TikTok’s Monetization Crisis and Its Struggle with Ad Revenue and Hesitant Advertisers

TIKTOK INCOME:

Pay on TikTok is horrendous. Now,   before you go to the comments section and leave angry remarks, let me explain. TikTok only pays about   $0.02 to $0.04 per 1,000 views, so even if you get a ridiculous amount of views, you’re not making much. Take Khaby Lame for example. He’s the most followed TikToker on the planet with a whopping   159 million followers and nearly 18 billion views. But, in terms of ad revenue from TikTok,   those 18 billion views only translate to  $540,000. That’s not a bad amount by any means,   but keep in mind, we’re talking about the most followed TikToker in the world. For perspective,   if you got that same number of views on YouTube,  your total earnings would be closer to $54 million assuming a $3 RPM. Now, of course, these TikTokers don’t just rely on TikTok adsense.

They also do brand deals and sponsorships and affiliate marketing and all that stuff which pulls in a whole lot of money. But, the disparity between TikTok AdSense and YouTube adsense is still staggering. I mean, we’re talking about a 100X difference. And it’s not just creators who are feeling the pain. TikTok is also very much feeling the pain having lost $7 billion last year and it’s only getting worse. Vine was facing this same challenge 10 years ago and this is the main reason that they eventually shut down. All of their most popular Viners would translate their audiences over to YouTube.  This includes Drew Gooden, David Dobrik,   Danny Gonzales, Cody Ko, and of course Logan Paul and Jake Paul. We’re starting to see the exact same thing happen with TikTokers as well.

Notable examples are Charli D’Amelio,  Bella Poarch, Addison Rae, and KallMeKris.  Fun fact, some of these creators have already earned substantially more on YouTube than TikTok.  KallMeKris for example has earned around $350,000   on TikTok but she’s already earned millions on  YouTube. This is not a great sign for TikTok as this is hard evidence that people are simply using TikTok as a springboard for YouTube or to jumpstart their music career while the platform is burning billions trying to stay afloat. So,   here’s TikTok’s monetization crisis and the uncertain future of the platform.

HESITANT ADVERTISERS: 

By far the largest shortcoming of TikTok is advertisers. Advertisers simply do not want to advertise on TikTok. It’s easy to blame the medium for this reluctance. Most advertisers simply aren’t used to making short-form ads in portrait mode. And this is true to a certain degree but it’s not the main reason.  I mean companies like Apple and Coca-Cola have marketing budgets in the hundreds of millions if not billions. And they have hundreds if not thousands of employees whose full-time job is to simply figure this out. So, the reason that companies are reluctant to advertise on TikTok is not because they don’t know how or can’t figure it out, it’s because they don’t want to. Why you ask?  Well, for one, it’s not a very lucrative audience.   41% of TikTok users are between the ages of 16  and 24 which means that most of them don’t have any money. For perspective, this is what YouTube’s audience demographic looks like.

As you can see,   it’s a lot more evenly dispersed. This in itself is a big turn-off for advertisers but the issue goes much deeper than just demographics. Likely the biggest concern for most advertisers is brand optics. It’s no secret that the content on TikTok is how should I say it “edgy”. You’ve got thirst traps, a bunch of cursing, and all this other stuff that YouTube tells you not to include. This is actually what has made TikTok so popular in the first place but there’s a reason that YouTube doesn’t lean into this content. Advertisers simply do not want to be associated with this type of content. I mean, if you were Apple,  would you really want your ad to play after this?

I’m gonna guess no. And this makes a far larger difference than you might think. At this point,   I think we can agree that TikTok is very much a worldwide platform. In 2021, it was literally the world’s most popular domain for crying out loud. So, clearly, it’s extremely popular across the globe but guess what? 80% of TikTok’s revenue still comes from China. And if you didn’t know,   the TikTok that we use is actually banned in  China. You see, the CCP decided that mainstream   TikTok is simply too vulgar and unproductive for the youth. So, instead, they have a healthy version of TikTok called Douyin.

Fundamentally speaking, it’s the same app. The difference is the type of content that is posted and promoted on the platform. Douyin primarily promotes science,  educational, and historical content instead of lip-syncs and dancing. Furthermore, younger generations are limited to just 40 minutes of  Douyin per day, so no hours of mindless scrolling.   Douyin is extremely popular in China but it doesn’t quite stack up to TikTok. Douyin boasts   730 million monthly active users while TikTok boasts 1.05 billion monthly active users. So,   TikTok is not only more popular but people tend to spend far more time on TikTok. But despite this,  China is able to account for 80% of TikTok’s revenue because advertisers are actually interested in appearing next to Douyin videos. So, until  TikTok is able to address advertiser hesitation, TikTok will continue to face major monetization issues leading to more creators migrating away.

SHORT FORM HELL: 

Advertisers no doubt play a massive role in how much is paid out to creators,   but they’re not the only issue plaguing TikTok.  You see, the short form is simply fundamentally harder to monetize because views are worth substantially less. On TikTok, for example,   the average video is only 36 to 42 seconds depending on the size of the account. Even if we assume that these videos have 75% audience retention on average, each view only translates to about 30 seconds of watch time. Now, compare that to what we see on YouTube. Using myself as an example, my average video gets just under 7  minutes of average watch time, which by the way thank you. This means that the average view on my channel is worth about 14 views on TikTok. 

