Whether or not it is banned, the app has forced its rivals to adopt a less lucrative model

Is tiktok’s time up? As the social-media app’s chief executive, Shou Zi Chew, prepares for a grilling before Congress on March 23rd, TikTok’s 100m-plus users in America fret that their government is preparing to ban the Chinese-owned platform on security fears. Their anguish contrasts with utter glee in Silicon Valley, where home-grown social-media firms would love to be rid of their popular rival. With every grumble from Capitol Hill, the share prices of Meta, Snap, Pinterest and others edge higher.

TikTok’s fate hangs in the balance. But what is already clear is that the app has changed social media for good—and in a way that will make life much harder for incumbent social apps. In less than six years TikTok has weaned the world off old-fashioned social-networking and got it addicted to algorithmically selected short-form video. Users love it. The trouble for social apps is that the new model makes less money than the old one, and may always do so.

The speed of the change is astonishing. Since entering America in 2017, TikTok has picked up more users than all but a handful of social-media apps, which have been around more than twice as long (see chart 1). Among young audiences, it crushes the competition. Americans aged 18-24 spend an hour a day on TikTok, twice as long as they spend on Instagram and Snapchat and more than five times as long as they spend on Facebook, which these days is mainly a medium for communicating with the grandparents (see chart 2).

TikTok’s success has prompted its rivals to reinvent themselves. Meta, which owns Facebook and Instagram, has turned both apps’ main feeds into algorithmically sorted “discovery engines” and launched Reels, a TikTok clone bolted onto Facebook and Instagram. Similar lookalike products have been created by YouTube (Shorts), Snapchat (Spotlight), Pinterest (Watch) and even Netflix (Fast Laughs). The latest TikTok-inspired makeover, announced on March 8th, was by Spotify, a music app whose homepage now features video clips that can be skipped by swiping up. (TikTok’s Chinese sister app, Douyin, is having a similar effect in its home market, where digital giants like Tencent are increasingly putting short videos at the centre of their offerings.)

The result is that short-form video has taken over social media. Of the 64 minutes that the average American spends viewing social media each day, 40 minutes are spent watching video clips, up from 28 minutes just three years ago, estimates Bernstein, a broker. However, this transformation comes with a snag. Although users have a seemingly endless appetite for short video, the format is proving less profitable than the old news feed.

TikTok monetises its American audience at a rate of just $0.31 per hour, a third the rate of Facebook and a fifth the rate of Instagram (see chart 3). This year it will make about $67 from each of its American users, while Instagram will make more than $200, estimates Insider Intelligence, a research firm. Nor is this just a TikTok problem. Mark Zuckerberg, Meta’s chief executive, told investors last month that “Currently, the monetisation efficiency of Reels is much less than Feed, so the more that Reels grows…it takes some time away from Feed and we actually lose money.”

The most comforting explanation for the earnings gap is that TikTok, Reels and the other short-video platforms are immature. “TikTok is still a toddler in the social-media ad landscape,” says Jasmine Enberg of Insider Intelligence, who points out that the app introduced ads only in 2019. Platforms tend to keep their ad load low while getting new users on board, and advertisers take time to warm to new products. “You can’t really wave a magic wand and declare that your new ads are ‘premium’ without any performance history to back it up, so they start at the end of the line,” says Michelle Urwin of Skai, an ad-tech company.

Here, at least, TikTok’s imitators have an advantage over TikTok itself. Using a trove of data built up over a decade and a half, when there were few rules against tracking users’ activity across the wider web, Meta already knows a lot about many of the users watching its videos and can make well informed guesses about the rest. If a new, unknown user watches the same videos as a group who are known to be rich, female graduates with children, say, it is a good bet that the new user has the same profile. TikTok says it has made big investments in its direct-response ads, including new tools for measuring their effectiveness. But it still has catching up to do. “Meta are leveraging their history,” says Mark Shmulik of Bernstein.

The social apps will not be the only losers in this new, trickier ad environment. “All advertising is about what the next-best alternative is,” says Brian Wieser of Madison and Wall, an advertising consultancy. Most advertisers allocate a budget to spend on ads on a particular platform, he says, and “the budget is the budget”, regardless of how far it goes. If social-media advertising becomes less effective across the board, it will be bad news not just for the platforms that sell those ads, but for the advertisers that buy them. ■

Mar 21st 2023 | 887 words