TikTok: Super App or Supernova?
TikTok’s parent company, ByteDance, was launched in 2012 around the simple idea of helping users entertain themselves on their smartphones while on the Beijing Subway. By May 2020, TikTok operated in 155 countries and, together with Douyin (its China app), it had roughly one billion monthly active users, placing it in the top ranks of digital platforms globally.
Some industry experts argued that it was the first consumer app operating at scale where artificial intelligence (or AI) was the product. But TikTok had drawn the attention of competitors, regulators, and politicians — especially in the U.S., where commercial success was critical to its long-term enterprise value. With less than two percent of its global revenue generated in the U.S., should the company continue to drive growth there or focus on monetizing that audience by introducing revenue generating activities like advertising? Would TikTok become the first “Super App” with a global footprint or, if it moved too fast, did it run the risk of becoming a supernova that shone brightly only for a passing moment? Harvard Business School senior lecturer Jeffrey Rayport discusses these strategic challenges in his case, “TikTok in 2020: Super App or Supernova?”
BRIAN KENNY: A question for you social media aficionados, what do DailyBooth, Yik Yak, Friendster and Meerkat have in common? Well, in a word, failure. They each have the dubious distinction of being among the long list of once wildly popular and now defunct social media platforms. They joined the likes of Vine, Google+, and others that were once declared the next big thing, with valuations in the hundreds of millions, only to hit a pothole on the information superhighway and careen off into oblivion. In the brief history of the internet, there are in fact dozens of social media platforms that had faltered after showing great promise, and there are a few, you know the ones, that have hit their stride and continued to thrive, all of which leaves one to wonder, will we know the next big thing when we see it? Today on Cold Call we’ve invited Professor Jeffrey Rayport to discuss his case entitled, “TikTok in 2020: Super App or Supernova?” I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR Presents network. Jeffrey Rayport is a member of the entrepreneurial faculty unit at Harvard Business School, and an expert in online media and eCommerce, with a focus on new business opportunities enabled by emerging digital technologies, I think you’re a three-pete here on Cold Call, Jeffrey, so thanks for coming back and joining us.
JEFFREY RAYPORT: Brian, thank you so much for having me.
BRIAN KENNY: This is a super fun case, I will admit that before reading the case I had spent virtually no time on TikTok, but everybody in my house around me seems to be on it all the time so I thought, okay, I’ll log in and test it out for a few and see what it’s all about, and literally about 30 minutes later I dug myself out of the hole that I had burrowed myself in on TikTok videos. It’s amazing, it’s really, I’m not sure how to describe it, but it’s amazing.
JEFFREY RAYPORT: It is remarkable, and all I can say is, if you were captivated for those first 30 minutes, spend a couple hours with it and wait until that AI figures out who you are and then it would become even more magnetic.
BRIAN KENNY: Let me ask you to start by telling us, when you step into the classroom, what would your cold call be to start the case on TikTok?
JEFFREY RAYPORT: Well, Brian, you said it was a really fun case, I completely agree with you, and the cold call, I think, maybe this is just a faculty member’s point of view, is really fun too. There’s this interesting question in every media business that is the tradeoff between growing audience and driving the business model, and TikTok, for all the reasons you just mentioned in your intro, the fact that there have been a lot of video player sites, Vine being maybe the most obvious, that seem to be similar short form virally distributed video content, that have come and gone. And so the presenting question in the case for our students and for our executives is, here you are a global phenomenon, of course this is 2020, and TikTok has recorded over 2 billion downloads, the fastest spreading app in the history of the app economy starting in 2008, it has a vast global audience by anyone’s standards, but less than 2% of its global revenues are generated in the United States. And so the question is, do you continue to drive audience growth in the United States? Or do you double down on monetization of that audience by introducing a number of revenue generating activities, the most obvious of which would be advertising?
BRIAN KENNY: Yeah, that’s a great way to start the case. I would add one dimension to that which is, if Brian Kenny starts to use the app, is it still valuable? Because I think I’ve driven many of these social media platforms into the ground when I started to use them.
