How TikTok Makes Money

I interview
THE Brendan Weinstein about how TikTok makes money. We discuss their B2B business model, making money from e-commerce in the future, why kids on TikTok are famous instead of Kid Cudi, I talk about ideas I have for TikTok to make money.

Show Notes:

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Transcript

building an indie business in the center of venture capital i am alex edmonds people on the internet call me supremerumham and this is the building an indie business podcast all right so today this episode is very different from my usual stuff i'm here with the brendan weinstein and and we're going to be discussing TikTok and how TikTok makes money um from b to b and how they might be making money from consumers and then i have my own ideas about how they should make some money um so we're going to be talking about that brendan how are you doing um i'm doing great uh thank you for asking i uh it's nice to you know be into the new year hopefully this year brings us some better luck than last year and uh just like always it's the best day of the week when i can you know catch a podcast episode with you hey okay um so let's get into it so uh you told me about this earlier about how TikTok makes money through ads and i thought this was uh really interesting so can you give everyone an overview um yes sure so to that differently than um the uh prototypical uh social media platforms which are selling advertisements based on tracking of user data compiling your interests demographics right your tenancies on site and then dynamically generating you advertisements in the hope that you'll click through it right that's how they generate their ad revenue um well with TikTok not being uh a a platform that actually um stores and and analyzes user data in terms of person-to-person connections um it monitors interest but it does not monitor where else you're experiencing um video or audio on the web ecommerce on the web such as facebook does with its um ability to have backlinks and it's um cross-domain tracking where it can actually tell if you've left the site purchase something and come back now that's where their advertisement value comes in right they know something specific about you that you did not choose to do on facebook came back and now they're still able to advertise that information to you right take that being more inclusive than that it's been much more focused on business right so like the biz the brands and the influencers are the revenue generators for TikTok um if you've seen if any of you seen like the hype house or like the you know the the um two different getaway houses that the influencers of tik tok basically get to live in and film and create immersive experiences for the audience on tiktok well that doesn't come at no cost right the house is an expense of um pit dock right the uh branding so let's consider um sponsorship clothing um designer you know dressed to the nines all the women makeup artists right they're they're basically putting on almost mini fashion shoots for themselves and i and all the power to them but that's an expense and that's a not marketing expense that you would see um you know i mean in a normal ad but it's a operating expense for them to do marketing so i don't see to talk so much as advertisement as it is as marketing marketing the platform to express you know what you could be if you signed up and became a creator what he she or her could be right i think that's much more relevant and valuable to them so um there's you know a big controversy going around lately about obviously the united states and TikTok's current predicament that they're in and this is something i'm not going to touch on politically i'm not so much you know i mean involved nor interested and i don't think it's appropriate to touch on that but what i will say is that um TikTok is understood to be unique right but it's not subsidis it's not wholly owned bike dance is the company that owns TikTok the asian corporation um based out of china and that's where a lot of the concern comes in right so i believe that if they're not actually advert selling advertisements on the kind of data that facebook twitter and the other platforms are which is consume as much information as we know about you use that to sell to um retailers or those interested in in you know advertising to you um that's the mission on tiktok the mission is much more focused towards um what is interesting right now what is trending right so who amongst the TikTok influencers are together and what type of um creativity or style clothing are they wearing right there's a lot more interest-based um graph that's been designed versus a social graph which is based upon how many people you know and then their second and third degree connections right so if you or i or someone out there were to post a video and i follow you and like it my followers are now going to be inclined to see that video right TikTok differently than that is an interest graph notice how when you open up TikTok you're just seeing a 4u feed and it's just some of the top videos um it's not just who you follow you know videos your friends have liked it's much more about what is interesting to the people who have been following and are interested in the types of videos that are being distributed at the top level so like the most viral videos um that to me took a level away from the concern of are they tracking my data if they're using interests and not who i am and who i know that seems to me like it's even a little bit more secure whereas facebook