Summary Notes


In season five, episode eight of Acquired, hosts Ben Gilbert and David Rosenthal delve into the story of ByteDance, the Chinese tech giant behind the cultural phenomenon TikTok. Valued at nearly $80 billion, ByteDance has reshaped social media usage among younger demographics worldwide. They examine how TikTok's machine learning-driven platform catapulted the song "Old Town Road" to historical Billboard success and discuss ByteDance's strategic acquisition of the app Musically, which was pivotal in TikTok's global expansion. The episode also touches on the implications of ByteDance's ownership for U.S. national security and the potential regulatory challenges it faces.

Summary Notes

Introduction to Acquired Podcast Season 5, Episode 8

  • Ben Gilbert and David Rosenthal introduce themselves and their affiliations with Pioneer Square Labs and Wave Capital respectively.
  • They announce the topic of discussion: ByteDance, the parent company of TikTok.
  • ByteDance is characterized as the most valuable tech startup, with TikTok being a revolutionary social media app.

"Welcome to season five, episode eight of Acquired, the podcast about great technology companies and the stories behind them. I'm Ben Gilbert, and I'm the co-founder of Pioneer Square Labs, a startup studio and early-stage venture fund in Seattle." "And I'm David Rosenthal, and I'm a general partner at Wave Capital, an early-stage venture fund focused on marketplaces based in San Francisco."

Ben and David provide a brief overview of the episode and their roles in the tech industry.

ByteDance and TikTok

  • ByteDance, a venture-backed Chinese company, is valued at nearly $80 billion.
  • TikTok has significantly impacted how younger generations use their phones.
  • The app's role in propelling Lil Nas X's "Old Town Road" to historic success is highlighted.

"Today, we'll tell the story of the most valuable tech startup in the world, ByteDance. You may not have heard of it, but you have almost certainly heard of their most popular product, Douyin. Or wait, if you're in our western audience, I mean, TikTok."

The importance of ByteDance and its flagship product, TikTok, is emphasized, noting its valuation and cultural impact.

The Unprecedented Success of TikTok

  • David expresses amazement at understanding the "Ehaw" challenge after researching TikTok.
  • Ben and David discuss TikTok's unique ability to create widespread sensations and its unparalleled success among social media platforms.

"Well, David, I mean, how on earth can this app create such a universal sensation for so many people at once to skyrocket it to number one like this? I mean, this is something that no other social media app has been able to accomplish."

The hosts ponder the phenomenon of TikTok's ability to create viral trends and sensations.

ByteDance's Valuation and Investors

  • The company behind ByteDance's valuation is teased, with Sequoia China mentioned as an early investor.
  • Ben and David build suspense around the reveal of the valuation entity.

"You, of course, know who assigned the $78 or $79 billion valuation to ByteDance, right?"

David teases the reveal of the investor responsible for ByteDance's high valuation.

ByteDance's Acquisition of Musically

  • The story of ByteDance will be told through its 2017 acquisition of Musically.
  • The acquisition is a key event in the creation of TikTok as it is known today.

"Well, listeners, the way we'll be telling this story is through ByteDance's 2017 acquisition of another China-based company, Musically."

Ben sets the stage for the narrative of ByteDance's strategic acquisition of Musically to develop TikTok.

Sponsorship by Pilot

  • Pilot, a company providing accounting, tax, and bookkeeping services, is introduced as a sponsor.
  • The hosts discuss Pilot's growth and the importance of outsourcing non-core business functions like accounting.

"Pilot is the one team for all of your company's accounting, tax, and bookkeeping needs, and in fact, now is the largest startup-focused accounting firm in the US."

The hosts explain Pilot's services and its relevance to startups, emphasizing the benefit of focusing on core business activities.

TikTok's History and Origins

  • The origins of TikTok are traced back to Alex Zhu, a mid-30s UI designer from China working at SAP.
  • Zhu's role as an in-house futurist at SAP, focusing on the future of education, is mentioned.
  • Zhu's observations of teenagers on a train using their phones collaboratively inspire the concept behind TikTok.

"The day we released this application to the market, we realized it was never going to take off. It was doomed to failure."

Alex Zhu reflects on the initial failure of his education video app, which would later pivot to become TikTok.

The Influence of Vine and Quaishou

  • Vine and Quaishou are identified as influential apps that likely impacted the direction of TikTok.
  • Vine's success with short-form video content and Quaishou's algorithm-driven content recommendation in China are highlighted.

"The US is a music country. Everyone there is so into music, and the US is the center of pop culture worldwide."

Lewis Yang, co-founder of Musically, expresses the belief that the US would be a key market for their app due to its musical culture and influence on pop culture.

