TikTok

We take Acquired to the Old Town Road to cover the amazing story behind the biggest global sensation of 2019 — and the highest valued private startup in the world — TikTok. How did a mid-30 year old UX architect at enterprise software giant SAP wind up creating Gen Z’s favorite social app that’s now rivaling Instagram in global MAU? Why is a 2017 merger of two Chinese companies being branded a US national security threat and retroactively placed under review by CFIUS? And perhaps most importantly, why is TikTok such an important product & technology innovation that all of us should be learning from? Tune in for all the answers! Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Carve Outs:Ben: Track 34 on Ghosts IV by Nine Inch Nails: https://www.youtube.com/watch?v=XF_ceFugJjQ David: Nintendo Switch Lite https://www.nintendo.com/switch/lite/ and Knives Out https://www.youtube.com/watch?v=qGqiHJTsRkQ Sources: https://www.nytimes.com/2019/11/18/technology/tiktok-alex-zhu-interview.html https://www.reuters.com/article/us-bytedance-tiktok-exclusive/exclusive-chinas-bytedance-moves-to-ringfence-its-tiktok-app-amid-u-s-probe-sources-idUSKBN1Y10OH https://www.nytimes.com/interactive/2019/10/10/arts/TIK-TOK.html?action=click&module=RelatedLinks&pgtype=Article https://www.nytimes.com/interactive/2019/10/10/arts/TIK-TOK.html?action=click&module=RelatedLinks&pgtype=Articlehttps://www.nytimes.com/2019/10/19/style/high-school-tiktok-clubs.html?action=click&module=RelatedLinks&pgtype=Article https://www.nytimes.com/2019/10/19/style/high-school-tiktok-clubs.html?action=click&module=RelatedLinks&pgtype=Articlehttps://www.nytimes.com/2019/11/03/technology/tiktok-facebook-youtube.html?action=click&module=RelatedLinks&pgtype=Article https://www.nytimes.com/2019/11/03/technology/tiktok-facebook-youtube.html?action=click&module=RelatedLinks&pgtype=Articlehttps://www.nytimes.com/2018/01/02/business/china-toutiao-censorship.htmlhttps://www.nytimes.com/2016/09/17/business/media/a-social-network-frequented-by-children-tests-the-limits-of-online-regulation.htmlhttps://www.youtube.com/watch?v=wTyg2E44pBAhttps://www.linkedin.com/in/keepsilence/https://www.vox.com/culture/2018/12/10/18129126/tiktok-app-musically-meme-cringehttps://www.theverge.com/tldr/2018/1/26/16937712/karma-is-a-bitch-riverdale-kreayshawn-memehttps://www.theverge.com/2018/8/2/17644260/musically-rebrand-tiktok-bytedance-douyinhttps://www.rollingstone.com/music/music-features/tiktok-video-app-growth-867587/https://en.wikipedia.org/wiki/Musical.lyhttps://en.wikipedia.org/wiki/ByteDance https://en.wikipedia.org/wiki/TikTok https://en.wikipedia.org/wiki/TikTok#cite_note-TechCrunch-32https://www.businessinsider.com/what-is-musically-2016-5 https://supchina.com/2017/09/13/can-pop-music-connect-teens-china-world-musical-ly-co-founder-louis-yang-wants-find/ https://supchina.com/podcast/ep-28-the-worlds-most-valuable-startup-bytedance-maker-of-tiktok-toutiao/https://supchina.com/podcast/ep-55-kuaishou-the-anti-douyin-tiktok/https://supchina.com/podcast/ep-56-not-just-tiktok-a-short-history-of-chinese-short-video-abroad/ https://supchina.com/2019/09/25/the-difference-between-tiktok-and-douyin/ https://pandaily.com/toutiaos-buy-1b-purchase-musical-ly/ https://www.reuters.com/article/us-china-internet-livestreaming-idUSKBN17E0EV https://www.youtube.com/watch?v=wTyg2E44pBA https://www.youtube.com/watch?v=ey15v81pwII https://www.scmp.com/tech/big-tech/article/3038639/alex-zhus-journey-failed-startup-tiktok-chief https://www.buzzfeednews.com/article/ryanmac/zuckerberg-musically-tiktok-china-facebook https://techcrunch.com/2019/11/12/instagram-reels/ https://www.techinasia.com/douyin-rise-in-china https://www.youtube.com/watch?v=ptKqFafZgCk https://technode.com/2017/05/17/kwai-kuaishou-chinas-biggest-social-video-sharing-app/

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  Cool. Yeah, we're jamming a lot in here.

• 0:02David Rosenthal?

  I know.

• 0:14Ben Gilbert?

  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.

• 0:29David Rosenthal?

  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.

• 0:36Ben Gilbert?

  And we are your hosts. 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. Valued at close to $80 billion, this privately-held, venture-backed Chinese company has completely changed how a generation of teens and 20-somethings globally use their phones. Or another fun way to introduce TikTok, what is this machine-learning-based social media app that skyrocketed the then-unknown Lil Nas X to number one on the Billboard Hot 100 for 17 weeks,

• 1:20Ben Gilbert?

  the longest of any song in history, with his breakout track, "Old Town Road"?

• 1:25David Rosenthal?

  Dude, after doing this research, I finally know what the e-hot challenge was.

• 1:32Ben Gilbert?

  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.

• 1:46David Rosenthal?

  Well, not in quite a long time. Pumped to the... The other fun thing that we're not going to talk as much about on the episode, but to say upfront, to also just build the acquired, you know, theme and suspense here.

• 2:00David Rosenthal?

  You of course know who assigned the, I think it's 78 or 79 billion dollar valuation to ByteDance, right?

• 2:08Ben Gilbert?

  Is it Sequoia China?

• 2:10David Rosenthal?

  No.

• 2:11Ben Gilbert?

  They were an earlier investor.

• 2:13David Rosenthal?

  Was an earlier investor.

• 2:14Ben Gilbert?

  Oh, boy. All right. I can't wait for this.

• 2:17David Rosenthal?

  The hits keep on coming, although this one actually is a hit.

• 2:20Ben Gilbert?

  Indeed. Well, listeners, the way we'll be telling this story is through ByteDance's 2017 acquisition of another China-based company, Musically. So join us on this journey of ByteDance acquiring Musically to create the TikTok that we know today. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 2:54David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 3:15Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 3:37David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 3:55Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. And now, on to TikTok.

• 4:25David Rosenthal?

  On to TikTok. So to start history and facts, we're going to go all the way back to 1920s, Charlie Chaplin, the origins of, no, I'm kidding. Although, if we really, really wanted to give it the full acquired treatment, we would, we would do that. But no, of course, I was referring to the great performer and the performing arts and the origins of showbiz, Charlie Chaplin. But no, we pick up the story relatively recently this time by acquired standards in 2012, not in China, but in the San Francisco Bay area with a man, and not a young man, as we so often talk about on this show, but a man named Alex Zhu, who is in his mid 30s. He's from China

• 5:09David Rosenthal?

  originally, and he is working-

• 5:11Ben Gilbert?

  I love that that's like, not a young man to you.

• 5:14David Rosenthal?

  Well, hey, I mean, I just turned 35, so I definitely don't feel like a young man anymore. But in comparison to what we're about to talk about, you might think that TikTok, or Musically, if you knew its initial incarnation, would have been started by a teenager or an Evan Spiegel-like character. But no, not at all, as we will see. In many ways, Alex is kind of the anti Evan Spiegel. So he's in his mid 30s, and he's working as a UI designer at the enterprise software giant, the European enterprise software giant, SAP, hotbed of consumer mobile social app innovation.

• 5:53Ben Gilbert?

  Oh, yeah, totally. The SAP mafia of, of social network startups.

• 5:59David Rosenthal?

  Indeed, indeed. After working, this is, this is actually his second stint with SAP. Alex, at this point, has a long career in enterprise software. And after his second stint at SAP that this is, working there for about a year, he's just been appointed as an in-house futurist at SAP, focused specifically on the future of education. You can just see Musically jumping right off the page here.

• 6:27Ben Gilbert?

  I saw some tweet years ago that said, "If you have the word 'digital' in your title, then you have the right job at the wrong company." I think that might be the same thing for futurists.

• 6:38David Rosenthal?

  Yeah, yeah. Why is it always that like enterprise companies have futurists?

• 6:44Ben Gilbert?

  I think Google does. Isn't Ray Kurzweil the Google's chief futurist or something?

• 6:49David Rosenthal?

  Oh, I don't know. Maybe. I'll have to look that up. So his new role as futurist, Alex's new role, is to, and he says this is on his LinkedIn profile, which we'll link to in the show notes, is quite amazing. He says, "His job was to research the future trends of education and learning, specifically identify opportunities for breakthrough innovation and social impact and convert ideas into prototypes and applications." And what did this mean at the time in 2012? I remember this super clearly. I was about to start business school at Stanford, and what was all the rage, both in the tech world and in the education world, were MOOCs. Coursera and Udacity had just launched, both of them

• 7:33David Rosenthal?

  out of Stanford, raised tons of money, and they were going to digitize universities and learning and education and bring it all online. Neither of them, but you know, both of them are still around, of course, but neither of them would go on to realize the potential that everyone thought they had at the moment, or at least not in a near-term timeframe. Interestingly, though, it was actually an enterprise software company to you that would go public and become quite a large company that would help existing schools manage their online degree programs. And actually, my old undergrad classmate, Jeremy Johnson, who's now the CEO of Andela, was one of the co-founders of that. So it was enterprise software. It did, you know, you could paint a story why it sort of made

• 8:15David Rosenthal?

  sense for Alex to be working on this within SAP. But as he gets deeper and deeper into it, he becomes really convinced that there are a couple of problems with the way MOOCs and online education is being approached at the time. And he's totally right. The biggest one, as he digs in, is that nobody finishes the courses. And not only nobody finishes the courses, nobody even finishes like a single video of a single lecture. They're just too long for most people, unless you're in an actual degree program where you have to, you know, I mean, jeez, students at colleges barely, you know, stay awake through lectures. Like, who's gonna, of their own free will and volition, watch a whole course?

• 8:58Ben Gilbert?

  Yeah, reflecting back on it, I think like I would, if I'm gonna watch even like the Khan Academy type stuff, it's gonna be like one video at a time and maybe not even the whole video. You kind of get that thing that you need and pop back out.

• 9:08David Rosenthal?

