TikTok: Super App or Explosive Star? | Cold Call

0:00When you need to build up your team to handle the growing chaos at work, use Indeed. Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a$75 sponsored job credit at Indeed.com slash podcast. That's Indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed Sponsored Jobs. This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome?

0:35That's new. They can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18+.

0:58HBR presents.

1:04A question for you social media aficionados. What do Daily Booth, 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 join 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.

1:44And 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, Tick Tock in 2020, Super App or Super Nova? I'm your host, Brian Kenney, 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 e-commerce with a focus on new business opportunities enabled by emerging digital technologies.

2:23I think you're a three-peat here on Cold Call, Jeffrey, so thanks for coming back and joining us. Brian, thank you so much for having me. 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, OK, I'll just log in and test it out for a few minutes and see what it's all about. And literally about 30 minutes later, I dug myself out of the hole that I had borrowed myself in on TikTok videos. It's amazing. It's really, I'm not sure how to describe it, but it's amazing.

2:54It 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 till that AI figures out who you are. And then it would become even more magnetic. 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? 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. You know, there's this interesting kind of question in every media business that is the tradeoff between growing audience and driving the business model.

3:30And 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 kind of short form, virally distributed video content that have come and gone. 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 percent of its global revenues are generated in the United States.

4:10And 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? Yeah, that's a great way to start the case. I would add one dimension to that, which is if Brian Kenney 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. 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.

4:44It turns out that the audience is roughly evenly divided between young people who are actually cool and hip and will derive the virality of the app. And us somewhat older and even more affluent folks, 53 percent of the audience have held. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a$75 sponsored job credit at Indeed.com slash podcast.

5:18That's Indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed sponsored jobs. This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web. like restoring a vintage motorcycle from a 50-page restoration block or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required compatibility and availability varies 18+.

5:52Total income is 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. 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? 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.

6:28What is it? On top of that, with the 2 billion downloads, it kind of 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, which is 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 10 years old. TikTok itself is not even five years old.

7:02In 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. Let's go back to that question of what it is. How do you define it? 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. I thought I'd just share with you and our listeners what came out of their impressions. 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.

7:36And guess what? There is a remote. It's called the AI. 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.

8:17It has even become an ed tech platform. There are people teaching on TikTok. So this question of what is it, I think is really, really fascinating. And I think where I come down is where one of the, 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. What's different about the AI that TikTok is using? 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.

8:56That'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, though, is that for TikTok's mainstream users, people who are committed users, the average user has about 2 ,000 meta tags that ByteDance, the owner of TikTok, has developed in order to profile each individual user.

9:41So 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… When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications, and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a$75 sponsored job credit at Indeed.com slash podcast. That's Indeed.com slash podcast.

10:17Terms and conditions apply. Need a hiring hero? This is a job for Indeed Sponsored Jobs. This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome, that's new. They can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18+. Phone, you're on the speed of your connection, But maybe the most indicative is, of course, your behaviors within the app.

10:55What 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, very well.

11:34And again, unlike Google, unlike Facebook, and like any other platform you can think of, you have told it nothing or everything, depending on your point of view. Like most things with AI, it's both impressive and scary at the same time, right? Absolutely. Let's talk about the origins of the firm a little bit. 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. The founder of ByteDance, the parent company of TikTok, is 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 in Beijing, as they were all over the world, were spending less time reading broadsheet newspapers, print media, and more time reading news on their smartphones.

12:20And so his initial insight was that he could ride effectively two waves. One was the rapid pace of smartphone adoption that had 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 Cao Cao, 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.

12:56But 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 Tao Chow, he had an insight, which is maybe this is a recipe for a brand new app offering. In this case, it was Duyin, 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.

13:38Is 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 know, you couldn't maybe when he first started with Tao Chow. Did he hit on the right timing and for some reason that allowed this to take off? Absolutely. 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.

14:13And of those, about 80 percent 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. And it happened very, very fast in China because of Chinese manufacturers, Xiaomi 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 the transition in mobile telephony from 3G to 4G, Hence the availability of wireless broadband connections and essentially glitch.

15:14Need a hiring hero? This is a job for Indeed Sponsored Jobs.

15:44free streams, not just of content, all other Facebook newsfeed, but actually video content. 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. Brian, that is a fascinating question. Let me see if I can answer that in a couple of ways.

16:17So it's supposed to 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 and 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, Duyin in China, is pretty heavily censored. And so if you go into Dooyin with 5 ,000 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 Dooyin.

16:57So another aspect of the 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 kind of 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.

17:32You'll be interested to know that the new mission of the company is to inspire creativity and to bring joy. It's hard not to get behind that mission, isn't it? I mean, 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?

18:01Well, 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 Marr, 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 very easily hate, even loathe it when it's interruptive, when it's spamming us, when it's taking over our devices.

18:37So 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 and ByteDance globally.

19:26I 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 the standpoint of revenue generation is advertising. And then the question is, given that they are pursuing advertising. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications, and more. Spend less time searching and more time actually interviewing candidates who check all your boxes.

20:01Listeners of this show will get a$75 sponsored job credit at Indeed.com slash podcast. That's Indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed Sponsored Jobs. This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome.

20:35Check responses set up required, compatibility and availability varies 18+. 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. 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 brands into that platform without stepping on ourselves the way that you described.

21:25There's certainly lots of stories about brands that have misstepped when they've tried to engage with the users 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. The case talks about five ad products, and we have a lovely exhibit with visualizations of these, and they all look kind of 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.

21:55Anyone 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 5 or 15 seconds, so that's the second ad unit. The third is something that we would recognize from broadcast television, an 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.

22:28One 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 of this unique expression 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. You know, 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.

23:02The first brand to do a hashtag challenge on TikTok was Guess Jeans. Guess Jeans ran a hashtag challenge called In My Denim. 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 guests 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 simply 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 know, you've had too much to drink at night and you feel troglodytic.

23:45And 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 guest jeans. So it raises this really interesting question, which is if you are guests 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 in quotes because I'm not sure everyone considered this advertising.