What Is the Secret of TikTok / Douyin’s Success? (Tech Strategy – Podcast 20)

In this class, I talk about why TikTok / Douyin took off so rapidly and powerfully.

You can listen here or at iTunes, Google Podcasts and Himalaya.

Choose two options for why TikTok / Douyin has grown so fast.

  1. Addictive Product. Short personalized videos focused on memes, comedy, and lip syncs are a psychological hack.
  2. Easy to Use and Highly Shareable Content Types. Tap into CDCN.
  3. Audience-Builder Digital Platform
  4. Network Effect, including data network effect (also called learning effect)
  5. First mover in new space
  6. AI and Digitized Operating Model.
This is part of Learning Goals: Level 4, with a focus on:
  • #12 the Basics of TikTok and Audience-Builder Platforms

Concepts for this class:

  • Digital Platforms: Audience Builder
  • B2B Customer View: Shareability, Word of Mouth and Virality
  • China Digital Consumer Network
  • Network Effects
  • First Mover
  • AI and Digital Operations

Companies for this class:

  • Bytedance / TikTok / Douyin

Photo Source: Bytedance


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

—–transcription below

Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the question for today’s class is, what is TikTok secret? How did this company go from an idea to global success so powerfully, so quickly? I mean, what was it? And generally when you see something like this happen, which is very rare. You know, it’s not about being smart or working hard. No, they’ve tapped into something far more powerful that is launching them upwards. So that is gonna be the question for today is what did they tap into? What’s the engine of this phenomenon? So we’ll get into that in a minute. But first, if you haven’t subscribed, please do so. You can go over to jeffthousand.com and sign up there and there’s a free 30 day trial. And you know, most of the content we’re doing as part of this class is now. paywall than for members, subscribers only. So a lot of what we’re gonna talk about in today’s class about audience builder platforms and things is stuff that members know about but we haven’t talked about outside of that setting. So there’s a lot of advantages to do that. It’s a lot of fun, join in, it’s great. Okay, let’s get into the topic. Now the structure for this class is going to be, I’m gonna give you some sort of choices for, you know. What is the engine? And I’m gonna ask you to make a guess or make your best shot. And then we’re gonna talk about TikTok, give you some of the basics information on that. Then we’ll talk about some ideas that I think are sort of the key ideas, concepts that relate to this company. And then at the end, we’ll vote again and I’ll give you my answer after that. So we’ll sort of take two passes at it and hopefully your answers will change or evolve from one to the other. Now for those of you who are subscribers, the learning goals that we’re gonna talk about are basically learning goals 12 and 13. And number 12 is really what we call audience builder platforms and a couple companies that really rely on that like TikTok, Dowin, Youku, YouTube companies like this, Instagram. That’s a pretty big idea, this idea of, when I mentioned, when we talked about digital platforms before, we mostly talked about marketplace platforms. I think there’s probably six to seven major types of digital platforms you see today. Marketplace is the one people talk a lot, that’s Alibaba, that’s buying and selling goods. Audience Builders, I think, is another common one, so that’s gonna be sort of today. That’ll be Learning Goal 12. Learning Goal 13, we will start to talk about machine learning and AI for the first time, I’ve been sort of slowly moving towards, you know, this whole class has been about digital, data, data technology, digital tools, sensors, smartphones, all of that. Well, I mean, the big so what in digital is now turning out to be AI machine learning, which is really just a type of software. So it’s a data technology, but everyone thinks it’s this big other thing. It’s got some fancy names. And we’re going to start to get more and more at that into that as a subject. So that’ll be the learning goals for this one. Number 12, number 13, TikTok and audience builder platforms is 12 and machine learning AI is number 13. Okay. So let’s talk about bite dance and TikTok. And you know, this is pretty cool company. When people talk about digital China, you’re really talking about Beijing. I mean, it’s All of these companies I’m talking about, I mean, most of them were 10 minutes away from my office at Peking University. So ByteDance was founded in Beijing. I mean, there’s some in Shenzhen that’s probably number two in terms of places. And then Hangzhou, obviously, because of Alibaba and some others. But really, it’s overwhelming Beijing. Like, if you’re a downtown Beijing, you would never know this because downtown you have the financial center, you have the Forbidden City, you have Tiananmen Square and all that. But outside of Beijing, beyond the Third Ring Road, in the Northeast, the Northwest, and the Southeast, there are new developments, sort of almost like business parks that are being built out there. And that’s where these companies are. Like if you go to the Northwest, which is where Peking University is, you go up Line 4, you go past the Third Ring Road, you see Peking University, Tsinghua, well that’s where you have Zhongguancun, which is a business park. You know that’s Ofo and Mobike and some of these out there. If you go even further north you get to DD, you get to Baidu, you get stuff like this. If you go sort of to the northeast of the city, well that’s when you get companies like Meituan. And if you go to the southeast that’s where like JD has their big facility and stuff down there. So it’s really kind of outside of downtown. If you go downtown you wouldn’t see it. It’s you know it’s investment firms and stuff like that. Anyway, so Bike Dance was founded 2012 in Beijing, Jiang Yimin, young guy in his 20s with some partners. I don’t really know their names off the top of my head. And they were kind of this one of the first of what we call the new generation, this new wave of companies that was founded 2012 and onward that are really AI first companies. They’re usually founded by people whose background is machine learning. And that made them different than the previous generation the DDS and the JDs, those were mostly founded five or 10 years before. So this was kind of the latest wave that came out and there’s a handful of them. A lot of the facial recognition companies, Computer Vision, Sense Time, Meg V, all of these, iFlytech, and then obviously ByteDance is one that people talk about as sort of an AI first company, that’s their core competency. And they’ve rolled out a series of products. really services that use this in a very clever way. So, you know, ToeTiao was kind of their first big hit, although it was their second product, but it was their first pretty big hit, which is just, it’s Chinese for headline. And it’s the news rat aggregator. They just, you know, they search the web and what people are reading and then aggregate it. Then you go online and you get your own personalized feed. And it turns out AI is really good at recommendation engines. And as we’ll talk about later in this class, what they started to do which was very different. I mean if you go to Alibaba they use AI, if you go to Amazon they use AI, if you go to Netflix, you know they all have recommendation engines where you just watched a video on how to fly an F-16 which I just watched today, it was pretty cool. And then they show you five or six other, here’s more videos based on what you’ve seen, would you choose those? They make recommendations. That’s not that new. What ByteTime, ByteDance and these companies have done that’s different is they went one step further. I mean AI recommendations thus far were like a digital tool as part of the workflow and decision flow of a human organization. You know they make the