Hey! Today, we have a very special guest for you. Adam Conner is not just an OG Margins reader, but he’s an early Facebook and Slack employee that now works for a progressive think tank in DC. Today he writes about competition in the US tech industry and TikTok vs. Facebook.
Hi all, I’m Adam Conner, longtime fan of The Margins, first-time contributor. In my day job I’m the VP of Tech Policy at the Center for American Progress, a progressive think tank in DC. In my past life I was Facebook’s first DC employee, where I helped to blaze the path for politicians to join social media (sorry about that). I was also the first DC employee for Slack, so I’ve worked in two parts of tech, enterprise SAAS and social networking, when they were both competitive (and then one when it wasn’t). That’s why I’m particularly interested in what’s going to happen in Congress a few weeks (the Big Tech CEO hearing originally scheduled for Monday has been delayed for the memorial service for Rep. John Lewis, please take a moment to remember a great man).
Et Tu, TikTok?
Sometime soon, House Antitrust subcommittee Chairman Cicilline will summon the CEOs of Amazon, Apple, Facebook, and Google to testify in the sixth hearing they’ve held on OnlinePlatformsandMarketPower, putting the topic of competition in the tech sector front and center. We will undoubtedly hear extensive references to “competitors” to the Big Tech monopolies, and in particular, about the rise of TikTok. Facebook, my former employer, has regularly named TikTok as a competitor in testimony in front of Congress, in interviews, and even in leaked internal Q&As. And TikTok is larger in size and revenue than Instagram or WhatsApp were when Facebook purchased them. I have always found it odd that Facebook cites TikTok as a meaningful competitor when the history of TikTok’s rise in the west actually seems to provide more evidence of Facebook’s dominance.
With the proliferation of millions of apps, the need to drive installs on a smartphone (as opposed to simple web-based sign-ups), and the lack of any sort of network interoperability or portability, starting and growing a new app is nearly impossible today. When TikTok was ready to contest the U.S. market following its growth in China, it had only one viable strategy: advertising. Specifically, the online ads designed to drive mobile app installs offered by the duopoly that dominates 80% of online advertising, Facebook and Google. In order to try and compete in the U.S. market, TikTok had no choice but to pay its future competitors billions of dollars in ads, giving up critical data on their targeting and successful installs along the way.
An examination of TikTok’s rise in the U.S. shows a narrow path to viability that only an exceptionally well-capitalized company with an already developed technology could even consider attempting. And it leaves me asking, if advertising is the only way to grow an app to viability today, could any app without billions of dollars to spend succeed today? Could any future U.S. startup ever hope to succeed as TikTok has given current competitive conditions?
As Ranjan noted in “TikTok and Tariffs” last year (which I credit with really piquing my interest on this topic), the Toutiao algorithm was making waves in tech circles long before it even made its way to U.S. shores. ByteDance developed its content recommendation algorithm in China for the news app Toutiao that was later adapted to Douyin (the Chinese version of TikTok) and finally to TikTok. The development of this technology in China has raised national security and privacy questions about TikTok in the U.S. that have come to the forefront of public attention recently. I’d argue these concerns deserve appropriate scrutiny, though not the current hysteria.
App Install Ads
Looking at TikTok’s rise in the U.S. starts with the November 2017 purchase of the Musical.ly app by ByteDance for a billion dollars (after Facebook attempts to purchase it reportedly failed). While Musical.ly had an existing install base of around 60 million, it was small compared to the ambitions ByteDance had for it, and it was renamed TikTok in the U.S. in August 2018.
TikTok then settled on the only reliable strategy available to grow a new mobile app: advertising. For all the celebration of growth hacking, mobile app install ads are often the only viable way to quickly build a new mobile app out and create a network that can later be monetized. Mobile app install ads, like App Install Ads on Facebook and App Campaign ads on Google, drive users to download apps to their smartphones.
These ads are a huge part of the online advertising market. AppsFlyer’s annual Global App Install Ad Spend projection from February 2020 estimated app install ad spend growing to $57.8 billion in 2019 and up to $118 billion by 2022. AppFlyer had previously estimated in 2019 that almost 58% of all app installs were driven by “marketing-driven installs (AKA non-organic installs or NOI),” primarily marketing via mobile app install ads. Here’s an example of one of TikTok’s app install ads from the Facebook Ad Library below.
Advertising analytics are notoriously opaque and spend numbers generally kept quiet, so we only have incomplete data and various adtech proprietary metrics to try and glean insights from. We do know that armed with cash, ByteDance undertook an advertising campaign that was reported by the Wall Street Journal to be more than $1 billion dollars in 2018. That breaks down to nearly $3 million dollars in advertising daily. This included nearly $300 million on Google advertisements for TikTok in 2018. There were so many ads that you could find threads on Reddit and other places on how to get rid of the TikTok ads users were seeing (and a lot of offline ads too).
