TikTok Is Facing A Peculiar Challenge That Led Vine To Shutdown

TikTok is facing the biggest challenge from none other than top creators. ByteDance announced itself "world's hottest startup" after raking in a whopping $19 billion profits in 2020. It has resulted in a rather peculiar situation for ByteDance management to tackle.

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With growth comes new and peculiar challenges. TikTok which once mocked Twitter for not being able to effectively deal with creators is now staring at a similar challenge that could prove to be disastrous.

TikTok may have to change its creator funding model because several high-profile creators have started questioning the monetization options and highlighted key flaws in the current process of payout that the platform has been following.

In a bid to keep top creators glued to the platform TikTok has created Creator Fund and allocated $200 million to compensate such creators of top-performing clips. Only those creators who have over 100k views per month on their videos are eligible to get a pie of this fund though.

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YouTube and TikTok star Hank Green feels disappointed about the way TikTok has set up the creator fund. He believes that it’s unfair for top creators to receive a fixed amount every month irrespective of the number of creators, views, and popularity of the platform which continue to grow with each passing month.

Green explains that the current payout model is leaned towards the company than having properly balanced. TikTok’s bottom line would suffer if the fund size is derived from a percentage of revenue and not a static pool. The company would have less profit than now. However, it would be very beneficial for creators. In the current static model, as the app becomes more popular more creators would join, and the fund will be distributed among more creators which will eventually make creators earn less per view.

Green further explains that TikTok will have to accommodate more creators in Creator Fund. If the Creator Fund does not rise in proportion to the number of creators and users, the payout amounts will decrease as the app becomes more popular.

This is in sharp contrast to YouTube where creators are paid according to how many views their content generates. For TikTok replicating the similar model is difficult – if not impossible – because it can’t insert pre-roll or mid-roll ads in short video clips. Therefore, it must find other ways of monetization to ensure creators get a fair and attractive revenue share.

This has been the problem with short-form video content platforms right from the beginning. Even Twitter failed to find a convincing solution which led Vine, the precursor of TikTok, to collapse. Now, TikTok has arrived at the same junction.

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Collapse Of Vine And TikTok: The Connection

In 2015, the growth of Vine attracted the eyeballs of investors and internet users. Almost everyone believed that under the umbrella of Twitter Vine would be able to steal the thunder and would achieve the success that Facebook failed to do with videos. Sensing the enormous growth potential of Vine and their significant continuation to it a group of top Vine stars, including Logan Paul and King Bach, met with top management of Twitter in an effort to increase their revenue share.

The proposal was pretty straightforward; Twitter was asked to create a pool of funds to compensate top creators. The proposal to the Vine was to pay the stars $1.2 million each and roll out product changes suggested by the top creators. In return, every top creator who would be the beneficiary of the fund will produce 12 pieces per month, or three vines each week. Unlike TikTok’s Creator Fund, it was a pool of creators and not just a fund and every creator of that pool was supposed to receive $1.2 million. Vine would agree to this arrangement, which could theoretically bring in billions of users and increase engagement on an app that is struggling. If they refused, then all the top stars of the platform would walk.

For Twitter, it was more of a challenge thrown to them. The platform did not have a viable monetization model for Vine’s short clips. Besides, as more top creators would become eligible to be a part of that pool, the total early payment amount will increase, so the liability for Vine. It was a tricky call to make as they can not afford to turn their back to top creators who were practically driving the growth of the platform. To Vine tried to insert ads and to upload longer videos but it was too little too late. In fact, the top creators left due to failed negotiations. Their audiences followed them wherever they went. Consequently, Vine usage started dropping sharply which made Twitter bring down the curtains on Vine in late 2016.

TikTok is well aware of this and has been working to increase monetization options in order to counter creators’ push for a larger share of the revenue pie.

Record Profit Celebration To Unprecedented Challenge

The increasing revenue of ByteDance apparently caught the eyeballs of Green. He noted that TikTok’s parent company ByteDance generated a whopping $34.3 billion in revenue in 2020. While not all of this came from TikTok, a growing share is due to TikTok’s increasing popularity and number of users.

TikTok apparently sensed the mindset of creators and made several efforts to increase the earning potentials of top creators on the platform without taking a hit on its revenue. The platform has added creator tipping to its Creator Fund in order to make top stars pocket more dollars. It’s also currently working on Creator Subscriptions as well as facilitating brand partnerships through its Creator Marketplace.

But the most important feature for TikTok, however, is integrated commerce. This allows creators to directly monetize themselves through revenue share agreements with brands.

This feature is already present in the Chinese version of TikTok, ‘Douyin’. Unlike TikTok, a majority of Douyin’s revenue comes from commerce activity. TikTok is working on several methods to integrate them, which could eventually provide TikTok creators with a more lucrative route.

But, for creators, it’s harder to make money from selling products than sharing ad revenue with YouTube. And, that’s why YouTube is more appealing to them. They can make money by signing up for the YouTube Partner Program, and then taking out ads. YouTube will insert these ads into their clips.

This makes the situation more concerning for TikTok. YouTube has set its eyes on the market of TikTok. With the launch of YouTube Shorts, Google-owned YouTube has become more appealing to creators than TikTok. Enjoying both the features – short and long videos – on a single platform that offers monetization based on the rev-share basis is always more lucrative than a to have a small chunk of the static pool. If the TikTok top stars decide to band together to negotiate a better deal with YouTube, it could jeopardize the market situation for TikTok or ByteDance.

What’s even more frustrating for TikTok is that some of the top creators, including MrBeast and SuperSaf, have started thinking their world beyond TikTok.

The Big Question

Now TikTok is staring at the problem that now-defunct Vine faced once, and Twitter failed to tackle the situation effectively. Now the big question is, how TikTok would diffuse the situation?

  • Would it consider increasing creators’ payout by taking a hit on its growing revenue?
  • Would that be feasible and acceptable by shareholders?

The increasing restlessness among the top creators seems quite justified if we see their demand in the light of the soaring revenue of ByteDance. The company’s revenue doubled, from $17 billion in 2019 to $34 billion by 2020. The Creator Fund would have doubled if it had grown in line with this increase. However, Green also notes that TikTok’s ads generate 6x more revenue now than before.

If the company agrees to set up a fun aligned to revenue-sharing model, it would make a big dent in ByteDance’s profits. If it continued that way, with the creators’ fund increasing relative to usage, ad performance, and other factors, that would mean that the company’s profit will tank, which will also have a direct impact on the soaring valuation.

But, it’s creators who drive the growth. They have a huge role to play in the acquisition and retention of both customers and users. And, if TikTok fails to defuse the situation by not paying them adequately, just like Vine, someone else will. Meta (Facebook) will be the first one to make a move and may agree to their demands as a part of a competition-killing strategy.

The issue could escalate to the point of being a serious concern. Although it is not yet at a critical point, it will be interesting to see how TikTok reacts to this new push and how this impacts the continued growth.

TikTok understands the seriousness of the issue very well and is closely monitoring the situation.

“We listen to our creator community, and we continue to seek feedback to improve our program,” the company said in a press note.

ByteDance was thrilled to announce the $19 billion in profit it raked in for 2020. It didn’t shy away from tagging itself as ‘world’s hottest startup’ then. Now, it will be interesting to see how flexible it is in meeting these new concerns which would have an everlasting impact on the company’s profit.

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