recommendation, the customer decides if they want to click on it and then it would be shown to you or you buy one product they show you another product you decide if you want to buy it and then you know it would be shipped or whatever. What ByteDance and a lot of these companies are doing is they’re automating the entire process. So there’s no human being involved at all. Totiao, TikTok, they don’t ask you to decide. Not only do they have recommendations for what you should watch, they show it to you. You don’t engage. I mean, you just sit there and you flick the button and the next one comes up on its own. They’ve taken the consumer out as well as every other human being out of the process. It’s a software run engine operation from start to finish. And that’s a powerful move. And I’m gonna talk a lot about that in AI. Okay, so that’s what they started doing. They did it with headlines. They did it with videos. They did it with some gaming stuff. But generally they’re searching for content or they’re getting people to put up content and then they search it and then you go online and you get a recommended newsfeed. that just shows you one after the next of this. And you literally don’t have to do anything. You just flick your finger and the next video comes up, but there’s no decision making at all. And they got very good at the psychological aspects of this. So that’s kind of, you know, bite dance in a nutshell. If you look at TikTok, Douyin in particular, Douyin is the Chinese version, TikTok is outside of China. I mean, this is them applying the same idea to videos. Before they might have done texts, they might have done music, they might have done memes, they might have done jokes. This was applying that same sort of, you know, recommendation and sort of viewing engine to short videos. And you know, they came up with this idea, they didn’t come up with it, but they did it really well, which was 15 seconds. That’s the video. And 15 second videos, you flick through them very quickly because they’re very quick. That’s very different than YouTube where you might watch for 10 minutes. So you’re going through a lot of videos very quickly, which generates a lot of data and feedback for them, which helps their recommendation engine get smarter. So that’s nice. It also turns out it’s a lot more addictive. It’s a lot more engaging. The analogy I use is if YouTube and Youku are Coca-Cola, you know that, okay, Coca-Cola, that’s Coca-Cola is sugar and caffeine in a can. That’s what it is. You can buy a lot of sodas in life. they don’t sell as well as Coca-Cola. Why? Because they’re not loaded to the gills with sugar and caffeine. You know, that was their bit, they’re in the caffeine business for the most part. Okay, if YouTube is in the, hey, this is an entertaining business and they’re Coca-Cola, TikTok is like Red Bull. They took the addictive aspects and just juice them up. You know, instead of 10 minutes, it’s 15 seconds. And they show you things that are highly shareable and that are very popular. I mean, they’re basically feeding you whatever you like to watch, they’re gonna feed you it all the way. If you like to watch videos of girls dancing and shopping malls, you’re gonna see girl after girl. I mean, it’s just, and this gets them into trouble with content a lot because they’ve been criticized that some of their content is too vulgar. And that’s happened in multiple countries because they’re literally showing people exactly what they want in 15 seconds, flick the next screen, flicks the next screen. So, you know, on that side, you know, video sharing turned out to be very, very popular and to have some powerful psychology to it. So that’s kind of what they started. Dough in TikTok, I mean, they were founded in 2012, but TikTok really didn’t start off, you know, take off until 2017, 2016. They launched in 2017 outside of China, but they were here a little bit before 2016, late 2016, they were launching in China as Douyin. And this is one of these ones where it’s like, they obviously caught lightning in a bottle. Like when you see the numbers of how fast they took off, where suddenly, you know, it’s in 150 markets in the world one year later. You know, one year and a half from when they enter India, like 2000, mid 2018, they’ve matched Facebook. When you see that sort of adoption, there’s clearly they’ve got a popular product. You know, they’ve got the hot app. It’s taking off on its own. And by the time we get to late 2019, now it’s early 2020, you know, they’re the seventh most downloaded mobile app anywhere, depending on how you measure these things. You can argue that they’re second or third in the United States depending how you count. I mean WhatsApp tends to be number one but then there’s Instagram and Facebook and you know they’re in the top five or ten pretty much anywhere they are and that’s pretty amazing giving the time frame. Okay so that’s a little bit of basics about the company. I’ll talk more about it but let’s take a vote first. I’m going to give you six options for this very I think important question. What’s the secret of their success? What’s the engine they tapped into that rocketed them upward? And I ask this question a lot. Like when I look at Macau, Macau has a similar story. If you go back to 2003, 2004, 2005-ish, Macau took off like a rocket ship in terms of money. It went from nothing to three to four times Las Vegas in revenue in like seven years. I mean, it was crazy. So my question is, okay, what was the engine there? I think it’s gambling. I think the economics and psychology of gambling are very powerful. How did Facebook take off originally? Social networking turned out to have a very powerful economic aspect and psychology. Five hour energy, you know this little drink that comes in the little bottles? That took off like a rocket ship too. I think that’s caffeine and sugar placed on the counter instead of in the aisles. when you check out at a cashier, they have those old things in a tray next to the cashier. I think that’s why I kind of always look for these simple solutions if it’s this powerful. So I’m going to give you six options for TikTok. Option number one, addictive product. It just turns out that highly personalized short videos, especially when they have music in them, when they’re memes, when they’re comedy, when they’re lip sync, which is what TikTok focuses on, it just turns out that that’s very addictive, that this was a psychology hack more than anything else. And I think that’s true of a lot of the famous internet companies that people talk so much about, oh, this one has a digital platform and this one has network effects. I think a lot of the times like companies like Facebook are really just good at hacking human psychology. So we’ll call that option number one. addictive product. This is a psych hack. And I’m putting these in the show notes so you can see the list there. Number two, it turns out it’s just really easy to use. Maybe it’s not a psych hack, but it turns out it’s just a super easy product to use. You don’t need to, not just to view, but to make your own little videos. You just, you literally need one finger and you can flick from screen to screen. You don’t need to know how to read. So, Language doesn’t matter. Anyone in any country can do this. You don’t need to know how to type. You can watch these things very, very quickly. They’re usually about music and dancing and funny things. So they’re entertaining. And then if you want to make your own, that’s super easy too. You just turn the camera around plus record and record your own. Or you, you know, you build on someone else’s or you share someone else’s or you edit your own. I mean, you can turn the camera around, make your own 15 second video. And right in the app, you can put in slow-mo, you can put speed up, you can add music. It’s just a super easy way to watch and become a content creator. So the threshold for every part of this is very, very low. It’s a very democratic type of content. I mean, literally anyone can do this. You can