Competing with TikTok: When to Imitate, When to Differentiate

Welcome to HBR On Strategy, case studies and conversations with the world's top business and management experts, hand-selected to help you unlock new ways of doing business. I'm Ramzi Kabbaz, an editor here at HBR. This month, we're highlighting 4 of the best HBR podcast episodes on strategy from 2023, curated by me. In 2023, TikTok became the 4th largest social network by number of users, behind only Facebook, YouTube, and Instagram. Meanwhile, the competition in the market for short-form videos had intensified. Instagram introduced Reels and YouTube launched Shorts, innovations that imitated TikTok's approach. In this episode, Harvard Business School professor Felix Oberholzer-Gee discusses imitation as a competitive strategy among the leading social networks. Traditional business strategy emphasizes the need to differentiate your product or service from competitors. But as these social networks have shown, imitation can actually lead to better financial performance. The question is, when is imitation a useful strategy and when does it become detrimental? If you're setting strategy for your team in a super competitive industry that relies on innovation, this episode has some good insights for you. It originally aired on Cold Call in August 2023. I hope you enjoy it as much as I did.

Have you ever gotten to the end of the day and wondered, where did all the time go? Well, if you're one of the billion or so daily users of TikTok, therein may lie the answer. Anyone who uses the platform can attest as to just how easy it is to get lost in an endless stream of videos customized to satisfy your specific interests, whether it be silly dances or pranks or life hacks. The Wall Street Journal described TikTok as an infinite candy store for the brain and a dopamine machine where over a lifetime, users can spend as much as 2.3 years on the app. By all appearances, TikTok is lapping the competition, but for how long? Today on Cold Call, we've invited Professor Felix Oberholzer-Gee to discuss his case titled, "Hey, Insta and YouTube, are you watching TikTok?" I'm your host, Brian Kenney, and you're listening to Cold Call on the HBR Podcast Network. Felix Oberholzer-Gee is an expert on competitive strategy and international competition. He is the author of Better, Simpler Strategy: A Value-Based Guide to Exceptional Performance. And he's also a fellow podcaster. He's the co-host of a fabulous podcast called After Hours on the TED Network. Felix, thanks for joining me today.

It's great to be here, Brian. Thanks for the invitation.

You bet. You're a repeat customer, so we're glad to have you back. That this is a case that obviously many, many of our listeners will be interested in hearing about because so many people take that dive down the TikTok rabbit hole on a daily basis.

That's right, yes.

I've done it. I'm guilty of having done that myself. Let me ask you to begin by just telling us what the central issue is in the case and what your cold call is to start the discussion.

The key issue in the case is one of imitation. So if you take any strategy course at HBS, I think the one thing that you will remember for the rest of your life is that ultimately, all financial success comes from differentiation. You've got to figure out a way how to be different, how to build a business that creates value in ways that the competition cannot easily emulate. And yet in tech, what you see is that whenever someone has a new idea, the idea gets copied very quickly, right? The case describes how Instagram and YouTube in particular copy many of the features of TikTok. And then of course, it's true for TikTok as well that they copy left and right what happens tends to be working in tech. And so the key issue is to ask, why is this? It runs counter to every intuition a strategist might have. And yet, it's one of the very big facts in tech. And the case conversation, we're trying to make sense of why this happens and when it actually leads to better financial performance and when it's probably detrimental to the firm's profitability.

Of course, they say imitation is the highest form of flattery, but TikTok might not agree with that in this instance. That's right, yes. Tell me why it was important to you to write the case. I know this relates back to your strategy work, but how did you come up with the idea to do this case?

