There’s little chance you haven’t heard of TikTok by now. Between the viral dance videos and President Donald Trump’s comments, speculation about the future of the popular video-sharing platform has reached a fever pitch.
Here’s everything you need to know about TikTok: where it came from, why countries are threatening to ban it, and how it could trigger a ripple effect through China’s billion-dollar startup scene.
Where did TikTok come from?
|Main office:||Los Angeles, USA|
|Data centers:||Los Angeles, Dublin, Singapore|
|Monthly Active Users:||800 million|
|Downloads:||over 2 billion|
|Annual revenue, 2019:||$200–$300 million|
|Available in:||141 countries, 39 languages|
TikTok’s origin story begins with ByteDance, a Chinese startup that brands itself as an artificial intelligence company. Its founder and CEO, 37-year-old Zhang Yiming, initially fought his way into the lucrative Chinese market with algorithm-driven content-sharing platforms. The company’s first major success, a curated news-sharing app called Toutiou, had 55 million daily active users within four years of its launch. The app dethroned Tencent — one of China’s most powerful tech giants — as the most-used Android news app in the country.
By 2016, ByteDance had turned its attention to video-sharing platforms. At the time, the Shanghai-based Musical.ly app was leading the global market. It allowed users to lip-sync pop songs and was finding a sizable audience overseas. Kuaishou, another Chinese short-form video platform, was also gaining traction locally. ByteDance incubated two apps that year. One mimicked Kuaishou, the other Musical.ly. Zhang bet that one might catch on.
The bet paid off. The Musical.ly copycat, known as Douyin in China, soared in the spring of 2017. By August of that year, it had more than 1 billion video views per day. By November, in an effort to open the market outside China, ByteDance had acquired Musical.ly for nearly $1 billion. The copycat outgrew the original, and in 2018, the two merged into a single app. It was known as TikTok.
How did it become so popular?
Once ByteDance acquired Musical.ly, it applied its unique business ethos to the video-sharing platform. “I would call Musical.ly more of a product-driven company,” says tech analyst Rui Ma, “and ByteDance a more ‘algorithm-and-operations-driven’ company.” Ma, the creator and co-host of a podcast called Tech Buzz China, says ByteDance’s operational practices, which include hosting creator meetups and outreach campaigns, are often overlooked by English-language media.
TikTok’s hypnotic algorithm keeps users glued to its customized “For You” page with far more precise suggestions than Facebook’s or Instagram’s. This sophisticated content-sharing AI, together with its prowess in the Chinese market — at a time when users were new to mobile internet and social media — paved the way for TikTok’s global popularity. “Every Chinese internet company has to answer the same question,” says Ma. “How do I cold-start this ecosystem when users don’t have existing friend lists?”
ByteDance answered with an algorithmic secret sauce fueling TikTok’s rise into a realm of billions: billions of users, billions of dollars, billions of page views. With coronavirus shelter-in-place orders upping screen time worldwide, the app’s popularity in the U.S. and India has exploded, with downloads in Brazil, Indonesia, Russia, and Mexico trailing close behind.
But with increased popularity comes increased scrutiny.
Why is the platform under investigation?
In November 2019, as TikTok approached 30 million U.S. users, an interagency government panel in Washington called the Committee on Foreign Investment in the United States (CFIUS) launched an investigation into TikTok’s 2017 Musical.ly buyout, which brought ByteDance into the American market.
At the time, CFIUS, which probes foreign investments for threats to national security, did not consider the merger to pose any risk. But over the past year, the panel has shown growing concern about the platform, and in early 2020, it issued regulations that redefine national security to include “economic security,” effectively widening the scope of its investigation into TikTok.
TikTok’s Chinese ownership has landed the social media platform in the same geopolitical crosshairs as Chinese technology companies like Huawei and Tencent: the fact that it operates out of China requires that the company comply with the Chinese Communist Party’s rules and regulations, leaving foreign user data potentially vulnerable to the CCP. ByteDance has said it houses much of TikTok’s American user data in the US and Singapore and would refuse state requests for data in China. But in the current charged political climate, American authorities remain unconvinced by their assertions.