JEFFREY RAYPORT: Well, that is a very interesting point. Some research just came out in the last few days saying good news to you big brands who are getting interested in TikTok, it turns out that the audience is roughly evenly divided between young people who are actually cool and hip and will drive the virality of the app, and us somewhat older and even more affluent folks. 53% of the audience have household incomes over $150,000, so it turns out it appeals to all ages and all stages of the socioeconomic spectrum, so you’re in good company.
BRIAN KENNY: That’s good news, good to know. So Jeffrey, what caught your attention about this case? Why did you decide to write it, and how does it relate to the things that you think about as a scholar?
JEFFREY RAYPORT: Brian, I guess I could say that there were multiple triggers to writing this case. TikTok had certainly caught my eye as something, and again, you alluded to this in your introduction, it is very hard to define what TikTok is. One of the questions that gets most excitement in the classroom is literally pushing students, participants, executives, to answer that question: What is it? On top of that, with the two billion downloads, it looks like escape velocity, and just in the last few weeks TikTok has reported that it now has over a billion daily active users, so it’s unlikely this is a flash in the pan, but that was another question was, what does it take to create a sustainable and scaling venture? And that goes right back to this question of, do you need scale in the audience, or do you actually need to demonstrate a robust business model? And the final thing to say is that the company that created it, ByteDance, is not even ten years old. TikTok itself is not even five years old. In some ways we’ve never seen a phenomenon quite like this, brand new, discontinuous innovation, extraordinary pace of uptake, and then potentially enormous impact on the worlds of advertising, promotion, and media.
BRIAN KENNY: Let’s go back to that question of what it is, how do you define it?
JEFFREY RAYPORT: Well, I was thinking about that, the other day I was with a group of 40-50 executives talking about this, and I asked them the question we’re just talking about, and I thought I’d just share with you and our listeners what came out of their impressions.
BRIAN KENNY: Great.
JEFFREY RAYPORT: So one was, it’s a reinvention of broadcast television. One of the pundits in the case talks about it being TV without the remote, and guess what, there is a remote, it’s called the AI, so interesting. It’s clearly in some ways a social network, it is also a performance platform, or a performance venue. It’s a marketplace, and also a retail platform, because people buy and sell stuff, as well as brands accessing the services of influencers. It’s big on brand promotion in that a lot of brands go there simply to express themselves. We also see a lot of what you might call branded publishing, or content marketing, happening on the site. And then on top of that, surprise surprise, as TikTok has enabled certain high followership influencers to get more time, meaning we’ve gone from 15 to 60 seconds as the permitted length of a TikTok video, to now three minutes standard. It has even become an ed tech platform; there are people teaching stuff on TikTok. So this question of “what is it?” I think is really, really fascinating, and I think where I come down is, where again, one of the pundits in the case says, this is the first time that a mainstream consumer application has come to market where AI is the product. I think this is, at the end of the day, this is an AI.
BRIAN KENNY: What’s different about the AI that TikTok is using?
JEFFREY RAYPORT: What’s interesting and different to my mind about TikTok is that we don’t explicitly give the app any information about ourselves. You go to Facebook or LinkedIn, you build a social profile and you identify your friends and you make connections, that’s a lot of information you’re anteing up, obviously very controversial right now with all the backlash around privacy. Google knows a ton about us for the simple reason that even if you do nothing else, you search on Google, so it knows what we’re interested in. It’s, as we used to call it, a database of intent. TikTok never asks for profile information, you input absolutely no data, as you found out with your 30 minutes with TikTok the other day. The only data, if you will, that the AI is ingesting is your behavior with the app. What’s interesting is that for TikTok’s mainstream users, people who are committed users, the average user has about 2000 meta tags that ByteDance, the owner of TikTok, has developed in order to profile each individual user. So you think about the fact that your video behavior indicates categories and interests and topics, your phone reveals its operating system, your carrier, the model of phone you’re on, the speed of your connection, but maybe the most indicative is of course your behaviors within the app. What do you swipe on? What do you tap? What do you favorite? What do you share? Which videos do you complete? Which do you leave after two seconds? Which videos do you not just complete, but you watch seven times because they’re so amusing. All of those represent, if you will, unstructured data inputs that allows TikTok to develop very quickly, essentially a profile and image, individualized down to a segment of one, to customize your video feed in a way that becomes increasingly appealing. And as I say, in a very short period of time I think most users experience that the power of the AI is such that within two or three days of usage, this thing has gotten to know you very well. And again, unlike Google, unlike Facebook, unlike any other platform you can think of, you have told it nothing, or everything, depending on your point of view.