  Get in exactly. You're gonna spend five minutes or, or less on there. And so as he comes to this realization, he thinks, so maybe the way to attack this is to make the videos short form instead of long form, these educational videos. And he realizes, you know, look, this is not something that an enterprise software company like SAP is gonna really be equipped to tackle here. So he is passionate about the space, though, and he does decide to start a company on the side, outside of SAP, while he's still working there.

• 9:39Ben Gilbert?

  He's gonna take his, uh, his futurism talents elsewhere.

• 9:42David Rosenthal?

  Yeah, exactly. At least according to his LinkedIn, he does stop being a futurist at SAP. He goes back to working on other normal projects as a UI designer and actually stays at the company, according to his LinkedIn, for quite a few years to come. But on the side, he's working on realizing this opportunity and he calls up an old friend from back in China, Louis Yang, who he had worked with at another company back in China. And they started a company called Cicada Education. A real auspicious name.

• 10:12Ben Gilbert?

  Cicada? Like the bugs?

• 10:15David Rosenthal?

  I believe so. At least that is how it's spelled.

• 10:18Ben Gilbert?

  I don't know if where you grew up, there were cicadas, but like in, in Ohio, every, I don't know, it was 13 years or something, you'd eat these gnarly bugs like for two weeks of summer.

• 10:28David Rosenthal?

  Yeah, I mean, same where I grew up in, in Pennsylvania and then especially in New Jersey, going to college, like, uh, did not make you want to study.

• 10:38David Rosenthal?

  Or name a company after them. So, so, so far, you know, there's, this is a interesting, compelling story. You know, there are a few, a few twists here, but, but it kind of sounds like your typical, you know, Bay Area startup story on the surface. But when you peel back the onion a little bit, there's a couple really unique things going on for the time. So one, the dual China and US headquarters of the company, Alex stays in the Bay Area, is still working at SAP there. Lewis is back in China. This is like not done at the time. I mean, A, I remember, you know, starting to invest in companies at, when I joined

• 11:19David Rosenthal?

  Medrona at this time, remote teams, period, are like a no-no for venture capitalists and startups, let alone cross-continent, cross-border, cross-cultural remote teams is just crazy. But these guys have a little bit of experience with that, or at least Alex does. After undergrad, he first worked at China Pages in China as a designer. And then he spent three years at Webex where I believe, I can't verify for sure, but I believe he reported up to Eric Wan. Wow. Founder and CEO, of course, of Zoom. Of Zoom. And Zoom would leverage this model, of course, as we covered on the Zoom episode, to amazing success.

• 12:03David Rosenthal?

  And Eric also did within Webex of having engineering back in China and all over the world, really, while having go-to-market based in the Bay Area. Crazy. So Alex, after Webex, joined SAP, then left SAP and went to an insurance software company called eBao. And that's where he met Lewis, who was the best PM there. And they worked together briefly there before Alex went and rejoined SAP and moved to the Bay Area. So he calls up Lewis, this really talented PM who he's worked with before, and they go out and they raise $250,000. And Ben, you actually know the folks that they raised this angel money from, right?

• 12:43Ben Gilbert?

  Yeah, yeah. One of the firms in there is China Rock Capital Management. It's a great cross-border China-US firm that had, important to this story, has a Palo Alto office.

• 12:54David Rosenthal?

  Yeah, so they're kind of at the forefront of this crazy idea of building cross-border companies. And the idea is that they're going to take Alex's insight and make these, and get experts across a wide variety of domains, from pure education to professionals, to create these short, kind of three to five-minute videos explaining a subject that they know really well. And they raise the money, they start working on this. As you can imagine, it's not super compelling. Alex actually says later, after the pivot to Musically, he says, "The day we released this application to the market, we realized it was never going to take off. It was doomed to failure."

• 13:33Ben Gilbert?

  To have one thing so right in short-form video and one thing so wrong in delivering education in sort of an entertainment-type format in that short-form video, it's kind of remarkable how they really, really deeply keyed into a trend but didn't exactly nail it the first time.

• 13:52David Rosenthal?

  Yeah, I mean, Alex Lane says, he says, "It's hard for a new startup," this is so true, "it's hard for a new startup to fight against human nature. It's better to follow human nature." And especially in short-form video, education is not just going to really compel somebody to open up an app of many on their phone. The other thing that they, so that's the big thing that they get wrong with Caketa, but the other thing that they get wrong, and this really goes on to inform Musically and TikTok, is the videos took way too long to create and they were way too hard. A, just cognitively, if you're an expert trying to convey the essence of a subject in three to five minutes, you can't. You could do that if you spend a lot of time organizing and figuring out how to convey

• 14:34David Rosenthal?

  information, but also just like the tools. And remember, this is back in 2012, 2013, the tools within the product to create these compelling videos are way, way, way too immature for this to go mainstream.

• 14:48Ben Gilbert?

  Yeah, if you think back, 2014 was probably the iPhone 6S. That era.

• 14:56David Rosenthal?

  I know, I think that was the iPhone 6.

• 14:59Ben Gilbert?

  Yeah, so, I mean, or let's put an OS number on it. That would have been iOS 7 had just come out.

• 15:05David Rosenthal?

  2014 was iPhone 6 and iOS like 7, 8. This means like back in the Cicada days, you're working with at best an iPhone 5S, which is the small screen, as much as I love and miss that thing. Like, creating video content on that was gonna be super hard.

• 15:24Ben Gilbert?

  Yep, and it was only, what, the second, third generation of retina phones? So there's still lots of phones out there that are the, you know, 320 by 480 or whatever it was.

• 15:34David Rosenthal?

  Yeah, totally. So, okay, we're now in spring of 2014. They've burned through most of the $250,000 that they raised, but Alex at least is part-time on this.

• 15:46Ben Gilbert?

  And I think he's hanging out a lot at the China Rock office in Palo Alto, and importantly, leads to him taking Caltrain rides.

• 15:54David Rosenthal?

  Yeah, well, I believe he was also probably working for SAP's campus down in Palo Alto at the time, too, spending some portion of his time there. So they decide to take another swing at this. And yes, as you said, Ben, he is famously commuting down from San Francisco to the peninsula, as so many people do, and often he takes Caltrain to avoid the traffic. And one day, he's thinking about, you know, the failure of Cicada, thinking about what they wanna pivot into and take a swing at next, based on what they learn. And he sees a group of teenagers on the train. And they're playing with their phones, and they're doing it together. And he starts like observing them, like, huh, what are these kids doing? Maybe I can learn something. You know, the stereotype at the time, you know, remember the like adults,

• 16:39David Rosenthal?

  the older partners at Madonna talking about this, like, oh, kids, like, they just sit on their phones, and they don't talk to each other, and they're not social, and like, everything's, you know, digital. But that's not what's happening at all. These kids are like collaborating together, they're talking, they're chatting, they're being loud. They're not parallel playing. They're using their phones, but they're... Doing things together physically on them. And so what are they doing? They're taking videos, selfie videos, but they have like one person who's making the video. Another person is finding music on their phone to play in the background to put a score to the video. And then other people are creating graphics and digital overlays that they're going

• 17:21David Rosenthal?

  to put on top of the video and narrate all together, you know, a story about their time on the train together. And then they're posting it out to other social media, to Instagram, to Twitter, to Facebook. And Alex realizes like, oh, wow. This is actually a perfect use case for all this tech that we've built and for short form video. Look at these links that these kids are going to, to create this content here on the train together. What if we made one app that made it really easy for all this to happen? And that would be kind of cool.

• 17:54Ben Gilbert?

  Yeah. And important here to know about Alex is there's lots of different sort of founder archetypes. He's really the product person slash designer archetype where part of the reason that he was able to raise that initial little seed money, he's able to not only design beautiful products, but observe problems in the world that can be solved with technology. And so the thing that we're sort of seeing here, when you're thinking to yourself, wow, how did they, you know, how was it a good idea to pivot when deciding, should we pivot? Should we not? Well, Alex was uniquely good at observing problems and with sort of like little resources, figuring out how to solve that problem with technology.

• 18:35David Rosenthal?

  Yeah. So Lewis actually talks about this later. He says, so we changed the product quickly from the education video app to do an experiment. What if we just provide some music in the product to allow people to quickly shoot a video with music? Will they feel very confident about what they create? And if they feel excited about it, will they share it? And this is interesting. He says, we created the prototype very quickly and we tried to launch in China, in Japan, in Europe and in the US. We just wanted to see, we were not sure which country was going to pick it up really quickly, but we had a gut feeling. That it should be the US. The US is a music country. Everyone there is so into music and the US is the center of pop culture worldwide.

• 19:18David Rosenthal?

  We got that gut feeling, but we still decided to try it worldwide. We just released it in the App Store, created some keywords for people to search for it. And the result is, yeah, in the US, people automatically started picking it up.

• 19:29Ben Gilbert?

  Fascinating. I did not know that the, that that was a hunch of why they, why they did it in the US.

• 19:36David Rosenthal?

  Yeah. So that's the official story of the launch of Musically. And as far as we know, we have no contradictory evidence that anything else was different. But there were two other apps that were blowing up at the same time that probably had a pretty big influence.

• 19:54Ben Gilbert?

  Dubsmash?

• 19:56David Rosenthal?

  No, Dubsmash actually launched right around the same time as Musically. They were, they were pretty concurrent. But that had a big influence on the direction that Musically decided to go.

• 20:04Ben Gilbert?

  Snapchat?

• 20:06David Rosenthal?

  Nope, not Snapchat. One is in the US and one is in China. One is Vine. Remember?

• 20:12Ben Gilbert?

  Oh, yeah. Twitter's, Twitter's biggest mistake.

• 20:16David Rosenthal?

  Oh, man. Such a tragedy. Like, and doing this research reminded me of it. So Vine was acquired by Twitter pre-launch, back when the team was still working on the product. And Jack Dorsey saw the potential for this and just loved it. And so they acquired the company in January 2013 before they launched the product. And Vine, I'm sure lots of our US listeners will remember this. It was six-second looping videos. And music and lip syncing was like a key use case.

• 20:46Ben Gilbert?

  It was like lip syncing and NBA replays.

• 20:48David Rosenthal?

  Yeah. Oh, man. Oh, such a good platform for sports replays. Users loved it. And of course it had priority distribution on Twitter, but especially teenagers. And, and man, this story, like this presages TikTok so exactly. So there was this Canadian teenager who goes by Ruth B, who goes viral after posting a short clip of herself singing a few lines that she just made up about a song about Peter Pan on Vine. Ends up turning it into a full song, gets a record deal, makes the Billboard Top 100 charts. And this is like, this should have been such a sign to Twitter that like, there's something really interesting happening on this platform.

