A TikTok party in Tokyo in February. (Photographer: Shiho Fukada/Bloomberg)

The Kids Use TikTok Now Because Data-Mined Videos Are So Much Fun

(Bloomberg Businessweek) -- Most nights, from around 7 till midnight, Sydney Jade is on TikTok, the smartphone app of the moment. The platinum blond teenager films herself singing show tunes, doing jumping jacks, and joking around with store clerks at a Walmart not far from her home in Oklahoma. Her short music videos and livestreams are popular—Jade has 284,000 followers, some of whom periodically send her virtual gifts, like 99¢ Rainbow Puke stickers.

Jade’s parents resisted TikTok at first. They hadn’t heard of the app and, Jade says, “didn’t like the idea of strangers watching me sing alone in front of the pink curtains in my bedroom.” But she convinced them that TikTok was “friendlier for kids than other apps like Facebook.” They let her join last year, just as, it seems, every other teenager signed on as well. In January, TikTok was the most downloaded app in the Android and iPhone stores, according to research firm Sensor Tower Inc.

The story sounds a lot like the rise of other social media powers such as Instagram and Snapchat, both of which pitched themselves as alternatives to Facebook’s big blue app. But TikTok wasn’t created by Stanford students Mark Zuckerberg could buy off or spend into the ground. It’s a subsidiary of a Beijing startup, Bytedance Ltd., that’s built a collection of valuable apps in China powered by vast troves of data and sophisticated artificial intelligence. Last year, Bytedance’s investors valued the company at $75 billion, the most of any startup in the world.

Inevitably, especially in the age of Donald Trump, TikTok’s fast growth and Chinese ownership have made it the subject of scrutiny. Last month, the Committee on Foreign Investment in the U.S. (CFIUS), ordered Beijing Kunlun Tech Co., a little-known Chinese gaming company that bought the very well-known gay-dating app Grindr, to sell the business over apparent concerns that Chinese intelligence agencies could potentially use data from the app to blackmail users. In an April 1 filing, the company said it’s in talks with CFIUS. U.S. authorities haven’t said they’re investigating Bytedance in connection with its ownership, but the company’s large user base could conceivably make it a target. “Social media platforms are increasingly considered sensitive by CFIUS,” says Farhad Jalinous, chair of the national security and CFIUS practice at law firm White & Case LLP. Bytedance says it now stores all TikTok data outside of China and that the Chinese government has no access. (The company’s privacy policy had previously warned users it could share their information with its Chinese businesses, as well as law enforcement agencies and public authorities, if legally required to do so.)

Separately, TikTok has faced concerns over privacy and child safety. In February, Bytedance was fined $5.7 million by the Federal Trade Commission to settle allegations that Musical.ly, which Bytedance bought and renamed TikTok, illegally collected information from minors. It was the largest FTC penalty in a children’s privacy case.

The settlement didn’t scare off Bytedance’s investors or the company itself, which is spending hundreds of millions of dollars to advertise on Facebook in the hope of luring away more users. Over the past three months, for instance, 13 percent of all the ads seen by users of Facebook’s Android app were for TikTok, says app-analytics firm Apptopia.

The result is that Bytedance has had more success outside of China than any previous Chinese internet company, including Baidu and Tencent. The TikTok app and its Chinese version have been installed more than a billion times. (It has no relation to TicToc, Bloomberg LP’s breaking news network.) Late last year, executives told investors that they expect $18 billion in revenue this year and $29 billion in 2020, according to people familiar with its finances who aren’t authorized to discuss the company publicly. Bytedance will “become a global player,” says Hans Tung, managing partner of GGV Capital, one of the company’s backers. “It’s just a matter of when.”

The Kids Use TikTok Now Because Data-Mined Videos Are So Much Fun

Bytedance’s Beijing headquarters, a former aerospace museum with 50-foot glass skylights, is a celebration of the company’s frantic pace. On a January afternoon, a video in the cafeteria asked workers to share New Year’s resolutions and regrets. Most seemed to involve workaholism. “To my ex, I’m sorry I was too busy at work,” one employee said. “I’m sorry to my kids that I’m never home,” another message lamented.

