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Happy Friday! You probably know that TikTok is owned by ByteDance, a Chinese tech giant. But I’d be most readers don’t know what else Bytedance does, or that TikTok is just a small piece of the ByteDance empire, less than 20% of revenue.

Today we're diving into ByteDance. Its beginnings in 2012 as a Chinese news app, the creation of its now famous TikTok recommendation algorithm, and how it built an empire sprawling from B2B SaaS to healthcare.

Plus, why it’s positioned to win one of tech’s next big battlegrounds: AI.

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DEEP DIVE

ByteDance

TikTok Ascendant

You don’t need me to tell you TikTok is hot right now — but the numbers are astounding.

TikTok launched in 2016 and by 2018 was the most downloaded app in the US. What started as an app for dance videos is now the world’s premier short form video platform with $4.6 billion in revenue, 1.2 billion users, and 142% YoY revenue growth. 80M Americans have a TikTok account. 63% of them are under 30.

The key to TikTok’s success? It’s not a social network. Facebook, Snap, and Instagram all rely on a network of your friends, family, and connections to serve up interesting content. TikTok has abandoned the social graph all together in favor of a more meritocratic, king-of-the-hill style algorithm.

TikTok’s mission is to deliver users the most engaging, stimulating content possible. Every new piece of content gets the same exposure for the first ~100 views before the algorithm boosts the most viral ones. Like Youtube or Twitter it’s an interest graph not a social graph.

The result is a 10X better recommendation algo than anything else on the market and a fun, addictive product with absolutely wild growth rates.

But for parent company ByteDance, TikTok generates less than 10% of total revenue and is one of many hits. A staggering 1.9 billion people use ByteDance products every month and as of last year, it was valued at an incredible $250 billion on secondary markets. At a quarter trillion dollar market cap it was the world’s most valuable private company. (Markets have since turned but it’s still in the top five.)

Which raises the question: What else does ByteDance do?

Origins: The New News

In 2012 the founders of 99fang.com, a real-estate search engine, started building a news app that would use an algo to curate headlines. Essentially a Netflix recommendation algorithm for news. They named their new company ByteDance and the news app Toutiao.

Four months after launch Toutiao had 1 million daily active users.

Today, Toutiao is a Chinese the largest news app in China and a crown jewel in the ByteDance empire. It has 332M monthly active users and generates $5.6B in revenue, more than even TikTok. It also racks up a cool 10 billion video views per day. Beyond news aggregation, is experimenting with ‘instant’ news written by AI.

Anu Hariharan, head of Y Combinator’s growth VC and an investor in ByteDance did a fantastic deep dive into Toutiao you can find here.

Why Toutiao?

A news feed aggregated by an algorithm sounds almost quaint today. In 2012 though, ‘big data’ algorithms were new. So were smartphones.

ByteDance nailed the timing, catching the smartphone wave just as it took off in China and launching a killer new UX no one had seen yet — the algo newsfeed. The combination made Toutiao an early winner in mobile and ByteDance has doubled down on and refined that recommendation algorithm ever since.

Note: ByteDance has launched dozens of other products built on this algo. It also has a history of turning internal tools into revenue lines.

Lark is a Slack + Notion + Zoom competitor that started, as an internal communications tool, much like how Slack started as a comms tool for the development team building Tiny Speck. Terark is a database product. Bytedance Cloud does what you’d expect.

New products are mostly focused on India and South East Asia, two of the fastest growing developing markets.

A few of ByteDance’s social products. From Technode way back in 2017.

The Super App Model

Whereas most US companies focus on a single job to be done - search, social networks, enterprise software - the Chinese ‘super app’ model is about frequency.

The question is: How many times do they come back to your service every day?

Chinese super apps create conglomerates that do everything from peer to peer payments to enterprise file sharing to bike rentals — all focused on maximizing how many times a user comes back to your apps per day. Bytedance has been called a super-app factory.

Algorithm First

At its core ByteDance is an AI company.

In 2016, on the back of Toutiao’s success,the ByteDance AI Lab was founded. The mission was to expand on the Toutiao recommendation engine and build an AI to understand text, images, and video.

