We have previously discussed the rising power of Chinese Internet companies such as Alibaba and Tencent, as they not only dominate in China but also expand some of their services to Southeast Asia. With regard to global expansion, however, Chinese tech giants have limited success, except for TikTok. Owned by the startup ByteDance headquartered in Beijing, TikTok is the first Chinese social video app that is doing extremely well globally, available in 155 countries and 75 languages and has grown to 1B+ monthly active user (MAU) including 122M in the US.

For readers who are not familiar with TikTok, it is a short video app displaying an endless scroll of 15-second video clips. Different from Facebook and Snapchat which rely on social graphs to recommend content to their users, TikTok uses machine learning to analyze user behavior and then tailors entertaining newsfeed even if a viewer has never followed anyone. As users spend more time liking and sharing videos, TikTok’s algorithm improves further and typically within a day, the app can get to know the user very well.

For example, a teenage girl who loves dancing usually sees clips of people dancing, while her elder brother who is a dog lover could regularly get clips of puppies. As a result, TikTok has surged in popularity as it is interactive and addictive. ByteDance has stated that U.S. users open the app 8 times a day and individual sessions on the app are the longest at 4.9 minutes, which compares favorably to Facebook (4.7 minutes), Instagram (3.1 minutes), and Snapchat (1.6 minutes).

In addition to its algo-based recommendations, the success of TikTok is also driven by spending heavily on user acquisition from other social platforms. The app initially struggled in the US, but in November 2017, ByteDance paid $800M to acquire the American app Musical.ly with100M users and rebranded it as TikTok. The company spent nearly $1 billion on advertising the app in 2018 and according to Apptopia, 13% of all the ads seen by FB’s Android users were for TikTok. We believe that paid user acquisition is important, as TikTok captures an enormous amount of user data, it acts as a moat for a highly sticky and scalable business.

Aside from user engagement, the revolutionary algo-based approach also creates a different value proposition for advertisers. Different from the traditional model where ad agency tries to create a curated campaign, advertisers can engage users to create self-generated videos based on those campaigns. As a result, there is early evidence showing the click-through rate of the video campaign could be 4X industry averages. We also see many publishers are proactively diverse in their traffic sources from Google and Facebook to TikTok. Are days of simply relying on traffic from search (dominated by Google) and/or social (driven by Facebook) gone? We shall see.

Given its huge success, incumbent social network players are not sitting tight. Mark Zuckerberg, FB’s CEO, has acknowledged the threat posed by ByteDance in an internal meeting and Instagram launched Reels in Brazil, a clone of TikTok in Nov 2019. Meanwhile, TikTok is unsurprisingly facing increasing regulatory scrutiny in the US. With escalating tensions between the US and China, American politicians have expressed deep concerns around the application given Chinese root.

Despite the regulation risk and increasing competition, ByteDance is still the world’s most valuable startup on the explosion of TikTok, reaching a valuation of $75B in 2018, according to CB insights. The company has considered an IPO in Hong Kong or the US as early as this year. The company was set to lose about $1bn in 2018 but was confident of making a profit in 2H2019. The company was expecting 18B revenue in 2019 and $29B in 2020 as the company is aggressively expanding its ads inventory. We continue to closely monitor any new development of TikTok and look forward to seeing more killer apps built by ByteDance’s ecosystem in the 5G era.