.

TikTok created a seamless discovery flywheel between viewers and creators that is more powerful than that created by similar social networks (Facebook, Instagram, Snapchat, Twitter, and even Twitch).

Let me quickly explain the components to what I'm calling their "discovery flywheel."

Creators

Musical.ly founder, Alex Zhu, said it best: (paraphrasing) Building a platform is like starting America. You need to create the "American Dream" with a 1% (celebrities or influencers) that the masses want to copy, but the majority of the nation (platform) is bolstered by a growing middle class (long list of creators) who are constantly aiming to move upwards. It is this "middle class" that creates the majority of content on TikTok of which 1-5% might become viral and attract new viewers and creators, but because these "middle class" creators are chasing the "American Dream," they will keep producing content on TikTok.

Viewers

The power of any platform is the # of viewers it can attract... because creators want to show off their creations.. and the more viewers there are, the more of that "American Dream" these creators can realize. But, where do the viewers come from? Well, viewers are attracted to content. That's why almost every entertainment platform that has been created started with a wide array of content as the catnip. Thus, with TikTok building an easy platform for creators to build content, they ensure the platform houses a large set of content to attract and engage viewers.

Advertisers

The maturity of a platform can be measured by the level of advertising involvement from big brands. Big brands are always looking for new platforms to reach their audiences, but they are particular about their investment so you'll often find them entering a platform when its at the critical mass point. Advertisers provide an alternative revenue source to both the platform and the creators. These advertisers fund creators by co-producing content or paying for sponsorship in order to acquire the viewers for their own products/services.

What Makes TikTok Different From Other Social Media?

I've mentioned in past WWRD series that growth (often topline or revenue growth) is:

# of units × $ spent per unit

Well, TikTok is still on the first portion: expanding # of units... in this case "units" are users on platform. The best way to grow a user base for a content company is to ensure content is easily discoverable.

TikTok fueled this discovery flywheel by these important product features:

1. Easy shareability - Other social media platforms try to keep you within their ecosystem, but not TikTok. They built a super easy sharing capability where viewers can share TikTok videos on other platforms with no friction. This is key because many viewers' social networks are actually on other platforms. (Think of this as finding a meme or gif that you love and sharing it with friends.) Because TikTok watermarked all exported videos with its "vibrating sound note" (aka logo), users on Facebook and Instagram were flooded with TikTok content, thus driving viewer awareness and interest.
2. Less focus on building a "community" on TikTok - Yes, communities are important and having a community on a platform makes the platform sticky. However, if you think about TikTok and what it's known for, it's entertainment. No one is on TikTok chatting with one another. They're on TikTok enjoying the content created and following creators like you do with TV/movie/music celebs. David Rosenthal and Ben Gilbert of Acquired Podcast said this best: (paraphrasing) The lack of emphasis on followership by TikTok's algorithm allows creators to believe the "American Dream" can happen for them. It's about their content, not about how many people they can bring to the platform or build on the platform. Also, this helps viewers discover new creators and new content without it being populated by the top celebs who already dominate other forums.
3. Insertion of videos with little to no follower or view count - Unlike other social networking platforms where you end up in a content bubble and see more and more of what you enjoy but less and less of random content that you could have discovered and liked had you been served the content, TikTok consistently inserts new and random videos in front of the viewer both to learn more about the user but also to encourage those "middle class" creators to generate more content. Imagine, as a new creator, your very first video ends up getting thousands, hundreds of thousands, or even millions of views. That is going to encourage you to create more videos because you'll be chasing that high. Meanwhile, for a viewer, the cost of swiping away from the content if not interested is so low. It's just 15 seconds of your time! This discovery mechanism becomes a win-win for both viewers and creators.

What's Next for TikTok?

When business folks talk about growth, they often refer to this growth framework:

• Market penetration - when a business tries to get more people to adopt their existing product within an existing market.
• Market development - when a business goes into a new market with the existing product.
• Product development - when a business develops a new product to sell to an existing market.
• Diversification - when a business builds a new product and sells to a new market.

