TikTok: Risking the Magic Recipe
Imagine you have an ice-cream recipe… the perfect ratio of ingredients, for a flavor that is somehow sweet and salty at the same time.
Your friends joke that it’s bad news having it around. “It’s addicting!”
After a while, you open a shop to let other people taste the magic. And wow… what a smart move! There’s always a line around the block, with influencers holding it in the air to snap photos. People literally cannot get enough.
So to give them what they want, you decide to sell it through grocery stores too.
But here’s the catch – to do that, you have to tweak the recipe. It’s just a small change, for a slightly longer shelf life, so you do it. “What’s the worst that can happen?”, you say to yourself…
Some people buy it. Many people don’t. And your friends and family hate it… “can you make us some of the old kind?”
Messing with the magic recipe is risky.
Today, we’re talking through a tech example that proves that point – TikTok Shop.
What is TikTok Shop
New as of September 2023, TikTok Shop is an in-app marketplace for creators to sell to other users. As a creator, you can link to products in any video you upload, and users who click those links are taken to an in-app storefront to complete the purchase.
And there are shops for pretty much anything you can think of – from pickle jar sweatshirts to Christmas tree ornaments that are Nicholas Cage themed (not kidding). And honestly, some of these stores seem to be working – the pickle jar afficionados apparently bought $1.7M in sweatshirts like this one over the course of a few months!
So listen, I hate to be the guy that rains on the pickle parade – but there is a catch. They’re messing with the recipe that has made TikTok so addicting.
Messing With The Magic Recipe
For those that haven’t succumbed to the pressure and tried out TikTok, here’s roughly how it works. You swipe through videos that are ~30 seconds each, and after every 3-4 videos you’ll see a video ad. If you’re new, you probably won’t realize it’s an ad until halfway through, and then you’ll get annoyed and flip to the next real video, settling back into a flow.
After what feels like two minutes of this… two hours will have passed!
This is the addicting recipe TikTok has perfected. But by introducing TikTok shop, they’re risking ruining it in two primary ways:
Perceptions of being sold to: Even if the frequency of actual ads stays the same, your perception of being sold to will go up. Creators you used to love watching will now be trying to sell you Nicholas Cage ornaments, and rather than 1 out of every 4-5 videos feeling like a sale, it’s going to feel like 1 out of every 2-3. Sure, TikTok could try to keep the frequency unchanged, but that’s basically them cannibalizing ad revenue (letting a creator sell to you instead of collecting ad revenue), which they are unlikely to do.
Sacrificing entertainment value for commercial value: The TikTok rabbit holes I find the most personally entertaining/addicting are 1/ RV remodels (which always seem to be broken into 100 part videos…) and 2/ biking stunts (especially the guy in Manhattan who flies around in traffic, it’s amazing). But I get 10x more value out of watching the guy recklessly biking than if he tried to sell me bike accessories.
He’s fine folks! Don’t stress.
So basically, by perceiving that there are more ads, and by missing out on some entertainment value, the overall impact of these changes could be quite negative.
Which leads to a natural follow-up question…
Why take that risk?
I see three reasons…
Slowing ads growth
While ad revenue is still growing, it’s growing at a lower rate. Here’s what I mean:
In 2020, TikTok generated $1.14B in ad revenue.
In 2021, that jumped a ridiculous 240% to $3.88B.
In 2022, it went up a very strong 155% to $9.9B.
In 2023, it went up a respectable 33% to $13.2B.
Now look – I’m not saying that 33% growth isn’t good. I’m just saying growth is slowing… When you’re in the tech industry, and everyone is obsessed with growth, seeing this would probably cause you to think differently. You might be willing to mess with a winning recipe if that risk could pay off with more growth.
Position of strength
They have an enormous, growing, captive audience to sell things to. As I wrote in my last post about TikTok (from April 2023, when I naively predicted a TikTok ban…):
“The usage and viewing time is staggering. Amongst that 1 in 3 Americans (2 in 3 American teenagers), the average viewing time is 80 minutes per day…”
And according to CNN, viewing time will be up 22% by the end of 2024, so expect a lot more half-smiling-staring-at-phone activity this year, just like this guy:
Photo by Eddie Wingertsahn With their userbase being so large, and time on the app increasing, they can afford to piss off a few users. In the worst case, they can backtrack and stop the bleeding if it goes horribly wrong.
Keeping creators happy
They’ve clearly been reading Forests Over Trees. Kidding! But there is a salient point from my Twitch vs. Clubhouse write-up:
“For any creator, audience building is one critical way platforms provide value. Another is monetization. Together, these two factors fuel growth by keeping creators engaged. They are motivated to create because they can see the momentum it creates for their fanbase, and their financial incentive to create grows as the fanbase grows.”
If you zoom-out, TikTok is basically giving creators a new way to monetize, encouraging them to spend more time making TikToks instead of YouTube shorts or something else.
Ok, so it’s happening, and we have a few clues about why. But there’s still one question…
Will TikTok Shop work?
Yes, I think so.
For one thing, the experiment seems to be going well so far… as evidenced by:
Their plan to 4x the shop fee over the course of the year. So instead of taking a 2% cut on any TikTok Shop sale, they’ll take 8%. (source)
Their plan to 10x shop revenues in 2024 as reported by Bloomberg… going up to $17B!
They wouldn’t set such audacious revenue goals, or risk scaring away shop owners with higher fees, if they weren’t already seeing decent traction.
Plus, they’re following in the footsteps of their e-commerce predecessors — doing their best to simplify the shop owner experience (cough, Shopify), and even introducing a “Fulfilled by TikTok” logistics solution (cough, Amazon!). What’s next… standing up their own cloud service!?
So I guess the lesson here – if there is one – is that sometimes…messing with the magic recipe works.
Bonus Bullets:
Quote of the Week
“Rarely are opportunities presented to you in a perfect way. In a nice little box with a yellow bow on top. 'Here, open it, it's perfect. You'll love it.' Opportunities – the good ones – are messy, confusing and hard to recognize. They're risky. They challenge you.”
– Susan Wojcicki, Former CEO of YouTube
Quick News Reactions
Making it work – that’s what Apple is doing in the EU, splitting off its EU app store so it can allow sideloading there by March 7th, complying with new regulations. Other countries will follow suit…
AI + Elections = Complete Chaos – I keep going a few days forgetting it’s an election year in the US. Prepare to hear 1,001 takes about how the platforms are, aren’t, should, or shouldn’t be handling things.
Most streamed event ever goes to… -- Peacock!? Pretty impressive technically, though gating national sports to a paid platform is super annoying. Also, Nielsen (the company that blessed Peacock with this award) is still a thing?
Indoor solar charging – is the coolest thing I’ve heard about in months. Please free me from the endless nightmare of losing cords and always being low on battery.
Overall Economy
This is the Weekly Economic Index published by the Dallas Fed. It’s made up of 10 different data sources from consumer to labor to production, and it’s designed to closely track US GDP. I’m going to keep an eye on it for at least a few months.
WEI reported last week — 2.9
Tech Equities & Bitcoin
The Nasdaq (blue) closely tracks tech equities, and I added the S&P 500 (green) and Bitcoin (orange) for comparison.
Tech Jobs Update
Here are a few things I’m paying attention to this week:
Big Tech Job Posts: LinkedIn has 7,325 (-23% WoW) US-based jobs for a group of 20 large firms (the ones I typically write about — Google, Apple, Netflix, etc.).
Graph: Layoffs from 2022-2024 (Source: Layoffs.FYI). Note that this is showing in-progress numbers for the current month.