be a farmer in the fields of India. You can’t read and can’t write, and you can watch and use TikTok and make your own videos. Okay, that’s option two, just super ease of use, very democratic. Number three, it’s a digital platform, it’s an audience builder. So this is, you know, Alibaba is a marketplace platform, social networks are a type of platform. This is a different type of platform, this is what we call an audience builder. So this is a multi-sided platform, which we’ve talked about before, there’s a lot of power in multi-sided platforms. platforms serve one, two, I’m sorry, two, three, four different user groups instead of one just customer type and usually a platform as a business model beats a product. So my sort of standard thing is these are the, you know, a digital platform is the super predator of our time in terms of business. They just, they’re very powerful competitors. So we’ll call that number three. It’s an audience builder platform, a digital platform, a multi-sided platform. Number four, it has a network effect. Network effect, as I’ve said many times, basically means the more people use the product or service, the better the product or service is. If people go eat a lot of chicken, it doesn’t make my chicken taste better. If more people use Skype or WeChat, I can call more people on Skype or WeChat, the product is better. So is there a network effect here? Some people say there is. The distinction to remember is you can have a network effect without being a multi-sided platform and you can be a multi-sided platform without having a network effect. They tend to go together, but it’s not 100%. That’s number four, network effect. Number five, first mover. They just got there first. And I’m going to ask you to pick two of your favorites here. So this could be combined. Look, they got there first. They were the ones who thought up. Coca-Cola, they’re the ones who thought up YouTube. You get there first. The benefit of getting there first is you don’t have any competition. Like I’m all about competition, and one of the best ways to win in business is either to beat the competition, like to have a competitive advantage, or to just avoid them. Just go where they aren’t. Whatever everyone else is doing, just don’t do that. Go do something different and get there first. Now eventually you’ll get copied. People will come. But if you get there first, you get a big sprint. You know, you’re ahead of the race. That’s number five, first mover. And number six is they are basically an AI and digital operational company. That they’re one of these, you know, AI at the core. AI is their core capability. And that’s got some power in it in itself. And we’re gonna talk about this a lot in upcoming classes that a fully digitized company where… the whole company is run on software and not people is very powerful. That’s gonna be something we’re gonna talk about a lot. So this is a digitized software company that creates the product, delivers the product, tailors the product, all of us, and all the human beings do is they just oversee the machine, the software machine they have built. But the machine runs on its own. The software machine runs. So we’ll call that number six. This is AI and digital operations from soup to nuts. Okay. Option one, addictive product, it’s a psych hack. Option two, it’s a very easy to use democratic process. Number three, it’s an audience builder digital platform. Number four, network effects. Number five, first mover. Number six, it’s an AI and digitized operation. So choose two and write them down or remember them. And we’ll go through some more on the company and then we’ll go through some theory and then I’ll have you vote again and then I’ll tell you what my two are. Okay, so take a minute. and pause the tape, take a good 30 seconds, really think about it. What are the two most powerful aspects of this? All right, so pause now. And we’re back. Did you pause? If you didn’t do it, do it again. Stop and do it. Not if you’re in a car, obviously, but if you’re not in a car, scribble it in a notepad, write on a piece of paper. As I’ve said from the very beginning, the more you try and answer these problems for yourselves, the more you will remember. Okay. Now, let’s go into some theory about TikTok a little bit more. I’ve kind of given you the basics. It’s actually not that complicated of a company. Um. I think the way to think about this is, I mean, what TikTok is good at doing is the type of content they show, it’s user generated content, right? For those of you who are subscribers, I wrote about this last week, that these audience builder platforms where one group of people creates the content and then the content creators, and then the other user group is the users, the viewers, and the platform just, you know, enables those connections so you watch what you want to watch. But one of the complexities about audience builders is the content creator as a user group is more complicated. If we’re talking about a marketplace like Alibaba, we know who the one side of the platform is the merchants and brands. The other side is the consumers. The merchants and brands we know. They’re either big brands, they’re small brands, they’re merchants, they’re retailers. We kind of know what they are. They’re companies, mostly. When you get into content creation, there’s a much wider spectrum of individuals, businesses, whatever, that can create content. Certainly we can have what we call professionally generated content, which people call PGC. Okay, these are journalists, these are media companies, these are movie studios, TV studios, these are companies that generate content as a business, and then they will often post it on a… platform like YouTube or Youku or whatever and you know they share it. It could be merchants and brands like Procter and Gamble or L’Oreal or Prada creating short videos as a form of marketing and putting those on the platform. So that could be sort of considered professionally generated content. That’s one extreme. On the other extreme of content creators we would say our user generated content. Simple user generated content is the phrase I use. And this is the person in the field watching a video on TikTok. And what TikTok will have you do is you’ll see a common meme like, Hey, everybody try and do this dance. You know, here, try and do a moonwalk and everyone that week will start making moonwalk videos. So you’ll see some person moonwalk. You’ll see kids on the street moonwalking. You’ll see models in the shopping mall moonwalking. And then you’re the farmer in the field. You turn the camera around. and you make a 15 second video of yourself moonwalking in the field and you share it. So there’s a lot of that sort of meme creation in TikTok. That would be considered user generated content. But very simple, anyone can do it. If you’re going to make a video on YouTube, the user generated content is a little more complicated. You probably have to have a nicer camera. You probably have to have Adobe Premiere to edit the video. You might want to add music. There’s a lot more involvement in making that type of content. And if you’re going to make songs, that’s even more complicated. You probably need a studio. Plus you need talent. That’s rare. If you’re going to write articles, they can be simple. Like anyone can write little articles on Facebook. Here’s 10 ways to lose weight this summer. But if you’re gonna, I mean, I’m a content creator, I’m one of these users, I create fairly in-depth content. You know, that’s usually people who have a certain amount of professional expertise. So user-generated content can go from simple, at which TikTok is one end, to very professional, and then in between we get a lot of funny companies like YouTube creators like Casey Neistat. who have millions and millions of followers. Joe Rogan is a podcaster who gets something like 100 million listens to his podcast every week. It’s absolutely insane. You know, they’re bigger than media companies. I mean, not to pat myself on the back, there are