TikTok Explained: Data, Network Effects, and Content
Tuesday, June 16th, 2020
Welcome to the sixth edition of Nuggies, an email newsletter that aggregates articles and commentary on business, economics, startups, and more, in bite-sized nuggets sent right to your email twice a week. Created by and for college students.
When most people join TikTok they see videos of dance and lip sync challenges, maybe some stories or a “put a finger down” video. Within one week of joining TikTok, I saw the following video of a guy in a Notre Dame t-shirt explaining a financial model of multiple airline stocks.
https://www.tiktok.com/@acouplecents/video/6812045326409600261
My first thought. How did I get here?
For context, I’m a finance major at Notre Dame. At the time, I was building financial models for class and reading equity research reports online. It was a little spooky.
If you haven’t used TikTok before, it’s a bit different from your typical social network. Platforms such as Twitter, Instagram, and even the late Vine all basically work the same way. You find accounts to follow and see the content made by the people you follow in a vertically scrolling feed.
TikTok is different. While a feed of content from people you follow exists, it’s intentionally secondary. The main feed is called the For You page, which shows TikToks specifically chosen for you by a machine learning algorithm. On TikTok, you don’t curate your feed like you would on Instagram or Twitter— data and algorithms do.
By analyzing your behavior on TikTok, including how long you view a video before skipping, likes, comments, and shares, the algorithm gets better and better and learns what you like. In my case, the algorithm figured out I liked finance.
On the content side, newly uploaded videos get shown to people randomly in-between more popular videos. By analyzing user responses, TikTok can decide whether to show the video to more people or not.
Network Effects and Social Media
One of the things that makes social media platforms useful and also difficult to compete against is network effects. A network effect is a phenomenon in business and economics in which a platform becomes more useful as more people use it.
TikTok becomes more valuable as more people use it because additional users produce content and data. More content and data improves TikTok’s algorithm and each user’s personal experience improves in quality.
Because of the algorithm and For You page, TikTok takes advantage of network effects in content discovery. In platforms like Instagram and Twitter, the user must go out and find content they like. This is usually limited to people the user knows, either close friends, celebrities, or organizations. This means content discovery is limited by the user’s existing known network.
In contrast, TikTok’s For You page means that the best content wins regardless of how many followers a creator has or how many people know who that creator is. The result is stronger network effects for content creators and better content discovery for users.
TikTok understands this dynamic and tries to strengthen it with fun creative tools for editing videos and adding music and effects as well as trends and challenges. It’s also easy to use audio from another video or embed another video in a duet.
While it’s fun and an activity on its own to spend hours learning a new TikTok dance or building a massive chain reaction, creators do so because it has a chance of blowing up. Algorithmic discovery makes the network larger and creates a meritocratic system which incentivizes creators to produce the best content possible.
Well-Designed User Interface
Other social media companies aren’t unaware of the benefits of the algorithmic feed. The issue is partly the legacy value proposition of their platform and user interface design challenges.
As an example, Instagram started as a social media platform to share pictures with your friends and stay connected. As it grew, they added the Explore page. (In case you didn’t know, it’s the tab with the magnifying glass icon.)
Explore tries to solve the content discovery problem with an algorithmic approach, but the issue is that it’s the secondary feed. When you open Instagram, you see your own curated feed of people you follow. When you open TikTok, you see the algorithmic page. It might seem like a small difference, but it makes a huge impact.
Does this make TikTok a good business?
TikTok is owned by a Chinese technology company called ByteDance, which also offers a similar app in China called Douyin. TikTok as we know it today was created after ByteDance acquired and partially combined another social media platform, Musical.ly.
Investors are excited about the algorithmic feed because they think it makes consumers more open-minded to discovery which makes ads less intrusive (if you even realize they’re an ad at all).
ByteDance is still a private company, but is valued at over $80 billion dollars. For context, Snap (the parent company of Snapchat) currently has a market capitalization of just under $30 billion.
TikTok, China & Privacy
It is worth noting the security concerns around TikTok. The United States has initiated an investigation into national security concerns with TikTok. Both TikTok and Bytedance collect user data, and by Chinese law, are required to provide any data to the Chinese government if it is requested.
ByteDance stands unique among tech giants for successfully having a strong footprint in both the United States and China. American tech companies have notoriously struggled with entering China due to regulation, competition, and fraud. Where the likes of Facebook and Uber have failed, ByteDance has so far succeeded, making the trajectory of the company incredibly unique.
Thank you for reading! Nuggies is created by Thomas Pero and Spencer Koehl, two undergraduate students at the University of Notre Dame.
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