How TikTok Tricked America

I am Sho Chu. I became the CEO of TikTok. This guy, Sho Chu. TikTok CEO Shoo Zi Chu. TikTok CEO Sho Chu doesn't run TikTok. Shoji Chu, the CEO of TikTok. I'm serious. He's really not in charge of the company. Mr. Chu, do you agree that TikTok is controlled by the CCP? No. It's so insane that this is happening. All these lawmakers, they're just buying what he's saying. We gotta dive into this. Okay, so the guy every pundit is talking about right now is named Sho Chu. And yes, he is technically the CEO of TikTok, but that title doesn't mean what you think it does in this context. The company has a long and complicated history that has left it with a confusing network of ownership interests. This isn't like Facebook, where Mark Zuckerberg has so much authority that he can change the name of the company to Meta at the drop of a hat. This guy, Sho Chu, he's essentially a frontman. He can put on a nice suit and go in front of Congress, but he really doesn't have any actual authority over the company. Even though Sho is technically the CEO of TikTok, there are four other important figures in this story. These five men have shaped TikTok into the massive force that it is today and put the company at risk of getting banned in the process. In order to understand who's really pulling the strings of TikTok, we have to go back to the beginning and a man named Alex Zhu. The year was 2012, and social networking was absolutely dominant. Facebook had just gone public in one of the biggest IPOs in tech history. Zuck had just turned 28 years old and was managing a company worth more than $100 billion. But Alex Zhu was older. He was 33 at the time. He wasn't your typical child prodigy, and he didn't exactly work for a sexy tech company. He was working at SAP, a decades old enterprise software company based in Germany. Yes, it was a tech company, but it wasn't a thriving hub of innov databases, accounting systems, payroll software. This was the type of stuff Alex was working on. But he clearly wanted more. So Alex began thinking about building a startup. Back in 2012, education technology was having a bit of a moment. OpenCourseWare like Udacity and Coursera, offered full college classes online for free. Alex liked the trend of independent online learning, but realized that hour long lectures were simply too long and hard to engage with for most people. No one was finishing the courses they started on these platforms. So something had to change and combine.

The idea of Coursera and the idea of Twitter into one product. Making educational contents first on mobile, bit size, short form. So we reduce the barrier to content creation as well as content consumption for education.

And this is where the original idea for TikTok's short video format came from. So he called up an old friend named Lewis Yang and started prototyping. For the first six months, things went pretty well. Alex and his team were able to raise $250,000 from investors and launch the first version of the app. But once real people started using it, things took a turn for the worse. Delivering a feed of video to smartphones was tricky. Back in 2014, most social media apps were still primarily focused on text and photos. The videos took too long to load, and at the end of the day, most people didn't really want to watch educational content. If Alex and his team wanted their app to take off, they would have to figure out how to get teenagers to love it. So Alex had to start studying user behavior and change his approach. Every day he would ride the train from San Francisco down south. And on that train he would observe how teens were playing with their phones. One particularly interesting behavior he noticed was the popularity of selfie videos. Now that everyone had a smartphone with a front facing camera that could take decent quality video, kids wanted to create more and more content. They wanted to share tricks, stunts, and most interestingly, lip sync videos.

Entertainment is going to be much easier than education because education is against the human nature and entertainment is basically following the human nature.

Alex made an important decision. Now it was time to refocus and hone in on lip syncing. His company had just 8% of their original funding remaining, but the opportunity seemed too good to pass up. Now there was one major competitor in the short form video space at the time. Today we're going to be talking about this brand new app called Vine. Vine took an Instagram style feed, but focused strictly on 6 second looping video clips. The app was a massive sensation and looked unstoppable at the time. But Alex had a few key advantages. First off, vine wasn't focused on lip syncing videos and didn't really offer any music related creation tools. And second, Twitter had just bought vine and was mismanaging the service terribly. This gave Alex and his team an opening, so they moved quickly to launch Musical Ly. The app was still rough around the edges, but it was the first app really focused on music and lip syncing and that gave it Niche appeal. Jimmy Fallon had started doing a segment on his show where celebrities would lip sync popular songs. And tons of those clips were going viral. There was even a TV show called Lip Sync Battle that aired every Tuesday. This put Musical Ly in the perfect position to pull in new users. People would watch the show and and then look for apps where they could lip sync on the app store. Musical Ly would pop up in the search results and they'd download it. It was growth time. After years of struggling to build something popular, Alex had finally found product market fit with Musical Ly and he was ready to scale it. So the question is, how did he grow the app so quickly? Instead of focusing on showing you content from your social network, the main feed was driven entirely by an algorithm. All that mattered to get promoted in the algorithm was engagement. If people were watching your videos all the way through, your content would get shown to more people. Every major app has had to lean more and more into this model, but Musical Ly was really the first to fully prioritize algorithmic feeds. This meant that new creators could quickly gain popularity, even if they didn't have a strong following to begin with. It also meant that users would have plenty of amazing content waiting for them whenever they opened the app. It didn't matter if their friends and family weren't posting anything interesting. But it wasn't just the algorithm that led to massive growth. In the early years, Alex also employed a second key, the creator fund.