about 1,400, 1,300 newspapers in the United States. I probably get more viewership and reader than 95% of them. And I’m just one dude with a laptop. I mean, so there’s an interesting sort of middle ground here and influencers and KOLs, which was the subject for this last week. You know, I talked about them. They’re content creators who are turning out to be very powerful. So content creation as a user group is a little complicated. And the important powerful aspect of it is people who view viewers can become creators. So. I mean, let’s talk about audience builders a little bit. An audience builder is a two-sided platform. Platforms are about creating connections and interactions between two different user groups. In this case, one user group is the viewer, people watching videos or reading articles or listening to music, and the other side is the content creator. And as I said, there’s a lot of variations in content creators. One of the most powerful aspects of this is when viewers become creators. or when people who buy stuff on Alibaba start selling stuff on Alibaba, or when people who get rides on Uber start offering rides on Uber, or when Airbnb renters start, you know, people who go and stay in other people’s homes, start renting out their own home. Because one of the problems with digital platforms is they’re very hard to start. Most people fail. And that is because you have to generate two different types of users at the same time. You have to go find a bunch of people who want to buy stuff and you have to go find a bunch of people who want to sell stuff and you have to get them both. But if you have a high conversion from viewer to creator or from consumer to merchant or from rider to driver. That’s a very powerful way to start generating both sides of the platform. It kind of gets you around that problem of the chicken and the egg. So TikTok definitely has that going and audience builders. Um, you know, that that’s kind of what they do. They build two user groups and You have a wide spectrum of content and you have a wide spectrum of viewer interest. So you get a lot of long tail content and long tail interests, which is why it’s so powerful. I mean, if you want to learn about anything in life on YouTube, you want to learn how to unclog your drain, just type into YouTube, how to unclog your drain and you’ll get hundreds of thousands of videos about that. They have content on every tiny little subject you’ve ever seen. which is why they’ve been so devastating to traditional media houses and movie studios because of their breadth of content. Plus, it’s a two-sided platform, so it’s free to the user because they make their money on advertising, which is a third user group. Okay, so audience builders, I think, are particularly powerful, especially because you can combine them with marketplaces, which is what’s happening in China. All right, so TikTok, people say it’s a social network. It’s not a social network. The videos you see on TikTok have nothing to do with who your friends are. In fact, if you go on Facebook, they show you what your friend posted. If you’re on Twitter, they show you who you chose to follow or who your friends are connected to. That’s what they show you. TikTok doesn’t do any of that. TikTok scans the entire ecosystem for all the content created and then uses its AI engine. to decide to make a recommendation for what you would most like to see and then it shows it to you without even asking you. It doesn’t care who you know. So it’s not a social network, people think it is, it’s totally not. It’s an audience builder platform. It’s like YouTube. You don’t connect to people on YouTube really. You follow people you care about. Okay. So. That I think is kind of the key learning goal for today is to think about the basics of TikTok and audience builder platforms. It is not a social network. What’s unique about TikTok or powerful is you have a high conversion from viewer to content creators. So you’re moving people from one side of the platform to the other. And I’ve sort of made this point before, when you think about a multi-sided platform is connecting two different user groups, that doesn’t necessarily mean two different groups of people. Often it’s the same group of people doing different roles at different points in time. The same person can be on both sides of the platform. You can be a viewer and a content creator. So that’s kind of the audience builder aspect, which was option number three. We get to network effects. Now network effects are the more someone uses something, the better the service is inherently. Now that first part is a little bit fuzzy actually because sometimes people say, oh, the more users that are on the platform, the better it is. Like the more people you can call with your phone, the more valuable your phone service is. I don’t think that’s actually common. I don’t think that’s usually what’s valuable. It’s not usually the number of users. It’s usually the number of valuable users. I don’t need to call everyone on the planet. I just need to call a certain number of people. So who is valuable to me is a subset of that. And also I think it’s more about the frequency of interaction and the value of the interactions. If I have a landline that connects me to everyone on the world in terms of telephones, that’s not valuable to me in itself. What’s valuable is the types and frequency of interactions I use on it. The connections just enable the interactions. The interactions are the value. The connections are just the infrastructure. So I don’t think it’s the more people that use something, the more valuable it is, that’s a network effect. I don’t think that’s almost, it’s almost never true. It’s usually about the more frequency of usage, the more frequency of interactions, the more valuable it is. The more people that create videos that I like on TikTok, the more valuable it becomes to me. If they’re not making stuff I like, I don’t watch. So it’s a little more subtle than that when people talk about network effects. Okay, so in this case, we’d be talking about a two-sided indirect network effect. The more people that view TikTok doesn’t make it more valuable to other viewers. I don’t care if you’re watching TikTok, doesn’t help me, but it makes it more valuable to people that create content because they have a bigger audience and vice versa. The more people that create content, it’s not helpful to the other content creators. In fact, it’s competition, but it’s more valuable to me as a viewer. So it’s a two-sided network effect, the values to the other side of the network. Now, TikTok definitely has that to some degree by being first to market, by getting out there first, being a first mover. They are in the lead in terms of the amount of content that is on their platform. Okay. Is that useful? Is it the amount of content or the amount of current content? I don’t really like to watch. I don’t read the newspaper from a year ago, right? The newspaper from a year ago is totally worthless to me. A lot of people who do what I do and who create content, articles, videos, podcasts on. let’s say digital, whatever, a subject, they focus on current events. Here’s what happened this week at Facebook, and let me tell you my take on it. They give you a hot take. Okay, I don’t care what someone’s hot take on what Facebook did two years ago is. I don’t care. What you want, the value of the network effect has, when it comes to audience builders and sort of content creation, has a lot to do with how long the value of the content lasts. Now what TikTok does, which is pretty great, is a lot of their content is evergreen. It doesn’t fade in value. If it was a funny video a year and a half ago of someone dancing in a field, it’s still funny today. So that’s very different than say, Totiao their other product where news articles, that was most about news articles. News articles from a year ago are worth nothing today as a viewer. So the network effect in this sort of content has a lot to do with how valuable the content is over