Cultural Phenomenon of Lip Syncing

  • The cultural relevance of lip-syncing in the US is discussed, with references to pop artists and the TV show "Lip Sync Battle."
  • Lip-syncing's popularity in the US is posited as a reason for TikTok's success in the country.

"There was actually a TV show called Lip Sync Battle."

Ben mentions the TV show "Lip Sync Battle" as an example of lip-syncing's popularity in the US, which may have contributed to TikTok's appeal.

Chinese Technology Company's Unique Position

  • The company's product is highly popular in the US market, which is unusual for a Chinese technology company.
  • The cultural differences are noted as a reason for where the product could be appreciated.

"this is really unique. For a chinese technology company to be building a product that is most popular in the US market like this was pretty unheard of and makes total sense when you think about the sort of cultural differences of where it could be appreciated."

The quote emphasizes the rarity of a Chinese technology company creating a product that gains significant popularity in the US, suggesting that understanding cultural differences is key to this achievement.

Musically's Evolution and App Store Optimization

  • Musically, initially a broad short-form video platform, was launched after pivoting in 2014.
  • The app's name indicated a focus on music, and App Store optimization played a crucial role in its early growth.
  • Keywords were stuffed in the app's title to leverage the iOS App Store's search term prioritization.

"So the title of the app is like, musically, dash, make videos for Instagram, Twitter and Facebook, with music, with your friends, have fun, like, blah, blah, blah, blah, blah."

This quote illustrates the keyword stuffing strategy used in the app's title to improve visibility and drive downloads from the App Store.

Lip Sync Battle's Influence on Musically

  • Downloads spiked on Thursday nights due to the Lip Sync Battle TV show on the Paramount network.
  • Musically did not directly feature on the show, but the app's title included "lip sync," leading users to discover it post-show.
  • The realization of this trend led to a focused redesign of the app to emphasize lip-syncing.

"No. So it appsync do the App Store optimization. They had put lip sync in the title of a bunch of versions of the app. And so after the show ends, people just go on and search the App Store for lip sync. And musically is what pops up."

The quote explains how the inclusion of "lip sync" in the app's title inadvertently connected the app with the popular Lip Sync Battle show, driving user discovery and downloads.

Strategic Pivot to Lip Syncing

  • Musically decided to focus on lip-syncing as the primary use case for the app.
  • The onboarding flow and content surfacing were redesigned to promote lip-sync video creation.
  • Regular notifications with lip-sync challenges encouraged continuous content creation.

"So they redesigned the app and in particular the onboarding flow for really making it clear that this is a great product for creating lip sync videos."

The quote highlights the strategic decision to redesign the app's onboarding experience to align with the lip-syncing focus, which was pivotal in driving user engagement.

Algorithmic Content Surfacing

  • Unlike Western social networks, musically (and later TikTok) surfaced content based on an algorithm rather than follower connections.
  • This approach allowed new users to discover content tailored to their interests, regardless of their social connections.

"The content that the app surfaces for you is based on an algorithm of what it thinks you're going to like completely regardless of who you follow."

This quote explains the fundamental difference in content discovery on musically/TikTok compared to other social networks, where content is surfaced algorithmically rather than through social connections.

Creator Success and Platform Economy

  • Creator success on TikTok is linked to the platform's ability to generate revenue streams for its users.
  • The platform initially centralized its economy to ensure certain creators achieved fame and monetization.
  • TikTok's algorithm acted as a personalized American Idol, allowing niche creators to find their audience without needing a direct relationship.

"The way that they did this at musically is first you centralize your economy. So you make sure you put your hand on the scale."

The quote discusses the initial strategy of centralizing the platform's economy to ensure that select creators could achieve success and monetization, setting a precedent for a sustainable creator economy.

Decentralization and Social Mobility

  • Musically aimed to decentralize after initial centralization to ensure new creators had opportunities for success.
  • The analogy of founding a country was used to describe building a social network, emphasizing the need for a path to success and wealth creation.

"Then, though, you have to take a second step, which is decentralizing."

The quote captures the need to shift from a centralized approach to a decentralized one, ensuring that new creators on the platform have the opportunity to succeed and that there is social mobility within the platform.

Musically's Organic Growth and Sharing

  • Musically's growth was facilitated by users sharing their creations on other platforms.
  • The app watermarked videos and made it easy to share content externally, driving organic growth.

"People were creating in musically because it could create a good product with little effort and sharing it everywhere else."

The quote points out the ease with which users could create and share content from musically on other platforms, contributing to the app's organic growth through external visibility.

Facebook's Interest in Acquisition

  • In 2016, Facebook showed interest in acquiring musically, with Mark Zuckerberg inviting the CEO to Menlo Park.
  • Serious discussions took place, but the acquisition did not materialize for undisclosed reasons.

"So there's serious acquisition talks going on between the companies."

This quote reveals that there were significant discussions about Facebook potentially acquiring musically, though the deal ultimately did not go through.