So for users, typically when they go to a social media platform, the first thing they're looking for is fair. But once they have the fare, it's not enough. They have to monetize. So if the platform is a platform that can generate most revenue stream for influencer, they will definitely stick around.

This was a really critical turning point for the company. Vine had refused to pay their biggest creators and it led to massive migration from vine to YouTube. Alex understood that if he could help new creators actually make some real money, they would stick around and help grow the platform. So that's just what he did. They started paying top creators and connecting them with advertisers. This allowed new creators to not only get discovered through the algorithm quickly, but also start making real money. But there was still one more critical trick that Alex used to grow Musical Ly so fast. See, there were still plenty of people who would use Musical Ly to create a fun lip sync video, but then go and post it on another social app like Twitter or Instagram. So Alex and his team did something really clever. They started Watermarking every Musical Ly video that was created on the platform with the company's logo. And you still see this today with TikTok videos that are watermarked with the TikTok logo so that when you share them on other platforms, you know that content came from TikTok. By watermarking the video, users on those other platforms would see musically and have the opportunity to download the app. These three strategies combined to supercharge growth, and by 2016, the app had over 10 million people using it every single day. This got the attention of Mark Zuckerberg, who'd already seen how important buying new hot apps was to keeping Facebook relevant. In 2012, he'd bought Instagram, and in 2014, he'd bought WhatsApp. But Zuck didn't just want to buy Musical Ly because they were growing quickly in the United States. There was something bigger at China. Back in 2016, China wasn't really a major political issue yet. Sure, Trump was starting to saber rattle about it a little bit, but most tech leaders still saw China as a massive opportunity to expand their businesses. Zuck was determined to crack the China problem if he could work out a way for Facebook to acquire Musical Ly that would give them a strong foothold into the Chinese market. Google had failed to break into the country, but Apple was selling plenty of iPhones, so it didn't seem impossible. So he calls up Alex and invites him to visit Facebook's headquarters in Menlo Park. Now, at this point, Alex has actually moved to Shanghai to spend more time with the Musical Ly product and engineering teams. Even though they've had massive success in America, the company is still very entrenched in China. Now, here is a major turning point in the story. The acquisition talks with Facebook had fallen apart, so Alex was more or less on his own. This is the moment when Music Lead was growing like wildfire in America, but his whole team was based in China, so it made sense for him to start focusing on growing there. Once they opened that Pandora's box, they couldn't close it. Every content company in China employs thousands of people to sift through every post and censor anything the Chinese Communist Party doesn't like. Ethical considerations aside, this is a big cost for a small startup to bear. But it's table stakes for growing a social app in China. Despite all these hurdles, in 2017, Alex and his team got Musical Ly growing in China. The plan was working. The app clearly had international appeal. If Facebook had successfully acquired Musical Ly, we would be in a very different situation today. No discussion of banning TikTok, no congressional hearings, no fake CEOs testifying. But then ByteDance entered the picture. ByteDance is a major part of why TikTok is under so much pressure today, and a big part of why TikTok's CEO actually has no real authority. Now, let me explain how we got here. Around the same time that Alex Zhu was starting to build Musical Ly, a Chinese software engineer named Zhang Yiming was starting his own social media company named Bytedance. And this is the third individual in the chain at TikTok. Zhang wasn't focused on short form video, though. He wanted to build an app to help people find interesting news articles. The app basically used a similar recommendation algorithm to surface the best news stories on the Internet, but tailored to a specific user's tastes. And that recommendation algorithm proved useful when ByteDance expanded into short form video. Zhang could see that ByteDance had created a solid foundation for growth with their news app, and that video could unlock a much larger market. This put a ton of pressure on Alex and the Musical Ly team. All of a sudden, they had one of the most well funded and fastest growing Chinese social media companies breathing down their neck. The good news was that Musical Ly was still doing well in the United States, and ByteDance was struggling to get traction there. So you have ByteDance dominating over in China and Musical Ly dominating in the United States. It only made sense to combine the two companies. And so ByteDance acquired Musical LY for nearly a billion dollars. But it was money well spent. They created