BRIAN KENNY: Like most things with AI, it’s both impressive and scary at the same time.
JEFFREY RAYPORT: Absolutely, absolutely.
BRIAN KENNY: Let’s talk about the origins of the firm a little bit, you mentioned, so we know that it’s a Chinese firm, it was started in China, but tell us a little bit about what the inspiration was and how it got rolling.
JEFFREY RAYPORT: The founder of ByteDance, the parent company of TikTok, is in a Chinese entrepreneur by the name of Zhang Yiming. He, in 2011, 2012, saw something that will be familiar to everyone listening, and that is that people getting on subway trains at Beijing, as they were all over the world, were spending less time reading broad sheet newspapers, print media, and more time reading news on their smartphones. And so his initial insight was that he could ride effectively two waves, one was the rapid pace of smartphone adoption that had been begun really with the release of the iPhone in 2007 and the Android phone shortly thereafter, combined with this shift from print to digital, specifically for news. And so the first offer from ByteDance was a service called Toutiao, which was essentially a news aggregator, but it was not just, if you will, state-controlled news or official news, but included, which was unusual for Chinese news sources at the time, a huge amount of soft news, celebrity reporting, gossip, and all the rest of it. But you could argue that the secret sauce was the role of an artificial intelligence which customized the news feed based on its increasing familiarity with each individual user’s interests, predilections, and tastes. As videos became more popular on Toutiao he had an insight which is, maybe this is a recipe for a brand new app offering, in this case, it was Douyin, which was the predecessor to TikTok, it’s still the brand name under which TikTok operates in mainland China, and that then became a mobile app, or mobile optimized service for short form videos, again, powered by the same AI that he developed in the earlier stage with news aggregation.
BRIAN KENNY: Is there something about the timing that made this particularly ripe for people to adopt it? I’m thinking about increasing speeds of broadband, the ability to stream video in ways that you couldn’t maybe when he first started with Toutiao. Was there something that made, did he hit on the right timing and for some reason that allowed this to take off?
JEFFREY RAYPORT: Absolutely, absolutely great point in the sense that two things were happening, not only was smartphone adoption running at blazing speeds, not just in China, but around the world, and just to put that in perspective, current stats indicate that of the 7 billion plus/minus humans on earth, about five and a quarter billion have active mobile devices, and of those about 80% have smartphones. So we’re now looking at a world where over 50% of the human population has a smartphone, that’s all happened in the last 10 years. It happened very, very fast in China because of the Chinese manufacturers, Yiming, and others creating essentially very powerful, very low-priced devices, hence very affordable, and democratized access. That was clearly part of this picture, and then you put your finger on another big trend, which was a transition in mobile telephony from 3G to 4G, hence the availability of wireless broadband connections, and essentially glitch free streams, not just of content, a la the Facebook newsfeed, but actually video content.
BRIAN KENNY: So it’s interesting to me also that this kind of a service launched in China, which we know has a lot of state controls over what people can see and do on the internet, and those of us who have been to China with our computers feel like they never come back the way they arrived. So I’m curious as to how he was able to get people to adopt this platform that basically required them to be extroverted in a way that seems like it might clash with Chinese culture.
JEFFREY RAYPORT: Brian, that is a fascinating question, let me see if I can answer that in a couple ways. I suppose it’d be fair to say that those early services certainly benefited from the fact that the President Xi in power then was not the President Xi we know today, meaning that it was a freewheeling economy that was celebrating tech entrepreneurship and the accumulation of wealth in a roughly speaking capitalist system, albeit with socialist characteristics, as the Chinese like to say. In addition, it is also the case that the version of TikTok, Douyin, in China is pretty heavily censored. And so if you go into Douyin with five or 6,000 keywords that you can search on TikTok and get results on, about 40% of those keywords that you could search on for TikTok are censored on Douyin. So another aspect of this story is that TikTok has been, or ByteDance, I should say, has been relatively well behaved, I think it would be fair to say, in the eyes of any state controllers who might be interested in this. The other thing is that regardless of what one may think about the nefarious uses to which AI might be put, I think ByteDance has benefited from the fact that this was about doing something really nice for people, everyone in big Chinese cities rides the subway, everyone needs a form of entertainment, this at least has presented initially as something pretty light and fluffy. You’ll be interested to know that the new mission of the company is to inspire creativity and to bring joy.