Expansion in China and Monetization Model

  • Musically aimed to grow in China, navigating a different monetization model centered around virtual goods and tipping.
  • The direct monetization model in China contrasted with the advertising-based model in the West.

"The business model for content is very successful in China, but very different from how it is in the west."

The quote contrasts the monetization models for content platforms in China and the West, highlighting the success of direct monetization through virtual goods and tipping in China.

Entry into China's Market and the Rise of Bytedance

  • Bytedance had significant success with Toutiao before launching Douyin.
  • Douyin, meaning "vibrating sound" or "shaking music," was Bytedance's response to the rise of short-form video apps.
  • Bytedance leveraged their existing user base and technology from Toutiao to quickly create and scale Douyin in China.

"Now I can hear vibrating sounds everywhere, making me uncomfortable. He's of course referring to Douyin, which is at this point has been launched by the number one content company in China, most valuable startup in the world, Bytedance." "And it's important to know, too, like Bytedance before Douyin was doing very well with Toutiao."

These quotes describe the cultural and market impact of Douyin in China and highlight Bytedance's strategic move to capitalize on the short-form video trend by leveraging their existing strengths from Toutiao.

Toutiao: The Foundation of Bytedance's Success

  • Toutiao, meaning "headlines," is a news and content aggregation app with a large user base in China.
  • Bytedance's early realization to not limit content formats in Toutiao allowed for diverse content, including short-form videos.
  • Bytedance's superior algorithmic recommendations contributed to their success by personalizing content for users.

"Toutiao is basically, you could think of it as like Apple news on steroids... They have the best AI technology to quickly suss out personalization for any given user."

This quote explains the functionality and competitive edge of Toutiao, emphasizing Bytedance's advanced AI technology for content personalization.

Monetization and Advertising in China

  • Bytedance not only implemented direct monetization within their products but also pioneered digital advertising in China.
  • Their sophisticated algorithm was key to understanding user preferences, which enhanced both content and ad recommendations.

"ByteDance has direct monetization and is capable of that within their products as well... They're also the first company that's really starting to crack the advertising market in China."

The quote discusses Bytedance's dual approach to monetization, highlighting their innovative steps in China's digital advertising market.

The Launch and Expansion of Douyin/TikTok

  • Douyin's launch in China was successful, prompting Bytedance to introduce TikTok in the US market.
  • Musically was concerned about Douyin's success in China and the potential threat to their own market share.
  • TikTok's initial launch in the US faced challenges due to the importance of apps feeling native to a country's users.

"They launched Douyin. That's going swimmingly in China... But similarly, Douyin is launched as TikTok in the US. It does not go well in the US."

This quote captures the contrasting outcomes of Douyin's launch in China versus TikTok's initial performance in the US, stressing the significance of localized user experience.

Competitive Dynamics and Acquisitions

  • Bytedance's strategic moves were likened to Facebook's competitive behavior.
  • The rapid user growth and content distribution strategies of Douyin put pressure on Musically.
  • Tencent and other companies showed interest in acquiring Musically, but Bytedance ultimately succeeded.

"Nine months later, in sort of fall of 2017, Douyin already has 100 million users... That's when ByteDance launches TikTok and takes Douyin internationally."

This quote outlines the aggressive growth and international expansion of Bytedance's platforms, which influenced the competitive landscape and acquisition decisions.

The Merger of TikTok and Musically

  • Bytedance acquired Musically and later merged it with TikTok to consolidate their position in the short-form video market.
  • The merger involved a massive advertising campaign to ensure a smooth transition of users to the new combined platform.

"They merge the platforms they rename Musically as TikTok and all of the great... They duped the backend database."

The quote describes the technical and marketing efforts behind merging Musically with TikTok, emphasizing the strategic importance of this move.

Political and Security Concerns

  • TikTok's rise brought attention to potential national security concerns due to its Chinese ownership.
  • US-China political tensions and the absence of TikTok content related to Hong Kong protests raised questions about censorship.

"TikTok is a, quote, Huawei-sized problem... TikTok is getting their location data, their facial data, biometric data through."

This quote highlights the security and privacy concerns associated with TikTok's data collection and its implications within the broader geopolitical context.

Facebook's Response to TikTok's Growth

  • Facebook, having previously attempted to acquire Musically, launched Lasso as a competitor to TikTok, which failed.
  • Facebook's CEO, Mark Zuckerberg, publicly criticized Chinese-owned social media for national security and censorship issues.
  • Instagram tested a new feature called Reels in Brazil, aiming to compete with TikTok's short-form video format.

"Facebook launched Lasso, which was their TikTok competitor... Instagram launched a test of a new feature in Brazil, in the Brazilian market that they're calling Reels."

