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China’s TikTok is showing American capitalists—and Mark Zuckerberg—how to disrupt the social media industry

July 29, 2022, 8:13 PM UTC
Shouzi Chew, chief executive officer of TikTok
Christopher Goodney—Bloomberg/Getty Images

One of the purest forms of American capitalism these days involves, ironically enough, a Chinese company.

TikTok, the wildly popular app imported from Chinese outfit ByteDance, continues to run circles around the original king of social media, Facebook and Instagram parent Meta, with the latest example arriving this week. 

After days of snowballing criticism about changes to the Instagram app designed to mimic TikTok’s popular recommended videos, Instagram backtracked on Thursday and said it will reverse course on the update. In an interview with Platformer, Instagram boss Adam Mosseri never made reference to TikTok, but implicitly acknowledged that his team hasn’t been able to replicate the ascendant competitor’s secret sauce.

“For the new feed designs, people are frustrated, and the usage data isn’t great,” Mosseri said. “So there I think that we need to take a big step back, regroup, and figure out how we want to move forward.”

The episode offers a striking case of American free markets at work—albeit tinged with the Chinese government’s shadow. Just as Facebook conquered the internet by perfecting a relatively novel concept—an interactive digital experience powered by users’ social networks—TikTok has created something that may be so superior that it ultimately supplants its predecessor.

With Meta boasting more than 3.65 billion monthly active users across its family of apps, the conventional wisdom has been that the company’s value—and main bulwark against competition—is the web of interconnections embedded in its massive audience. You need to be on Facebook or Instagram because that’s where all your friends and all their favorite content (pictures, news, gossip, party invitations) are living. 

TikTok turned that logic on its head. The ByteDance unit is taking eyeballs away from Meta not by having built an equally vast social network, but by sidestepping the social graph entirely. Instead, TikTok leverages superior A.I.-driven algorithms to dazzle and hook users.

Consumers are voting with their thumbs, downloading TikTok at a blistering pace and closing the usage gap with Facebook and Instagram. TikTok’s global active user count has grown from 55 million in early 2018 to 1 billion in mid-2021. During that same stretch, Facebook’s monthly active count rose from 2.2 billion to 2.9 billion, with a dramatic slowdown in the past 12 months. Meta doesn’t regularly release Instagram usage data.

Meta is trying to get hip with the times. On its earnings call Wednesday, Mark Zuckerberg said he wants to double the amount of A.I.-recommended content shown on Facebook and Instagram by the end of 2023. But Instagram’s revamp reversal this week highlights the gulf that exists between Meta and TikTok.

In essence, TikTok is just better at knowing what you want and delivering it to you.

How this phenomenon came to be is certainly subject to intense debate, often centering on thorny questions about ByteDance’s ties to the Chinese political regime. 

Since ByteDance is a private company, we know little about its financial ties to the Chinese government. The Information reported last year that Chinese leaders took one of three seats on ByteDance’s board, along with a 1% stake in the company—though the Chinese government doesn’t really need formal board seats or equity investments to exert authority over a domestic corporation.

There’s also the specter of TikTok benefiting from ByteDance’s Chinese version of the app, Douyin. 

There’s no evidence to date suggesting Douyin honed superior A.I. technology by using immense amounts of intrusive data collected and provided by the Chinese government, but it’s certainly a possibility. And as the New York Times reported late last year, an internal company document suggests that TikTok’s development process “is closely intertwined with the process of Douyin’s.” (A TikTok spokeswoman told the Times that “while there’s some commonality in the code, the TikTok and Douyin apps are run entirely separately, on separate servers, and neither code contains user data.”)

Nevertheless, TikTok’s rise upends a decade of Silicon Valley domination, with the potential to reshape the industry’s business and regulatory landscape. Meta officials are throwing huge sums of money at reshaping their product in the image of TikTok, siphoning money away from their augmented and virtual reality R&D budget. TikTok’s emergence also takes some of the antitrust heat off Meta, allowing Zuckerberg’s team to argue that this fast-arriving freight train shows that the social media ecosystem remains competitive. 

Silicon Valley loves to talk about using innovation to “disrupt” entrenched industries. The rise of TikTok is a painful lesson for Meta, but one that tech entrepreneurs should appreciate.

TikTok eventually could fall victim to changing tastes, a more forward-thinking competitor, government intervention, public scandals, or its own bloated largesse. (Anything sound familiar there, Meta?) If that happens, it will once again show capitalism at its finest.