can guarantee at an 89 89 guaranteed rate that 24 hours before you change your relationship status they will know that is harnessing too much data about a user so i think that the whole you know concern is a little bit over far-fetched and i think that they actually probably are doing a phenomenal job in creating their revenue streams today while being hindered by the us um uh you know different sanctions and attempted legality and injunctions they've placed against them um so when tiktok differently than instagram created its you know influencer creator model everyone on in on TikTok can be a creator right use charging you know post videos share them become viral have the audio behind you what's trending that's that's the feeling of tic toc right um now what i feel is sort of dangerous with that right is that bite dance still does control the majority of which is their parent company the majority of that data and or storage of that information that us tiktok users in the united states and across the world are actually interacting with now TikTok is a private company right it is owned by a chinese organization bike dance if anyone he could tell me another bike dance application i'd be quite shocked alex can you um no i know they owned musically and then they turned it into TikTok but i don't know much after that correct so their other applications include larp which is in china the um google workspace basically you have your apps your email your chat drive right the bat a music label with music streaming app and then in china tiktok exists in an entirely different form it's called baidu this is because the TikTok u.s and rest of the world regulations are different than china's right yeah more reason to believe that the scrutiny they're receiving may or may not be warranted but it certainly seems that there's steps to that have been taken to differentiate the two and not just consolidate all data in one and hold on to it um i'm not sure how you feel alex i i know that you're not really a tic toc user um are you at all interested in like what they might be doing with your information had they had it kind of so uh i was on tech talk to promote my book back in july and um it just didn't work out until like i couldn't get traction so i kind of just stopped using it and then i found out that all all the all the like they're they're taking the data they're like what i didn't like was that they were like saving what i was putting on the keyboard and so i deleted it after that and i deleted my account too but uh my nephew just made a TikTok account so i might jump back on it to support him and watch his videos um i mean that definitely certainly makes sense i would i would bet that almost all if in fact yes all analytical tracking tools will be tracking your key clicks um on click is an analytic event um yeah which keys on a keyboard that's a little tricky um but you want to know what's clicked there for like you can follow the funnel so you know them tracking and understanding alex edmonds right clicked on this item at this second is way less relevant than user id anonymized right follow this conversion funnel and then how many other uniques are like him right or her that to me is a fair way to analyze your data to be able to know whom exactly clicked on what and this is listening to what by knowing no um anonymous um like name and data masking and beyond that it's strictly right there a picture of you your account and what you're listening to at the moment i'm fine with that if it's only my followers right so for me the whole model of TikTok is a little bit um i guess scattered i feel like there's a few things they i mentioned in the beginning they do well but then there's a lot of things that don't really make sense to me in terms of the business model and that's where i want to touch on next so yeah i was a little confused so for twitter i i log into like twitter ads and i create the ad myself and then i give them my budget and then i put in my credit card and that's how a twitter ad gets born so what like how do you how do you advertise on TikTok let's say i'm i i want to advertise revenue research on tech talk how would i do that um okay so there are a couple different ways right um one of them is certainly their brand um influencers and their brand partnerships are what are you mean generating and deriving those um those advertisements so differently than seeing uh abercrombie and fetch shirt as an ad on instagram you may see a certain celebrity right wearing all let's say nike apparel right and that post was paid and or split in revenue between both the influencer the TikTok user and TikTok for allowing the advertisement of another brand right to represent and be represented at such a large viewership on their platform if i have 10 million viewers and you throw a nike shirt on me 10 million people are seeing that getting the parent company doesn't have a right to say um well without my cut they're not allowed to wear their naked shirt right that's only fair so in my opinion it's a lot more safe knowing that you're not actually programmatically being distributed ads that could be from anywhere filled with malware you click on it and and now someone's tracking you it's much more advertisement and um marketing uh oriented in music apparel events um promotions right um filters and different types of of interactive immersive experiences on the platform so what i think is they have definitely a business model that is here to stay as long as they're not only focused on the strategic advertisement you know mass quantity of users