The Next Growth Frontiers: Millennials & Monetization

If US doesn't ban TikTok, then the next growth phrase for the brand would be in "market penetration" and "product development", meaning it needs to expand its user base and develop monetization products within the platform to keep creators producing and viewers engaged.

Market penetration: Millennials

41.1% of the US TikTok user base in January was <24 years old; however, with the pandemic, the 25-34 year old (Millennial) user base increased +5% to 27.4%. For context, the Millennial cohort in the US was 72M in 2019, and TikTok had 37M US users last year. That means, ~10M of the 37M TikTokers were Millennials, which would only account for 14% of the total US Millennial population. In other words, TikTok has another 86% of the Millennial population to grab!

Product development: Monetization

Twitch, a livestreaming platform for gamers, does this really well. (Full disclosure: I used to work at Twitch.) Twitch creators can monetize their content through viewer subscriptions to their channel, donations from viewers in the form of virtual goods called "Bits," and share in the revenue generated by ads running on their channel.

Why pay creators, you may ask? Aside from the fact you should pay talent for their contributions to the success of your platform, it's also a sticky way of keeping your flywheel moving. When other platforms provide monetization options, there is more incentive for creators to jump ship and go where they can get paid. Without a constant influx of new content, viewers will get bored and leave the platform. Then, the flywheel will stop working.

According to Digital Trends, TikTok's parent-company ByteDance hauled in $3 billion in profits in 2019, but TikTok didn't share those profits with its creators. Currently, there is some monetization capabilities like tips to Creators via a digital gift during livestreams, but apparently TikTok gets 50% of revenue. Sensor Tower estimates lifetime US user spending was $86.5 million on TikTok (as of Q1 2020), ~19% of total global lifetime user spending. This affords TikTok more opportunity to deepen their relationship with their creators.

Spitballing Ideas

Clearly, I don't work for TikTok, so I have no idea of the inner workings of the company nor what they're planning to develop. However, I've been in the growth space for a long time and I have some ideas. These are off-the-cuff ideas—not fleshed out. (Hey Kevin Mayer, Vanessa Pappas and Zhao Qi, if you take any of these ideas, don't forget to give me some credit! ;-))

• Instagram "flash mob" / generational rivalry call-to-action - Remember those flash mobs that used to show up in the middle of nowhere? (Millennials know what I'm talking about.) Or those college rivalries between upper and lower classmen? This idea would be to flood Instagram (where many Millennials are) with a call-to-action to overtake TikTok for a certain time period with Millennial-specific user-generated videos (e.g. our love of 90s Saturday Morning Cartoons). This will create a reason for Millennials to not only watch such nostalgic content on TikTok but also fuel them to partake with creations of their own, resulting in increases Millennial cohort penetration and usage.
• Credit card multiplier model for viewers - Just like those annoying but very addictive "5X points for grocery" or "3X points for gasoline", TikTok can create categories of "actions" that viewers can perform on a regular basis. In return, the more of those actions viewers take (with an upper limit, of course), the more "points" they receive. Viewers can then use these points to "gift" or tip creators. This multiplier effect will incentivize TikTokers to continue the actions you want, such as viewing hashtags or specific types of videos or minutes/hours watched on platform.
• Referrer "Power-Up" bonus - Rewarding referrals is common for companies trying to grow their user base. Since TikTok is all about virality of content and keeping viewers engaged, the bonus here can be like the Super Mario Power-Up mushroom, where a TikToker can use it to plus-up specific actions on platform. For example, a "power-up" point can be equivalent to 5 "likes" so a TikToker can use their 1 "power-up" point to like a video, which will gain +5 extra likes. Users will then want to refer more friends to the platform to earn more power-up points to then use on the platform. (A very virtuous cycle.)

Takeaway

We should all learn from TikTok and its explosive growth. Though the clock is ticking for TikTok and we don't know where it'll land with the US government, one thing is for sure: if it survives, it will continue to grow.

And, if TikTok use my ideas, they'll grow even faster. (Just kidding. Not really.)