BRIAN KENNY: It’s hard not to get behind that mission isn’t it?
JEFFREY RAYPORT: It really is.
BRIAN KENNY: We live in a time where the polarization is such that you don’t even want to watch the news, but this is a harmless, fun form of entertainment, so I think they’ve struck something there. But at the end of the day, Jeffrey, it’s a business, and the case goes into great detail about how this business is now trying to monetize what they’re doing. So can you talk a little bit about that? How are they going about monetizing the platform?
JEFFREY RAYPORT: Well, one of the reasons that we think there’s success with that cold call we talked about is that conventional wisdom in the media world is that the minute you take something that is delightful and joyous, generally speaking the imposition of advertising degrades the experience. And I say that with great respect for my colleagues, Dan O’Brien, Dan Maher, who wrote this case with me, and really were the initiators of this piece of research. We all love advertising, but as consumers, in some ways when it’s not done right, we can easily hate, even loathe it, when it’s interruptive, when it’s spamming us, when it’s taking over our devices. So the question is, if you pursue a monetization model making use of advertising in traditional ways, do you in fact degrade the user experience of the app? And in that sense, in most of the stories that we’ve been talking about, including much of digital audience building over the last 20 years, the friction free way to grow audience, this is how Facebook got to 3 billion users, is to start with a light touch on monetization, and then impose it later on, at least light touch until you have escape velocity. What is interesting here is that TikTok is relying roughly, maybe not 100%, but 70-80% on advertising in ByteDance globally, I should say that there’s 20-30% of sales of virtual coins, virtual gifts, other kinds of, if you will, economic exchange that take place inside the app. But the main event, from a standpoint of revenue generation, is advertising. And then the question is, given that they are pursuing advertising, has it actually become a drag on audience growth? Meaning has it actually degraded the user experience? TikTok has proven uniquely successful as a channel for brands, precisely because most of what brands are doing in the medium doesn’t look like advertising, even though the brands are showing up, and spending what would otherwise be considered, certainly by their CFO, as ad dollars, and that is a fascinating finesse that lies at the heart of this business model.
BRIAN KENNY: Speaking as a brand manager, I feel for all of my peers out there, because every time one of these platforms emerges, we all struggle to try and figure out, how do we integrate our brand it into that platform without stepping on ourselves the way that you describe. There’s certainly lots of stories about brands that have mis-stepped when they’ve tried to engage with the uses of these platforms. The case goes into some detail about how advertisers are viewing this as well, so I’m wondering if you could talk about what the perceptions are of some of the big brands that are out there trying to use the platform.