• 21:26David Rosenthal?

  But Twitter was going through its IPO at this time. They had crazy management drama. They didn't have enough resources to invest in it. And The platform just kind of peters out and yeah, and they ultimately shut it down. But of course, lots of people saw what was going on here and I have to imagine that Alex and Lewis did, and this had a big influence on the direction of Musically. So the second one, Back in China, is an app that's still a super large company today called KuaiXiao. I believe that's how you pronounce it. And that was actually started in 2011 as a GIF maker tool in China. And they'd raised money from Morningside Ventures originally. It didn't go super well. They were just a utility.

• 22:10David Rosenthal?

  And so they brought in one of their advisors and angel investors to take over as CEO, this guy named Su Hua. And Su had worked at both Google and Baidu. And he pretty quickly transforms KuaiXiao into a short video platform. And this is the first big short video platform in China. And it starts taking off like wildfire.

• 22:32Ben Gilbert?

  Was Morningside also the first money into ByteDance?

• 22:36David Rosenthal?

  That's a good question. They might have been.

• 22:39Ben Gilbert?

  I'm pretty sure.

• 22:40David Rosenthal?

  They might have been. They're, they're really good early-stage venture folks in China. And KuaiXiao also really interestingly starts taking off not among what you think of as the normal audience for tech products in China, which is sort of wealthy, middle and upper class, tier one city urban elites. KuaiXiao takes off in the rural areas with sort of the 80% of the country that is still living in the provinces and are getting their first smartphones around this time. And KuaiXiao is just for like people to make videos and talk about their kind of daily lives. There's a great 2017 Tech Note article that talks about their strategy.

• 23:21David Rosenthal?

  And it says, it's like a really authentic place where people can be themselves and show their lives. And the way that it all works is the content that people see is not driven by who you are or who you follow. It's driven by an algorithm that is recommending, it gets to know what you like and it recommends videos that other people make to you that just find their way to you. So you don't have to go out and find influencers, find topics. It just starts to get to know you and it surfaces all this interesting stuff, much like other companies that we're going to see in a minute here.

• 23:56Ben Gilbert?

  Huh. There's one other interesting thing to note on why it blew up in America. So in America, this notion of sort of lip syncing has always been like a thing people knew about. I mean, it's not like there was a dedicated video platform for it, but it was sort of like a popular thing to, you know, sing along with music. And, you know, famously, there have been some big debacles where even pop artists were lip syncing their own songs and sort of got called out for that. This is a bit later, but just to drive the point home on lip syncing as a cultural phenomenon in the US, but not China at the time, there was actually a TV show called Lip Sync Battle.

• 24:33David Rosenthal?

  Oh, yeah. This is going to come up in a second here.

• 24:36Ben Gilbert?

  All right. Well, I won't spoil it too much, but like, you gotta like, understand at this time that this is really unique for a Chinese technology company to be building a product that is, you know, 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.

• 24:56David Rosenthal?

  The super cool thing is, the team learns their way into this. So we're still in 2014 when they make this pivot and they launch the MVP of Musically. Now, they're already thinking about music, clearly, by the name of the app, as being a key feature, but it was, it was more Vine and Quay Show than it was what we think of Musically and TikTok today. It was a broad, short-form video platform. And so they launch it and they do a couple of really interesting things. So, one, Louis talked in that quote about the name of the app and doing App Store optimization. This was a point in time when the App Store, and particularly the iOS App Store, started really prioritizing search terms.

• 25:41David Rosenthal?

  And so I don't know if you remember, Ben, like, a bunch of apps and Musically does this more than anyone.

• 25:46Ben Gilbert?

  Keyword stuffing?

• 25:47David Rosenthal?

  Stuff a ton of, yeah, keywords into their titles. 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. It just goes on and on and on. They stuff all these keywords in there. And that's what starts getting the initial download traffic that the app is getting in the US. So this is where, based on that, they start to learn a couple of things. And this eventually leads to the big breakthrough of Lip Sync Battle. So they operate for a few months, the app's growing, they're getting really good retention and usage, people that are downloading it and trying it are sticking with it. But they're not like hitting rocket ship growth yet. And so they started digging into their

• 26:31David Rosenthal?

  data and they realized that on Thursday nights in the US, every Thursday night, there's a big spike in downloads. And so they started like going on the app, trying to figure out why. And they've always been really good about staying close to their users. They have lots of user research groups that they do to this day. Alex talks about how he creates fake accounts and just goes into first Musically and now TikTok and interacts with users, just trying to get a sense of what's going on and why they're using it. And they realized that it's because of the Lip Sync Battle TV show, which airs Thursday nights in the US on the Paramount Network. I had totally forgotten about this, but Lip Sync Battle is actually a spinoff from the Jimmy Fallon Show. So Jimmy started doing this as a skit on the show on the Jimmy

• 27:14David Rosenthal?

  Fallon Show. And then he went and he pitched it with a couple other producers to NBC as its own show. NBC turned it down, but Paramount picked it up and it became a huge hit. People love it.

• 27:25Ben Gilbert?

  That's awesome. I had no idea the history of that.

• 27:29David Rosenthal?

  Yeah.

• 27:29Ben Gilbert?

  Did they mention Musically at all on that? Or was it just sort of like people getting inspired from the show that they want to be doing?

• 27:36David Rosenthal?

  No, so it's back to the App Store optimization. They had put Lip Sync in the title of, you know, 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.

• 27:52Ben Gilbert?

  Makes total sense.

• 27:54David Rosenthal?

  Yeah. Super cool. So it's now in spring of 2015 when they realized this is happening. And because growth has been slow, they decide a couple of things. One, we need to make a decision and go all in on a particular use case, like classic enterprise software crossing the chasm type problem of you have a broad platform that ultimately will be useful for lots of different things. But in the beginning, you have to have one very specific use case to knock down that first bowling pin of why people are going to use the product. And they're like Alex and Lewis realize, okay, lip syncing, this is it. We're going to go all in. So they redesigned the app and they, in particular,

• 28:36David Rosenthal?

  The onboarding flow for really making it clear that like this is a great product for creating lip sync videos. And then importantly, the videos that they surface to you, once you're in the app, they start surfacing the very best lip syncing videos. And this is when the flywheel really starts to kick off. So they changed the onboarding flow to make it clear that Musically is really great at helping you create lip sync videos. Two, they then start sending users regular notifications, like daily notifications with challenges of lip sync videos that they can

• 29:16David Rosenthal?

  create using the app. And this starts driving people to keep coming back. People were coming back and consuming content, but this starts driving people to come back and create content on a more than weekly basis. And this is the origin of challenges that ultimately the Yee Haw Challenge would be one of the biggest of that would help drive, help drive Old Town Road, of course, but that's still to come. And then the product model is super cool. So if you think about Instagram, Facebook, Twitter, even Snapchat, all the successful Western social networks up to this point, the content that you see is based on who you follow. And so when people log on to

• 29:58David Rosenthal?

  the app and create accounts for the first time, who are they going to follow? They're going to do, Ben and I were chatting before the show, you know, we've been playing with TikTok over the past couple of days in bed and you're like, oh, I went in, I followed a bunch of my friends and none of them have any videos. On TikTok and on Musically before that, it didn't matter. And this is what they take from Kuai Show back in China, because 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. So when you're a new user onboarded for the first time, it prioritizes content that you have no connection to. And that makes it super different from other apps, A, but also this incredible opportunity.

• 30:41Ben Gilbert?

  Yeah, it's about finding the content to fit with your interests, not the person fit. So like a person that you know and not your own perceived content fit. It's not like I would tell you that I like sci fi and I like. What's actually become quite clear to me from TikTok is what TikTok has learned is I like prank videos and I like extreme sports things. And it is crazy how I've been using TikTok for a year and didn't follow anyone. And I followed people this week and it didn't improve my experience at all. It's like it's, it's still the same stuff from people who I've never met. That is just like very well tailored to me at this point.

• 31:20David Rosenthal?

  Totally. So, once they make these changes in the spring of 2015, the app just takes off like a rocket ship. So two months later, on July 6th, it's number one in the US iOS App Store. Since then, Musically and then its successor TikTok has never fallen out of the top 40 apps, which is pretty incredible. This is the beginning of the rise that puts it not just on Snapchat trajectory, but now, you know, well beyond to Instagram and even potentially bigger.

• 31:50Ben Gilbert?

  And the interesting thing about this, two points I want to make. One is in apps where the expectation was set originally that I'm going to express interest in who I care about and then I get to follow them. I get really annoyed later when that promise is broken and Twitter starts doing the algorithmic timeline. Facebook starts to limit organic distribution and makes you sort of pay for exposure if you're a brand. There's all these things where you start to feel like, gosh, they're really messing with what the brand promise was here. TikTok from the very beginning is, we are going to show you what we think is the most engaging for you. And we make no promises about, I mean, yeah, sure, there's that following tab, but like, that's not where you live. You live on the tab where it's, hey, this is, this is what we think you'll most like. Yeah.

• 32:33David Rosenthal?

  Which is like the explore tab on Instagram that nobody goes to.

• 32:37Ben Gilbert?

  Right, right, right, right. And so their algorithm, of course, is not public, but there's been some really nice speculation by, and I might mess up his name, but it's a great Medium post by Matt Schlicht, where he sort of talks about his experience dribbling stuff out and trying to reverse engineer the algorithm a little bit on TikTok. And this is of course flashing forward a little bit, but I think it's important to. Really understand what it's doing. It's kind of like it's always A B testing. So the vast majority of what you're being shown is things that TikTok thinks you will like based on your previous viewing and liking history. But mixed in there is every video gets the waters tested. So they can kind of see, hey, how engaging is this?

• 33:21Ben Gilbert?

  And so it looks for, you know, what is the conversion ratio from view to like? What's the conversion ratio from view to finish viewing? And that sort of determines how it, how it spreads wider and wider and wider. It's important to have a basic understanding of how the algorithm works. So when we say things like, the platform truly rewards and spreads the most objectively liked or objectively good, talented videos, that's actually what it's doing.

• 33:50David Rosenthal?

  Well, it's even more than this. And this is, as I was doing research and thinking about, again, what made Musically successful more than its peers at the time and what's made TikTok such an incredible global phenomenon? It really is, to bring it back to the American Idol analogy. It's like a personalized American Idol for every single consumer on the app. Because in American Idol, it's just a flat TV show, right? It's like, what can the producers go out and find from talent all across the country that's going to have the broadest mass market appeal? On TikTok, though, they can have all of this content in all of these niches and have the personalized algorithmic feed for each consumer.