time. And TikTok because they’re very clever. Not only does their audience builder platform have a high conversion rate from viewer to creator, it also focuses on content that is evergreen, that doesn’t decrease in value. So in theory, their network effect, as more and more people post funny videos, their service becomes more valuable than a service with fewer funny videos. So that’s the idea there. Now that’s an important distinction. One thing people talk about with TikTok is what they call a data network effect. They also call it a learning effect. I’m not gonna get into this right now because it’s a whole nother subject, but the idea is the more people use a service, the more it becomes personalized to you. The more videos they watch, the more they know what you like. The more people that watch any video of any kind on TikTok, the more they know about consumer behavior generally so they can show you better stuff. So they call that kind of a learning effect or a data network effect. Search engines actually have this. The more people that search on Google, the more Google knows about what results are valuable to everybody with that question. That’s a data network effect in the aggregate. But also the more you personally search for whatever you’re interested in, you as an individual, the more they know what to show you as a result individually. So people also call this personalization, or customization, or a data network effect, or a learning effect, it’s all the same thing. I think it’s wildly overrated as an idea, but I think it is in some cases like search engines pretty powerful, but anyways, that’s another subject, but it is a subset of a network effect. Now what I’ve just given you is part of what I would call the competitor view, my process when I look at companies, which is pretty much all I do every day. I always look at it from the consumer view, if it’s a consumer company, facing company, and I look at it from the competitor view. What is the experience of a consumer? What do they care about? How do they walk through the process? That’s important because if people don’t like your stuff, it doesn’t matter how strong your competitive barriers are because nobody likes your stuff. Then I go to the competitor view, is like, okay, if this product has some traction, some adoption, people are buying it, they like it. well-run competitor be able to break into your business? That’s kind of the competitor view who wants to break in versus the consumer view, how do you like it? Now, the two ideas I’ve just given you, multi-sided platform and audience builder and network effect with data network effect as a subtype. I put those both under the category of competitive advantage. In the competitor view, do you have a barrier? Do you have something that’s protecting you? And those would be two examples of, I think, ways that could happen. And most companies don’t have one, some companies do. The other part of this sort of competitor view is what I’ve referred to in the past as operational marathon. Like if you have a restaurant on the street and I have a restaurant across the street. Neither of us have any sort of competitive barriers. Anyone can rent the next place down and open another restaurant. There’s no barriers. It’s a free for all. So it’s all about operational marathon. It’s all about who can operate better, who can operate more efficiently, who can operate more effectively, who can get to operational scale better. That’s the game you’re in. It’s like, okay, you’re making chicken. I don’t know why I keep using chicken. You’re making chicken, I’m making chicken. Well, I’m offering spicy chicken and I’m working on my marketing and I’m hiring better people and I’m training my staff and I’m getting better locations and I’ve got a better supply. I mean, it’s just an operational competition that goes on forever. The way Michael Porter describes this, which I think is very useful, he says, look, in a competitive barrier, a competitive advantage, it basically means your business is doing activities that are different than other. businesses. You are doing something, let’s say a series of activities that they can’t do for some reason because you have a barrier. They can’t get into your game. If you don’t have that, that means your business is doing the same activities as the other businesses. So the only question is who does these activities better? That’s operational marathon. Okay. And I put that under the competitive view. When I look at competitive view, I look at competitive advantages and I look at operational Now, within operational marathon, I think there’s options five and six that I gave you are in that bucket. Number five was first mover advantage. Like if we’re in an operational marathon building. building out capabilities, hiring staff, getting customers, getting content. If I started a year and a half ahead of you, I’ve got a lead, you know, that’s just first mover. Operationally, I have been running longer. If it’s a marathon, I like this analogy, marathon. You know, if you start running in the marathon a day before everyone else, you get pretty far ahead. I consider that an operational advantage, getting there first. So first mover, I put into that bucket. And then the other one is AI and digitized operations, which is option number six. Now this is actually really, really important. And as we get into learning goal 13, which is AI and machine learning, I’m gonna talk a lot about this. This is one of these ideas. I don’t wanna get into it too much today because it’s a whole subject in itself, but it’s one of those subjects that kind of blows your mind. I mean, it’s so powerful and it’s so big, it kind of makes you real a little bit. And the idea is, from the beginning of this class, I’ve said there’s a couple important things happening in digital. One, it’s just digital tools are emerging and people are using them in various ways, use cases. Digital platforms are emerging. That was a second bucket. Digital platforms tend to be very powerful business models. The third big thing happening, which I haven’t mentioned before, is we are seeing businesses where the core operational workflows are all software. There are no people involved anymore. It’s not like we have staff in the office and then they go down to the store and they sell stuff and then we record what they sell and that goes into a database and we run some software on that. And then we make an order and that someone makes a phone call and then we stock the shelves. No, no, no, the whole business from front to back, top to bottom is software and people aren’t involved. And when that happens. which I think TikTok has done, people are no longer doing the business. What people are doing is designing a machine that does the business on its own. And they’re designing the machine and overseeing the machine, but the machine does all the business itself. It never sleeps, it runs forever. And one of the reasons this is so powerful is because the limitations of scale go away. If you want to, you know, if you want to, I’ll stop using chicken as an analogy. If you want to open a retail store, if you want to be a movie studio, okay, maybe you make 10 movies a year. You know, you hire people, you hire directors, you film the movie, you have to work on the script, you have to get the editing done, then you spend a year putting it out. And how many movies could a movie studio make per year? I think your average movie studio puts out like 20 or 30. Same with TV shows, you know. Okay, and let’s say you wanted to put out 100 movies per year. How would you do that? Well, you’d have to hire a ton of people. You’d have to find a lot more content because content process is very difficult. You’d have to do more marketing. You’d have to get it into movie theaters. You’d have to ship it. You’d have to, I mean, there’s a lot going on there. And at a certain point, you can’t do it anymore. Your scale becomes, the complexity and the bureaucracy become too much. So operational scale, which is an advantage. If you’re