JEFFREY RAYPORT: The case talks about five ad products, and we have a lovely exhibit with visualizations of these, and they all look innovative at first blush. But when you sit down and parse this list, there are three that are pretty standard, there’s one that is what we would call a pre-roll, anyone who’s opened up a YouTube video and sees a 15 second video play before they see the video they want, that’s a pre-roll. So the app has a pre-roll ad unit, if you will, when you first open the app, there is a pre-roll on steroids that lasts a minute instead of five or 15 seconds, so that’s the second ad unit. The third is something that we recognize from broadcast television and interstitial ad, meaning those ads that appear in your feed, they’re short videos from brands that run between the videos that come from influencers, creators on the platform. The last two are the most interesting, and maybe no surprise it’s where the action is. One of them is something that is very familiar from the world of Snapchat, which is filters and lenses, so that I can make a video this unique expression of myself, or my reaction to your six-month-old puppy, Brian, that you acquired during COVID, for whom you’re buying lots and lots of dog food. I can take a bunch of branded stickers and lenses and do something to augment my own video in a way that ties into the brand, but it’s still an organic and natural expression of my own creativity, and I haven’t been bought and sold by anyone as an influencer. The ones that are even more interesting are what TikTok refers to as hashtag challenges. The first brand to do a hashtag challenge on TikTok was GUESS Jeans, and GUESS Jeans ran a hashtag challenge called #InMyDenim. Sounds very frivolous, but let’s talk about what it is. There was a basic challenge to essentially create a video that replicated a very simple storyline that had been spelled out by GUESS, and presumably their ad agency and the geniuses at TikTok who try to figure out what’s going to go viral. And the storyline was some believe this, you’re just a regular person, you’ve gotten out of bed in the morning, you feel schlumpy, or you’re coming home from a long day of work and you feel schlumpy, or you’ve had too much to drink at night and you feel troglodytic, and then you reach out towards the camera lens and block the lens with your hand, or throw a blanket over the camera lens, or go into your closet and then open the door one nanosecond later and come out, when you reappear after these quick interruptions, you’re dressed in denim, and in denim you look like the sexiest, coolest, most compelling, charismatic version of yourself that a camera eye has ever seen. Now here’s what’s interesting, not every one of those hashtag challenge responses, there were tens of thousands of responses, not everyone actually had people wearing GUESS Jeans. So it raises this really interesting question, which is if you are GUESS, or Home Depot, or Kroger, or any of the other major brands that have advertising on the platform, and I say advertising, I should say it in quotes, because I’m not sure everyone would consider this advertising, what would you rather have, an interruptive 15 second or 30 second video placement that might be repurposed from broadcast or cable television, or a hashtag challenge that foments a social movement that is inspired by your brand. So what’s been fascinating to see is that in the same way that we have a hard time actually answering the question, what is TikTok? We have a hard time answering the question, what does advertising, or more broadly commercial messaging, look like on TikTok, because it turns out that the more organic and, if you will, native it is to the medium, the more powerful and successful it is, hence the less interruptive, and many of these brand interventions, if you will, enrich rather than degrade the platform.
BRIAN KENNY: Yeah, and we know that consumers don’t mind engaging with brands in fun ways like that too, we’ve seen that play out in other social platforms, and TikTok’s trying to figure this out, the case talks about the fact that they have really, in the Asian culture, the instant commerce on these social platforms is much more common than it is in the United States, so part of their global strategy is to try and figure out how to make commerce work on this platform in the Western world, is that right?
JEFFREY RAYPORT: That is absolutely right. I mean, it is interesting to note a couple things, one is that their VP of business solutions, a guy named Blake Chandlee in the case, talks about the fact that his vision for the future is a world in which TikTok has the very best influencers on the face of this earth, who every time a brand wants to launch a campaign, AKA a social movement, the brand would show up, and instead of briefing the creatives at their ad agency on Madison Avenue, they would be briefing the interested influencers or creators who want to show up to hear about what the brand’s all about, and what they wish to achieve, with no particular constraints on what those creators would do with that. This idea that influencers can create not just highly persuasive video, but video that actually, let’s put it this way, does more than just change minds, but actually sells stuff, is something that is happening in mainland China at a scale that is almost unimaginable. So this version that you see on TikTok of people talking about product, whether it’s going to a restaurant, flying an airline, or buying the latest smartphone from HTC, these videos are what are now referred to in China as live shopping, and in 2019 live shopping, clearly not just on TikTok but on major platforms, starting with Taobao, which is an Alibaba property, they did 120 billion of gross merchandise volume, meaning GMV revenues, so real retail revenues in China on live shopping media alone. That number in 2020 grew to 300 billion.
BRIAN KENNY: Wow.
JEFFREY RAYPORT: The prediction is it’ll be up 50% in 2021. So this idea, back to this notion that TikTok defies definition, according to traditional media categories, it is a medium in which every form of communication, every video, is also implicitly and even explicitly, a point of sale. And so the commercial actionability of what goes on on TikTok, and therefore the leverage of the power that these influencers have to move activity, commercial activity, for brands, is quite extraordinary.