• 34:35David Rosenthal?

  And so they're able to take of so much more content and talent and creators and make them successful because they only need to find their niche audience. And they don't even need to go find it anymore. TikTok is finding it for them.

• 34:50Ben Gilbert?

  Fascinating. But important in knowing that you don't need to find your own audience and you're relying on TikTok finding it for you, it means you don't get to form that direct relationship with that audience. So it's not necessarily going to lead to a follow or something where they're going to see your next piece of content. You may be a flash in the pan if you're, if that's your best and only great video. And so it truly rewards the, the venture investing philosophy espoused by, by Sequoia early on, you're only as good as your last investment.

• 35:20David Rosenthal?

  Yeah, or your last TikTok video.

• 35:23Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is no longer the hard part.

• 35:37David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 35:51Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 36:01David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 36:19Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise: the workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 36:35David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually, and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 36:51Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 37:01David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. So let's talk about what success for creators on TikTok means. And this is another area where the platform is really different from the existing social networks that come before them. Alex gives a great talk on YouTube at a Greylock event. Greylock and our friends at GGV were the main venture investors behind Musically before it was acquired and became TikTok. But Alex, in this talk, he has this amazing analogy of building the social network of

• 37:46David Rosenthal?

  Musically to being like founding and building a country, a nation. He says, "At first, it's like you find a new world, a new land, and you have nothing. You just have a land. You just have real estate. You need to attract people to come to that land. And to attract the people, you need to show them a path to success. You need to create this image of your new land of being a land of opportunity. And the way that you do that is some version of a path to wealth creation. Because ultimately, it's an economy that a country runs on, a political economy. And it's the same thing with a social media platform." So he says, "Alex says, "When users first come to a new social media platform, the first thing they're looking for is fame.

• 38:31David Rosenthal?

  That's like a stand-in for an economy. It's like a proxy. People believe, once they have fame, then they can get money." And he says, "But that's not enough. Once they have the fame, they have to monetize. And so the platform that can generate the biggest revenue streams for its biggest users, that's the one that will stick around." And he says, "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, you make sure that some of those initial people that are on the platform, those initial creators, the ones with the most talent, that you..." Are subjectively judging as the arbiters of the platform, you make sure that they get rich. And so Alex doesn't talk a lot about how Musically does this, but ByteDance with TikTok in China,

• 39:16David Rosenthal?

  they just are paying content creators. And people who are creating the best content, they pay them more money and they invite them to exclusive events. And they get all sorts of perks and they broker introductions between them and marketers and advertisers who are going to want to sponsor their content, either directly or through the platform. That's like the first step. But then Alex talks about, and this I think is a really amazing insight. He says, then though, you have to take a second step, which is decentralizing. So you start with a centralized economy where you're making sure that some people succeed. But then though, you have to pull back and decentralize. Because if you want to keep attracting new creators, and this is where Facebook and Instagram

• 40:01David Rosenthal?

  have really failed to make this step, you have to ensure that there really is opportunity for everyone, that there's the equivalent of the American dream. If you're someone who is new to the platform, you have to believe that there's a chance that you will, a real chance that you'd get discovered and that you can find success, even though you're starting from a cold start. And this actually is kind of back to the American Idol analogy. Like, this is why the algorithm and the algorithmic feed within Musically and then TikTok is so important and makes it so different from Instagram.

• 40:33Ben Gilbert?

  God, there's a lot there. But it's a pretty interesting analogy to the criticism of America right now, that the American dream has failed. And actually, the, you know, once you're at one end of the pole or the other, you kind of tend to stay there. Like, maybe you could see people arguing that our country needs a equivalent TikTok-ification.

• 40:53David Rosenthal?

  Also quite ironic that this vision, and Reddick is coming from a cross-border US and Chinese startup that then gets acquired by and becomes part of the largest startup in China. The two subpoints that he makes about this need to decentralize is, one, exactly what you said, Ben, you need to have true social And economic mobility within the platform. But also, just as important too, and to your point about making money, you need a viable middle class. So of course, you're going to have the elite, the upper class, the little Nas X, the people who become just so much bigger than anything they could have ever imagined. But you also need viability for the middle.

• 41:36David Rosenthal?

  There's, there's going to be people who just don't have talent and then they won't make it. But there are going to be the people who have, you know, a few successes or have like a very, you know, a relatively small niche. How do you help them succeed? And this is something that the platform hasn't fully, fully figured out in the West. But we're going to talk about this a bunch more as we go through the rest of the episode.

• 41:57Ben Gilbert?

  Yeah, it's really interesting. There's another point that's important to hit on that's part of Musically's success here. And that's they really do something pretty innovative in overhauling the app to be all in on lip syncing because they're able to allow people to be a little bit creative and get a lot of output, which was kind of the magic of Instagram when it started. You could be a crappy photographer and put a cool filter on it. And then no matter what, it was going to look cool. And it very much rings true of the, the way to bootstrap a, a network, which is come for the tool, stay for the network. People were creating in Musically because it could create a good product with little effort

• 42:41Ben Gilbert?

  and sharing it everywhere else. And Musically watermark every single one of those videos and made it very easy to share it everywhere else. If there's one big difference to know between Musically then and Tik Tok now, Musically really grew organically because people were sharing their creations that were far easier to make than you would think everywhere they possibly could.

• 43:04David Rosenthal?

  This aspect of Musically's growth is a page straight out of the playbook of Instagram, which did this exact same thing.

• 43:13Ben Gilbert?

  That heist from Twitter.

• 43:14David Rosenthal?

  Yeah, exactly, was make a really, really great utility that made the content you were creating as a creator look much better in a very easy manner. Hipstamatic, was that the, the straight utility competitor to Instagram? Yep. Yeah. And then provide that really easy sharing functionality. And, and really it was Twitter that, that Instagram grew off the back of. And then Twitter shut them off the platform, but it was already too late. Yep. Smashing grab job accomplished. So Musically does the same thing on that front. So now by 2016, Musically is on fire. So they have 10 million DAU and over 90 million users, up from 10 million the year before in 2015.

• 43:58David Rosenthal?

  So they've grown 10x, uh, close to 9x in 2016. There's also something else very interesting going on in the year 2016 in social network land. Well, there's a bunch of things that we've covered on this show, but 2016 is the year that Facebook and Mark Zuckerberg are trying to crack into China. So remember, um, Zuck, I think this was the year that he made it, his annual challenge was Oh, that's right. Two-fold. One, he was gonna learn Mandarin and two, he was gonna go jogging all around the world. And, uh, and there was this famous moment I had totally forgotten about till doing research for this episode, where he goes jogging through Tiananmen Square with a bunch

• 44:40David Rosenthal?

  of Chinese Communist Party officials and he's working super, super hard. I mean, he views, you know, Facebook at this point is still on its exponential growth curve. They've acquired Instagram and Zuck is looking at China and seeing the billion people there and seeing the lack of a real, you know, Renren is around, but nobody has really become the Facebook equivalent of China at this point. WeChat is still in its infancy and he thinks this is gonna be the next big market for Facebook.

• 45:09Ben Gilbert?

  Yeah, pretty wild. And as we would, as we would see, that did not quite turn out.

• 45:14David Rosenthal?

  It did not quite turn out. In fact, quite the opposite. But, you know, 2016, this is, you know, the WhatsApp acquisition has happened. Mark has tried to buy Snapchat several times. He's, of course, acquired Instagram. He's acquired Oculus. What's the Facebook playbook for entering these adjacent large markets? It's acquisition. I did not know this until yesterday, but it's been reported that in August of 2016, Zuck invites Alex, Alex moved back to Shanghai at this point, to be full time with the product and engineering team in, in China. Zuck invites Alex to come meet with him in Menlo Park and expresses interest in acquiring Musically.

• 45:57David Rosenthal?

  And apparently, the next month, in October of 2016, a whole team from Facebook goes out and visits Musically headquarters in Shanghai. So there's serious acquisition talks going on between the companies. Man, just imagine what would have been if this had happened.

• 46:12Ben Gilbert?

  It's crazy they go to China because a very large part of the business was being run out of LA at this point. I mean, it musically had a Santa Monica office. There was a North America GM, another Alex, Alex Hoffman, who was running, I'd say, running that so well that the perception by most Americans using this was this is, this is not a Chinese app. I'm not using something, you know, sort of not built here. I'm, I'm using a social media app like any other. And I think that the product team in Santa Monica had a lot to do with that.

• 46:44David Rosenthal?

  But of course, Alex and Lewis are the co-CEOs of the company. So yeah, this, apparently acquisition talks were quite serious, but the deal falls apart and hasn't been reported why. I don't know if it was regulatory concerns or

• 46:58Ben Gilbert?

  I don't think it was price.

• 46:59David Rosenthal?

  price concerns. Yeah, it seems unlikely it was price.

• 47:02Ben Gilbert?

  Looking at a $20 billion pickup of WhatsApp, I don't think it was price.

• 47:07David Rosenthal?

  So we now enter 2017. Musically is still on fire from a growth perspective. They've just come out of these discussions with Facebook with renewed resolve to be an independent company and continue growing, not as part of Facebook. The big priority for that year that the team that Alex and Lewis decide on is to launch and grow back in their homeland in China. So now, remember, they had launched the initial experiment in a bunch of countries, including China, but then they totally deprioritized and focused on the West, first in the US and then had grown throughout North America and Europe. But in China, it was a different story. And it was a different story for a couple of reasons.

• 47:52David Rosenthal?

  One, because everything is different in China. But of course, they should be, if anyone, if any kind of Western social network or Western adopted social network is positioned to succeed in China, you would think it would be Musically because the founders are Chinese and at least half of the company, more than half the company is based there. But there are a couple of things that are different. One, the business model for content is very successful in China, but very different from how it is in the West. In the West, of course, almost all media companies from traditional media companies through all the social media companies monetize through advertising. In China, the advertising market at this point was not yet anywhere near the level of maturity that it is in the West.

• 48:37David Rosenthal?

  Instead, direct monetization is the most powerful business model for social apps in China.

• 48:43Ben Gilbert?

  Which wasn't something that I realized until we did that Tencent episode and realized, really, that Tencent invented the sort of modern video game business model and a lot of where content in the West is shifting.

• 48:54David Rosenthal?