a new combined app called TikTok and asked users to download it and log in using their existence existing musical ly credentials. TikTok became the most downloaded app for iPhones in 2018. And users were absolutely obsessed. They spent nearly one full hour every day using the app. In just a few short years, Zuck had switched from wanting to buy TikTok to wanting to put it out of business. While our services like WhatsApp are used by protesters and activists everywhere. Due to strong encryption and privacy protections on TikTok, the Chinese app growing quickly around the world, mentions of these same protests are censored even here in the US that's when things started to go south. Alex Zhu, the former futurist who designed the app, he was gone from the company. Now Zhang Yiming was running ByteDance and had full control of TikTok. But things were about to get more complicated. In January of 2019, an independent American think tank published a report calling TikTok a major threat to national security. The primary concern was that TikTok, because it was now owned by a Chinese company, could potentially be forced to provide user data to the Chinese government upon request. This was a huge national security risk. Since tons of military personnel around the world used TikTok, all that data would flow back to servers controlled by ByteDance executives, who ultimately answer to the Chinese Communist party. Now, while ByteDance executives have claimed that they wouldn't share user data with the Chinese government, the legal reality is that they may have little choice in the matter. This was a new kind of problem. Chinese tech companies had developed social media platforms before, but they'd never reached the scale of TikTok. The key problem is that Chinese authorities have significant latitude to request information from private companies. TikTok's privacy policy in America says the data may be transferred to China, and it's impossible for US Authorities to track what happens after it does. And Chinese government overreach wasn't only a problem for ByteDance's American apps. Back in 2012, when Zhang Yiming was still in the early stage of building ByteDance, he came face to face with the strength of the Chinese Communist Party. See, before he launched that news app, he actually launched another product, which roughly translates to profound gags. It was an app to share memes and funny videos, and it was doing really well, at least at first. The ByteDance team was was able to grow the app to over 200 million active users by 2018. But then the Chinese government shut it down. The app was simply too hard to accurately censor, and the CCP couldn't allow it to continue. Now, this wasn't really a massive setback, because by then, ByteDance had already launched TikTok. But this clearly set the tone for how the ByteDance team would have to operate going forward. The fact that Zhang Yiming got his hand slapped by the Chinese government is telling him here. We've seen story after story of big tech billionaires in China going missing. Chinese Communist Party has spent the last decade relentlessly attacking the local technology sector. Xi Jinping took power in 2013, and since then, he's been extremely worried about tech companies becoming too influential and straying from the core values of the Communist Party. And this leads us one step up in the TikTok hierarchy. Let's look at the tools that are the Chinese Communist Party uses to control tech companies. Obviously, they can pass laws that control what Internet companies can and can't do in China, but those don't always apply to Chinese tech companies that operate internationally. ByteDance has created international subsidiaries in the Cayman Islands to allow them more freedom to operate. But there's still plenty of ways that Xi Jinping can exercise control over tech companies. One big one is the China Internet Investment Fund. It's basically just a standard venture capital firm. They buy small stakes in tech companies, and they've picked a ton of winners. They've invested in Weibo, which is China's version of Twitter. They invested in SenseTime, one of China's leading AI companies. And of course, they've also invested in ByteDance. But where most venture capitalists are in it mostly for the money and want to own 10 or maybe 20% of the company, the China Internet Investment Fund often buys just one. The trick is that the fund is mostly owned by the Cyberspace administration of China, which is their Internet regulator, Kind of like America's Federal Communication Commission. But that's where the comparisons end, because the FCC would never make an investment in Facebook. But in China, these state capitalist venture partnerships are increasingly becoming the norm. In America, a 1% ownership stake usually doesn't confirm any benefits. Sure, you get to participate in the financial upside, but you're unlikely to really gain much control over the company. Not in China, though. When the Chinese Internet Investment Fund does a deal, they receive golden shares that give them board seats and the ability to make real decisions. Xi Jinping has been ramping up these deals like crazy. The share of private companies in China with state connected investors grew from 14 in 2000 to over 33% in 2019. So now, even if