Ban or no ban, TikTok is still the app of the hour: it will continue to make its rivals sweat.
I
will begin with a question: Is Silicon Valley secretly planning a victory dance
if TikTok is banned? During the time when the CEO of the social media app
TikTok, Shou Zi Chew, was being questioned by Congress last month, TikTok's
more than 100 million users in the United States were concerned that their
government was planning to ban the Chinese-owned platform due to concerns over
national security. Their agony stands in stark contrast to the jubilation that
can be seen in Silicon Valley, where locally established social media companies
would be overjoyed to see the back of their well-known competitor. Shares of
companies like as Meta, Pinterest, and Snap all see their prices rise whenever
there is a rumble emanating from Capitol Hill.
The future of TikTok is now uncertain. But what is now abundantly evident is that the app has irrevocably altered social media in a way that will make life more difficult for social apps that are already in existence. Within a span of fewer than six years, TikTok has weaned the world off of traditional forms of social networking and hooked it on short films that are selected based on an algorithm. Users are crazy about it. The problem for the platforms is that the new model generates less revenue than the old one did, and it's possible that this will always be the case.
Incredible progress has been made in such a short amount of time. Since its introduction to the American market in 2017, TikTok has amassed a greater number of users than all but a select group of social media applications that have been available for more than twice as long (see table 1 for additional information). It dominates the market share of its target demographic, young people. A daily hour is spent on TikTok by young adults in the United States aged 18 to 24. This is twice as long as they spend on Instagram and Snapchat combined, and more than five times as long as they spend on Facebook, which is mostly used by this age group to communicate with their parents and older relatives.
Figure 1:
Monthly Active Users of Social Media in the United States (in Millions)
|
Social Media |
Monthly Active Users in 2022 |
Forecast for 2024 (Monthly Active Users) |
|
YouTube |
220 million |
235 million |
|
Facebook |
170 million |
168 million |
|
Instagram |
125 million |
130 million |
|
Snapchat |
84 million |
84 million |
|
Twitter |
49 million |
47 million |
|
TikTok |
91 million |
110 million |
Source: Culled from The Economist (2023)
Because of TikTok's success, its competitors have been forced to develop new features and capabilities. Reels is a TikTok clone that has been grafted onto Facebook and Instagram. Reels was introduced by Meta, the company that owns both Facebook and Instagram. Both applications' main feeds have been transformed into algorithmically sorted discovery engines. Pinterest (with Watch), Snapchat (with Spotlight), YouTube (with Shorts), and even Netflix (with Fast Laughs) have all developed products that are conceptually comparable to one another. The most recent makeover, which was unveiled on March 8 and was inspired by TikTok, was carried out by Spotify, a music-streaming app. The homepage of Spotify now displays video segments that users may skip by swiping up. Douyin, the Chinese version of TikTok, is having a similar impact in China, where digital giants like Tencent are increasingly making short videos the focal point of their product offers.
As a direct consequence of this, short-form video content now dominates across all social media platforms. The available published research indicates that of the total 64 minutes that the typical American spends per day using such services, 40 minutes are spent watching video clips. This is an increase from the previous level of just 28 minutes just three years ago. However, there is a catch to this change that you should be aware of. Despite the fact that consumers have an insatiable desire for short videos, the format is proving to be less profitable than the traditional news feed.
The Great Monetization Race
TikTok generates revenue from its audience in the United States at a rate of just $0.31 for every hour that the average user spends on the app. This is a third of the rate that Facebook generates revenue and a fifth of the rate that Instagram generates revenue. According to estimates provided by a research company called Insider Intelligence, TikTok will generate approximately $67 from each of its American users this year, whereas Instagram will make more than $200. And this is not an issue that is unique to TikTok. As of right now, the monetization efficiency of Reels is significantly lower than that of Feed. Therefore, the more that Reels expands, it takes some time away from Feed, and Meta actually loses money as a result of this. In March of last year, Meta's chief executive, Mark Zuckerberg, shared this information with investors.
The notion that TikTok, Reels, and the other sites for short videos are still in their developmental stages provides the most reassuring justification for the revenue discrepancy. TikTok is still "the other kid on the block" when it comes to the world of social media advertising, and the app did not begin serving advertisements until 2019. Because it takes time for marketers to become familiar with new products, platforms typically limit the number of advertisements they display while they are working to attract new customers. A new service like TikTok cannot truly wave a magic wand and announce that its new advertising are 'premium' without any performance history to back it up, thus it is only reasonable that they begin at the end of the line.
Meta identifies this state of the affairs as one that it has visited in the past. It took some time, but Instagram's Stories feature is now a lucrative revenue generator for the social media platform. Meta is taking a more aggressive approach to monetizing Reels, and the company anticipates that it will stop losing money by the end of this year. However, the company recognizes that there will be a significant amount of time before Reels achieves the same level of profitability as the previous news stream. The management of Meta is aware that it took them a number of years to successfully bridge the gap that existed between Stories and Feed advertisements. They anticipate that Reels will require a greater amount of time for this.
