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The DL - An inside view into Pacific Northwest Tech

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Welcome to The DL, a weekly newsletter about tech, startups, and investing in the Pacific Northwest.
 
November 18 · Issue #22 · View online
The DL
Welcome to The DL, a weekly newsletter about tech, startups, and investing in the Pacific Northwest.

This week’s issue covers why I’m obsessed with TikTok, the business model of tolls, Nike’s breakup with Amazon, and the best (and worst) love stories you’ll find on the internet.

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Why I'm Obsessed with TikTok
If you’re someone who cares about tech trends, then you need to get on TikTok. As of this fall, TikTok is officially more popular with teens than Facebook, and it’s growing rapidly (1.5B users, 500M+ added this year).

So what is it? TikTok is an app with a feed of short videos set to music (here are some of my favorites). It launched in 2017 through a merger/acquisition with Musical.ly, and the product is seeing amazing adoption. Here are three reasons it’s doing so well:

#1 - Iterative Content Creation = Higher Quality Videos
the Haribo Challenge on TikTok
the Haribo Challenge on TikTok
For “old” people who don’t get TikTok, the best analogy for how content gets created on TikTok is the Ice Bucket Challenge. Someone creates a meme, lots of people go and recreate that meme with different takes, and the recreations often become more popular than the original video.

TikTok’s “memes” are based around music and sounds, so if you see a video you like, you can tap the sound and see all the other videos that have used the same sound and/or use that sound to create your own video.

The example above (link to watch) shows a popular meme called the #haribochallenge where people line up gummy bears like they’re at an Adele concert. If you look it up on TikTok, there are now literally a million variations of the original gummy bear video.

This is one of the magical parts of TikTok because it’s a lot easier to be funny and creative when you are starting with something interesting, and it keeps content fresh for much longer than the typical social network because more people contribute and share with their friends.

#2 - AI-Driven Curation = Can’t Stop Watching
highlights from TikTok's 2018 Rewind video
highlights from TikTok's 2018 Rewind video
When you open TikTok, it drops you straight into the “For You” page, a mash up of Instagram’s Discover, with YouTube’s autoplay, and Spotify’s recommendations. In the For You page, content isn’t based on who you follow or subscribe to, it’s just based on what TikTok thinks you’ll like.

ByteDance (TikTok’s owner) has a long history in AI content curation, and the best way to experience the algorithmic addiction is to just spend an hour (or ten) watching and liking videos. As TikTok starts understanding what you like (e.g., sports highlights, pranks, funny kids, dancing, etc.), your For You feed becomes an endless stream of 15 second dopamine hits.

Also important to note, TikTok gathers a ton of data. Unlike a YouTube video that lasts ~10 minutes, TikTok videos are ~15 seconds, so in 30 minutes you’ve probably given TikTok your thoughts on 100+ videos.

#3. Followers Don’t Matter = Potential for Overnight Fame
1M likes and 3.8M views on her first video!
1M likes and 3.8M views on her first video!
Because of the non-follower-based content feed in TikTok, a new user can set up a TikTok account today, create an amazing video, and have millions of views by tomorrow.

TikTok pushes videos out to users based on their “AI” understanding of the video and other users’ interests. Then, if people engage (e.g., watch the full video, like, comment, etc.) at a high enough rate, they will show it to more and more users, and the most popular videos can rack up millions of views.

In a world where the top career choice for kids is YouTuber, this is a pretty compelling reason to create content for TikTok. Of course, the flip side of a non-follower-based feed is that there’s no guarantee future videos will get the same distribution as the ones that go viral.

All in all, it’s exciting to watch the rise of a new social platform, and there are a lot of lessons to learn from their approach to content creation, curation, and distribution. So go check it out! Also, here are some links to articles:
  • Dan’s Favorite TikTok Videos (Twitter)
  • How TikTok Holds Our Attention (New Yorker)
  • TikTok’s Chief Is on a Mission to Prove It’s Not a Menace (NYT)
  • The Complete Beginner’s Guide to TikTok (Medium)

Value creation and value capture - SR99 case study
Last week the Seattle Times reported that it costs $0.30 to collect $1.00 for the 99 Tunnel toll. Apparently, back when people collected physical money in tollbooths, collection overhead was 20-30%, so 30% is really bad.

Crappy deal for WSDOT to pay so much for an automated system, but it seems like the tolling contractor is doing a great job capturing the value they are creating, so good for them! Definitely an interesting example of a company that “automates” an old manual process but keeps pricing the same and captures a large portion of the value they create.

And in case you missed it last time, check out my Geekwire post on the three types of ML companies: (1) automators, (2) augmenters, and (3) avant-garde.

Nike vs. Amazon - Brands vs. Sellers
Lots of coverage on Nike’s break-up with Amazon last week:
  • Nike Retail Chief on Amazon Split: We Want ‘Premium Experiences’ (Bloomberg)
  • Nike just ‘tip of the iceberg’ of companies ditching Amazon and selling directly to consumers (CNBC)
  • Nike Cuts Ties With Amazon, but Shoes Won’t Vanish From Site (NYT)

One thing that jumped out to me here is if you look at Amazon’s flywheel diagram, it highlights “sellers,” not “brands.” The Amazon model is great for books, music, and CDs because book sellers can’t compete on much except for selection and price, since books are commodities. But it doesn’t work very well for companies that are selling a brand.

Obviously every company wants a premium for their brand, direct customer relationships, and the ability to reach a large audience, but there are trade-offs to get all three, so it will be interesting to see which brands continue to partner with Amazon and which ones go their own way.

Here’s one compelling perspective from Emily Weiss, CEO of Glossier, on their decision to not sell products into Amazon:
“The interesting thing about Amazon and how they’ve addressed obviously one of the biggest consumer needs, which is solving buying, is that in the process, in some ways, they’ve kind of killed shopping.”
“When you look at a platform like Amazon, no woman has ever told me that their criteria for best mascara was what was fastest or cheapest. That’s not how people are buying emotional things – like a fashion or beauty product. But the leading paradigm of what an e-commerce experience gives you is one of efficiency, and one of breadth of product. When what users are actually doing and wanting is one of breadth of connection”

Other stuff Dan's talking about
🤮 are you kidding me, San Francisco?
🤮 are you kidding me, San Francisco?
💕 Here’s a much better love story - This is probably not even possible today because millennials can’t plan more than a year in advance, but that’s what makes the story so amazing
📺 In the Age of AI - Shoutout to new papa Alex Spencer who recommended this Frontline documentary on the AI race between the US and China and how it is changing the world. Great way to get up to speed on the latest in AI research and China’s tech scene
🔮 The future of the internet - In the US, when big companies want to undergo a “digital transformation,” they spend a lot of money on consultants. In China, they just get on WeChat. Here’s why the NYT thinks the future of the internet is “superapps” like WeChat
📡 The future of streaming - Is watching Netflix at 1.5x speed going to be the only way to get through all your shows on Netflix, Disney+, AND Apple TV? According to CNET, this is “the horror future we deserve” 🤣

Please hit reply! (Or subscribe or forward!)
About me: I work as an investor at Madrona Venture Group, a Seattle-based venture capital firm that has been early partners with companies like Amazon, Smartsheet, Apptio, and Redfin.

If you have thoughts, questions, or comments, hit reply!

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