TikTok’s billion-dollar secret that wasn’t

Last week at Vox Media’s Code conference, Evan Spiegel, Snap’s CEO, touched upon the various pain points that currently afflict the developer behind Snapchat, resulting last month in the company shuttering several projects and announcing a layoff of roughly 20% of staff. Many advertising-dependent businesses are currently experiencing formidable challenges, as I outline in my three-part Mobile Marketing Winter series (parts one, two, and three). Broadly, they are:

  1. Apple’s App Tracking Transparency (ATT) privacy policy, which disrupts the transmission of data between hub-and-spoke ad platforms and their advertisers. This interruption creates friction for behavioral targeting for advertising systems like the one utilized by Snap (and, notably, Meta);
  2. The deflation of the COVID engagement boom, which saw consumers spending more time and money with online services during periods of social isolation and limited interpersonal interaction. As these restrictions fade, consumer spending behavior reverts to pre-COVID norms;
  3. A weak macroeconomic environment, with persistently high inflation in the US but especially in Europe that has abated consumer purchasing power.

As I state in the Mobile Marketing Winter series, it’s impossible to disentangle these issues, and in combination, they create severely burdensome challenges for the digital advertising market. Precisely because the largest digital advertising platforms are so easy to operate, digital ad spend can quickly be slashed during periods of economic fragility. Similarly, systemic shocks like platform policies can also cause ad spend to be trimmed if that spend can’t find a suitable new home. Spiegel spoke to this dynamic at the Code conference by invoking the competitive threat posed by TikTok; Spiegel delineated TikTok’s path to becoming such an influential and imposing presence within the social media landscape:

What nobody had anticipated in the United States was the level of investment that ByteDance made into the U.S. market, and of course in Europe, because it was just something that was unimaginable — no startup could afford to invest billions and billions and billions of dollars in user acquisition like that around the world…It was a totally different strategy than any technology company had expected before because it wasn’t an innovation-led strategy; it was really about subsidizing large-scale user acquisition.

While it’s probably true that no other company has spent so much, so quickly on user acquisition, it seems odd to point to that strategy now as something of a startling, sleeper success. The fact that ByteDance spent aggressively on user acquisition to grow TikTok has been common knowledge for years: at one point, the company spent an estimated $3MM per day on acquisition marketing in the United States alone, and the company is purported to have spent roughly $1BN on advertising over the course of 2018. Snap should have been more acutely aware of the scale of that spend than anyone, since, as the WSJ reports, TikTok was its largest advertiser account that year.

It should have been obvious that selling ad space to a direct, ascendant competitor was a Faustian bargain for Snap given the size of its user base and the unique overlap in demographic appeal between Snapchat and TikTok. I’ve called the Facebook app the Everything Store for Ads because its enormous user scale and the generic nature of its newsfeed renders it an appropriate canvas for almost anything to be advertised. Prior to ATT, Meta leveraged its incredible bank of third-party data to route people to relevant products through ads based on their behavioral histories, aggregated from external properties. A retailer selling a pair of pants, or a mobile game developer promoting a match-three puzzle game, isn’t a competitive threat to Meta: those products wouldn’t displace Facebook or Instagram.

That’s not true for TikTok as an advertiser on Snapchat: it’s not a stretch to imagine that a Snapchat user might abandon the app after discovering TikTok. And while Meta almost certainly did and still does sell ad inventory to TikTok, it’s hard to believe that TikTok could have become the largest single advertiser on Meta’s platform for exactly that reason. Meta (then, Facebook) attempted to acquire Musical.ly (which would rebrand to TikTok after being acquired by ByteDance) and launched a nearly identitical competitor app, Lasso, in 2018. Meta unequivocally understood the commercial threat to its core business posed by TikTok, especially with Chinese consumer technology firms increasingly expanding in the West over the past few years as the operating environment for them domestically grew more hostile.

It’s well-worn wisdom in technology start-up circles that building a business atop another company’s platform can have devastating consequences. But selling exposure to other companies, especially competitors, is an equally precarious business model, even if that exposure is compensated through advertising spend. In 2015, when the in-game advertising model was beginning to take root, I wrote:

But in selling ads for other games, these developers eject users from their own spheres of influence, mostly into the portfolios of large developers that have invested heavily in analytics and can employ some level of intelligence in shuffling users into the games they’ll most enjoy…Of course, not every user that clicks on an ad or even ultimately downloads an advertised game churns out of the source app, but that’s a secondary point. Monetizing with advertising presents an impossible choice for small developers: fuel the growth of one’s competitors or compete on the basis of balance sheet strength.

This is equally true with the competitive dynamic between Snapchat and TikTok: by dint of the sheer scale of ByteDance’s ad spend, Snap knew just how much conviction it possessed in growing TikTok. This conviction (money) should have given Snap pause: ByteDance is a large, sophisticated operator, and surely it wouldn’t risk its advertising budget at that magnitude of spend without having first tested whether the users it was acquiring were engaging and retaining. The very fact that ByteDance was willing to invest so heavily into user acquisition should have been a signal to Snap that ByteDance was confident that it was buying, not renting, user engagement.