Facebook (NASDAQ:FB) launched Lasso, a short video app that closely resembled ByteDance's TikTok, back in late 2018. But Lasso never gained much steam, and the app had fewer than 80,000 users in Mexico (its top market) at the beginning of June, according to App Annie.

Brady Voss, the lead product designer who oversaw Lasso's development, also left Facebook just a few days after its launch. Therefore, it wasn't surprising when Facebook recently discontinued the app.

TikTok logo

Image source: TikTok.

However, Lasso's shutdown coincides with the launch of Reels, a new Instagram feature that lets users record 15-second videos and share them as Stories. Users can add music from Instagram's catalog and share their Reels publicly via a "Top Reels" section on the Explore tab.

Facebook has already rolled out Reels in several countries, including India, Brazil, France, and Germany, and plans to launch the feature in the U.S. and dozens of other markets over the next few weeks. But will Reels actually fare any better than Lasso?

Why is Facebook worried about TikTok?

TikTok, known as Douyin in China, gained over 800 million monthly active users (MAUs) in less than four years. It's now the second-most popular free iOS app in the U.S., according to App Annie, and the fourth-most popular Google Play app. Facebook, Messenger, Instagram, and WhatsApp all trail TikTok in both app stores.

A young woman uses a smartphone.

Image source: Getty Images.

TikTok's meteoric rise is troubling for Facebook, which is running out of room to grow as its entire family of apps approaches three billion MAUs. TikTok is also popular with Gen Z and Millennial users, many of whom consider Facebook to be a social network for older users.

Only 34% of U.S. teens regularly engaged with each other on Facebook, according to Piper Jaffray, compared to 62% on TikTok, 82% on Snap's (NYSE:SNAP) Snapchat, and 85% on Instagram.

Between last February and this January, the percentage of Gen Z users on TikTok in the U.S. nearly tripled from 12% to 35%, according to a YPulse survey. The percentage of Millennials surged more than six-fold, from 3% to 19%.

TikTok's soaring popularity in the U.S. marks a stark contrast to Facebook's sluggish growth in the U.S. and Canada, where its MAUs grew just 4% annually to 253 million in the first quarter of 2020. Facebook also generates its highest average revenue per user (ARPU) in the U.S. and Canada; TikTok's meteoric rise across the region could throttle that revenue.

Sticking with its anti-Snapchat strategy

Facebook's clash with TikTok closely resembles its ongoing war against Snapchat. Facebook reportedly tried to buy Snapchat for $3 billion in 2013, but that offer was rebuffed. Facebook then launched several Snapchat clones, including Poke and Slingshot, but all those apps fizzled out.

Facebook finally decided to leverage Instagram's appeal with younger users to challenge Snapchat, and it added many of Snapchat's popular features -- including ephemeral messages, short videos, and filters -- to its app. That strategy paid off, and Snapchat's growth stalled out in 2018.

Facebook is sticking with that playbook to tackle TikTok. Lasso failed as a stand-alone competitor, but baking TikTok-like Reels into Instagram could work. However, investors should recall Snapchat still bounced back strongly with accelerating growth in daily active users over the past year.

Facebook's failure to crush Snapchat with Instagram suggests a similar sequence of events could occur with Reels and TikTok. Reels might gain some initial traction against TikTok, especially as more markets ban the Chinese app on national security concerns, but it probably won't deal a mortal wound.

The key takeaway

Facebook likely realizes it can't kill TikTok by cloning its features in Instagram. It also probably knows Gen Z and Millennial users will use TikTok, Instagram, Snapchat, and other apps in tandem instead of sticking with a single platform.

Therefore, Facebook's investors should expect Reels to widen Instagram's moat against TikTok -- but they shouldn't expect the new feature to significantly curb its rival's long-term growth.