So one is obviously because TikTok is a hot topic. So it's in the news every day. There's really interesting questions around the regulation of social media, which I'm particularly interested in given now that we have all this evidence that spending a lot of time on social media, in particular for kids and young teenagers, has all of these detrimental effects. Question is like, how should we think about regulating the sector? How should we think about regulating a company that is controversial because of its ties to China? So that's one part of the interest. The second part that I find fascinating is all of these platforms benefit from network effects, right? The platform becomes more attractive, more powerful, the more users it has because it gets more content, and so on and so on. And so typically we think of markets with important network effects as the kinds of markets where it's really difficult to enter. You see it a little bit in the evolving Twitter drama, how it's just incredibly difficult to establish a second platform after one of these platforms has been dominant for so long. But it's not always true. It's obviously not true when Instagram made inroads into the market that used to be dominated by Facebook. And now most recently, it's not true when something like TikTok comes along and it just seems to have success against platforms that benefit from incredible network effects. And so another part of the interest why I was really fascinated by what is happening and try to better understand how to make sense of the fragility of network effects business models that sort of runs counter to an intuition that says these are actually really fabulous platforms to invest in because once you're dominant, once you're really powerful in the market, it's really hard to replace you.

You've already named several of the players in this landscape. But maybe just for our listeners' benefit, if you could just talk a little bit about this sector and who the major players are in relation to TikTok.

Facebook remains the granddaddy of social networks. So it's huge in reach. Lots of people still spend a lot of time. It's not aging well, I think is fair to say, in that it doesn't really catch on with younger generations. And so you see that Instagram, I think, is probably If I think about our MBA students, what's the social network that they know the best, that they spend the most time on in their late 20s, early 30s? I would guess that's probably Instagram for most people. And then the younger generation that then took in really interesting ways to TikTok very quickly. Over time, one of the really interesting changes on TikTok that the case documents is that we still think of it as a very young app. But it's actually now not unusual to see more mature people like you and I spend a good amount of time on TikTok also. So the age distribution, which used to be very narrow, very focused on very young people, now over time has gotten much broader. And as a result, the content that TikTok offers has gotten much broader. Of course, the silly dances are part of the culture and are part of the app. But say, if you want really amazing information on what's happening, say, with generative AI on a daily basis, TikTok is a really serious source. One interesting fact that the case documents is that even when it comes to news, sort of daily business and political news, TikTok is now an important source of information for many of its users.

Yeah, I have some 20-somethings at home, and that's where they get their news and their restaurant reviews and all kinds of things. They go right to TikTok. So you're absolutely spot on about that. Let's talk a little bit about the founder. I don't want to mispronounce the name. Is it Zhang Yiming?

Yes.

Talk about his background and sort of the idea for TikTok. How did it come up?

The story is actually quite fascinating in that he's a serial entrepreneur. He's worked for multinational companies. He worked for Chinese companies. And then the birth of sort of his own organization and his own idea, I think one of the very One of the first things that they did was an app for jokes, which, you know, in a country where in particular the government is not fond of jokes, didn't work very well, didn't last very long. But then the most enduring success so far is an app called Toutiao, which is a news app. It's become a really important part of the Chinese ecosystem in that the app is really good at giving you unusual insights, unusual news, which of course is not so easy to do in a country where much of the news machine is dominated by government and by government interests.

And he gained a lot of insights from some of these earlier experiments, right? I mean, one of the most differentiating aspects of TikTok, I think, is the use of AI and how it serves content up to people. Were those things that he sort of gleaned as he went along?