Why do   I bring this up? Well, monetization has more to do with watch time than views. I tend to put an ad break once every 3 minutes which means that the average view translates 3 ad impressions.   For simplicity, let’s say that TikTok shows an ad once every 3 minutes as well. Since each video is only watched for 30 seconds at best, a viewer would have to scroll through 6 TikToks before reaching an ad and that’s the best-case scenario.  More likely, they’ll have to scroll through 10 or   15 TikToks before seeing an ad but we’ll call it 6  to give them the benefit of the doubt. This means that each view on TikTok only translates to 1/6th  of an ad impression. Putting this next to YouTube, we’ll see that each YouTube view translates to  18 times more ad impressions.

So, if we want to really create an accurate comparison between how much advertisers pay on YouTube vs how much they pay on TikTok, we can’t compare views to revenue,  we have to compare ad impressions to revenue.   YouTube generally pays about $3 to $5 per thousand views in most niches. And as we previously touched on, TikTok pays 2 to 4 cents per thousand views.  But, if we normalize based on ad impressions,   we’ll see that TikTok is actually paying 36 to 72  cents for the same number of ad impressions that you would get from 1000 YouTube views. Still about  7-8 times worse than YouTube but also 18 times better than what the upfront numbers suggested.  The only way to work around this obstacle is to move towards longer-form content which is exactly what TikTok and its creators have been doing.

What started at a maximum video length of 7 seconds has grown all the way to 10 minutes. TikTok has also been testing with landscape mode, but increasing the average view duration isn’t as easy as just getting creators to post longer videos. The algorithm highly values audience retention,   so if TikTokers want their long-form videos to perform well, they have to increase video length without sacrificing audience retention. Also, we see all those articles about our ever-decreasing attention spans. And if that’s true anywhere, it’s true on TikTok. So, TikTok is very much fighting an uphill battle when it comes to monetization due to the fundamental nature of its content.

GIVING UP:

Hearing all this, you might be saying that this isn’t just an issue on TikTok. Instagram and YouTube have also been promoting short-form content. So, they should be facing the same issues right? Well, you’re right, YouTube and Instagram are indeed facing the same issues. With YouTube shorts, for example, you can expect to earn 5   cents per thousand views. But, here’s the thing,  YouTube and Instagram are not tied down by short-form content. Short-form content is not their golden goose. It’s simply an expansion effort.   And they’re already starting to decide that this expansion effort isn’t worth it. You see, platform monetization is a two-sided coin. If creators aren’t earning much money from ads, neither is the platform. At least, the creators can go out and get brand deals and sponsors and affiliates and all that. For these platforms, their only revenue is ad revenue.

So, if that’s garbage, the entire revenue from the whole effort is garbage,  and that’s what seems to be playing out. In fact,   according to Mark Zuckerberg, revenue from Reels is so garbage that Meta is losing $500 million per quarter because of users watching Reels instead of scrolling through pictures. Yeah, I don’t think you’d be surprised to hear that Meta has stopped offering Reels bonuses to creators. So,   while Instagram and YouTube are very much in the same position as TikTok with shorts, they’re also not. They have the luxury of pulling back and focusing on what they were already doing. The same cannot be said about TikTok. But then what is the solution? Well, unfortunately for TikTok,   there is no clear solution to their monetization problem. Again, this is literally why Vine shut down. What TikTok really needs is time.

They need time for brands to become more open to the idea of advertising on TikTok. In the meantime, their best bet is to tinker with the algorithm to push longer-form content that’s more advertiser-friendly. But, this is also a pretty big gamble.   This can lead to a sort of ad apocalypse as we saw with YouTube back in 2017. More edgy creators got pushed off the platform as family-friendly content got pushed to the top. But, the thing to note is that YouTube always had a good mix of edgy and family-friendly content, so the shift towards family-friendly content was more natural. With TikTok on the other hand, we’re primarily dealing with edgy content so the shift is a lot more jarring, and it’s not clear how many viewers TikTok would push off the platform by making such a change. But,  with their peers already dropping out and pulling back, this might be the hail mary that TikTok needs to make to stay relevant over the long term.

THE STATE OF TIKTOK: 

As you can see, TikTok is very much facing a  monetization crisis and there is no easy solution,   but there is a silver lining for TikTok. Unlike  Vine which was backed by Twitter which was in itself not a profitable company, TikTok is backed by Bytedance which has been posting record profits. In fact, they made $25 billion last year. So, losses from TikTok are definitely something that they can sustain even over the long term. Also, even if Bytedance can’t pull it off on their own, they’ve got the backing of the CCP.  You can bet that as long as TikTok is popular,   the CCP won’t let them go under as  TikTok is literally a goldmine for them.   So, from a financial perspective, they very much have time on their side. But they may not be able to say the same thing about their creators or viewers. Their creators are naturally pivoting towards YouTube to build stronger businesses with more revenue. And as for viewers, TikTok faces the risk of their viewers growing up, kind of like what Snapchat is dealing with right now.   So while TikTok may not be on the clock for financial reasons, they’re very much on the clock due to trends amongst its viewers and creators.  Will they be able to beat the clock? Only time will tell. While all of this madness has been going on with short-form content, podcasts have actually been doing better than ever on YouTube.