A year later ByteDance launched TikTok and its Chinese doppelgänger Douyin and had another set of hits. That’s where the story we know today picks up.

Today Douyin has 700M MAUs and a fascinating built in ecommerce engine that could be coming to TikTok.

But under the headlines, at the center of all of ByteDance’s products is the same killer personalization and recommendation engines. They start with demographics and location then rapidly learn what you like and what to show you to keep you interested and keep you engaged. What started with Toutiao has evolved and become famous as TikTok’s secret sauce.

Now they’re selling that recommendation algo as a service.

Speaking of timing, TikTok is pinging me as I write this…

BytePlus

BytePlus is the TikTok algorithm packaged and delivered for your business. You share your user data and behavior with the BytePlus API and in exchange you get TikTok quality recommendations. A few examples from the landing page:

They also provide user analytics, engagement tracking, and ad tracking. Everything ByteDance uses internally to track and keep users.

And they claim it’s working:

In 2019, BytePlus’ Chinese predecessor ByteAir launched was receiving 600 billion user requests every day and working with giants like Samsung. I’m betting BytePlus is already much, much bigger.

In some ways, TikTok, Toutiao, and ByteDance’s other recommendation-based products are search competitors. Their AI-first approach shows users what they want before they need to go to Google. Have some kind of curiosity or desire? Don’t search for it, just flip open TikTok and see what it gives you.

Own the Pipes: AI Edition

Last week I wrote about ‘pipes’ companies. Companies that provide vital infrastructure that underpin entire industries. AWS, TSMC, Stripe, and SpaceX have all run this playbook to a tee:

The AWS Playbook for Building a Hundred Billion Dollar Company

1. Find a new, booming industry

2. Find a high CapEx problem that prevents companies from starting or scaling 3. Sell the solution as a subscription, the easier the better

4. Iterate over and over and over again until no one can ever catch you

Well AI is a booming new industry. Along with biotech I mentioned it as a possible sector for the next great infrastructure company. But I didn’t know what a ‘pipes’ play would look like in AI. Data? Labeling?

Now I do. Comparing BytePlus against that playbook they check all the boxes:

TikTok’s algo is without a doubt a 10x better product. Compare it to Microsoft’s LinkedIn algo if you don’t believe me.

The upfront costs of building good AI are very high.

If BytePlus performs at the level of TikTok’s algo and AI integration continues to accelerate, ByteDance could build an AWS sized business on AI as a service.

And at the same time it will collect even more data, the key requirement for training new and improved AI.

Threats

Combine ByteDance’s existing products and 2 billion users with data coming in from BytePlus’ out of the box AI and you have the makings of the future of AI.

You also have the makings of the greatest spying and surveillance system ever created. That is, if you wanted to use it for that.

But consider where we are:

In 2019 TikTok came under fire for censoring and suppressing videos related to Chinese internment camps in Xinjiang.

A few users managed to evade the algo’s censors by embedding messages about Xinjiang into make up tutorials. The clips are incredible.

In 2020 the Chinese government bought 1% of ByteDance and took a board seat. Technically they did it with an investment through three state owned enterprises but no one seems to have any illusions about the implications.

And time after time leaks show ByteDance is accessing American TikTok users’ data in China. Given it’s their product that feels like an obvious thing they might do but there’s been a lot of public grandstanding to appease Congress the past few years.

It’s not a great record.

In the US, Silicon Valley giants like Google and Apple have resisted working with the government on military projects. In China, it’s unclear that a Chinese company could turn down their government if asked to build tools for the military.

Actually, it’s almost certain they could not.

That’s hard to square with the list of US investors that include KKR, Sequioa, General Atlantic, and Y Combinator.

It also raises questions about what can or should be done.

TLDR

ByteDance has created one of the greatest businesses of the 21st century so far. They have nearly 2 billion users and now it’s poised to do for AI what Amazon did for servers. In the process they’ll build ever better algorithms.

ONE FUN THING

GPT Chat is insanely good. It's free and you should check it out.

Mainly, it's an incredible research tool. You'll want to check the numbers - as there's no way to know where it got them from - but the information and the writing style is shockingly good.