Yeah, so there is an aspect of using an algorithm that is good at discovering unusual news that then lends itself also to discover content that you and I might like. And perhaps the most interesting aspect about how TikTok uses artificial intelligence is in how careful it is to deploy the tool. So for instance, if you upload a video, say it's your very first video. And you have no track record. We know nothing about you. Maybe our prior says, well, it's not so likely that you will upload something that will find mass appeal. TikTok is democratic and open in a really astounding way in that what they would do is they would expose your video to a smallish number of users, say 100 to 500 exposure is quite typical. And there's no AI involved at all. It's just we're running a little test and we see, is there something about the video that you have just uploaded that seems to be appealing? If there's signal of general appeal that maybe people spend watching the entire video or people spend commenting or liking the video, then it will get exposed to a much larger group of users. So anywhere from, say, 1,000 to 10,000 or so. This is what they call a cold start pool and then like a second pool that your video would go into. And what's really interesting and fascinating, that's big strategic consequences, is that this openness allows people who don't have a track record, who are not very well known, who are not connected or followed by a large number of users, allows basically anyone a chance at becoming TikTok famous. When you sort of see how people come up with ever new ideas, in part this also has to do with just how open and how democratic the app is in that it respects early signals about popularity. And then at a much later stage, of course, matches carefully what we know about you and what we have learned about the content. So this is maybe the most radical difference to say to a platform if you compare this to Instagram. Instagram is social in a way that TikTok is not in that most of what you see is content that is produced by people you follow or by people you're close to. So it's the social structures, the social network that determines both what you see, but also who has a reasonable chance of being seen on the web. If you're a first-time poster on Instagram and you have zero followers, just about no one is going to see any of the content that you will upload. Upload. And so, yes, they're using sophisticated AI to match your preferences to content that you might like. There's a process called collaborative filtering that essentially describes this. But it's applied late in the game after we have vetted content, after we have already a rough sense of what could be popular, what could be the next best thing.

And I guess that gives them an early view into maybe potential content creators that have the potential to go viral at some point.

That's right. Maybe the most radical feature of the platform is to say that video that you uploaded is a huge hit, and you have become recently popular. Many more people follow you because you had a series of successes. The platform will now work against you because we want to keep that openness. We want to allow new creators to come in. And so, your job actually gets a little more difficult. And you always see it when people provide these lists of who are the most popular creators on TikTok. These lists expire very quickly. Like someone who used to be very successful 2 months ago might as well not really have much success. And that's the working of the algorithm. Kim Kardashian on Instagram, that's never going to happen. In fact, there the dynamics are the exact opposite in that someone who has been popular for a very long time will not only retain his or her popularity, in all likelihood, sort of success feeds success in that you become more and more important for the platform.

I think another thing that people really like about TikTok, and I've never created a video on the platform, but I have looked at some of the tools that they embed within the app to make it easy for people to create videos. The case talks about the acquisition of Musical.ly, Musical.ly, as being kind of an important turning point. Can you talk a little bit about the strategy behind that acquisition?

So there are two things. One is if you think about ByteDance as the company that develops Douyin, the domestic version of TikTok, and then eventually TikTok, the contribution of Musical.ly is really that it was very popular among young people in the West, not so much in China. And I think the matching of Western tastes to Western content That was something that Musical.ly really facilitated. Now I should say early on there was much more shared content. And I think part of what we see now across many businesses and across many social media also is sort of the separation between West and East. And now unfortunately it's much harder to access Chinese content on TikTok. And it's quite more difficult also for users of Douyin in China. To access Western content. So you see sort of this repositioning as a result of political pressures that now give us a fare that is a little less varied, a little less interesting than it used to be.

One of the things the case points out is the astronomic growth of TikTok. I was just kind of blown away by the rate at which they scaled. Can you talk a little bit about that and how that was possible?

So the moment you have more viewers, it becomes more interesting to produce content. If you make it really easy to produce content and You had mentioned before that they were really good at providing the tools to shoot videos, the filters, all the tools essentially that you need in order to look great on video. Because all of these tools were available and made it really easy, you have an explosion in content that then leads to additional users. So there's nothing that unusual about these apps that can take off very radically in a very short period of time. When you look at BeReal, another recent social network that has petered out right now. But it went from basically 0 to 10 million users in just an astonishing short period of time. So those are just the network effects. And then the big question is always, is this just the flavor of the minute, or have you actually created something that has enduring value? Here, maybe the most interesting part of the case is when you look at the data a little more closely, you see that much of the phenomenon is driven by young women, both teenagers and women in their early 20s. When you compare Instagram and TikTok, this is where TikTok really shines, where they have an amazing competitive advantage. And that, of course, ties with everything we know about the not-so-fabulous social effects that come from spending a lot of time on Instagram, where you see everyone's best life all the time. It's a polished, curated interface where Everyone always looks fabulous. And by contrast, I think TikTok is much more, you know, sort of off the cuff. It's funny. It's disrespectful often of established norms of what video production needs to look like if you take a video to the web. And it's particularly costly, I think, socially speaking, for young women to be on places like Instagram where to a first approximation, it's very hard to feel good about yourself because you see everyone else who always looks better than you do, who seems to be more successful, seems to be traveling all the time, eating at the best restaurants, and so on and so on and so on. And then you see a slice of life that is so much more alive in some sense, so much more real, so much more what people actually look like and do. And the silly dances are refreshing exactly because they're not perfect. And so That competitive advantage is in part what made TikTok the superstar that it is today.

