TikTok is a free short-form video-sharing app that rewards its users with endless hours of entertainment. It’s a free app, so how does it make money?
So, How Does TikTok Make Money To Pay Its Creators
TikTok’s use of ads to generate revenue was just recent. TikTok for Business launched in June of last year with the goal of helping businesses and brands market their products and services inside the app.
Due to TikTok’s algorithm, it can filter the type of videos exposed to a user. The hashtags help categorize videos. Depending on what the user’s liked videos and the tags present in their own videos, it shows similar content in the “For You Page”, or FYP.
This algorithm is extremely useful for TikTok, and businesses (or brands) pay a minimum of $500. Depending on the duration and the format of the ad, TikTok charges up to $120,000. This translates to $6B in 2019 alone. Tiktok also spends some of this amount to run its own ads on other social media platforms, spending up to $3m a day back in 2018.
TikTok’s Investors and Acquisitions
TikTok gets its funding from several companies. For the last 5 years, TikTok received funds from Sequoia Capital China, CCB International, and General Atlantic. It also received funding from Softbank, KKR, and Primavera Capital Group. The latter companies provided a total of $3B worth of investments. The funding received raised TikTok’s valuation at $75B.
TikTok’s parent company, Bytedance, acquired Musical.ly for $1B. The acquisition makes it possible for the company to gain a DAU (daily active users) of 60 million. Bytedance already has an existing news app that has a 120 million DAU. The AI used in this app was introduced to Musical.ly.
Since the demographic (teenagers and young adults) were indicators and early adopters of trends, Bytedance used this as an opportunity to rebrand the app to TikTok. The rebrand was necessary due to Musical.ly’s failure to gain ad traction.
Before the rebrand, Musical.ly was in a partnership with famous brands. One of the earliest was NBA, which currently has a following of more than 12 million. Last year, TikTok offered sponsorship to UEFA’s Euro 2020. Amazon is also relying on TikTok user creativity to generate sales, and the company has announced that they’re focusing on providing their customers trending product finds.
Live Streaming and Virtual Gifts
Musical.ly has a gifting system for its content creators. Musers (musical.ly users) show up on their favorite live stream channels and give gifts to the content creators. The live streams were known as Live.ly’s.
Users have reportedly earned over $10,000 in a span of two months. Musical.ly, in a partnership with Live.me, has given over a million dollars to content creators. They’ve also made a feature where creators can sell merchandise on the platform.
Bytedance’s acquisition of Musical.ly and its subsequent rebranding of the company to TikTok had some minor improvements to the app. The 15-second and one-minute videos were still kept, with more filters and effects to improve viewing quality. Editing features were also added and an upgrade over the app code.
Gifts, Coins, and Diamonds
Live.ly has an in-app currency called coins which can be used to purchase virtual gifts. Viewers can send these gifts during a live stream.
TikTok still uses the same setup as Live.ly. TikTok allows users aged 18 years and older to purchase coins. The coins are not convertible to cash nor are they transferable from one user to another. The coins also disappear should the user decide to deactivate their account.
Gifts in TikTok vary. These take the form of stylized icons like pandas, hands, or rainbows. These gifts are worth anywhere from five coins up to a thousand. The gifts purchased using coins are converted to diamonds for the receiver or the content creator.
Accrued diamonds are converted into real money, and users can withdraw these into their preferred payment channels such as Paypal or Zelle. Under TikTok’s policy, the conversion rate of diamonds to cash is at their discretion and they have the right to change it.
TikTok will only allow users to withdraw money if it’s equivalent to at least $100. The company keeps fifty percent of the profit, hence, users withdrawing $1000 will get to keep $500. This brings the maximum allowable withdrawal per day to that amount only.
Top Earners in TikTok
In terms of earnings, verified TikTok accounts can expect earnings of at least $5 per post. For a user with a following of 2000, they can earn the minimum. On the other hand, TikTok accounts with followers in the millions earn a maximum of a thousand dollars per post.
The top earner on the video-sharing app is Addison Rae. The former competitive dancer earns about $5 million a year from short clips. She has over 70 million followers. The second top earner on TikTok is Charli D’Amelio, earning $4 million.
She surpasses Addison Rae’s 70 million followers, although this is still up to debate due to controversies regarding follower buying. The TikTok star hasn’t commented on the issue. She also shares the spotlight with her sister Dixie.