In just three years after its launch in 2017, TikTok has taken the social media world by storm. With around 1.9 billion lifetime app downloads and about 800 million monthly active users worldwide, TikTok has become the 7th most downloaded mobile app of the decade, from 2010 to 2019.
TikTok’s growth was so rapid that incumbent social media company Facebook even launched its own short-video app Lasso in the US in November 2018. However, Lasso was only downloaded by 70,000 US users within four months of its launch in comparison to about 40 million users for TikTok in the same amount of time.
So how did TikTok become an internet sensation and what is its business model?
Let’s find out!
How TikTok Started
Today we all know that TikTok is a short-video app used by youngsters all around the world, but it didn’t start under the name of TikTok. It first began under the name Douyin, launched in 2016 to the Chinese market by the Beijing-based company ByteDance.
Similar to Facebook, ByteDance is a Chinese company that owns several other popular networking apps, and it was founded in the year 2012 by CEO Zhang Yiming, a former Microsoft engineer and serial entrepreneur.
Just within a year of its launch, Douyin soared to 100 million users and in 2017, it launched iOS and Android versions in international markets under a new name – TikTok.
Soon after its launch, TikTok reached 500 million global active users and rose to the top of the charts in many Asian markets. In 2018, TikTok ranked No.1 among free app downloads on app stores in Thailand and ranked fourth worldwide as the most downloaded non-gaming app.
However, while TikTok was rapidly growing in popularity all over the world, another short-video app had already risen in the U.S. – Musical.ly, which had launched in 2014 and allowed users to create 15-second lip-syncing music videos.
Towards the ending of 2017, TikTok’s parent company, ByteDance purchased Musical.ly for about $1 billion and operated Musical.ly and TikTok as two separate social media platforms until August 2018.
To create a larger user base and officially enter the US market, TikTok merged with Musical.ly in 2018. All existing Musical.ly profiles and data were consolidated into TikTok and Musical.ly was shut down.
Soon after that, in October 2018, TikTok became the most downloaded app in the US and the first Chinese app to achieve this feat. Then at the beginning of 2019, TikTok and Douyin together reached one billion app downloads all over the world, excluding Android installs in China.
One major reason why the number of TikTok downloads have sky-rocketed is due to its popularity in India, which contributes to about one-quarter of TikTok’s total downloads. 188 million TikTok downloads were attributed to India in just the first quarter of 2019, surpassing even Facebook at 176 million.
In 2020, TikTok became the most downloaded non-gaming app in the United States in January and the most downloaded app in India in February. Douyin and TikTok are essentially the same app, except that they run on separate servers to comply with Chinese censorship restrictions.
TikTok’s Business Model
There are two ways that TikTok earns money through its app:
- TikTok Ads
TikTok hasn’t developed a considerable advertising business yet, but many companies have successfully used influencers and sponsored hashtag challenges on TikTok to get their message out to the youth, and have started taking an interest in showing ads on TikTok due to its growing popularity.
TikTok is also planning to bring out a self-serve ad model that is currently being beta-tested, which will make it much easier for marketers to purchase ads without having to go through with the TikTok sales team. Currently, TikTok charges its advertisers on a CPM (Cost Per Thousand Impressions) basis and the ad creating process is quite similar to other social media platforms.
2. TikTok Coins
Another source of income for TikTok is virtual coins through which both TikTok and TikTokers can earn money. TikTokers that have at least 1,000 followers can earn virtual gifts by broadcasting a live video.
If users like their content, they can send virtual gifts as tips to them, but each gift is worth a certain amount of coins and the users have to purchase these coins with real money through the app. Then they can use these coins to send gifts to their favourite content creators.
These coins start at 100 for $0.99 and go up to 10,000 for $99.99 and the virtual gifts range from Panda which is worth 5 coins to Drama Queen which is worth 5,000 coins. Data from Sensor Tower notes that the 100 coin pack is the most popular with the users, followed by the 500 coin pack.
After receiving the gifts, the Tiktokers can convert them into diamonds, which are worth $0.5 each. However, TikTok charges a 50% commission first and then adds the rest of the amount to the TikToker’s account. The TikTok users can only withdraw their money once they have reached $100 and can’t withdraw more than $1,000 in a day.
TikTok even began testing shoppable ads in November 2019, which would allow the creators to place social commerce links in their posts, through which users could complete a purchase without leaving the app. However, this option is still in beta with no news of a broader rollout.
In 2019, TikTok generated $176.9 million in revenue, out of which $88.5 million was generated in the fourth quarter alone. However, before the introduction of ads in the course of 2019, TikTok’s revenue was generated through in-app purchases and according to Sensor Tower, it brought in $3.5 million from TikTok users all over the world in October 2018, which represented a 275% increase over the revenue in October 2017.
TikTok’s Biggest Investors
In 2018, TikTok had secured $3 billion in a fund-raising round led by SoftBank Group Corp., including firms like KKR & Co. and General Atlantic, which pushed ByteDance’s valuation to $75 billion.
The latest investment firm to build a stake in TikTok is Tiger Global Management through a Secondary Market round on March 30, 2020. Tiger Global Management has not disclosed the amount invested. However, Financial Times reported that after the company’s shares were recently sold on secondary markets, investors have implied ByteDance’s valuation to now be between $90 billion and $100 billion.
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