These quotes discuss Facebook's attempts to counter TikTok's success and the ongoing battle for dominance in the social media landscape.

Experimentation and Product Features

  • Facebook's history of experimenting and rolling out features to a vast user base.
  • Statsig as a modern tool for companies to ship products quickly, manage A/B testing, and observe the impact on business metrics.
  • The platform provides visualizations and a powerful stats engine for real-time product observability.
  • It allows companies to connect new features to core business metrics and gauge their effect on customer usage.

"Facebook continuously experiment and roll out product features to billions of users around the world."

This quote highlights Facebook's approach to product development, which Statsig emulates and makes available to other companies.

"Statsig is a feature management and experimentation platform that helps product teams ship faster, automate a b testing, and see the impact every feature is having on the core business metrics."

This quote explains what Statsig does and how it benefits product teams by linking feature releases to business performance.

Statsig's Clientele and Use Cases

  • Notable clients using Statsig include Notion, Brex, OpenAI, Flipkart, Figma, Microsoft, and Cruise Automation.
  • Statsig is particularly effective for managing and testing AI product features, as demonstrated by Notion.
  • Statsig integrates with data warehouses, allowing companies to use their existing data systems without needing to migrate.

"Customers include Notion, Brex, OpenAI, Flipkart, Figma, Microsoft and Cruise Automation."

This quote lists some of the high-profile customers of Statsig, indicating the platform's versatility and widespread adoption.

"Also, Statsig is a great platform for rolling out and testing AI product features."

This quote emphasizes Statsig's capability in managing and testing AI features, which is a growing area in product development.

Acquisition Categories

  • Discussion on categorizing acquisitions: people, technology, product, business line, asset, or other.
  • Ben Gilbert views a particular acquisition as an asset acquisition aimed at acquiring an audience, equating it to buying distribution.
  • David Rosenthal considers consolidation as a category, emphasizing network effects through the integration of user bases.

"For listeners who are new to the show, we like to categorize an acquisition, whether it's a people acquisition, technology, product, business line, asset or other."

This quote introduces the concept of categorizing acquisitions based on what is primarily being acquired, which is a framework for analyzing mergers and acquisitions.

"I actually called this one an asset acquisition, where the asset they were acquiring was the audience."

Ben Gilbert's quote identifies the primary asset of interest in a particular acquisition, suggesting a strategic move to acquire user distribution.

  • Analysis of TikTok's success as a new social media platform in a post-Facebook world.
  • TikTok's disruption through a new canvas for creative expression, leading to rapid growth.
  • The difference between social networks and social media, with TikTok being an example of the latter.
  • TikTok's potential for broad appeal due to content-driven algorithms, as opposed to relationship-driven platforms like Facebook.

"A narrative violation for sure, happening right now, is that you can't create a new consumer social network like, sorry, we live in the post Facebook world, and that's not happening. And yet TikTok did."

This quote discusses the unexpected success of TikTok in a market dominated by established social networks, highlighting a disruption in the industry.

"This is like a totally new type of network effect that we're looking at that actually acts as a global system instead of a whole bunch of stitched together, bifurcated, personalized systems."

The quote explains how TikTok's network effect differs from traditional social networks by offering a unified global platform rather than segmented personal networks.

The Value of Content and Network Effects

  • The importance of fresh content in maintaining TikTok's appeal and growth.
  • Comparison of TikTok's content-driven model with YouTube and the implications for user engagement.
  • The potential longevity of TikTok as a platform based on its ability to keep delivering relevant and engaging content to users.

"The fire hose of new content creation that is coming into TikTok every day, if that dips or dries up, then the algorithms aren't going to have amazing new content to recommend to people."

This quote emphasizes the necessity of a constant influx of new content for TikTok's success and the role of algorithms in content distribution.

"It actually is n squared."

David Rosenthal's quote concisely affirms the application of Metcalfe's law to TikTok, where the value of the network truly is proportional to the square of its users.

Business Analysis and Grading of Acquisitions

  • Discussion on grading acquisitions based on their return on investment and strategic value.
  • Ben Gilbert's perspective on ByteDance's acquisition of Musical.ly and its contribution to TikTok's success.
  • David Rosenthal's agreement on the acquisition's grade, with a caveat regarding the outcome of CFIUS review.

"If you take this sort of top down market view and analyze it based on buying a ticket to attend that billion dollar social network dance, I absolutely think it was a fantastic purchase and probably one that will go down in history of one of the best ever."

Ben Gilbert's quote provides a high-level endorsement of the acquisition's value, suggesting it could be historically significant if TikTok maintains its growth and monetizes effectively.

"I'm also an a for... But one overarching caveat, which is this is all pending what happens with the CFIUS review."

David Rosenthal's quote gives a positive grade to the acquisition but highlights the uncertainty of regulatory review, which could impact the overall success of the deal.

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