  Virtual goods, gifting, tipping, you know, payments, of course, being a huge part of that and a revenue generator for the platforms. But the gifting and tipping is really, really interesting. So now back to what we were talking about a minute ago with the management of the economy of the network effect between creators and consumers on a platform like Musically. Musically and TikTok, the China business model is actually a really elegant way to do that. If you allow for virtual goods, gifting and tipping, that the consumers can show their appreciation to the creators for any given piece of content, or a series of pieces of

• 49:33David Rosenthal?

  content, and then those creators are able to exchange those gifts, convert it in part or whole into actual cash, now you can start to make a living and build a middle class on a platform. So this is happening in China, and QuaiShou is the pioneer of this. Remember, QuaiShou's user base is primarily rural, so advertising, you know, e-commerce companies and the like, don't really have all that much interest. This is pre-Pinduoduo days, which we should definitely cover on another episode, but don't have all that much interest in reaching these audiences. Instead, they're able to monetize through this direct monetization. So that's one big thing. Musically has to figure out how to navigate this new business

• 50:16David Rosenthal?

  model, or different business model in China. Two, though, and this is going to become much more important as we get towards the end of the story. Anytime you're talking about a media business in China, whether social or otherwise, you are operating in a very, very different political environment than you are in the West. And we touched on this a little bit in the Tencent episode, but Tencent, ByteDance is going to come in here in a minute, and basically any content company, platform, or non-platform in China employs thousands and thousands of censors that are going through all the content, working with the Chinese Communist Party, making sure that, of course, the content on the platform is upholding the laws of the

• 51:01David Rosenthal?

  party, but even the wishes of the party. That is super different from a Western social network, be it Facebook or Instagram or Musically at the time where anything goes. In late 2017, after working on this for most of the year, having this be the major priority in the company, Lewis gives a talk at a GGV event where he, I'm imagining he must be a pretty funny guy. He says, quote, "I regret not having entered into China's market earlier. Now I can hear vibrating sounds everywhere, making me uncomfortable." So, most listeners, or at least most Western listeners, aren't going to get what he means there. But by vibrating sounds everywhere making me uncomfortable, he's of course referring

• 51:42David Rosenthal?

  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 Douyin means literally vibrating sound or shaking music.

• 52:00Ben Gilbert?

  And it's important to know, too, like ByteDance before Douyin was doing very well with Tautiao. I mean, hundreds of millions of users. This is the best news and information technology company in China. And so, when they see, hey, this Musically thing is taking off in the US, wow, they're not effective at entering China. And oh, yeah, the world is starting to shift where this short-form video thing that maybe didn't make sense a couple of years ago in China does make sense now. It's effectively a fast follow, where ByteDance is like, cool, we'll leverage all we have from Tautiao to go and build Douyin, which is going to look a lot like Musically does in the US. We're going to launch that here in China and beat them to their own country.

• 52:43David Rosenthal?

  Yeah. I mean, this is basically ByteDance's version of Instagram Stories here. Yeah, a word about ByteDance, which we've, of course, referred to a bunch in this episode. So, Tautiao, which Ben just alluded to, up until this point, was the core app of the company and the biggest and most important product. So, what is Tautiao? And why does this make ByteDance such a formidable competitor to Musically? So, Tautiao is basically, you could think of it as like Apple News on steroids. It's, Tautiao literally means headlines. It is a news and content aggregation app, maybe more like Flipboard back in the day. But unlike Apple News or Flipboard or whatever, well, A, people spend an insane amount of

• 53:28David Rosenthal?

  time on it. And Ben, like you mentioned, an incredible portion of China, something like half of the internet users in China are daily active users of Tautiao. But, two, more importantly... Really early on, ByteDance realized with Tootiao that they couldn't be limited by formats. So of course they have text and news on there, but they also have photos. They also have long form video and of course, they also have short form video. And short form video within Tootiao is a big driver of engagement and content with the app. And the other really key thing about ByteDance and the reason why they've succeeded above so many of their competitors in China

• 54:11David Rosenthal?

  is that their algorithmic recommendations, just like we were talking about with Musically that made it made Musically so interesting and different, are the best in the world. They have the best AI technology to quickly suss out personalization for any given user about what they're going to like. And then go scour this immense vast corpus of content that they're bringing in to Tootiao every single day to find the very best stuff that you're going to love across all different types of formats.

• 54:40Ben Gilbert?

  Yep. And all of course vetted, thousands and thousands of censors employed by the company to to make sure that that aggregated content going to users is vetted.

• 54:49David Rosenthal?

  So talk about a moat here and a super easily accessible adjacent market for Tootiao and ByteDance to get into is pure short form video. So they're seeing the super success of Musically in the West. Now ByteDance has always talked about having aspirations of expanding beyond the Chinese market and being one of the first of the new generation of Chinese internet companies that is going to be a global company. They see what's going on with Musically and they say, okay, this is the perfect, you know, Instagram stories, be a copier and fast follow model for us here. Now just real quick, the other reason why this is so appealing to them is, we talked a minute ago about

• 55:33David Rosenthal?

  Monetization models in China and advertising versus direct monetization. Now ByteDance has direct monetization and is capable of that within their products as well. But they're also the first company that's really starting to crack the advertising market in China. And again, it gets back to this super sophisticated algorithm, which gets to know users' preference. So just like Facebook advertising, where they know you so well, they can recommend content to you. They can also recommend ads to you. I mean, arguably, I would say with Facebook, like it's better at recommending ad content than it is at organic content, because so much of the weight in the algorithm is who you know and who you follow, as opposed to Tootiao and ByteDance. ByteDance, over the past couple of years, has been turning this algorithm into advertising too.

• 56:18David Rosenthal?

  And they're really starting to build, for the first time, a digital advertising market in China.

• 56:23Ben Gilbert?

  Yeah, and what's important to know here is they launched Douyin that's going swimmingly in China. Musically, frankly, is scared at this point because they're like, okay, we we sat around and missed China for too long. And like, now we're probably going to get beat there. But similarly, Douyin is launched as TikTok in the US. It does not go well in the US. Musically is still, you know, it's got this passionate, large, organically built user base. I think it's easy to gloss over the sort of importance of feeling like it's a native app for your country. You know, there's not a lot of people using WeChat in the US because it doesn't. Certainly, the Chinese version doesn't feel like it's for people in the US because it's not. And the American version is so stripped down that, you know, it doesn't, it doesn't feel right either.

• 57:09Ben Gilbert?

  But Musically really did. And that's a huge piece of that sort of Santa Monica office. And so TikTok versus Musically in the US, to the extent that you want to win this market, it's at least so far going to be Musically.

• 57:23David Rosenthal?

  Yeah. Well, so it's interesting. It really like the parallels to Facebook's behavior with competitors are so apt here. So first, ByteDance copied Musically domestically in China with Douyin. That launched at the end of 2016. Nine months later, in sort of fall of 2017, Douyin already has 100 million users and they're serving over a billion video views a day. So they've got this amazing technology that they lifted right out of Tootiao, better than anything Musically has. Two, they've got this incredible scale, but they've got the distribution relationship with consumers from Tootiao. So they're plugging Douyin within Tootiao to all their users.

• 58:05David Rosenthal?

  You know, it's kind of like, at this point, you know, all the platforms and especially the Chinese platforms are super smart to the distribution hack of like sharing out your content onto other platforms and then exfiltrating those users. There's no way that ByteDance is gonna let Musically come in and do the same thing on Tootiao. They're gonna do it. We're now in the fall of 2017 and that's when ByteDance launches TikTok and takes Douyin internationally. So, no, it doesn't get anywhere near the amount of traction that Musically has, but it's not really a full test. It's more like a toe in the water because-

• 58:41Ben Gilbert?

  Shot across the bow, too.

• 58:42David Rosenthal?

  Yeah, it's a shot across the bow because, so we're now towards the end of 2017. Musically's been struggling mightily in this big effort for the year to enter China. Uh, and so they're ready to re-entertain acquisition talks. I don't know, I don't believe Facebook was involved in this round, but Quayshow, the original short-form video platform in China, and of course Tencent are really interested in acquiring the company at this point in time. So now remember Tencent is of course a big investor and an acquirer of content all around the world, not just in China. You know, owner of Riot Games and League of Legends, investor in Epic Games and Fortnite and so many other things.

• 59:24Ben Gilbert?

  And actually amazingly, when you look over at ByteDance, somehow that company has never taken investment from Tencent or Alibaba. Like every sort of big startup-

• 59:36David Rosenthal?

  Or Baidu, I believe. I think, yeah, they're the first kind of like independent startup out there.

• 59:41Ben Gilbert?

  Yeah, that like, like that was the big first generation of, of the Chinese tech giants was those three. And every other one that we've sort of covered, that's been a recent.

• 59:50David Rosenthal?

  Xiaomi, Meituan, you know, Pinduoduo, I believe Pinduoduo, all took money from one of those three, the BAT, the big three in China.

• 59:57Ben Gilbert?

  But ByteDance is much more a sort of traditional venture funded mega unicorn.

• 1:00:03David Rosenthal?

  And think about Tencent, which of the BAT is ByteDance the biggest threat to, at least right now?

• 1:00:10Ben Gilbert?

  Tencent.

• 1:00:11David Rosenthal?

  Tencent for sure. And WeChat, you know?

• 1:00:14Ben Gilbert?

  TikTok is Tencent's miss. When, when you sort of think about what each of those three companies were and their sort of loose US allegory, you have Alibaba being the Amazon, you have Baidu being the Google, and you have Tencent being the, the Facebook, the Facebook Twitter, sort of the social. And, and for both ByteDance and Musically to come up, developed in China under their nose, and end up being today, an $80 billion valuation company is the first big credible threat to Tencent.

• 1:00:46David Rosenthal?

  Tencent, of course, is really motivated and interest and interested in potentially acquiring Musically. And that's where the shot across the bow from TikTok, from ByteDance launching TikTok internationally right around this time is super important. So, once the dust settles, it's announced on November 10th, 2017, that ByteDance, not Quisho or Tencent, is acquiring Musically for between 800 million and a billion dollars. The exact number wasn't announced. It's really interesting and you gotta think about like, we have, what drove that decision to sell to ByteDance? You have to think it's, you know, a sort of like the power of thinking about, wow, what could these two platforms do together?

• 1:01:30David Rosenthal?

  And Alex actually takes some time off, but then comes back in and he is now running TikTok, all of TikTok within ByteDance. And Lewis, I believe, stays on fully all the way through at ByteDance. But also, man, if we were to sell and presumably sell for equity, definitely to Quisho, potentially to Tencent too, to one of these other companies, you know, and we know now that we're going to have this direct competitor from ByteDance and TikTok all around the world. Man, what kind of slog is that gonna be?