low cost per click generate you know i mean advertisement revenue through the mass interactive um and mass actions being triggered on the site um so TikTok's main revenue sources um bike dance as the owner made about 17 billion dollars in 2019. oh well okay 17 billion but then comparison um i believe that somewhere along the lines yeah the the disneys make 20 to 30 billion dollars in revenue a quarter right so bike dance as we said china's audience being that much larger can make sense but TikTok 17 billion dollars in revenue what can they capture of that with only 200 million of the one of the 2.1 billion users on the bike dance platform yeah and 2019 i didn't even know what TikTok was so imagine what that number is now did you know what musically was uh kind of um did you know what vine was yeah okay it's their vision of blending you mean the um best capabilities and best um uh most intriguing uh features of each which made it short form right like it changed by allowing you to add clips and you mean like almost like different scenes but its biggest difference was the music oh yeah unlike any other social platform they by by being a affiliate of bike dance bike dance has a music streaming application in which it has the same licenses to music that all our uh us streaming platforms do so when you hear that music in the background that's legally um licensed to be able to be played by you without you taking credit in the background of your video that's not the case on instagram or or twitter if you go viral and there's a song playing behind you that record label will come after you and they will they will serve you with maybe not actually follow through but it is their right to sue you right and that's why reels on instagram hasn't been as successful yes i would say that's part of it and also i think that they are actually um working on with facebook having the ability to um stream like maybe not the direct mp3 audio of it but stream the videos in the live section so if you could play the video behind right while you're doing um your preparation and acting out your video or your real that could work but that loses the whole purpose because as you cut scenes the song doesn't change so for me tik tok is fits it sort of within its own niche and in space that felt so inundated a few years ago but now feels like it's segmenting and separating partially due to you know fear of the you know consumer um our current government and um uh like not the non-information our government's given and the lack of updates we've had to what's going on in terms of the e-commerce TikTok oracle deal um so it's a little scary i believe i think that their revenue is certainly taking a hit right now because they don't know how to prepare for a in you know i mean experience or an environment in which they're not allowed to actually generate revenue in the united states or be a part of you know i mean this united states ecosystem right that that is scary i i would say definitely scary um many people disagreed with me recently and said what's to what's 200 million to their 2.1 billion users in asia who are spending more per user average revenue per user for in asia is higher than in the united states in terms of mobile apps it's another 200 000 users 200 000 users are not are from the united states 1.8 billion are in china yeah but like you don't want to cut yourself off from a section of the world just because i i totally agree i love you brought that up that's why they've been trying to work out e-commerce agreements with the united states on how they could have a separate application but still be earning the revenue in which the business model they've generated allows for right so uh i want to recap real quick so in terms of b2b they make money from ads they make money from the filters and the music as well um they make music i mean they make um money not um syndicating the music they make money and not having to pay per license for the music because they own a licensing distribution deal okay so wait every time i use like a kid cuddy song in my TikTok video do they get paid somehow if if they don't get paid they haven't hit the threshold of what meets like that that certain barrier that is okay once you've you know amassed a certain amount of time or earned revenue now it's no longer yours and it has to be split amongst the content owner right um so if yes if your podcast is a top 10 podcast and you're opening it up with ludacris you know yelling at everyone in the beginning then yeah eventually the the the record label um is going to start to see a kickback right that's part of the way that that works there's and that just like an advertisement works however long they view that if they click on it there's a value placed on that um right i believe that makes it unique i also believe the music is what make ticks makes tiktok as a social platform itself more immersive and unique okay and what about the filters is there any money there um i i've never been too keen on researching into the filters i know that if one were to brand or create their own like designer like if i was a um a shoemaker and i put you know created my new shoe and i want to launch it on TikTok so that um you know i mean like either way filters work you could be seen in my shoes right that could be um people could get sponsored for where sponsored to wear certain apparel they certainly are right now but i'm not sure where tik tok and or by dances um revenue and or cut of that is i would doubt it's anything at all because if they did get into a conversation over it i think that