A case study on social media companies in Silicon Valley: an economics perspective.

Why copycatting has unfortunately become the best move for companies

Since the rise of Facebook in the mid-2000s, social media companies have been the fastest growing in Silicon Valley - Snap, Instagram, YouTube, and Facebook are consistently the most downloaded apps in the world [1]. In the past couple years, though, these top platforms have become stagnant, rarely releasing novel features that don’t already exist on other platforms. Without losing their positioning as universal platforms for society, these four platforms now share many of the same features: endless feeds of posts to scroll through, stories that disappear after twenty-four hours, like and comment metrics to measure engagement with followers, and customizable profiles that can be created by any user. Thus, it is clear that the rate of innovation amongst these companies is quite slow relative to other spaces in Silicon Valley.

Here, I explore the current state of competition amongst social media companies in Silicon Valley. In particular, I discuss homogeneity amongst top social media companies - why it exists, examples of its effectiveness and ineffectiveness in retaining users, how these companies compete otherwise, and how it creates opportunities for disruption.

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We begin by investigating the nature of competition in the market of social media companies. In this market, there are six main players: TikTok, Snap, YouTube, Instagram, Twitter, and Facebook. All six platforms primarily make money by advertisements, so the more users that exist on the platform, the more data the company has to sell in the form of advertisements. Because every platform is free to use, the players in the market compete for user engagement - any second spent on one of these six apps could be instead spent on the other five. 

Due to the structural similarities of all six players, the platforms differentiate from one another with the unique content and experience that they provide. Twitter holds the niche of posting news and information as quickly as possible with little thought, YouTube has a stronghold on all long-form video content over one minute long, and Snap maintains its lead in quick messaging via photos that can be edited easily. 

However, it is clear that TikTok, with over one billion downloads in the past year, has ascended to the top of the social media pyramid. TikTok was the first major social media platform of its kind to offer the integration of endless scrolling with automated content recommendation. It also offers an incredibly accessible form of video creation, with in-app editing that makes creating and posting effortless. As a result, many creators and users who previously spent most of their time on Instagram, YouTube, or Snap have flocked to the platform. 

TikTok offered a novel concept that disrupted the other platforms it was competing against. To understand why this disruption was successful, we consider incentives of innovation for the large incumbents of the market versus the smaller potential entrants. For the larger incumbents, investing in R&D is less profitable than investing in “feature innovation,” which adds new functionality to align with the existing core infrastructure of the company and maximize profit. In particular, incentives of larger companies align with keeping growth stable, so the profit a larger company would get from discovering the next disruptive core offering would be diminished by integration costs. For example, this commonly occurs in the cereal industry, where massive brands will elect to produce many variations of one core cereal product versus proposing a more innovative cereal that may diminish the returns of the singular cereal. This phenomenon is known as the innovator’s dilemma, where companies with big businesses cannot change their basic, successful core functions quickly enough to innovate against their coming obsolescence.

Potential entrants, though, do not encounter any of these agency problems. Small firms prioritize quick growth and therefore are able to pivot to new concepts easily, optimizing their offering to be better than the incumbents. Furthermore, if entrants do not pursue product innovation, they will inevitably be pushed out of competition by the established giants who already have market power. The first mover advantage in this market is also very high - the unique value add of the innovation will draw in users looking for new experiences, and the network effects accumulate to where the potential entrant can optimize the new core offering and maintain its overall simplicity better than any other company. 

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The social media technology market in general is unique in that the typical benefits of R&D, such as secrecy and patents, no longer hold. Each new feature of a social media platform is reverse-engineerable, and copyright law traditionally fails to hold against ideas such as stories, hashtags, groups, or comments [2]. As a result, the bigger players in the market pursue this copying strategy: with the best engineering talent, they wait on the potential entrants to observe which ones are successfully innovating and reducing their user engagement, and then make a move to acquire the entrant or steal their idea. Facebook is infamous for this strategy, having already tried to copy Snapchat, Pinterest, Zoom, and TikTok to no avail [3].

The most notable success of this strategy occurred in 2016, when Instagram successfully copied Snap “Stories”, posts that disappear after twenty-four hours, and adapted the idea to its own user interface. Fundamentally, the concept reduced the bar of what users posted on the Instagram platform and has attracted more than 500 million daily users to the feature since. Additionally, at the time of the new feature release, Snapchat had 150 million daily active users before being quickly outpaced by Instagram, gaining only 30 million new daily active users in the next two years [4].

As a result, all six of these platforms offer almost the exact same structural experiences and must compete in a different way for people’s time: content. A user is incentivized to stay on a platform with consistently the best content, and the cost of lacking entertaining content is very high. Mobile devices have made it possible for users uninterested in the content of one platform to switch to a new one offering a similar experience in as little as two swipes. 

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In the past five years, though, the new occupations of “content creator” and “influencer” have been popularized by YouTube and Instagram. By producing entertaining content on these platforms, users begin to generate a dedicated following and then develop ways to monetize their following to make a living. Likewise, regular users will follow their favorite accounts and be incentivized to return to a particular platform to check on the new content released by their favorite creators. As a result, when a creator elects to exclusively use one platform, every one of their followers across all platforms are incentivized to also join this one platform. The social network effects that allowed Facebook to exponentially grow are no longer the focal point in retaining users. Instead of friends inviting other friends to platforms, creators and their content are attracting and retaining people on new platforms. As a result, these companies have begun to compete for creators in the creator economy.