BRIAN KENNY: It’s amazing the numbers and the pace with which this has taken off. So I have a two-part question here, one is, is TikTok a disruptor? Have they really changed the landscape such that they meet that definition of a disruptor? And coupled with that is, why do other platforms fizzle out?
JEFFREY RAYPORT: So I think it’d be fair to say that TikTok is definitely a disruptor, but most disruptors focus on a product or a sector, and TikTok somehow is, whether intentionally or otherwise, disrupting multiple sectors at the same time, if it’s disrupting anything at all. Part of the reason, I think, that one could bet on TikTok’s staying power, is that unlike those prior platforms, like MySpace, Friendster in the social networking space, or Vine in the short form video space, part of, you could argue, a successful disruption is actually creating a complete ecosystem to support the trajectory of disruption. And I think if you were to ask, what is the single most important key success factor beyond the brilliance of the AI we’ve been to talking about, and hence this incredibly captivating programming, if you will, that each of us gets across a billion users a day on our mobile devices, it’s the fact that TikTok has been very aggressive, not just about growing audience, and by the way, just to put this in perspective, at the time of the case they spent a billion dollars of marketing money growing audience in the US, so $3 million a day to drive downloads, so they’ve been growing audience, very aggressive. But they’ve taken that same kind of aggressive approach to clearing the market of the world’s essentially best, most pedigreed influencers, in the context of social media as expressed through video. And so the ways in which TikTok has actively courted that community is essentially to have become what… Another business that came and went a few years ago, if you remember when Disney bought Maker Studios for half a billion dollars, Maker Studios was what we used to call an MCN, or a multi-channel network, it was a talent agency that represented the long tail of would be celebrities, otherwise known as the tens or hundreds of thousands of influencers around the world. TikTok essentially became its own MCN, and they went to such an extent that for some they were spending a million bucks to place a single video from an influencer, for many of them they were offering office space, for all of them they were offering mentorship, everyone was getting access to fully licensed copyrighted music libraries, and snippets of TV and film to aid them with the raw materials to put together their videos, they had authoring tools. And then maybe most valuable of all, when you have a powerful AI like this, telling you more or less in real time how a video is doing, you can deliver back to a creator exceedingly nuanced, ripped from the headlines information, about what you’re doing right, what you’re doing wrong, and how to 10X your viewership or followership tomorrow with the next video you post.
BRIAN KENNY: You sound a little excited about all of this, Jeffrey, I think you may have answered your question in the case title, which is this is a super app and not a supernova.
JEFFREY RAYPORT: I think that’s right, I think that’s right, it’s clearer today than it was at the time that we did the case, mainly because they’re bigger, more successful, and much of what they envision in the case, they’ve now actually delivered for brands in the market.
BRIAN KENNY: Yeah, it is remarkable. This has been a fabulous conversation as usual, Jeffrey, I have one on more question before I let you go and that is, if there’s one thing you want our listeners to take away from this case on TikTok, what would it be?
JEFFREY RAYPORT: I suppose we all are skeptical every time we read, especially in the business press, that some wildly radical innovation represents something genuinely new under the sun. This is a reminder, speaking of that message of happiness and joy, whether this is for good or for evil, it is fascinating, it is genuinely something new under the sun, and it provides all of us, especially in the worlds of marketing and media, a great challenge, which is understanding what it is, and then the even more interesting question is, what kind of impact does it have on the rest of the business world?
BRIAN KENNY: Jeffrey, it’s a great case, thank you for coming on Cold Call to talk about it.
JEFFREY RAYPORT: Brian, thank you so much for having me, it’s a pleasure.
BRIAN KENNY: We are excited to be celebrating the 100-year anniversary of the case method at Harvard Business School. It’s a yearlong celebration, kicking off this month alongside our new academic year. If you want more on the history of the case method, visit our website: www.hbs.edu/casemethod100. Cold Call is a great way to get a taste of the case method, after all each episode features a business case and its faculty author. You might also like our other podcasts: After Hours, Climate Rising, Skydeck, and Managing the Future of Work. Find them on Apple Podcasts or wherever you listen. Thanks again for joining us. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School, brought to you by the HBR Presents network.