• 1:01:59Ben Gilbert?

  Yeah, that's a great point. It's interesting to know too, the scale of both of these platforms at the time of the acquisition. So it's like, well, what did they get for 800 to a billion? There musically had 100 million monthly active users at this point. And of course, TikTok, because of the scale of China, TikTok slash Douyin had 500 million monthly active users. They're buying a big company at this point, and not necessarily in terms of people or revenue, but like, that is a thing that tons of people around the world, and really the Western world, use all the time.

• 1:02:34David Rosenthal?

  Well, we'll get into this, maybe, maybe to pull forward, what would have happened otherwise a little bit, like, I have to imagine that musically didn't have a ton of leverage at this point in time, because Facebook's already out, right? We don't know what happened, but unlikely that they're going to be an acquirer. You know, you've got Tencent and Quayshow interested. Tencent's probably the biggest point of leverage, but ByteDance is doing, executing a build or buy right in front of them. Like, there's very little imaginable path that musically, either on its own or as part of Tencent, is going to win as a big standalone network here.

• 1:03:10Ben Gilbert?

  Yeah, billion sounds like a big number, and it was only up a little bit from the post-money in the last round. But when you think about it, it's only $10 per monthly active user. And when you think about, like, what does Facebook make off of a monthly active user per year in the US? It's like 25, 30 bucks. And so to be able to go and pick up, you know, what might be the next generation of of social networks and get those users in perpetuity for 10 bucks a head, you know, it's, it's actually kind of a steal.

• 1:03:37David Rosenthal?

  Yeah, totally. So they do the acquisition. Initially, musically and TikTok stay separate. But then, clearly, and this makes so much sense, partway through 2018, they merged the platforms, they rename musically as TikTok, and all of the great-

• 1:03:54Ben Gilbert?

  So they don't. This is the craziest thing. So I could not believe that this is how this worked, because here's what I thought. I'm like, cool, you buy this, you already have the apps installed on everyone's phone, you, you just, you deprecate the old TikTok in, in the Western world, and you, you- Just rename Musically TikTok and then boom, you're off to the races.

• 1:04:12David Rosenthal?

  Interesting. I assume that that is what they did.

• 1:04:13Ben Gilbert?

  Me too. And I can't quite figure out why they did it the other way, but here's what they did. They duped the backend database. So they basically said, if you have a Musically account, then when you log into the next generation of TikTok that we'll be putting in the App Store soon, your entire account will be maintained. So your same credentials, everything. But they actually created a new and combined app, put it in the App Store as TikTok, and then told everyone to go download it and say, download it and log in.

• 1:04:43David Rosenthal?

  You had to go download a new app? Musically didn't auto convert into TikTok?

• 1:04:47Ben Gilbert?

  I'm like 90% sure. This is like, I'd love anyone to sort of check my, uh, my research on this. And [email protected] or let us know in the Slack.

• 1:04:55David Rosenthal?

  That is the case that everybody did migrate.

• 1:04:58Ben Gilbert?

  Here's the nutty thing is ByteDance spent like a billion and a half dollars, I think, over the next several months, doing a massive ad campaign in the Western world for TikTok. And basically, this is a, they spent more than the actual acquisition in advertising dollars to make sure that they made a huge splash, not only with new users and saying, hey, you know, you should, uh, you know, you should go check out this new TikTok app. It's great. But ensuring that all the existing users moved over from Musically.

• 1:05:31David Rosenthal?

  I think we've seen this on a couple of episodes now, certainly on Disney Plus, our most recent episode. But I think it's tempting as a technology company, and especially as a social media company, but really any tech company, any consumer facing tech company, to think that product and growth hacky distribution is always the key to success. That's wrong. It's the key to success in the early days, when you're figuring out product market fit and getting early growth. But then, once you're past that point and you're trying to go mainstream, you need to be spending, and spending smartly, marketing dollars. And you need to be doing it at a scale that is going to get you to break through.

• 1:06:15David Rosenthal?

  This is what, you know, Disney has done with all their content forever, but that they're doing with Disney Plus. You know, this is what Netflix does. This is what Amazon does. This is what Facebook does. And this is importantly, what ByteDance did in China and had raised enough money to be able to do and learn the playbook there. And then now they're running around the world.

• 1:06:33Ben Gilbert?

  Yep. Absolutely.

• 1:06:36David Rosenthal?

  They merged the platforms in 2018. Man, that's crazy. I didn't know that that's how they did that. By the end of 2018, the combined platforms, Douyin and TikTok have 500 MAU worldwide, which is more than 2X Snap and already 50% of Instagram. It's the most downloaded app in the App Store, in the iOS App Store for all of 2018, which of course, downloads don't always translate to retained users, but still pretty impressive. Users spend an average of 52 minutes a day in the app, which I believe is significantly higher than any other social network out there. And then this year in 2019, TikTok adds another estimated

• 1:07:15David Rosenthal?

  300 million MAU to get to 800 million MAU total worldwide. They are approaching Facebook and Instagram scale here. But of course, 2019, before we wrap up history and facts, we can't not talk about Dakota here with Facebook and US and China and everything going on between the countries and indeed between these companies right now. You know, as we all know, 2019 hasn't exactly been a banner year for US and China political relations. We talked about this a lot in the first episode of this season on our Huawei episode. But in January 2019, the think tank Peterson Institute for International Economics

• 1:07:58David Rosenthal?

  comes out and says that TikTok is a quote Huawei sized problem. I was thinking about this during our Huawei episode. It could be a potentially larger than Huawei sized problem in terms of a national security threat to the US. And particularly like for many, many reasons, but one specific use case is that lots of military personnel use TikTok. There are many videos of people in Western militaries. You know, they're using it and TikTok is getting their location data, their facial data, you know, biometric data through that, which, you know, the company is owned by ByteDance, which is a Chinese company. If the, you know, Chinese government were to request that data from ByteDance, they

• 1:08:42David Rosenthal?

  would, even if they didn't want to give it to them, they would legally be forced to comply and give that data to the Chinese government.

• 1:08:48Ben Gilbert?

  This news changes every day. So this may even change by the time we release this episode, but TikTok executives or ByteDance executives are regularly asked this question and also sort of regularly say, oh no, we won't, we won't do that. But like, As you say, David, like you would be legally compelled to do it.

• 1:09:04David Rosenthal?

  They may want not to do that, but you know, and they do talk about, you know, according to Alex has talked about this, for the version of TikTok in Western countries, not Douyin, the data is actually stored in the US, I believe on AWS, on Amazon servers in the US, there's that. But again, legally, it's owned by ByteDance. Would they have to give that data to the government, to the Chinese government if they asked for it? And then this becomes even more acute in spring of 2019 and through the summer and through today, when the protests in Hong Kong start. And interestingly, you know, they're of course blowing up on social media all around the Western world, particularly on Twitter, and you know, so much discussion of it everywhere, but interestingly, not

• 1:09:49David Rosenthal?

  so much on TikTok. And then people started asking the question, well, why aren't people talking about the Hong Kong protests on TikTok? Is it because, you know, what TikTok says, which is like, hey, this is a platform for goofing off. This is for like making fun, entertaining content. Or is it because TikTok is censoring posts about the, about the protests?

• 1:10:11Ben Gilbert?

  And so listeners, as you can imagine, it makes some, you know, US politicians uneasy in saying, wait a minute, this is a thing that's like taking off in our country. Well, surely this, this must be subject to CFIUS review. This is the committee, I'm gonna, I'm gonna butcher it, but something about committee.

• 1:10:27David Rosenthal?

  The Committee on Foreign Investment in the United States, which we've talked about several times on this show.

• 1:10:31Ben Gilbert?

  Yeah. If a, if a foreign entity wants to come in and buy a massive AI company or a massive defense company, then like, it makes sense that the government would say, well, let us look at this first. We have this really interesting scenario here where these are both Chinese companies, granted with a, one with a presence in the US, but tons of users in the US. And now, close to two years after this acquisition got done, there's now politicians calling to institute a CFIUS review.

• 1:11:02David Rosenthal?

  So formerly, a CFIUS review has been opened on the Musically acquisition, which of course was two years ago, it's already closed in the past. But when it was done, there was no CFIUS review. I mean, A, because I think people weren't really thinking about this at the time.

• 1:11:16Ben Gilbert?

  It's also a Chinese company buying another Chinese company.

• 1:11:18David Rosenthal?

  It was a Chinese company. Yeah.

• 1:11:20Ben Gilbert?

  Yeah.

• 1:11:20David Rosenthal?

  Super interesting. So I mentioned Facebook.

• 1:11:25David Rosenthal?

  I think, you know, all of what we just said is true. And like, these are really serious questions and potential problems and things for TikTok and the US government and the Chinese government, you know, and ByteDance and all of the ecosystem to grapple with. At the same time, conveniently, who is out there fanning the flames of this fire and the controversy? Mark Zuckerberg and Facebook. So, you know, remember 2016, Facebook almost bought Musically and their number one priority, Zuck's number one priority for that year was figure out how to enter China. Well, here we are in 2019 and Facebook is completely out of China and proud of it because

• 1:12:09David Rosenthal?

  they're under tons of political pressure, to put it mildly, here in the US. And they also now have this emerging threat to their, you know, social network hegemony in the West with 800 million monthly active users in TikTok. So, November 2018, a year ago, Facebook launched Lasso, which was their TikTok competitor.

• 1:12:32Ben Gilbert?

  It's their latest attempt to make a really jank, independent app that's a copy of a, yeah.

• 1:12:38David Rosenthal?

  Super jank, fails miserably. And so, so then in 2019, as this controversy really starts to grow, just a couple of months ago, in October, Zuckerberg gives a speech at Georgetown University where he calls, you know, he calls out all Chinese-owned social media in general about these issues around national security and around privacy and around censorship. But he specifically calls out TikTok and ByteDance as a national security threat and a threat to, you know, Western values and ways of life. Now, again, he may not be wrong. Like, these are super, super, super important questions, but it's also a really convenient

• 1:13:20David Rosenthal?

  misdirect from like, the equally valid and important questions about Facebook's role in influencing elections, Facebook's own role in free speech, you know, et cetera, et cetera. So it's against the backdrop of all this that the CFIUS review.

• 1:13:36David Rosenthal?

  Does get instantiated this month, going back and relooking at this Musically acquisition. So it'll be really interesting to see what happens here in the next, this is probably going to take more than a couple of months, but heading into 2020, you know, if CFIUS were to rule to try and reverse retroactively this acquisition, what would happen? Yeah.