in a marathon, You build scale, you sell more food, you sell more books, your Walmart has hundreds of stores instead of tens. Scale is an advantage, up to a point. At a certain point, scale becomes unworkable. You become a bureaucratic. It gets harder and harder to grow. You need to hire more and more people. It becomes dysfunctional. They talk about the coordination costs internally become prohibitive. And also not just scale becomes difficult, but also the scope and the complexity of your product. Usually when companies get big, they standardize to a small number of products. If you’re gonna sell bicycles, like let’s say your giant bicycles, which we talked about, and you’re a big manufacturer, you might have a hundred types of bikes you make in all your factories and your designers and your stores. You’re not gonna have a million types of bicycles that you make different every year. The complexity in types of products becomes unworkable and your size in general becomes unworkable. You hit limits because human beings have trouble with that. Now let’s say you have a… content creation platform like TikTok. Okay, it’s all software. People out in the world create the content, they make the videos, they upload them. Your software is just hunting the world for content that people upload. You’re recommending it, you’re showing it to other people and then they’re watching it. And the whole thing runs without people being involved once you’ve created the machine. Now think about, is there a limit to size? Can TikTok share a million videos to 50 million people? Sure. Can they do 10 times that? Yeah, they can. They have no limit in terms of scale. They can keep going up in a way that a movie studio, which is also a content company, if you’re a viewer, if you’re a consumer sitting at home, am I gonna watch Netflix? Am I gonna watch a movie or am I gonna play on TikTok? It’s all the same, kind of. They don’t have any limits on their scale. They also don’t have any limits on complexity. They can offer a million different types of videos on every single type of subject. Some can be long, some can be short, some can be music. They don’t have, because software can handle the complexity and the scale in a way human beings can’t. So when you redesign, what we’re starting to see now, which is really impressive, is we’re starting to see companies where the entire process, the entire workflow, is all software without people involved and that’s when it takes off and it’s unbelievable what it can do and I think TikTok has done that. So anyways that’s kind of option number six. I’m going to go more into this a lot because it’s it’s a huge idea but that’s kind of option number six is this idea of creating software engines that run the whole business for you. And I put that under operational marathon. That like, if you have a competitor that’s doing this and you’re trying to do stuff the old way, you’re in deep trouble. Okay, so that’s the competitor view. Competitive advantage, audience builder, platform, network effects, operational marathon, first mover, AI, digitized operations. Okay. Last subject, the consumer view. Now the consumer view is what is, the consumer doesn’t care about any of this. Sometimes in a business, you know, if you go in to buy a cell phone, smartphone, there aren’t a thousand types of options because the competitive dynamics limit the options. So in some cases, the shape of the industry is determined by the competitive dynamics and the economics. In other cases, it’s determined more by what consumers want. It’s usually a balance of these two factors. Consumers would probably like to have a thousand smartphones to choose from, but the economics only get you a handful. Other things like having snack food, well, there’s a million types of snack food. So sometimes I look at it from both sides. Now the consumer view on TikTok, I think is equally interesting. It’s not about technology, it’s not about digital, it’s not about platforms, it’s not about all this stuff I love so much. It’s about the fact that it’s just a super addictive product. It’s a psych hack that you get on the TikTok, which I do, and you start flicking videos and you look up and it’s a half hour later and you’re like, what happened? Happens with video games too. Have you ever noticed that? Like you get on video games, like I can’t watch a movie for five hours, you know, my butt hurts, but I can play video games and I’ll look up and I’m like, is it three hours already? It’s almost like you get into trance. It’s a big deal in gambling. Like people who sit in front of slot machines, slot machines are psych hacks. I mean they just get people into this trance like state where they just love being in the state and they don’t really even care if they win. So one is this just an addictive product. It’s short videos that are super personalized to what you specifically want and the videos are focused on things that people like like funny jokes, memes, dancing. I mean it is just to me it’s Red Bull. It’s like. One, people like Red Bull. It’s bad for you, but people like it because it’s sugary, it tastes good, it gives you a caffeine rush, it’s addictive, but it’s bad for you. A lot of the content on this platform is like that. You know, watching funny videos all day is not good for you. Watching vulgar memes is probably not good for you. This is not a good use of your time. But you get on there and you watch and, you know. There’s something very powerful on the psychology, the consumer side. Turns out short videos, super popular. So I think that’s option number one, addictive product. And that’s a whole world of thinking. I’m actually working on some papers on this, which I call like how software hacks humans. This idea that software is very good at hacking our psyches. And if you have an addiction to certain things, like people who have gambling problems. Slot machines used to be their biggest problem because of the trance that slot machines, mechanical slot machines would put you in, in a way that like Blackjack doesn’t. But when slot machines went digital, people who had that problem like had huge problems because it turns out software designed slot machines are really good at hacking you in a very precise way, in a way that mechanical slot machines were just kind of crude. So okay, then the second one is ease of use. I look at this one a lot. Ease of use is like how shareable is your product? You know, one of the nice things about China, digital China, digital Chinese consumers, this idea of the digital China consumer network is you can, is how shareable is a product? Well, it turns out everything TikTok does is really shareable. It’s like, hey, look at this funny meme I met and you send it to all your friends. Maybe you send it on WeChat or Weibo or whatever, or Facebook or whatever. The product itself is very shareable. So it taps into sort of the network connectivity aspect in a pretty powerful way, in a way that like say podcasts, this is a podcast, people don’t share podcasts. People share videos a lot, short videos. People share funny pictures a lot. Instagram is actually kind of similar to TikTok, I think. It’s very shareable. Anyone can take a photo. Hey, look at me here. I’m at the beach and people share it with their friends because they like to share. So that’s a lot of, I think what’s going on with TikTok is very easy to use. Uh, this is option number two and very shareable. It taps into social networks and the digital network, which we’ve talked about, I think very powerfully in a way that podcasting doesn’t. Like, if I want to get a lot of shares, I mean, I create a lot of content. You know, long articles, podcasts that are usually an hour, but I also can create short content. Here’s a graphic. Here’s a picture. Here’s a three-minute video of me and Torino talking about something. Now, that short content, I don’t think is terribly good for getting any ideas of substance across, but it is very shareable. and it gets shared all over the place. So, you know, a lot of what people do is