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Jacob Carpenter

NEWSWORTHY

A winning hand. The House passed a sweeping tech-related spending package Thursday that includes $52 billion in subsidies for semiconductor manufacturers, sending the bill to President Joe Biden for his expected sign-off, the Associated Press reported. House Democratic leaders pushed the $280 billion bill through despite last-minute fears that Republican members would scuttle it in response to a surprise Senate agreement reached Wednesday on a separate spending-and-tax package. House members voted 243–187 in favor of the so-called CHIPS-plus bill, with 24 Republicans backing the measure.

No panic here. Apple shares rose 3% in midday trading Friday after the tech giant’s fiscal third-quarter earnings edged past analyst forecasts, Bloomberg reported. The iPhone maker posted $83 billion in revenue for the quarter, squeaking by Wall Street’s prediction of $82.8 billion, and earnings of $1.20 a share, four cents better than expected. Apple’s smartphone and iPad sales exceeded analyst projections, though its Mac, wearable, and services revenue fell slightly short.

Rediscovering its prime. Amazon executives delivered a surprisingly upbeat outlook on consumer spending during an earnings call Thursday, leading to a 11% surge in midday trading Friday, CNBC reported. The company issued a mixed second-quarter earnings report, beating revenue estimates but falling short of profit forecasts, as the e-commerce giant’s core retail business continued to see slower growth. But Amazon’s base of higher-income customers, who haven’t pulled back on spending as much as lower-income buyers, is expected to buoy its e-commerce business in the second half of 2022. 

Opposition was duly noted. Federal Trade Commission Chair Lina Khan overruled the agency’s staff recommendation against pursuing a challenge of Meta’s acquisition of virtual reality developer Within, Bloomberg reported Friday, citing three sources familiar with the decision. Khan’s support of the lawsuit, which aims to halt Meta’s reported $400 million purchase of the company, illustrates her commitment to stopping large acquisitions by Big Tech companies after more than a decade of unfettered deals. Critics of the FTC’s action argued that the Meta-Within agreement doesn’t meet the legal requirements for stopping an acquisition on anticompetitive grounds.

FOOD FOR THOUGHT

How they really feel. Intel announced dreadful fiscal third-quarter earnings late Thursday, and Wall Street is taking the chipmaker to the woodshed. MarketWatch reported Friday that analysts pummeled Intel for falling far short of revenue and earnings estimates, despite the company’s claims of an impending renaissance. A sampling of the ominous phrases used in client notes: “circling the drain,” “their competitor is about to destroy them,” “we just don’t see a path forward,” “about as messy as a quarter can get.” The underwhelming results, which stemmed from slowing demand and internal production issues, were coupled with a cut in the company’s current-quarter forecast. Intel shares sank 10% in midday trading Friday.

From the article:

Barclays analyst Blayne Curtis also suggested that more pain could follow.

“The substantial miss smells like the clearing the decks moment that some investors have been looking for but we aren’t even sure if estimates are reset enough and we struggle with what exactly the bull case is with the continued roadmap issues and such a disconnect between the company’s optimism and the current reality,” he wrote in his note to clients.

IN CASE YOU MISSED IT

After putting a dent in Facebook and Instagram, TikTok has Spotify in its sights next, by Christine Mui

A.I. is rapidly transforming biological research—with big implications for everything from drug discovery to agriculture to sustainability, by Jeremy Kahn

Prices of Ethereum’s original coin soar as crypto miners flock to ETC ahead of looming Merge, by Christiaan Hetzner

Leaked documents show how TikTok staff were told to ‘downplay’ parent company ByteDance and any China ties, by Christiaan Hetzner

TikTok says it rejected China’s request for a stealth propaganda account targeting Western audiences, by Olivia Solon and Bloomberg

Someone recreated Kmart in VR—and it’s attracting thousands of nostalgia-fueled fans, by Chris Morris

Twitter’s 5-day trial against Elon Musk to start Oct. 17 in Delaware, by Jef Feeley and Bloomberg

BEFORE YOU GO

Class is in session. TechCrunch reported Friday that the companies behind Hulu (Disney) and HBO Max (Warner Bros. Discovery) have struck an unusual arrangement to share the streaming rights of the ABC show Abbott Elementary. I’ll use this as a not-at-all shameless entry point to promote this splendid piece of old-school network comedy. Creator-star Quinta Brunson is an absolute delight, Sheryl Lee Ralph and Lisa Ann Walter are pitch-perfect as grizzled veteran teachers, and Janelle James’s incompetent principal is the best character on TV (apologies to Jimmy McGill/Saul Goodman). I highly recommend catching up on the first season, wherever it’s streaming.

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