Yeah, so it's a little more approachable, I guess, for a lot of people. But there are some creators on TikTok who rise to the top. There are some creators that are more popular than others. Can you talk a little bit about some of the people that seem to be really creating the greatest impact on TikTok?

It's hard to say something general because it varies quite a bit over time. So for a little while, One of the top creators was a person who made fun of the overly complicated life hacks that you often see on the web. That was really precious and that was fun. But it's also true, I think, which is sort of true for much of media content on the web, that the formula gets old fairly quickly. And then, you know, we're moving on to the next thing that is really amazing. So I don't think there is sort of one way to approach content on TikTok and then, you know, know that it'll be a success. There may be a few ingredients that seem to be important. I would say authenticity is maybe the most important one. So we have, say, all of these cooking videos, but they're not the Instagram type cooking videos where you create this amazing thing that looks really wonderful. No, it's like, the average video includes like some minor catastrophes that are probably much more typical for the average cooking process than the beautiful products that we see elsewhere on the web. I would maybe point out, and this is an important difference to YouTube, we haven't really spoken much about YouTube. In part, I think TikTok takes off because it gets the shift from pictures and photos to video. And of course, by doing that, it entrenches on the territory that was the YouTube territory. YouTube in some sense is maybe more equivalent to what TikTok meant or was trying to do with the one difference that TikTok content, at least in the early days, was incredibly short, typically much less than 30 seconds. Advertisers have maybe here played a not so great role in TikTok's rise in that they're pushing the platform to have longer-form content that, you know, is more amenable to brand building, to messaging to consumers. And so when you see complaints like users that are mildly unhappy about how TikTok has evolved over time, you will see lots and lots of complaints about the overly long videos, which of course we had gotten used to on YouTube, right, where every little piece of content is stretched in ways. So it's just like incredible, really like the simplest web hack that you can imagine that really should take 15 seconds. Now on YouTube, it's a 6.5-minute video simply because of advertising opportunities and the incentives that are created by advertising opportunities. So in that sense, YouTube and TikTok have become a little more similar. And it's not the most popular change on TikTok when you ask the users.

That leads me to the next question I had was about the business model for TikTok, because we know it's pretty clear what the business model is on YouTube and on Instagram and some of these other platforms. And thinking with my chief marketing officer hat on, we've struggled a little bit with how to use TikTok in a way that is sort of in alignment with the HBS brand. So I think other brands are trying to figure this out too. But how is TikTok making money?

It's important to remember that TikTok is really— the company is ByteDance, and it makes, at least at this moment in time, it makes most of its money in the Chinese market where it's both a little bit of advertising finance, but then it's become a really big player in e-commerce. You will see, if I had to predict how TikTok is going to evolve over time, is shopping opportunities, e-commerce, I think is part of where the brand is headed for sure. For the time being, it's mostly advertising where I think brands have struggled with the authenticity that is at the heart of TikTok, maybe in part because they've gotten used to looking so polished on Instagram and other places. Brands, you know, want to give off the perfect image, and the TikTok team often finds it difficult to sort of get across what it will really take to create a memorable campaign on TikTok because it's not what brands first and foremost do. And authenticity, I think, is often something that we talk about when we talk about corporate leaders and when we talk about the way you endear yourself to consumers, but it's actually really hard to do in a marketing and advertising context. And so advertising prices on TikTok have been lower than on, say, Instagram. Instagram remains the most heavily monetized of the lot. Large social networks. It's doing really, really well from a financial perspective. And TikTok is catching up very quickly, in part because it has much higher engagement rates than all of the other social networks. But it's a process teaching marketers what it will take to be successful on the site.