Some people question whether or not the gap will actually ever be filled. When it comes to making money off of their users' time, even the most developed video apps are unable to compete with the traditional social networks. YouTube, which has been operational for 18 years, produces far less money per user hour compared to social media platforms like Facebook or Instagram. In China, where short-form video became popular a few years before it did in the West, the monetization rate of short-video advertisements on local e-commerce applications was only about 15% last year. This is significantly lower than the global average.
A news feed consisting of text and graphics will invariably have a higher ad load than a video will, for a number of reasons. If you scroll through Instagram for five minutes, you might see dozens of advertisements, yet if you watch a five-minute video on YouTube, you might only see three adverts. When customers are in a more passive mindset, such as when they are watching video rather than scrolling through a feed of friends' updates, they are less likely to click through to a product page to make a purchase. It costs around half as much to book 1,000 impressions for a video ad on Instagram Reels than it does for 1,000 impressions for an ad in Instagram's news feed. This suggests that advertisers view Instagram Reels ads as having a lower likelihood of generating clicks.
When Targeting is a Hit or a “Miss-Take”
Due to the fact that many marketers have not yet created ads in video format, competition in auctions for video advertisements is lower than competition for static advertisements. Large advertisers place a high value on video advertisements and report record interaction on TikTok, where products have become popular with the hashtag "#TikTokmademebuyit." However, the vast majority of small businesses, which are the source of the billions of dollars that social networks have amassed, find it difficult to generate video spots. According to published evidence, just over 40 percent of Meta's around 10 million advertisers employ Reels advertisements. It's possible that artificial intelligence will make it simpler to convince the remaining 60% of people to make video advertising. One senior executive envisions a not-too-distant future in which even a tiny retailer will be able to produce customized video advertisements by merely using voice instructions. In preparation for when it finally comes, half of the lengthy tail has been cut off.
The targeting capabilities of short-video apps are also significantly reduced. The fact that users of TikTok and its many imitators are required to do nothing more than watch and swipe away when they become bored is one of the reasons why the platform is so popular with viewers. This is then analyzed by the algorithm to determine the types of videos (and, consequently, advertising) that the user prefers. The last generation of social networks convinced users to fill out lengthy profiles that included information on everything from their schooling to their marital status. However, this speculation is no substitute for the hard personal data that was acquired by that age of social networks. As a consequence of this, the majority of advertisers continue to view short-form video as an appropriate venue for less specific, so-called brand advertising—that is, advertising designed to increase public awareness of their product—rather than the hyper-personalized (and more value) direct-response advertisements that traditional social networks specialize in.
At least in this regard, TikTok's competitors have an advantage over the original TikTok app. Meta already knows a lot about many of the people who watch its videos and is able to make educated estimates about the rest of the users by utilizing a trove of data that has been accumulated over the course of a decade and a half, at a time when there were few regulations prohibiting tracking users' activity across the wider web. If a new user who is not known views the same videos as a group that is known to be comprised of wealthy female graduates who have children, for example, it is a good bet that the new user has the same profile as the group. TikTok claims that it has made significant expenditures in its direct-response advertisements, including the development of new techniques for evaluating the performance of these advertisements. But it has a ways to go before it can catch up.
In this new and more challenging advertising climate, social applications are not the only ones who stand to lose. To a large extent, the focus of all advertising is on identifying the next-best option. The vast majority of advertisers set aside a certain amount of money to spend on advertisements on a specific platform, and that amount of money stays the same no matter how far it goes. If advertisements on social media become less effective in general, this will be terrible news not only for the platforms that sell those advertisements, but also for the marketers that buy them.
Notes
Guzman, A. (2023, April 11).
There’s a Problem With Biden’s Threat to Ban TikTok: How to Actually Block
Americans From Using the App? Retrieved from Fortune:
https://fortune.com/2023/04/11/tiktok-ban-biden-threat-difficult-risky-implement/
The Economist. (2023, March
21). How TikTok Broke Social Media. Retrieved from
https://www.economist.com/business/2023/03/21/how-tiktok-broke-social-media
Thorbecke , C., & Fung,
B. (2023, March 23). The US Government is Once Again Threatening to Ban
TikTok. What You Should Know. Retrieved from CNN Business:
https://www.cnn.com/2023/03/18/tech/tiktok-ban-explainer/index.html#:~:text=Late%20last%20year%2C%20President%20Joe,little%20more%20than%20political%20theater.%E2%80%9D
Yurieff, K. (2021, January
26). Two of TikTok’s Competitors are Merging. Retrieved from CNN
Business: https://www.cnn.com/2021/01/26/tech/byte-clash-tiktok/index.html
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