all the influencers would just say okay that's fine i'll wear a white t-shirt mm-hmm okay right otherwise why you don't need to give them the money it's not like they hooked you up with the shirt went and bought it for you and came back with it right all right interesting okay so the reason why i wanted to recap is because you were about to transition into consumers you talked about um how e-commerce uh platforms would partner with TikTok and take a TikTok would take a percentage of every sale made on the platform so can you go a little bit more into your side i would love to so this has been my view of what i believe will transpire for quite a bit now and that is i and many others agree the only way that this united states um actual merger or or sale acquisition to oracle walmart microsoft is that the current i think that's still the current um uh like most up-to-date um possibility as far as i know yeah right the way that i viewed that was you ever been uh have you been on instagram lately yeah can you click on an item and shop and purchase it uh i think so yes you can yeah check out right there secondly can you purchase items um online from let's say um not on twitter yet but if i were to open up an application and you were to tag items you're wearing as like a um a thrift shop app i could click on that and purchase it correct yeah right now with walmart microsoft partnering with well oracle as well walmart has the ability to now distribute and create an entirely new e-commerce platform embedded within tiktok for all of its millennial relevant information i mean on uh products it's holiday season right so here's advertisement for hats clubs xboxes right you see someone tick-tocking themselves playing an esports game don't you think it's smart to advertise to them here purchase that system right here with one click yeah it seems to be the instagrams fashion um purchasing to tic tocs toc's immersive and interactive lifestyle purchasing um that's the way i i viewed it microsoft being the largest cloud hosting provider in the country in the world and the security level the um financial and user data it can collect the ability for it to um process payments invoices receipts um returns and have the data on each user is very important right so you have microsoft's infrastructure because remember you just lost bike dances um walmart's ability to provide you any type of in any form of materials whether it be clothing or flowers right on flower on mother's day or something that they're advertising there's another revenue stream there and if we consider this as a walmart and then you consider the millennials and gen z that don't shop at walmart but are on TikTok i see it being a humongous if worked out correctly potential revenue um re not revenue creation revenue um innovation in a sense that walmart can put itself back on the map get itself acquainted with i mean the younger millennial gen z audience and start to analyze what if its products are actually being interest you know being pursued being clicked on what are the average ages of each product um i believe that's where walmart got itself involved i believe that that's how TikTok continues to grow and earn significant significant amounts of revenue outside of the typical social platform um hyped up valuations and um crazy multiples on on revenue i think TikTok has a much stronger case for whether it stay public or it become a subsidiary of an amazon or walmart uh a major you know i mean um retailer while keeping all of its social and technological um computing capabilities and uh operations separate they may be able to have a basically let's call it the modern day target right you got everything depending upon what kind of style you're in what budget you have but it's right at your fingertips and you can see who else you know like respect and admire has that exact item and that's the single greatest um incentive to buy the strongest buyer power comes from word of mouth marketing yeah and then another thing with walmart is uh i was trying to buy something online like over the holidays and i noticed that these weren't products be like when i looked when i searched for it these weren't products that were being sold only by walmart there were people like setting up online stores through walmart so that's another thing like maybe i could sell my book through walmart and you're not supporting just walmart you're supporting me when you buy the book that's the exact same thing as the um as the TikTok is because they need to create that marketplace so that you could actually check out and if they're hosted somewhere those items are influencers uploading an item to sell right yeah that will expand the walmart model to allow you and others to create and and innovate and makers to to produce excuse me to produce a television i mean a tv shirt or to produce a tv shirt a television a t-shirt based on their television show um it allows you to produce um you know custom branded um material for your entire team right there's tons more opportunities once our country and our commerce tendencies start to tilt which they always do towards those who have influence what is that this person wearing and she and what is she doing good i'm going to go do that if i can't i'm going to make sure that i contact whomever the store is and push for that right so i definitely think it opens up a more amazon like model where you're at least allowing the creator to earn um i just definitely have my i have some skeptical views on how easily this can be taken advantage of especially not having been born and