According to a 2020 report by VC firm SignalFire, the global creator economy contains over 50 million creators who generate content and monetize their personal brand in the form of a small business [5]. Two million global creators are already making six-figures, and Mediakix data shows the influencer marketing industry is projected to be worth $15 billion by 2022 [6]. Numerous studies have found that “content creator” is now the most popular job amongst children aged 8-12 [7], and the COVID-19 pandemic gave many the opportunity to pursue the influencer career path on different platforms.

Now, the influx of creators in the next couple years must each initially decide which primary platform to begin their growth. We frame this market as a vertical one, where creators “sell” their content to platforms in exchange for payouts and having a platform to develop a following. From there, platforms “sell” the creators’ content to users in exchange for their data to use in advertisement provisions. Hence, companies are competing for the loyalty of creators and their followers.

There are four main factors creators consider when deciding which platform to enter: intra-platform competition, costs of content, demand, and profit from content. With regards to intra-platform competition, if a platform is extremely competitive and saturated with creators, a new creator is less likely to choose it as its primary platform. Furthermore, if there are many creators in a particular niche to the point where developing a following becomes difficult, one will naturally choose another platform. When analyzing this market, we must also consider costs. Although physical entry costs are zero, the primary cost is the constant output of content required by these platforms. If the learning curve for creating high quality content is too high (e.g. video editing skills, content brainstorming), one will not elect to choose that platform. Demand for this market is often derived from the number of users on the platform -- if there are many users and not many content creators, the demand will be very high and potential entrants will be incentivized to join those platforms. The profit of this market is based both on short-term and long term profit; short term profit consists of direct payment from platform to creator, and long-term profit relies on the ability for followings developed on the platform to be monetized on and off of it.

Although TikTok initially had an advantage due to its appreciation for authentic and simple content, in-app editing, and relative newness, other social platforms are making big investments into creators. The TikTok Creator Fund was the first of its kind, starting with $200 million in March 2020 to help support ambitious creators seeking a livelihood through their innovative content8. In November 2020, Snap announced a $1 million daily pool which it pays out to the creators of each day’s top-performing videos on its short-form video service, Spotlight [9]. YouTube then announced in March 2021 that it plans to pay $100 million to creators who use YouTube Shorts, its TikTok competitor, throughout the next year [10]. 

Snap and YouTube invested in a more dependable fund in hopes that it would draw in the new creators who placed higher value on the payout to continually post to their new services, which would in turn help the companies attract and retain users. Indeed, since these announcements, Snapchat’s first-quarter earnings report announced that the social video feature achieved 125 million users in March and 100 million users in January [11]. Video submissions were up 40% between the two months, and active users watching at least 10 minutes a day grew by 70%. Alphabet, YouTube’s parent company, also recently announced in its Q1 earnings update that Shorts is now up to 6.5 billion daily views, up from 3.5 billion at the end of 2020 [12].

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The copying seems to be a successful strategy for now, but it may not be true that the strategy will continue to hold in the future. Given the lack of in-house innovation from these large companies, billion-dollar social media startups like Clubhouse and Dispo are prime to take a large share of the market. As demonstrated by TikTok, users are constantly craving new experiences, and future startups can make the first mover’s advantage even greater to the point where replicating would be fruitless. Given Facebook’s readiness to copy almost every successful feature and product until one sticks, though, it unfortunately may take its downfall from this oligopoly for innovation to return to normal and homogeneity to become a thing of the past.

Sources

1. Webster, “Zoom and Among Us dominate Apple’s most downloaded charts in 2020,”The Verge, 2 Dec 2020.

2. P. Mohan, “Clone Wars: Why Instagram Will Legally Get Away With Copying Snapchat Stories”, Fast Company, 5 Aug 2016.

3. S. Ghaffary, “TikTok clone Instagram Reels is just one of the many times Facebook has copied its competitors”, Vox, 5 Aug 2020.

4. K. Wagner, “‘Stories’ was Instagram’s smartest move yet”, Vox, 8 Aug 2018.

5. Y. Yuan, J. Constantine, “SignalFire’s Creator Economy Market Map”, SignalFire, 2020. 

6. “The Influencer Marketing Industry Global Ad Spend: A $5-$10 Billion Market By 2020”, Mediakix, 6 March 2018. 

7. C. Taylor, “Kids now dream of being professional YouTubers rather than astronauts, study finds”, CNBC, 19 Jul 2019.

8. V. Pappas, “Introducing the $200M TikTok Creator Fund”, TikTok Newsroom, 22 Jul 2020.

9. S. Rodriguez, “Snap is launching a competitor to TikTok and Instagram Reels”, CNBC, 23 Nov 2020.

10. J. Elias, “YouTube will pay $100 million to people who make popular videos for its TikTok competitor”, CNBC, 11 May 2021.

11. “Snap Inc. Announces First Quarter 2021 Financial Results”, Business Wire, 22 April 2021.

12. “Alphabet Q1 Earnings Call”, Youtube, uploaded by Alphabet Investor Relations, 27 April 2021.