• 1:14:00Ben Gilbert?

  How can the US force two Chinese companies to uncombine? I mean, I guess there's US shareholders of Musically and lots of them, maybe even more than 50%. I have to assume it was more than majority owned by venture investors, given the four rounds that they did.

• 1:14:18David Rosenthal?

  Well, actually, it's really interesting, you know, going back to Ben, if it's true, what you said about how they integrated Musically and TikTok, and if they actually used the TikTok app and core infrastructure and migrated Musically onto it, I wonder if, you know, it seems crazy from like a product decision, but I wonder if they were thinking about this, if this is now going to be an argument of a potential

• 1:14:44Ben Gilbert?

  No, this was RS at the whole time.

• 1:14:46David Rosenthal?

  US governmental review. Yeah, like, hey, this is, this is TikTok, this is, this was never Musically.

• 1:14:52Ben Gilbert?

  Interesting thought.

• 1:14:53David Rosenthal?

  Huh. Yeah. The last piece of the puzzle here that we are definitely going to watch play out. Of course, a year ago, when Facebook launched Lasso, which you've never heard of, it failed miserably. But just a couple of weeks ago, at the beginning of November in 2019, Facebook and Instagram launched a test of a new feature in Brazil, in the Brazilian market, that they're calling Reels, and R-E-E-L-S. And just like when they launched Stories and copied Snapchat, this is a much more fully featured TikTok competitor in a new tab natively within Instagram. So we'll see how that performs.

• 1:15:36Ben Gilbert?

  Oh, man. Well, this may need a follow up at some point.

• 1:15:40David Rosenthal?

  The plot thickens. We spent, one of the reasons we spent a lot of time talking about the core of how the product operates at Musically and TikTok and the algorithmic recommendation is, one, because that's how there was the secret to the company's success, but two, it may end up being the moat that protects them here from Instagram copying them. Because if you think about Snapchat, when Instagram copied stories, it was the same network model on Snapchat as it is on Instagram of like, I'm following, I'm interacting with people I know or people I care about or people, influencers or whatever. Here, it's not. So like, is Instagram going to be able to recreate the algorithmic feed within Instagram? We'll see.

• 1:16:23Ben Gilbert?

  Great question. Yeah, it may be fundamentally different. And in the way that stories fit in nicely, this may not fit in so nicely. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:16:46David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:17:02Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:17:17David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:17:41Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:18:00David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:18:30Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you.

• 1:18:55David Rosenthal?

  All right. Acquisition category?

• 1:18:58Ben Gilbert?

  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. And I actually called this one an asset acquisition, where the asset they were acquiring was the audience. They sort of were buying distribution instead of paying to build their own distribution. I don't have enough context to know if they actually needed to buy the product or not. I looked at this more like buying, buying distribution.

• 1:19:32David Rosenthal?

  Yeah, it's interesting. We added, at some point, I can't remember which episode, maybe it was Zillow Trulia, we added consolidation as a category. I think that's what I'd go with here.

• 1:19:43Ben Gilbert?

  There's more network effects when you add more nodes to the network.

• 1:19:47David Rosenthal?

  Yeah, like, even with all the differences we talked about, you know, at the end of the day, this was the same product.

• 1:19:56David Rosenthal?

  You know, different versions of it, but the same, filling the same need and use case. And so just like Zillow and Trulia or Rover and Dog Vacay, by being able to consolidate these two companies and these two user bases, both on the creator and the consumer side, they were able, I think, to drive a lot more scale in their network effects sooner.

• 1:20:16Ben Gilbert?

  I definitely buy that, which I'm going to hold my comments on until grading.

• 1:20:21David Rosenthal?

  All right. The suspense builds.

• 1:20:24Ben Gilbert?

  I think we pretty much have covered what would have happened otherwise. Do you want to go into playbook?

• 1:20:28David Rosenthal?

  Yeah. I mean, the biggest thing for me is just like, I had no idea about all of these dynamics underlying how Musically and TikTok and ByteDance work. And this really orthogonal view to how all other Western social networks operate in having content be driven by the actual content and algorithms recommending it as opposed to the people making it. I think this is a huge, huge trend that is super important for entrepreneurs to be thinking about across all types of content companies.

• 1:21:02Ben Gilbert?

  Yeah. Okay. I want to dive into that, but I want to take one step back first and say, the way to emerge as a new social network. So there's a narrative violation here. And whether or not you like the term narrative violation, which is so.

• 1:21:17David Rosenthal?

  Yes. I love how acquired finally made the New York Times.

• 1:21:20Ben Gilbert?

  In the Times last week.

• 1:21:21David Rosenthal?

  Narrative violations. Amazing. Thanks, Aaron.

• 1:21:25Ben Gilbert?

  A narrative violation for sure happening right now is that you can't create a consumer, a new consumer social network. Like, sorry, we live in the post-Facebook world and like, that's not happening. And yet TikTok did. So what happened? And the way that I was sort of thinking about this is initially to emerge as a social network and sort of V1, it was simple. You could just enable people to communicate with each other with messages or whatever, wall posts and show information about themselves. So think sort of like basic Friendster or early Facebook. And this was like very primitive creative expression. It was basically just a communication channel. But the way to disrupt that world is to create a new canvas for people to. Easily be creative within.

• 1:22:08Ben Gilbert?

  And this comes a little bit from Eugene Way's theory from his amazing post-status as a service. But you basically need a canvas that enables people to be creative without doing a lot of work and to have a large amount of variance in what can be created. Because this will facilitate a new generation of creating, sharing, following. And thus TikTok was able to be sort of explosive in growth by nailing the format of this new method for creative expression. So you can consider that basically like an amplifier for the work that one has to put in on what they can get out the other side. And so by enabling sort of this new format, this new canvas that you have the ability to paint on

• 1:22:52Ben Gilbert?

  and be more creative than you thought you could be, it sort of naturally attracts people to it. And then you can sort of bootstrap a new network on top of that. So TikTok is about sharing with anyone where Facebook and Instagram were about sharing with friends. So David, this is where I want to bring in your point. There's a much higher K factor or the viral coefficient when the content can get distributed to that much larger group. This really gets to your point of winner take all. It's really like diving into Metcalfe's law, which is that aphorism that the value of a network is proportional to the square of the number of connected users in a system, like or equals N squared.

• 1:23:34Ben Gilbert?

  And the flaw in this, in applying it to the Facebooks of the world, is that with something like Facebook, it's not actually N squared. Because when a new person I don't know joins Facebook, it's extremely unlikely that it actually increases the value for me. But with TikTok, that's not true.

• 1:23:49David Rosenthal?

  It's actually, it actually is N squared.

• 1:23:53Ben Gilbert?

  Yeah, 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.

• 1:24:06David Rosenthal?

  Yeah, it's really, as you were saying that, I actually think this mega trend, you know, well, this trend. And theme is even bigger than we've been talking about because for the last 15 years, the word, the phrase "social network" has meant a technology-driven platform with personal connections on it. You know, it is, it's just been like the friend model of Facebook, the follow model of Twitter, or Snap, or Instagram, or whatever. Like, there's, there's just this implicit assumption that all social networks are based on relationships between

• 1:24:49David Rosenthal?

  people. But that's not at all what TikTok is. In many ways, you know, YouTube is much more similar to this, too. It's, the relationships are about the content, and it's about relationships, it's one-to-many relationships between creators and consumers. And unlike YouTube, though, on TikTok, a much higher percentage of consumers also become creators. Now, nowhere near 100%, not as high as, say, Instagram, but much, much higher than YouTube because the barriers to creation are much lower because of the short-form format versus the long-form format on YouTube. I think you could make one of two arguments. Either that this represents

• 1:25:31David Rosenthal?

  a wholesale rethinking of what "social media" quote-unquote is, or it's a different category altogether. Like, it's not social media. This is pure media, like UGC-driven media. And so, like, to this narrative violation of, like, you can't create a new social network, well, maybe that's sort of, you know, sort of true. Like, if you think about how Snap came on the scene and competed with Facebook, it was a competing social network. It was just they found a separate network of users, and younger users, that weren't attracted to Facebook. But it was a substitute product, right? And same with Instagram. This is not that. It really isn't. Even though most of the users are young right now, that is not going to be the case forever. This is a network that's going to have broad, universal

• 1:26:16David Rosenthal?

  appeal, just like YouTube, because it's not about the people, it's about the content. And they can find the best content for you, whether you're, you know, nine or 90.

• 1:26:26Ben Gilbert?

  Yeah, what you're really seeing is the purest distillation of social network versus social media in a way that we had sort of blurred them together before. This is very much social media, really not a social network. Whereas you look at something like Facebook, it's much more a social network, not really social media.

• 1:26:44David Rosenthal?

  It's a social network.

• 1:26:45Ben Gilbert?

  And the why TikTok has been so explosive is it's all the benefits of YouTube, like true social media where someone creates content and it could benefit literally anyone around the world, not just their little community of people that they're actually friends with. But it's also the best of Facebook or Twitter where it satisfies that instant gratification, short form, in the moment, bite-sized content.

• 1:27:09David Rosenthal?

  Yeah, in a way that YouTube, you know, I love YouTube and we gotta redo that episode because we were so wrong, but I'm never gonna whip out YouTube while I'm standing in line, you know, waiting to check out at the register, but I might whip out TikTok because all the videos are 15 seconds or less.

• 1:27:26Ben Gilbert?

  Which actually, this is a double edged sword. So this leads to what my sort of bear case is on TikTok long term. And there's a bear case that is SoftBank invested, which is its own bear case. And you could also say $80 billion valuation, really?

• 1:27:42David Rosenthal?

  In-bite dance.

• 1:27:43Ben Gilbert?

  Yes, yes. But the one that's more based on fundamentals is, look, Facebook has been entrenched in my life since 2005 or '06 because it carries all the people I've ever met with me. And like, a lot of them fall off the network and maybe some move over to Instagram and don't post on Facebook or whatever, but like, that's based on a really solid bedrock of important things in my life. And with TikTok being so much about instant gratification and me not really knowing any of the people I follow, again, this could be different for lots of other people, but I think for most people, you don't know the vast majority of the people that end up in your feed. Will it actually have that sort of staying power that Facebook has had by having that social network that's important to you?

• 1:28:28Ben Gilbert?

  And to really bring it back to our previous conversation, like, maybe social media has higher short-term value because of the incredible propagation, but maybe social networks have more long-term staying power.

• 1:28:46David Rosenthal?