The corporate culture is intense even by the standards of Chinese startups. Employee performance goals are published internally via a mobile app the company created called Lark and are reviewed every other month. In an interview, Bytedance’s senior vice president for corporate development, Liu Zhen, mentions that founder and Chief Executive Officer Zhang Yiming likes to travel to the West when the Beijing office shuts down during Chinese holidays. “So he can keep working,” she explains. Zhang declined interview requests.

Now 36, he started Bytedance in 2012, in an apartment near Beijing’s Tsinghua University. One of its first apps, Neihan Duanzi (“implied jokes”), used AI to tailor a selection of memes to individual users’ tastes. The effect was irreverent—think of Reddit, but a little bit grosser and more personal—and the app attracted tens of millions of users. Bytedance used the same approach to develop a news app, Jinri Toutiao (“today’s headlines”), which became China’s largest news site, with more than 700 million users. The success prompted acquisition offers from Baidu, Alibaba, and Tencent, all of which Zhang declined.

Then in 2016 it launched a short-video app in China called Douyin that allowed users to add music and animations. The following year, it created an international version, TikTok. Users who open TikTok are confronted with an endless feed of short, full-screen videos, generally set to music. Tapping on a magnifying glass icon reveals TikTok’s “Discover” page, which displays a carousel of videos under “trending hashtags.” These are internet memes such as #potatoportrait, where users apply makeup to potatoes, or #simbachallenge, which asks them to reenact an iconic Lion King scene.

Although these features make TikTok feel similar to Facebook, Instagram, and Snap, the app doesn’t rely on social connections to figure out what to show you when you open it. Instead, TikTok decides what videos to show by tapping into data, starting with your location. Then, as you start watching, it analyzes the faces, voices, music, or objects in videos you watch the longest. Liking, sharing, or commenting improves TikTok’s algorithm further. Within a day, the app can get to know you so well it feels like it’s reading your mind. That’s why Jade, the Oklahoma teen, mostly sees videos of people dancing, while her mom regularly gets clips of dog tricks.

Another way TikTok differs from big American social media apps, which largely grew through word of mouth, is that its expansion didn’t happen entirely through the magic of viral marketing. Although the app initially took off in India and Southeast Asia, it struggled to attract users in the U.S. and Europe. In November 2017, Bytedance paid about $800 million for Musical.ly, a music video app that had more than 100 million users. A few months later, those users would find the old Musical.ly app replaced with one bearing TikTok’s neon logo instead. The app suddenly had a substantial footprint in the U.S. “Musical.ly believed in organic growth, and that worked great with early adopters,” says GGV Capital’s Tung, who also invested in Musical.ly. “TikTok is more based on algorithm recommendations and paid growth,” meaning ads on Facebook and elsewhere.

Unlike on other platforms, where trends bubble up from users’ posts, many of TikTok’s trending hashtags are created by the company’s marketers. Ahead of its U.S. launch, Bytedance hired about 40 social media celebrities to make videos—including YouTube comedian David Dobrik—paying each tens of thousands of dollars. Some contracts required the influencers to ask their YouTube, Snapchat, and Instagram fans to move over to TikTok.

Bytedance still makes most of its money in China, where its short-video app charges advertisers 15 percent of what influencers get paid to promote brands. TikTok also takes a cut from the sale of digital coins that fans buy for creators during livestreamed videos.

In theory, relying more on professionally created content should make TikTok safer than Twitter or Facebook are. But users say livestreams are peppered with lewd acts and vulgar comments. That can be terrifying for children. Jade, the Oklahoma teen, says she recently cut short a live appearance after commenters said they knew where she lived and threatened to kill her dog. “It wasn’t real, but it could have been, and I got scared,” she says. In February a 35-year-old man was accused by the Los Angeles County Sheriff’s Department of posing as a 13-year-old boy to send sexual messages to at least 21 girls on TikTok. Police said he showed up at the home of one of his alleged victims, a 9-year-old.