On August 3, ByteDance founder Zhang sent an exasperated internal memo to his staff. “Even though we’ve repeatedly stressed that we’re a privately run business, and despite our willingness to adopt even more technical solutions to allay their concerns,” Zhang wrote, “CFIUS still believes ByteDance has to sell the TikTok U.S. operation. We do not agree with this decision.”
Is Trump going to ban TikTok?
On Thursday, President Trump announced that he would use his emergency economic powers to ban TikTok from operating in the U.S.
The announcement comes on the heels of India’s ban, announced on June 29, under which TikTok and 58 other Chinese apps were banned overnight after fatal military clashes on the China-India border. Experts say India’s ban is largely political and that no clear audit was conducted before the decision. TikTok chose to comply with the ban by voluntarily removing its app from the Google Play and iOS App stores, then shutting down its servers across India. With only a day’s notice — little time to migrate their followings to other platforms — more than 119 million active Indian users were booted off the app.
Although it’s unclear whether Trump can enforce an all-out ban on TikTok, the fate of India’s influencers has shaken American TikTokers, many of whom have taken to the app to post preemptive eulogies.
The executive order puts a 45-day countdown on American companies to cut all business ties with TikTok. This will render TikTok’s operations in the U.S. unmanageable, leaving ByteDance scrambling to sell its U.S. business to an American company before mid-September. As of Monday afternoon, TikTok was reportedly in acquisition talks with Microsoft and Twitter, while the company itself has said it will sue the Trump administration to challenge the ban.
What does Microsoft have to do with all this?
With the future of TikTok’s U.S. operation threatened, Zhang (who briefly worked at Microsoft) has approached the American tech company to buy out the American wing of the business. Microsoft has cultivated deep roots in the Chinese market; LinkedIn and Github, which it owns, are two of the three major foreign-owned platforms in China that host user-generated content. While Google and other foreign-owned search engines have been booted from the Chinese market, Microsoft’s Bing has remained and largely complied with Chinese censorship orders.
Will TikTok be the same after a purchase?
Although Microsoft’s success with Xbox has cemented its place in the gaming market, trendy and youth-oriented it is not. Some worry a Microsoft-owned TikTok would share the fate of the company’s failed consumer-facing products, like Zune or Groove Music.
It’s not clear what would be included in the acquisition deal between ByteDance and Microsoft. New York Times tech columnist Kevin Roose argues that TikTok’s algorithms “could be the most valuable asset the company owns.” The success of the algorithm, though, may be difficult to maintain without ByteDance’s stewardship. “The magic in it is sort of in the optimization,” says Rui Ma. Once ByteDance and Microsoft start to operate the algorithms separately and make their own optimization decisions, the same TikTok could split into two very different products.
After Microsoft announced its interest in an acquisition, analysts estimated the valuation of TikTok’s U.S. services at between $20 and $50 billion — very much within cash-rich Microsoft’s budget. But that valuation may dip with the growing political risks attached to the merger. The Beijing-based financial-news publication Caixin has reported a source close to the negotiation as saying that, as of August 7, the valuation had been lowered to $10 billion. That would be a huge loss for ByteDance, a company whose global ambitions distinguish it from most Chinese tech giants. TikTok is far and away its top-earning app.
What does an American TikTok buyout mean for other Chinese startups?
TikTok’s story has become a cautionary tale for other Chinese entrepreneurs. In the short term, Chinese companies will be incentivized to stay in the domestic market, according to Jennifer Zhu, a Hong Kong–based entrepreneur and investor. “Your choice is between Do I develop the next three provinces that have 100 million people? or Do I go to the U.S. and have this massive risk?’” says Zhu. After the hostility surrounding TikTok’s situation, she expects more Chinese entrepreneurs to choose the former.
Investor hesitation couldn’t come at a worse time: while China’s venture-capital market is the second largest in the world, it has seen a steady decline over the past few years. In the first quarter of 2020, thanks in large part to the pandemic, the market shrank by 60%. As more Chinese apps undergo foreign scrutiny, both Chinese and overseas investors will think twice before backing a Chinese company with global ambitions.
The video-sharing app’s potential American buyout may signal a sea change in China’s vibrant startup ecosystem. “Personally, I’m pretty pessimistic,” says Rui Ma, who regularly speaks with investors in the market. “I don’t see them as being interested in Chinese companies that are going to go global.”