Zhang Yiming wanted to run ByteDance independently from the Chinese Communist Party, he really couldn't. And that leads us up one more rung on the ladder of control at TikTok. A man named Zhang Fupeng, who keeps such a low profile. There's only one photograph of him online, but a report delivered to the Australian parliament identified him as both the editor in chief at ByteDance and its communist Party secretary. His goal is to transmit the correct political direction, public opinion, guidance, and value orientation into every business and product line. And of course, since he works for the Chinese Communist Party, that means he works for Xi Jinping. And this is the heart of the TikTok issue. It's clear that Xi Jinping controls the company, since he controls everything that happens in China. And with increasing tensions between the United States and China, it's easy to see why American lawmakers are so worried about TikTok. The odd thing here is that they decided to bring in Sho Chu, a guy who's clearly not in charge of what happens at TikTok? But now to the really big should the United States ban TikTok? China has banned American social networks for years. YouTube, Facebook, Twitter and more are all banned in China. So it's not like the United States would be hypocritical in banning TikTok. But America doesn't want to be like China. We're the free speech country. We're all about freedom. And stopping Americans from using a particular social network seems directly at odds with core American values. Now this isn't really as much of a free speech issue as people think think because Facebook and YouTube have already built direct competitors to TikTok and are happy to have those creators move over. And ironically, the algorithm that made TikTok so successful in the first place might wind up limiting the damage from an outright ban. The concept of followers or subscribers and really the entire social graph are much less important on TikTok than other social networks. If you create amazing content, it'll go viral anywhere. So if TikTok gets banned, most creators will be able to re establish their followings fairly quickly on YouTube or Instagram. Many TikTokers are cross posting content already. But it's more complicated than that. It's important to remember how China controls the Internet. You can access American social networks while in China. It's just very difficult and usually requires a vpn. So the simplest solution might be to just compel Apple and Google to remove TikTok from the App Store, but still let Americans use TikTok in a web browser. The real issue with TikTok isn't any one person accessing the service. It's only a problem at scale. With 100 million Americans using the app regularly, the potential for swaying political opinion is significant. Now you're probably thinking you could say the same thing about Facebook or Twitter, and plenty of journalists have. But those are American companies run by American citizens that answer to the the American government. Congress can't even get the real people in charge of TikTok to show up on Capitol Hill to answer questions. And that's the real risk here. It's simply too naive to ignore the fact that China is a major geopolitical rival and is completely unaligned with the long term interests of the United States. This wouldn't be a major new power exercised by the US Government either. America is always overseeing international control of American companies. The Committee on Foreign Investment in the United States or CFIUS, reviews every American company that sells to a foreign country. During the Cold War, the Soviet Union would have loved to purchase one of America's dominant television networks, but that would have been insane if that happened. There are still risks to an outright ban of TikTok, though it's far from a cut and dry issue. Everyone who advocates for regulation always imagines the hypothetical perfect scenario, but laws often have unintended consequences. It's entirely possible that the government goes way too far with the ban and ends up creating a mess in the process. Fundamentally, when you're thinking about the TikTok issue, it really highlights the importance of intellectual flexibility. A lot of people get hung up on this when they let a single principle guide their entire decision making process. Yes, free speech is important, and yes, property rights are important, but we have to acknowledge the reality of the situation. The CCP has banned every American social media app in China and now controls the fastest growing app in America. Things are completely out of balance. Political tensions between the United States and China are continuing to escalate. You don't have to look further than the recent restrictions on semiconductor exports exports to see how serious things are getting in order to understand how the economic battle between America and China is developing. Just watch this video next and really quickly. I'm working on a really cool new project and if you'd like to be notified when it goes live, just drop your email@john coogan.com I promise not to spam you. I just want to be able to tell everyone directly when it goes live. I can't really share much yet, but if you enter your email and@johncoogan.com, you'll be the first to know about it. Thanks a lot.