How Did Douyin Successfully Establish Its Network in China?

1. Acquisition

No platform, regardless of its quality or technical superiority, can grow without acquiring an initial set of
users. Acquiring a larger user base is critical to refining AI technology to better match users and videos,
particularly for a platform like Douyin that heavily relies on AI.

2. Activation

Acquiring users is not enough, as many downloads lead to immediate deletions. Platforms want users to
complete an action (such as creating an account, watching a video, posting a comment, etc.) that could
engage them with the platform.

3. Retention

The next element is to motivate users to return to the app. Every platform needs to ensure that the churn
rate is much lower than the activation rate to achieve growth.

4. Referral

Referral means turning customers into advocates. As a user forms friendships with people with similar
tastes, the user can introduce several potential users to the platform. However, driving referrals usually
requires a systematic process that incentivizes referrals on a consistent basis.

5. Revenue

Every platform requires revenues not only to sustain its own growth but also to continue attracting
complementors. However, revenues may not be gained unless a sufficiently large network is generated to
attract advertisers and sponsors.

What Were the Main Challenges That TikTok Was Facing, and What Was Their Impact on the Platform?

Negative Externalities

Negative externalities arise when the behaviour (or just the presence) of some users or user groups may
reduce the value of the platform. The presence of low-quality videos may reduce platform value even
though it increases the quantity of available videos. The presence of advertisers may reduce the value of a
platform, even though generating revenues is critical.

Global Network Effects

Many of TikTok’s emerging competitors are global players who can capitalize on global network effects. A
global user base may lead to positive externalities by offering more enriched and diverse content to attract
more users across countries. However, TikTok users are largely concentrated in low-clout Asian countries9,
which may not appeal to new users in these Asian or to Western users due to differences in languages and
video preferences. Further, government regulations may diminish TikTok’s ability to exploit global network
effects because they may ban videos developed in one country from being shown in another country.
WHAT HAPPENED

The Decision

ByteDance decided to merge Musical.ly with TikTok on August 2, 2018 to create a unified global
platform. The new platform incorporated the most popular elements from both platforms. Musical.ly
users’ accounts, content, and fan base were automatically moved to TikTok. After the merger, TikTok
added several new features such as enhanced creative tools and green-screen background effects.

Strategic Rationale behind the Decision

Leverage Global Network Effects

Shira Lazar, chief executive officer and on-air personality of What’s Trending, and who has been creating
for and helping others grow on Musical.ly for years, stated that a key message is the pursuit of global
reach, as ByteDance aims at creating a borderless ecosystem from Latin America to China to North
America. The merger means that TikTok’s users in Asia and Musical.ly’s users in the United States and
Europe can now see content created by each other—but, notably, users in China cannot.

Mutual Synergies

Yiming stated that the integration with Muscial.ly helped TikTok create a significant global platform for
its content creators to engage with new markets, whereas TikTok’s global-leading AI technology would
help musical.ly accelerate its incredible pace of innovation in mobile short-video creation.12

Pursuit of Diverse Content

Market research found that a 48 per cent churn rate was due to lack of variety in content—a problem that
may be solved by combining the two platforms.13

Capitalizing on Higher Clout

While it was difficult to bring together local networks in low-clout Asian countries due to differences in
languages and user preferences, Muscial.ly provided TikTok with a large user base in the high-clout
countries of Europe and the United States. The popular appeal of Western cultures may enable TikTok to
attract local networks from multiple countries to interact with users from high-clout Western countries.
Such interactions may result in global network externalities, as video developers may target
geographically diverse segments, and viewers may enjoy a greater variety of videos.