  Yeah, I think what it probably... Thinking about this, I think to me, what this means is it is even more important for TikTok and other potential social media networks like it, well, certainly like Toot Tiao, to constantly refresh with new, fresh, relevant content, because that's the lifeblood. Like, if, if 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. And the value of the library of old content probably gets stale

• 1:29:29David Rosenthal?

  much, much more quickly than the value of digitizing your relationships with all your friends.

• 1:29:36Ben Gilbert?

  Which means the better comp here is actually YouTube than Facebook.

• 1:29:39David Rosenthal?

  Yeah, totally. All right. Well, there we have it. Do we want to do?

• 1:29:45Ben Gilbert?

  Grading?

• 1:29:46David Rosenthal?

  Grading.

• 1:29:47Ben Gilbert?

  All right. So, so I have a take. I was thinking about this before jumping on. So the, the task of grading, if we think ByteDance will make back the billion dollars they spent on Musically with their current business model is actually like, it's kind of tricky to, to back into that based on CPMs or, you know, average revenue they're making today per user or stuff like that. So to take a different angle at it, I, I want to talk about an episode that we haven't done, which is Facebook buying WhatsApp. And without doing any research, I preliminarily think that's going to be an A. And the major reason being, Facebook seems to have a monopoly on being the dominant social network, and that allows them to be the best marketing channel in the world to reach consumers targeted

• 1:30:31Ben Gilbert?

  by demographic or interest. And if you think about it, before TikTok, there were six social networks with over a billion users. And I looked this up a few minutes ago. It's in order, Facebook, YouTube, WhatsApp, Facebook Messenger, WeChat, and Instagram. And this is globally. So Facebook owns four of the six billion plus person's social network or social media properties.

• 1:30:55David Rosenthal?

  Wow.

• 1:30:56Ben Gilbert?

  So like if you if you take that lens on it, so like Facebook, which is a $200 billion market cap company, only having to drop 10% of their entire, you know, enterprise value to protect against the greatest threat to them out there, it was actually still a fantastic move at that time, even if they're not monetizing WhatsApp now. It was basically like a $20 billion insurance policy to allow them to keep printing that $20 billion in net income that they generate every year. So now bringing it back to Musically, which was only a billion dollar acquisition. And if you believe that that was essential to enable TikTok to become the insane platform that it is today with somewhere between half a billion and a billion MAUs, David, I think you estimated it at like 800 million.

• 1:31:40David Rosenthal?

  800 million, but they'll, assuming nothing major changes, it'll be a billion soon.

• 1:31:45Ben Gilbert?

  Yeah. Yeah, like it seems like a no brainer that it'll be sort of this like first legitimate challenger to Instagram, which really is what Snap was supposed to be, but fell short of with only 300 million monthly.

• 1:31:56David Rosenthal?

  But again, I think the difference is, yes, Snap had Snap's network effect was relegated to a specific demographic of people. I think there's a chance that that's different for for TikTok.

• 1:32:11Ben Gilbert?

  I think you're right. And I mean, I think, I think that's why, if you take this sort of top down market view and analyze it based on, you know, 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. If one, TikTok can hold on, like can actually, to the point that we were talking about earlier, create lasting value, like to have staying power, to be able to make sure that even though they don't really own those personal relationships, that they're an important part of your life on an ongoing basis. And two, really start to turn on the the gas and monetize like Facebook has been able to.

• 1:32:52David Rosenthal?

  Yeah, yeah. Okay, so you're a

• 1:32:55Ben Gilbert?

  I'm an A. I'll say A.

• 1:32:58David Rosenthal?

  A, okay. All right, so I have one overarching caveat to all of my great, I'm also gonna be an A, but one overarching caveat, which is, this is all pending what happens with the CFIUS review.

• 1:33:11Ben Gilbert?

  Absolutely.

• 1:33:12David Rosenthal?

  Like, that could throw a huge wrench in everything here.

• 1:33:16Ben Gilbert?

  It could be like multiple billions of dollars of just lighting money on fire.

• 1:33:20David Rosenthal?

  Yeah, totally. So pending that, I'm gonna, I am, we are gonna grade this just from a pure like business perspective, assuming that this is the CFIUS review, you know, there was no view of it happening when the acquisition was done over the last couple of years, and let's assume that the acquisition doesn't get reversed. So that said, I'm also an A for, I'm not an A+ though, so I'm an A because, for two reasons. One, this was the way, like ByteDance, this is what makes ByteDance so exciting, all of these dynamics. That's the reason why it was and is the highest valued startup privately held company in the world. So they would have been completely fine without Musically,

• 1:34:03David Rosenthal?

  but I think they would have had a very hard time penetrating into the West. They would have been able to expand outside of China into other Asian countries, but getting into the West and specifically into the US in such a big and quick way would have been really, really hard. So this is their path to do that, one. Two, as we talked about in acquisition category for consolidation, just generally for like these two products in the space, combining them is gonna allow them to grow much faster and with far fewer roadblocks. Because, again, it all gets back to content, this flywheel effect between content and that creators are creating, and then consumers consuming that content

• 1:34:47David Rosenthal?

  and needing the firehose of new compelling content by getting all of it all around the world onto the same platform. That's really going to drive things much faster. I think it's not an A+ though, because to me, an A+ is like this one company and this one acquisition like created a new category, saved something like an Instagram, like Facebook was not going to succeed at doing Instagram on its own. I even forget what their clone was called. They needed to buy the company, you know, or Apple and next. So I think that's why I'm not an A+, but with the caveat of Cepius, totally agree. I'm an A.

• 1:35:25Ben Gilbert?

  Cool. Well, do you want to do our first carve out in a while?

• 1:35:28David Rosenthal?

  Yeah, let's do it. I've got two saved up. One, because we haven't done it in a while and two for the holidays. So my first carve out is the Nintendo Switch Lite. I bought it when it came out and it's awesome. I haven't owned a video game console in years, but I'm traveling for Thanksgiving. So listeners, if my audio quality is a bit off on this one, I apologize. It's just been so great. Like I haven't even played, I have played no new games on it. I just bought Breath of the Wild on Black Friday.

• 1:35:58Ben Gilbert?

  You shared this with me like a couple of weeks ago, that you have a Switch and you've only played the classic Nintendo games.

• 1:36:05David Rosenthal?

  I've only been playing NES, Super Nintendo games. And then I bought a few, they're a bunch of, you know, both indie titles and reissue games from previous consoles in the Nintendo eShop that are all like so good. I'm not even like that excited to play Breath of the Wild. I'm just so enjoying going back and playing like Super Metroid and like Castlevania and all this stuff. So that's one. My second carve out is Jenny and I are with my family for Thanksgiving and we went out last night and saw the movie Knives Out with Daniel Craig. And I knew very little about it, wasn't expecting it to be awesome, but it was like really, really fun. Super great holiday movie. Really well done.

• 1:36:49Ben Gilbert?

  All right, I gotta see it. Mine actually has to do with this episode, but I won't tell you how until the end. So I'm going to recommend a Nine Inch Nails album from 2008.

• 1:37:02David Rosenthal?

  I know where you're going with this.

• 1:37:05Ben Gilbert?

  I remember discovering this in college and being like, well, first of all, I'm like a big Trent Reznor fan and like a lot of the sort of harder, more classic Nine Inch Nails stuff is like when you're like really gonna like have some good speakers around and rock out.

• 1:37:22David Rosenthal?

  Super awesome dude.

• 1:37:23Ben Gilbert?

  And unbelievable live shows, all the soundtracks that he's done with Atticus Ross, including Social Network and Gone Girl, and most recently Watchmen have been awesome. He released this album called Ghosts 1 to 4, and it's a four-disc album. It's my favorite music to work to. Like, it's sort of like deconstructed tracks. They're very minimalist tracks. It's a great put it on and like think music. So my two favorite tracks on it are track 26 on Ghosts 3, track 29 on Ghosts 4. You should go play both of those right now on Spotify because they're great. But the one that I'm recommending today is track 34 from Ghosts 4, which is the sample that is the bass of the beat in Old Town Road.

• 1:38:07David Rosenthal?

  So great.

• 1:38:09Ben Gilbert?

  It is.

• 1:38:10David Rosenthal?

  We'll link in the show notes to, um, The New York Times did an awesome, uh, both text piece and also a video reporting that's on YouTube where they go and interview the producer in the Netherlands who used this sample and made the beat. It's so good.

• 1:38:25Ben Gilbert?

  It's awesome. And it's one of these things where I always knew, like, listening to Old Town Road, I'm like, I kind of, I know something like what this beat is, but I never put two and two together. And then watching that New York Times video, I was like, no way, it's actually Trent Reznor under this whole thing. So I just thought that was the coolest thing.

• 1:38:42David Rosenthal?

  Amazing. Trent Reznor and Billy Ray Cyrus, Lil Nas X, and TikTok. And, uh, oh, and I forget, I'm blanking on the name of the producer from the Netherlands. But anyway, that is a true 2019 moment, if there ever was one.

• 1:38:59Ben Gilbert?

  Absolutely.

• 1:39:02David Rosenthal?

  All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 1:39:08Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:39:19David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers, and how fast you can use that signal to guide what you ship next.

• 1:39:39Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system, so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 1:39:52David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:40:03Ben Gilbert?

  All right, listeners, that is all for today. So if you liked this episode, or really anything that we've done, please don't be shy about sharing it on social media or leaving us a review on Apple Podcasts. We haven't mentioned that for a while, but it's an awesome way to help the show grow. And I think I learned recently that the iTunes charts are actually dictated by the number of subscribes per unit of time in the Apple Podcasts app. So if you listen in a different app and you want to help us bump up the charts, you should go and click Subscribe in Apple Podcasts. We are starting to get into that territory where we're getting a bunch of nice organic traffic from people looking for new technology shows to listen to and seeing us in the charts. So thank you so much for doing that, or leaving a review, or sharing us.

• 1:40:47Ben Gilbert?

  We really, really deeply appreciate you helping to grow the show.

• 1:40:53David Rosenthal?

  And by the way, if you're an entrepreneur or aspiring entrepreneur, and you're thinking about making the TikTok for podcasts, get in touch with us.

• 1:41:01Ben Gilbert?

  David, I have someone to email you after this.

• 1:41:06Ben Gilbert?

  If you want to go deeper on any company building topics, you should consider becoming an Acquired Limited Partner. You can click the link in the show notes or go to glow.fm/acquired and all new listeners get a seven day free trial. And with that, we will see you next time. See you next time.