How Does TikTok Make Money?

It is the go-to app for teens everywhere and its growth is outpacing the likes of Facebook (NASDAQ: FB) and Snapchat (NYSE: SNAP). In-fact, the TikTok app was second only to Disney+ (NYSE: DIS) in downloads over the holiday period this year, and one of the most coveted apps in the world in 2019, with 738 million downloads. 

TikTok’s owner, ByteDance, is a Beijing-based tech startup recently valued at $75 billion. It has also been accused of being a national security threat among many U.S. politicians, especially at the height of the U.S.-China trade war towards the end of 2019. With an eye on an IPO in the near future, ByteDance has opted to go public in Hong Kong rather than New York, but people are still wondering how exactly its flagship app actually makes money. 

TikTok’s business model

If any of our readers remember ‘Vine’, the short-form video hosting service which was acquired by Jack Dorsey’s Twitter (NYSE: TWTR) in 2012, then you will have a good idea of how TikTok works. The two are very similar and generally work on the same premise of short-form video hosting, but with the addition of much more augmented reality (AR) in TikTok.

How its business model works, however, is a more complicated matter. The app was launched in 2017 and only began allowing companies to purchase traditional ads on the app in November 2018. As a private, China-based company, it can be quite difficult to gather exact company earnings. Nonetheless, in July last year, CrunchBase estimated that TikTok was generating up to $1 million in advertising per year, as well as an unknown amount from in-app purchases of ‘coins’ ranging in value from $0.99 to $99.99. 

Possible money-making strategies

As TikTok is still quite a young company, not much has yet been revealed regarding its future app monetization strategy. However, there are several avenues it can go down if it is to follow models set by the likes of Snapchat or Alphabet-owned (NASDAQ: GOOGL) YouTube. 

• It could use advertising avenues that generate targeted ads, which in turn would generate revenue. 
• As users begin to earn more money as influencers on the app, TikTok could implement a fee where the platform takes a cut of the earnings. 
• Creating a subscription model for premium content on the app. With more than 500 million active users as of October 2019, there’s sure to be a few takers. 

Of course, TikTok is but a small segment of the wider ByteDance machine, which generated $7.5 billion in revenue in 2017 and received a $75 billion valuation, more than Uber (NYSE: UBER) and Lyft (NASDAQ: LYFT). 

U.S. opposition to TikTok

Despite its growing success and popularity, TikTok has come under intense scrutiny among U.S. politicians who believe the app could pose a credible threat to national security. The U.S. army actually banned the app’s use amid fears that the Chinese government would gain access to confidential information on devices. The ban followed a similar incident with the U.S. Navy in late 2019 and was encouraged by Department of Defense guidance given in December. 

Senators have also made requests for investigations into the apps data usage, as well as discouraging U.S. markets from allowing ByteDance to enter domestic stock exchanges. In response, ByteDance hired a number of former U.S. officials back in October to allay fears, which resulted in a transparency report being published in early January. However, the report omitted China from its findings, displaying instead information on its global usage. 

Should ByteDance decide to go public on a U.S. exchange in the future, it is likely it will need to be more transparent with its practices and win over the support of the many doubters in office.  

What now for TikTok?

TikTok has built itself a very popular app, but sustaining it will be another battle altogether. It will have to continue to appeal to its audience or else it may become the next Snapchat. Facebook has already launched an — admittedly poor — competitor in ‘Lasso’, but Facebook has billions of dollars at its disposal, compared to ByteDance. 

ByteDance will need to find a way to make TikTok profitable, or at least worth the resources and time dedicated to it. As one of the most successful global applications to come from China in modern times, TikTok will need to drive on from this critical point in its existence and begin making its existence worthwhile. 

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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Alphabet, Disney, Facebook, and Twitter. Read our full disclosure policy here.