what I do the same is, you know, you do long form content and writing and podcasts, but you do short form content as a form of shareable marketing. That’s pretty common actually. Anyways, TikTok is, is hitting that lever too. Incredibly shareable content and very democratic. Everyone can do it. Everyone can create, everyone can share. And that’s basically it. So I think that’s all six of my options. How am I doing on time here today? Oh, I’m right on time, perfect. I try not to go on too far. But okay, so let me sort of relist them and now I want you to choose again. What do you think of the two most powerful levers they’re pulling? Option number one, which is part of the consumer view, is look, it’s just addictive. There’s something going on with the psychology here. They’re hacking the psychology. Something about short videos, flicking the screen, highly personalized, everything I want. It doesn’t even ask me what I wanna see next. I’m not even engaged in the decision making. It makes a recommendation, and then it automatically decides for me and shows it to me. There’s something powerful about that. Number two, ease of sharing, ease of use. Okay, maybe it’s not about the psychology, maybe it’s just that look, anyone can do this. Anyone can watch these videos, anyone can make these videos or make memes, and they’re very very shareable. They latch into social media in a really powerful way and probably like, it’s probably among the most shareable content you’ll see are photos and short videos. And just that’s what people do. Graphics are pretty good too. Okay, so maybe it’s mostly that. Maybe it’s like people are just sharing this stuff everywhere and that gets more usage and there you go. All right, factor number three, under the competitive view, under competitive advantage, I said it’s an audience builder digital platform. It’s a multi-sided platform. Multi-sided platforms have a lot of advantages. You get… users on one side who watch and then users on the other side who create content and the platform connects these two and helps them interact and because it’s multi-sided the viewers get to watch everything for free which is powerful no doubt about that. It has a particularly high conversion rate from people who view to people who create. Airbnb really benefited from this as well. Like people who stayed in Airbnbs have a high propensity to offer their own apartments as rentals. That’s a pretty powerful thing. So that’s number three. It’s not a social network, but it is a multi-sided platform, a digital platform which we are calling Audience Builder. Number four, it’s a network effect. The more evergreen content you have, the more content that doesn’t decay in value over time, which jokes and funny videos really keep their value. People can watch a funny joke from 20 years ago. The evergreen content, the more evergreen content there is, the more valuable it is to every user, viewer. And the more viewers there are. the more valuable it is to everyone creating content because you can get viewers. Okay, so it’s a network effect with evergreen content and a lot of long tail niche subjects. That’s number four. Number five, we’ve moved to the operational marathon aspect. Okay, look, they were just a first mover. They got there first, they thought it up, good for them. They invented it. Well, they didn’t invent it, but they were the point of the first. And so they’re just ahead and maybe people will catch up. I mean, keep in mind, Facebook was not first as a social network. It was after MySpace and Friendster. They just did it better. Visa and MasterCard were not first movers in credit cards. They were like 10 years late. So sometimes being a first mover in platforms is not terribly helpful. But sometimes being first mover in something that is addictive with a lot of psychology can be very powerful. Okay, and number six, the last one is they have, you know, they’re really an AI digitized company where the entire company runs on software. You know, the videos are uploaded. the algorithm searches the videos, it decides what you should see next, it shows it to you, and human beings are not involved in the core workflows of this business. So it has no limits to its scalability, it has no limits to its complexity, and really kind of has limited limits to its learning, but that’s a subject we’ll talk about later. Okay, so those are your six. And again the list is in the show notes if you’ve forgotten. So let’s take another vote. Spend a couple minutes thinking about it. Like what really, how do you explain this rocket ship? It’s a phenomenon. It’s a global phenomenon. How do you explain it? What’s your simple, most powerful explanation? And choose to. Okay, do that. Now press pause. Okay, did you do it? If you didn’t do it, stop it. One last chance. If you didn’t do it, press pause, go do it. Again, you’ll get 10 times more out of this every second that you try and do it for yourself. Yeah, it’s funny, like if you ask people, you know, a year later what they remember, they remember what they tried themselves. That’s really most of what sticks. So keep doing it and I’ll keep pushing you. All right, let me give you my take on this. This is where judgment comes in a little bit. Like, clearly TikTok has got a lot of stuff going for it. Like, you know, there’s definitely, it’s multiple things that they are doing well because their business model tends to tap into some powerful things. Like, I really like the fact that I think short videos just tend to be very popular. I think they are. I think it’s popular, I think it’s kind of addictive, I think they’re fun to watch, especially if they’re just funny stuff. I think that’s good. I don’t think that’s the big, big lever that moved the numbers, because I think there’s a lot of popular stuff out there you can do. You can watch this, you can watch YouTube, you can listen to music, you can go to Spotify. I think it’s a compelling… type of content. I don’t think it is 50 times better than other types of content such that it would explain the rocket ship effect. So the first, I don’t point to option one as the big gun. I think it’s important. I think it’s true. I don’t think it’s the big gun. I think the biggest gun they had going for them in the first two years was option number two. their product, the short videos, especially when they’re made by people, made by users, get shared all over the place. Because you want to show it to your friends. I may or may not show a video I see on NBC or Netflix or YouTube to my friends or whatever, my own network. I may or may not do that. Maybe if it’s funny, but if I made it myself, I’m probably gonna show it. Like if you took photos, you’re gonna send them. So I think one… their content in itself was very shareable and that short videos are things that people just like to share, especially if they’re funny. And especially if they’re user-generated content, because you share that with your friends. So I think option two to me in the first two years was probably their biggest gun, that they just had a content type and a way of setting up the business. And they talk about this, that they designed the business to be, to maximize shareability from the, you know, from the… The fact that it’s funny, the fact that they use a lot of music, the fact that it’s easy for you to make your own, the fact that it’s easy for you to edit someone else’s and then that’s so you’ll share. They want to tap into the digital network, you know, the what I call the China digital consumer network, which I think is powerful. I think they tapped into shareability and that moved the numbers faster than anything else. And I think you combine that with number five, which was first mover. And that explains the upward trajectory early on. They had a good app with a good service that was incredibly shareable and they got their first. So they took off like wildfire as it sort of lit across the network. That to me is year one, year two. And that’s probably the two biggest factors I’d point to. I think the fact, you