There are certainly some headwinds that TikTok has run into in the past year, particularly on the political front. I'm wondering if you can talk a little bit about some of the challenges that they face and how the leadership there is thinking about it?

So I think there's two things to say. The first one is sort of the general uneasiness about social and social platforms. I think that used to not be such a big concern before we understood just like the many negative effects that can come from social media. I think we're also at a point where privacy concerns are relatively big. For every one person who is concerned about privacy, we find one person who really likes personalization. So that tension, I think, doesn't go away. Personalization and privacy is basically the same thing. And it's very funny to see how some companies try to compete in one and not the other. But overall, I think there's a reasonable set of concerns. The fact that they play out in conversations about TikTok just has to do with the really radical change in sentiment in the United States when it comes to everything China. So to give a specific example, can we have a serious conversation whether there should be a market for location data where companies can buy where you are at any point in time? Yes, I think absolutely. There's probably an argument to be made why this market should exist. And I think there are reasonable arguments to be made why having this data of a particular individual and always knowing where you were at what point in time is deeply problematic. And we should probably not allow that kind of data to be sold. None of this is a conversation about TikTok. Because if the Chinese government concerns were really true, we would shut down that same market on Facebook. In fact, with really serious constitutional concerns, the US government is involved in that it purchases data on people's location. So do we need a really serious conversation about how best to regulate social media? Absolutely. Is this a TikTok concern first and foremost? No, not at all. The TikTok concern mostly says something about anti-Chinese sentiment. That seems to have taken hold, at least in political circles for the time being. It's always a little hard to know how people actually feel. I remember 10 years ago, you would go to Washington, D.C., and there's nothing negative that you can say about China that would find anyone's attention. Now, it's the exact opposite. Anything positive that you can say about China gets sort of washed away and ridiculed and can't really be. It's almost like we needed an external enemy, and we have found it in a country that in many ways is still closely, closely linked to the US economy and does really amazing things for many people in the US. We don't really seem to be able to see it at this moment in time.

Yeah. Let's go back then to the central theme of the case, which is this notion of imitation. And I'm just wondering, You know, if you look at Instagram and Facebook more broadly, and YouTube for that matter, are they trying to compete more for creators or for followers? Is it a chicken and egg thing?