bred as a united states organization um yeah um i think correct me if i'm wrong but before everything happened with the us government they had a deal with shopify to do exactly what you just mentioned correct they were going to virtually it was going to be similar to where you on instagram you could tag the items on shopify you could basically integrate your shopify store which i believe actually is still possible on instagram i think instagram that's how it handles it you'd be able to integrate your store choose which items you'd like to sell and the images and list them for sale um instagram allows for you to just check out with paypal and it ships it right to you i've actually purchased shout outs to barcelo i've actually purchased a couple of dave portnoy shirts on instagram um seamless right i was like i saw a picture of him wearing it i cooked it it was like oh i want that one button and i'm done that to me is i'm not feeling advertised to therefore i'm more likely to conduct a transaction that's where i think that TikTok has a niche in a very very influential in potentially influential space in the e-commerce influencer and mobile ecommerce market right yeah i was pretty excited for the shopify deal because we have friends with shopify stores and that would give them an opportunity to sell shout out to ross aerodrawings.net where you can buy blueprints of uh like historical planes yeah definitely um shout out ross he's uh also been a big help for us too um behind the scenes doing some doing some of the leg work uh so thank you very much ross yeah and we have a terra simply uh selling candles that's a dianna allen yes yeah so yeah um i also i i wanted oh if you're listening this far into the podcast um brendan and i we we're doing some kind of research on TikTok could you tell us who your favorite TikTok person is and why because we're trying to figure out like why these kids are famous when they're just random kids right it's not like selena gomez or kid cudi on tiktok being the most popular it's just random kids yeah they could become that and my interest is are those who are the most followed also the highest paid and the most well-dressed and is that the reason why they're viewed as important relevant and famous or is it just because TikTok has put them up in the high pass in this white house and they get to be famous for no reason um we're trying to dig into why and a certain influencer or a certain TikTokuser may have more influence over another and why they are so admired yeah so i actually have one theory that i haven't brought up with brendan so he's hearing this for the first time now so we've discussed that musically is like the original TikTok and then they branded it rebranded it to TikTok so my theory is that these kids were like the original musically and they grew their following and TikTok just like boosted them up a bit and that's how they grew their following on TikTok to hundreds of millions of people following them on TikTok and now they're making money because they were the original users of musically um i believe musically had like 1.1 million users to TikTok 2.1 billion um correct me if i'm wrong anyone out there but musically was very very early in its in its infancy um when that happened the idea of the music behind the videos without musically i don't know that TikTok exists because that to me is the true real differentiator some of the dances the the clever you know i mean like cuts of the videos in the very beginning people you know women like whomever addison wright for example if you find a video or she's not going to be having a song in background dancing it's either somewhat to do with the revenue generating as a result of that for her and or to talk or it's simply because what no no no like nothing else to do that's what we're trying to figure out is why who and how is the money being circulated amongst the creators of TikTok yeah you actually brought up something interesting with the music because that is TikTok's competitive advantage because like anyone could make up a dance and post it on snapchat or instagram but they can't have the music and the music music is catchy to people so that catches their attention and then they want to watch like 50 videos of this same person um dancing or others competing with that same dance but only TikTok has that music license because of the record label that they own through their parent companies yeah so um i wanted to have a little fun with this uh next part so um part of revenue research is me just coming up with crazy ideas to uh for this industry or the industry that i'm writing about to like to maybe use and you know maybe cr give me credit in the future so i wanted to talk or for me to just shoot him down and make him make him feel wrong no comment there so i have a bunch of revenue ideas that TikTok can use and i wanted to get your opinion about um these brennan so my first idea is that when i was first on TikTok i i wanted to sell my book right i was trying to get pre-orders and um it wouldn't let me like post a link to the book in my bio so i couldn't do like lincoln bio as i would do on instagram so what do you think about the ability to buy like that feature of having the link in the box like having yeah having the link in the bio right away so like i sign in a TikTok and i pay 10 a month to have the link in my bio and when they include the ability to sell directly through the platform like say like a walmart right the link in bio is going to take you to a separate payment processor outside of the platform right and now you've