Ivibrato time up? On March 23, as the social media app’s chief executive, Zhou Shouzi, was preparing to be questioned in Congress, economist As of press time, TikTok’s more than 100 million users in the United States are concerned that their government is preparing to ban the Chinese-owned platform due to security concerns. Their anguish stands in stark contrast to the excruciating joy in Silicon Valley, where homegrown social media companies are looking to shake off their popular rivals. With every complaint from Capitol Hill, the shares of Meta, Pinterest, Snap, and others rallied.
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The fate of TikTok hangs in the balance. But it’s already clear that the app has revolutionized social media — and in some ways will make life harder for existing social apps. In less than six years, TikTok has freed the world from the shackles of old-fashioned social networks and hooked it to short, algorithmically selected videos. Users love it. The trouble with platforms is that the new model makes less money than the old model, and probably always has.
The speed of change is astonishing. Since entering the US in 2017, TikTok has drawn more users than any other social media app, with only a handful of social media apps spending more than twice as much time on it (see Figure 1). Among younger audiences, it crushes the competition. Americans aged 18-24 spend an hour a day on TikTok, twice as much as they do on Instagram and Snapchat, and more than five times as much on Facebook, which is now primarily a medium for communicating with grandparents (See Chart 2).
TikTok’s success has prompted its competitors to reinvent themselves. Meta, which owns Facebook and Instagram, has turned the apps’ main feed into an algorithmically sorted “discovery engine” and launched Reels, a TikTok clone tied to Facebook and Instagram. Pinterest (Watch), Snapchat (Spotlight), YouTube (Shorts) and even Netflix (Fast Laughs) have all created similar lookalikes. Spotify, the music streaming app whose home page now includes video clips that can be skipped by swiping up, announced its latest TikTok-inspired revamp on March 8. (TikTok’s Chinese sister app Douyin has had a similar impact in its home market, with digital giants such as Tencent increasingly making short videos central to their offerings.)
The result is that short videos have taken over social media. Broker Bernstein estimates that the average American spends 40 minutes watching video clips out of the 64 minutes a day they spend watching such services, up from 28 minutes three years ago. However, this transition comes with obstacles. Despite users’ seemingly insatiable appetite for short videos, the format has proven less profitable than the old news feed.
TikTok monetizes its US audience at a rate that a typical user spends $0.31 per hour on the app, a third of Facebook and a fifth of Instagram (see Figure 3). It will make about $67 per U.S. user this year, compared with more than $200 for Instagram, estimates research firm Insider Intelligence. This isn’t just a TikTok problem. Meta’s CEO, Mark Zuckerberg, told investors last month that “Right now, Reels are far less efficient at monetizing than Feed, so the more Reels grow … it will take some time compared to Feed, We would actually lose money.”
The most comforting explanation for the income gap is the immaturity of TikTok, Reels, and other short-video platforms. “TikTok is still in its infancy when it comes to social media advertising,” said Jasmine Enberg of Insider Intelligence, noting that the app only launched ads in 2019. Platforms tend to keep ad load low while attracting new users, and it takes time for advertisers to adjust to new offerings. “You really can’t wave a magic wand and declare your new ads to be ‘premium’ without any performance history to back them up, so they start at the end of the line,” says Michelle Urwin of ad tech firm Skai. company.
Meta points out that it’s been here before. Instagram’s Stories feature took a while to get advertisers to sign up, but it’s now a big revenue generator. Meta is monetizing Reels more aggressively and expects it to stop losing money around the end of the year. But the company acknowledges that it will be a long time before Reels is as profitable as the old news feed. “We know it took us a few years to close the gap between Stories ads and Feed ads,” Susan Li, Meta’s chief financial officer, said on an earnings call last month. And we expect Reels to take longer.”
Some wonder if the gap will actually close. Even full-fledged video apps can’t keep up with the old social networks when it comes to monetizing user time. Bernstein estimates that 18-year-old YouTube generates less than half the revenue per user per hour of Facebook or Instagram. In China, where short videos became popular several years earlier than in the West, the monetization rate of short video ads was only about 15% of that of local e-commerce app ads last year.
On the one hand, the ad load in videos is inevitably lower than in news feeds of text and images. Watch a five-minute YouTube clip and you might see three ads; scroll through Instagram for five minutes and you can see dozens. Watching a video also seems to put consumers in a more passive mood than scrolling through a friend’s update feed, making them less likely to click to buy. Tinuiti, a major marketing agency, reports that it costs about half as much to book 1,000 video ad impressions on Instagram Reels as it does on Instagram’s newsfeed, meaning advertisers think Reels ads are less likely to generate clicks.
Auctions for video ads have less competition than static ads because many advertisers have not produced ads in video format. Big advertisers are embracing video ads (and reporting record engagement on TikTok, where products have gone viral with the hashtag #TikTokmademebuyit). But the long tail of small businesses from which the social network makes billions find video ads tricky to produce. More than 40 percent of Meta’s 10 million or so advertisers use Reels ads, the company said. Making the remaining 60% to create video ads might be made easier by AI. One senior executive envisions a near future in which small retailers can create custom video ads using only voice commands. Until that moment comes when half of the long tail is chopped off.
Short video apps are also hampered by weaker positioning. For viewers, part of the appeal of TikTok and its many imitators is that users can just watch and swipe when bored. The algorithm uses this to learn what types of videos and ads they like. But such guesswork is no substitute for the hard personal data collected by social networks of the previous generation, which persuaded users to fill out a lengthy profile that included everything from education to marital status. The upshot is that many advertisers still see short-form video as a place for loosely-targeted so-called brand advertising to increase general awareness of their products, rather than the highly personalized (and more valuable) direct-response ads of the past — schools Social networking specialization.
At least in this regard, TikTok imitators have an advantage over TikTok itself. Using reams of data amassed over 15 years, when there were few rules against tracking user activity on the wider web, Meta already knows a lot about the many users who watch its videos, and can make an educated guess about the rest. If a new, unknown user watches the same videos as a known group of wealthy female graduates with children, say, that new user has the same profile is a good bet. TikTok says it has invested heavily in its direct response ads, including new tools to measure their effectiveness. But it still has a lot of work to do. “Meta is leveraging their history,” said Bernstein’s Mark Shmulik.
Social apps won’t be the only losers in this new, trickier advertising environment. “All advertising is about what the second-best option is,” says Brian Wieser of advertising consultancy Madison and Wall. Most advertisers allocate budgets to run ads on specific platforms, and “a budget is a budget,” no matter how far it goes, he said. If the effectiveness of social media ads declines across the board, that’s bad news not only for the platforms that sell them, but also for the advertisers who buy them. ■
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