Yeah, so it's a platform, right? Without one, you don't really have the other. What's interesting in particular about YouTube is they, I think, by and large have decided to create a competitive advantage in attracting creators. So this is done by having good tools just like everyone else. But then it's also done by really generously sharing the revenue that comes from advertising revenue in particular when you think about YouTube. I think what you see is sometimes if I don't find a way to beat the competition in creating a super attractive product that users would really love. One opportunity is always to then compete at the other side of the platform. And so what you get is sort of this rebalancing of competition. When competition first propelled TikTok, it was all about competition for users that then attracted the creators. And I think what YouTube is trying to do is trying to reverse this to sort of have the primacy of creators. And I know The best videos, the funniest stories, they will always be on the short-form video version that YouTube has created. And as a result, if I know this, maybe it's true that then users will flock to YouTube first and will maybe make life a little more difficult for TikTok. That is a much harder thing to do for Instagram because Instagram in some sense was always much more driven by creators and in the first place, right? It was the celebrities and the people we admire that created the type of content that both provided interesting advertising opportunities but also had us glued when we were wondering about how stars live and what they have for breakfast and all the rest of it. And to rebalance a platform like Instagram is much more difficult. And so what you see is that they make these big pronouncements that in your feed you will see much more content that is not social content. And then predictably, there is big backlash from the creators who exactly know, well, the reason why they're very popular is because they're the social glue that creates the Instagram experience in the first place. And so it has you think about the flexibility with which platforms can respond to one another. I'll give you another example. I think that's sort of shows a very similar dynamic. When Etsy was pretty popular, it became a force in e-commerce. Amazon, in response, created Handmade. The moment that happened, the Etsy share price fell pretty dramatically because everyone's intuition was, well, these are platforms. There are really big, important network effects. And if the gigantic platform in your space imitates what you have done, Basically, that's really bad news. Now it turns out that Etsy is actually perfectly okay. And again, it has to do with a difference in the orientation on the two platforms. Amazon will always be in the customer's corner and it will always do right by the customer first and foremost. And that's less true for Etsy. Etsy first and foremost is a platform for creators. And for makers, that creates a form of competitive differentiation. And then you can get imitation as in the case when YouTube now essentially does exactly what TikTok has done, except it expects to have a really big advantage in attracting creators simply because it has economies of scale that TikTok doesn't really have at this moment in time. If I'd be nervous about any one of the networks, I'd probably be nervous about Instagram's ability to weather the competitive storm that is TikTok.

So that leads perfectly into my next question, which is simply, is there room for all of these different platforms? I'll go back to my kids again. I think the only one they use these days is TikTok. Is that some sort of a harbinger for where these platforms will net out?

Part of it is just sort of the generational turnover. The last thing you want is be on the social network that your parents are on. That I think helps new entrants to some extent. And then the question is, can you come up with a form factor that is really different? I mean, TikTok has done such a great job creating content that is refreshing, that is different, that seems surprising, sort of this never-ending series of videos that are often quite far from what you thought you might like, and yet you somehow find it very appealing. That, I think, is a really tough act to follow. Will there be something else? Yes, of course, absolutely there will be something else.

Felix, this has been a great conversation, just as I thought it would be. I'll ask you one last question, which is simply, if you want our listeners to remember one thing about the TikTok case, what would it be?

I think this strict separation of thinking seriously about how best to regulate social media and not getting caught up in popular sentiment in favor of a particular country or against a particular country, I think that will serve us so well. If we just take a really hard look at how do we want social media to serve the economy, how do we want social media to serve individuals, and then find rules that actually do, I think, what we generally have done best to let companies compete and then to see who's going to win and who's going to lose. And if a foreign company wins by doing something that creates a lot of value for a lot of people and incredible engagement and enthusiasm, so be it. I think one of the worst things we can do to the economy— this is not only true for social media, of course— is fall back into to a nationalism that somehow seems to think everything that is not born here is problematic, perhaps evil, needs to be somehow cut back.

Before we let you go, I just want to give you an opportunity to tell our listeners again the name of your podcast and just give us the quick elevator pitch for what that's about.

Yes, happy to do so. So it's a show called After Hours. It's faculty, colleagues, and I who talk about mostly current issues in business and culture. We're on summer break right now, I should say, but we'll be back in September. And I'm sure there will be lots and lots to talk about, including what has happened to TikTok and social media over the summer.

Yeah, it's a great show. I encourage everybody to listen to it. Felix Oberhofer-Gee, thank you for joining me.

My pleasure. It was great to be here. With you.

That was Harvard Business School professor Felix Oberholzer-Gee in conversation with Brian Kenny on Cold Call. Next Wednesday, Hannah Bates will be back with another handpicked conversation about strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. And while you're there, be sure to leave us a review. We're a production of Harvard Business Review. If you want more articles, case studies, books, and videos like this, find it all at hbr.org. This episode was produced by Anne Sanny and Hannah Bates. Ian Fox is our editor, and I'm your guest host, Ramsey Cabaz. Special thanks to Adi Ignatius, Maureen Hoak, Karen Player, Nicole Smith, Anne Bartholomew, and you, our listeners.

Happy New Year.