know, number, let’s say six option, the fact that they’re a digitized operation, I think that’s good. I don’t think it’s a huge difference between Yoku and Quaishou and YouTube and all these others. You know, if I’m watching YouTube and they’ve teed up the next recommendations and I click on the one I want, as opposed to TikTok where it picks up the next recommendation for me, I don’t think their recommendation engine is five times better than anyone else’s. I think it’s fine. I don’t think the fact that they’ve taken out the decision-making is a huge factor. I think it’s good. But I don’t think that explains the rocket ship either. I don’t think their recommendation engine and automation of the digital processes was so powerful relative to competitors. I think it’s good. I don’t think it’s the rocket ship. I think it was number two plus number five, that shareability plus the first mover. And then we get to this old phrase, which is a lot of times what you see, especially in Silicon Valley, is there’s this idea of come for the app, stay for the platform. Where they get you with a new app, because it’s cool and it’s fun and it’s the big thing and everyone gets on it. It’s snap, it’s Instagram, it’s WeChat pay, whatever. They get you with the hot app, which is like, look, you’re really cool right now, but nobody stays cool forever. But then when you get in there, that’s when you get factor four, which is the network effect. The more con they have a wealth of content now that no one else has in short video, they’re way ahead. So they are getting a network effect between a massive amount of evergreen content and a massive user base. And that locks people in. Well, it doesn’t lock people in, but it makes it almost impossible for competitors to take them down. So they got you in with the hot, cool, it’s really neat, it’s really shareable. But then they turned it into a platform which gives them good competitive barriers. And that’s come for the AppStay for the platform. So I think that’s. I think that was the wall around the castle was the network effect. And the other stuff was the power. Okay, so that’s kind of my short explanation is it’s those two factors got them going and then this third one of network effects I think is what’s protecting them more and more as time goes on. And that’s great. But I think it depends. I think there’s a big caveat to all of this. It’s not clear to me that short video is not a fad. Like, it’s pretty cool. I mean, it is cool, people like it. I’m not sure that five years from now, short video is gonna be what everyone’s spending their time on. And they are sort of locked into that format. And what happens when YouTube and Youku, they also offer short video? Right, like, it’s… Like YouTube looks to me like rock steady. People are always going to watch videos. Fine. Spotify. People are always going to listen to music. Fine. Are people always going to watch short 15 second videos or could this fade in popularity or could something cooler come out and then they lose that value on the consumer side? And keep in mind, network effects are great, but they go down as fast as they go up. If they start losing users, if they start losing viewers, because people aren’t watching short videos like they used to, now they’re watching live streaming, which they are, maybe next year they’ll watch some new thing, then the platform becomes much less valuable to the content creators, so they start making fewer content. you know, videos, which then makes it less valuable to the viewers because there’s less content and vice versa. So that the effect works backwards as well. So that’s kind of been my biggest question on TikTok is how long is this phenomenon going to last? You know, country music was popular for a while and then it faded. Grunge was popular for a while then it faded. Sometimes things are like fads. Flash sales in China were very popular, but they’re not as popular anymore. You know, is this one of the nice things about Coca-Cola? is it’s been popular for 100 years. Like you can count on the fact that people like it, but consumers can change. So I think there’s a volatility here or a lack of uncertainty going forward that they could, you know, they could fade in a way that I think other products and services, it’s a little more clear. Like I think Warren Buffett’s quote on this when someone was talking about something popular, his joke was, you know, I remember when the hula hoop was really popular. Right? Like things do fade. Maybe not this year. Maybe it’s not a crash, but five years. And if short videos aren’t popular in five years, what happens to TikTok? So anyways, that’s my biggest question is like, if their biggest strength is on the consumer side, which I think it is, how steady is that? How predictable is that? Well, it’s not clear to me. It is OK. Anyways, that’s kind of my basic take. The learning goals for today’s class are. Basically learning goal number 12 on the list, which is the basics of TikTok and audience builders as a platform. So that’s the idea. Think about audience builder as a different type of digital platform. And we’re gonna talk about others. There’s several. And then, starting to get comfortable with this idea of TikTok as a different type of content sharing platform. Because there’s quite a lot of these out there and they keep emerging from out of the woodwork. And I think that’s it. And then I teed up a little bit learning goal 13, which is about AI and machine learning, which is gonna be a huge topic. I spend 40% of my time digging into machine learning these days. I think in software and digital, that’s the biggest thing out there on the horizon. Really not on the horizon even today. Okay, and I think that’s enough for today. I took you to about an hour, I believe. But I hope this has been helpful. I think we’re building more and more on content. So for those of you who have been sticking with it and especially the subscribers, you can see I’m starting to build on concept after concept after concept and repeat and repeat and repeat. And hopefully, these things will start to knit together. There’s an old, well actually, it might be my quote. I used to say that like, like information and savings accumulate over time. But interest and knowledge compound. Like, people love compounding interest because you make 6% a year on your money, then you have a little more money, then you make 6% on the bigger number. So over time, the curve is exponential. It’s the same thing for knowledge. As we go into more and more concepts, we’ve done probably 10 or 15 big ones now. you’ll start to make connections between them. And as I give you sort of concept number 16, number 17, number 18, your level of knowledge won’t increase linearly, it will start to go exponential because you’ll start making connections between these things. Oh, TikTok is also a digital platform, we talked about that, but it’s got a network effect. But we’ve got the consumer view. Knowledge compounds the same way interest does. So I hope you’re gonna start seeing that more and more as we go on, if you stay with it, that you’ll, you’ll, should accelerate. I find that to be true in general. But anyways, I think that’s it for today. Have a great week to everybody. I’m totally stuck in Bangkok. I can’t fly anywhere. It’s not really the safety issue. It’s the issue of anywhere you fly into, you don’t know if you’re going to be able to fly home because the rules on entry to various countries keep changing. I was going to go to Italy and now it turns out like you can’t go to Italy. So I’m totally stranded, which is a very odd situation. But it’s great because I’m doing a ton of content and having a great time. So anyways, I hope everyone is doing well. I hope you’re staying safe. If you have any feedback on this, I think we’re restructuring this. We’re moving it forward. We’re iterating. So hopefully this class should become more and more valuable to you as we go along. But that’s it. Have a good week. Stay safe.

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