In response to the FTC settlement, TikTok began requiring users in some countries, including the U.S., to input their birthdays, denying entry to the full-feature app to those who say they’re under 13. It also started using facial-recognition software to identify youthful faces, expelling underage creators, and preventing younger viewers from seeing mature content.

It’s too soon to say whether these changes will work, but TikTok has won cautious praise from some child safety advocates who say its challenges are similar to those facing other platforms, but that the stakes are higher because of its younger audience. “Three years ago, we were having a really hard time trying to pin them down and get them to do the right thing,” says Julie Inman Grant, commissioner of Australia’s eSafety Office, a government agency. “They’re starting to be more responsible.”

Bytedance is aiming for more than mere social responsibility. The company’s long-term goal is to eliminate objectionable content entirely, to be “controversy free,” as Tung, the investor, puts it. It’s a uniquely Chinese censorship strategy—distinct from the hands-off approach of Bytedance’s American counterparts, who tend to express support for almost unrestricted free speech. (Zuckerberg once famously said that Holocaust denial should be permitted on Facebook.) Last year, Zhang issued a public apology after media regulators shut down the jokes app for hosting vulgar content. The company hired thousands of people to police content, giving preference to Communist Party members, and invested more money in developing algorithms to screen posts.

Today, Bytedance’s AI screens videos as they’re posted, automatically removing content without waiting for user complaints. The ambition, says Raj Mishra, TikTok’s head of operations in India, is to be a “one-stop entertainment platform where people come to have fun rather than creating any political strife.” He makes no attempt to defer to the freedoms of speech and expression that are written into the constitution of the world’s largest democracy. When asked if TikTok would allow criticism of, for example, Indian Prime Minister Narendra Modi, to be prominently featured in the app, Mishra answers, “No.” In mid-April, Google and Apple app stores blocked new downloads of TikTok in India after a court asked the government to ban the app over concerns about pornography. Bytedance is fighting the action.

The Kids Use TikTok Now Because Data-Mined Videos Are So Much Fun

Whether Bytedance ultimately succeeds will depend in large part on its ability to attract older users with more spending power. TikTok has been encouraging cooking, travel, and sports videos designed for those crowds. At the same time, it’s adding thousands of employees to its 40,000-person staff and pumping hundreds of millions of dollars more into ad campaigns. It’s also working on a search engine, a way for livestreamers to sell products, and a Slack-like chat service for businesses.

According to people familiar with the company, executives have met with bankers to discuss going public. (The company denies it has plans for a public offering.) Bytedance was set to lose about $1 billion in 2018, according to another person familiar with its financials.

Even so, the company’s global ambitions have been enough to get the attention of Facebook, which released a TikTok-like app, Lasso, in late 2018. While only 70,000 people have downloaded it so far, according to Sensor Tower, Facebook has had success knocking off competitors’ apps in the past. The company released several Snapchat clones before successfully copying its most popular feature, Stories, within Instagram. That caused Snap’s growth to slow, and Instagram’s to take off.

Zuckerberg seemed to acknowledge the threat posed by Bytedance and other Chinese upstarts last year during a U.S. Senate hearing in the wake of the Cambridge Analytica scandal. Dan Sullivan, an Alaska Republican, threw him a softball, offering that Zuckerberg’s rise from college dropout to technology mogul might have a patriotic element.

“Only in America,” Sullivan said. “Would you agree with that?”

“Senator, mostly in America,” Zuckerberg offered, noting that “there are some very strong Chinese internet companies.”

“You’re supposed to answer ‘yes’ to this question,” said Sullivan.

Back in Oklahoma, Jade isn’t sweating geopolitics or regulation, and she’s mostly off Facebook and Snapchat. On TikTok, she applies a fresh coat of candy apple lipstick and lip-syncs to Kelis’s Milkshake while dancing behind a J.C. Penney cash register.

“There are nasty people here and there,” she says of her experience using the app. “But for the most part, it’s just a fun, friendly place.” —With Selina Wang, Pavel Alpeyev, and Mark Bergen

To contact the editor responsible for this story: Max Chafkin at mchafkin@bloomberg.net, Bret Begun

©2019 Bloomberg L.P.