lost your traction right so if you're let's say at the end of someone's feed and it's average popping up an ad where either way they're getting rev generating revenue by cl you clicking on the ad and then going to purchase the book those types can be you know i mean fit into a business model but that's why i like the idea of embedding the ability to purchase is right amazon started out as bookstore right who's to say that like if you were to take the walmart of amazon why wouldn't walmart have kids toys or books or ebooks movies purchasable right if there's a clip in the background of uh um audio sample and it's friday the 13th plane should you know have a little pop-up right there that says like rent friday the 13th on stars right now right like those are ways that they could get tons of affiliate revenue by actually engaging interacting with and honing in on what that actual user is interested in right now right and then i just realized another problem with that idea or like a problem is that so for those who don't know the goal of a social media platform is to keep users on there as much as possible so by allowing me to put the link in the mario without having a cut of that i'm going against their goals and that's why they're not going to allow me to have that feature right away but the thing about my idea is i'm paying for it so they're getting some revenue from me having to pay for it correct or if you don't want to have it handled internally maybe you give them five percent of all of your sales from that link versus two percent from the choosing their native in-app purchasing yeah but also wouldn't that be difficult to track because i'm going off their platform onto like my website data analytics will allow you to do that that's um like pixels they have track like they have track packs they allow you to um cross uh cross domain across and cross affiliate um tracking and then so i have three ideas that was the first one my second one is boosted posts so like as a user i would be able to pay so that more people see my product or no my post on TikTok um yeah so i called this user ad revenue uh what do you think about that i don't i don't disagree with it i'm not sure where they are right now um in terms of that i do think that that may screw up a little bit of the interests um and um like the their interest map that they've built over the social map because it's like if you right are to sponsor a post and it gets kicked off right that's adding no level of interest right to basically the front page but your 40 now has to equate to more than anyone else on the platform would have gener would have been generating the company using the model and the algorithm that they have been so keen on not even letting the united states get their hands on right so that's all i worry about is that it's like when you saw sponsored posts on facebook in the beginning they were all over the top instagram it's it's a guarantee if i see sponsored it's the one i'm not going to purchase right right and then there there's a chance that someone will there's there's not a chance someone will abuse that in some way like uh someone will give them ten dollars and maybe try to get people to give them personal information and then hack them so that's an issue right there right how how how secure is it like their payment information your name such and such yeah and then so my third idea was it goes against their model currently but its users pay for ad-free an ad-free platform so currently what's the experience like when viewing an ad you can't really tell that it's an ad that's why we're doing this whole episode like i couldn't figure out how they were making rhetorical but yes it's not really that felt right unless you're sitting on TikTok for hours and hours and hours and scrolling until you can't find anything it's probably where you're going to actually see much of the you know i mean advertisements that are being snuck in there think about it you're uh from me right now i'm wearing this sweatshirt that could be the ad how would you know right like it's using the re using the creators as the affiliate advertisement um model almost and some of them are split as the creator gets 80 the advertiser gets 20 and then vice versa if nike is throwing you you know 20 sweatshirts and saying we need you to just like pose here in this so that we can make it go viral and have it be a top item and then sell it for sure all right um is there anything else you want to mention um the only other thing i quickly wanted to mention was full disclaimer um none of this information that i've received and or spoken about today has come from my sister my sister is an employee of tiktok we have not discussed even the fact that i'm conducting this episode most of much of this is through knowledge that we've developed in our relationship my sister and i but mostly through research that alex and i have discovered and found sometimes alarming and sometimes informative to the rest of the public right uh where can people find you online um please follow me um on twitter at b as in brendan m as and michael weinstein seven uh 197 on twitter and email you can catch me at ba m weinstein seven gmail.com all right and we'll put that in the show notes too um follow my nephew on TikTok uh pitchman 525 pitch as in p-i-c-h um thank you for listening follow me on twitter one more shout out follow no code no problem my buddy ryan meyer on TikTok if you're interested in um software development web development or visual development yeah for sure um thank you for listening have a nice day bye