While ByteDance’s ad spending was across numerous platforms, as noted by this graphic from Apptopia in 2018, the majority of its spend was on Facebook. The initial focus on Facebook was logical; Facebook had helped to pioneer the app install ad, and the amount of time their users spent on mobile made them the top choice for app install ads in 2018, with AppFlyer’s Performance Index in 2018 ranking Facebook app install ads #1 in almost all of their categories.
22% of all ads
According to data from the ad and apps analytics company Sensor Tower, TikTok quickly rose to be the #1 share of voice in their measurement analytics of Facebook Ads in Q1 and Q2 of 2018. Reuters reported that “nearly 22% of all ads seen by U.S. Apple device users on Facebook ad network came from TikTok and its Chinese counterpart Douyin” while Bloomberg noted in 2019 “13 percent of all the ads seen by users of Facebook’s Android app were for TikTok.”
But in mid-2019, that focus on Facebook ads began to drop off, and TikTok dropped from the #1 to the #40th app install advertisers, according to Adweek. As Reuters cited,
One source said TikTok calculated it had reached most people likely to use the app, so it shifted to building an ads business to compete against Facebook's...A TikTok spokesman confirmed the trend, saying the company ‘significantly scaled back spending and refined its ad strategy, resulting in an increased return on investment and stickiness among new users.’
Following Facebook, ByteDance’s U.S. advertising focus would shift to Snapchat, where ByteDance/TikTok would become Snapchat’s biggest advertiser in 2018. As detailed in the WSJ:
U.S. tech companies, meanwhile, are waking up to the challenge TikTok poses. Inside Snap, a debate erupted over taking the competitor’s ads. Many employees felt they were aiding a rival trying to lure away its users. Snap decided to keep selling the ads.
That relationship would only grow as AdWeek reported that “TikTok's ad spend with Snapchat quadrupled in a year,” becoming the single biggest advertiser on Snapchat. As Snapchat faced increased pressure from investors to increase profits and challenges in battling Instagram’s success in copying its features, they faced a difficult choice in whether to restrict their largest advertiser in trying to acquire part of their network.
Questions for the Antitrust Hearings
The rise of TikTok as a large social network presents many opportunities to ask questions about the factors that lead to its rise. For instance, this situation raises questions about the viability of growing any new app without billions of dollars in ads.
What does it say about the competitive environment if sustainable organic growth may no longer be possible for new apps?
In a world where app install ads are the only viable option to grow out new networks and app installs, how should we consider the conflict of interest between the networks that make the advertising so valuable and their interest in keeping that network?
Should app install advertisers be allowed to block competitors from advertising on their platform?
Looking at the publicly available data also raises other questions: did TikTok really run out of users that it could acquire on Facebook, the largest social network in the world, in eighteen months? It’s hard to believe that given the amount of money they’ve spent since then on the much smaller social network Snapchat.
What does it say about the competitive environment for new apps that the app Facebook cites most often as a competitor is one that Facebook profited handsomely from and also had the power to limit its growth, had it chosen to do so?
The rise of TikTok as a U.S. competitor should be held up as a cautionary tale. Only once their technology was perfected and they were armed with billions of dollars to spend on advertising, could TikTok attempt to enter the U.S. market. Then TikTok had to spend billions of dollars on competitors’ platforms in order to achieve viability, and access could have been blocked as the competitive threat grew. TikTok could do this because they grew in the huge and sheltered Chinese market and could import that technology and revenue into the U.S., an example of the global competition that Big Tech companies often cite. Yet at home, almost no new U.S. company could ever meet these conditions today.
Mobile app install ads represent the complicated intersection of two of the tech duopolies that we currently live in, and TikTok represents the complications of the global technology competition situation. But while TikTok may be a competitor to Facebook in the U.S. now, that’s only because Facebook decided to allow it to become one and made hundreds of millions of dollars from the app in the process.
Looking at the factors contributing to TikTok’s rise as a potential Facebook competitor highlights the critical question: is it possible for any future U.S. startup to succeed as TikTok has given current competitive conditions? For the committee preparing to question Mark Zuckerberg and the other Big Tech CEOs, the answer to that question is essential.
Margins is a free newsletter on the business of technology, and technology of business. It’s written by Ranjan Roy, a former Wall Street trader turned content strategist, and Can Duruk, a product manager in Silicon Valley. We love computers, journalism, business, and think they all can have a heart. We’d love to have you as readers.