The Inevitable Acquisition of TikTok
President Trump announced on 6th August that if TikTok does not find an American buyer within 45 days, the widely popular app will be banned from the United States. It seems that Microsoft may be TikTok’s only hope to keep its American presence alive.
The executive order stems from concerns surrounding data collection and flow of Chinese apps, with accusations alleging that this sensitive data can be used by the Chinese government for espionage. TikTok is owned by Chinese tech conglomerate ByteDance, which bought popular social media app Musical.ly back in 2017 and consolidated user accounts to create this stronger and more successful platform. The company has strived to provide unprecedented transparency to abate these worries, even offering the opportunity for experts to examine the code behind its ‘secret sauce’ algorithm. But with US-China relations at a low, it seems that only an American acquirer will save the platform.
Microsoft is prepared to pay a portion of US$50 billion, which is the estimated valuation of the business, to acquire TikTok’s operations in the United States, Canada, Australia, and New Zealand. Wedbush analyst Dan Ives estimates that this valuation could potentially hit US$200 billion in a few years. This is owed to the app’s steep user and engagement trajectory, with a potential to grow exponentially thanks to the increase of social media use during the COVID-19 pandemic. Despite being described by Ives as a ‘unique deal of a decade opportunity with a price tag that could easily be consummated’, this is a transaction that is high-risk, high-reward.
Upon first glance, it would seem more reasonable and natural for Big Tech firms like Facebook and Google to snatch this deal, with an established presence in consumer social media. However, facing antitrust scrutiny, an acquisition would not be ideal. Further, Microsoft is well-known as an enterprise software company. Acquiring TikTok would be a significant shift away from typical offerings for the longtime leader, highlighting Microsoft’s corporate prowess if this acquisition is successful. Microsoft’s ‘slam dunk’ takeover of LinkedIn in 2016 suggests that its approach to TikTok would be similar, where the app would retain significant independence. ‘As long as they don’t change the fundamental product, and let it run how [TikTok’s] leadership wants to, I think it will be a successful acquisition,’ DA Davidson analyst Rishi Jaluria says.
The reason why TikTok will be hard to acquire is that the app remains entangled with ByteDance’s many operations. The shared software tools used to develop TikTok’s core features are available to more than two dozen apps under ByteDance, meaning any of these apps have access to TikTok’s giant database. Although the United States has engineers that could help with untangling many of these Chinese connections, the deepest knowledge of TikTok’s systems remains in China. This includes knowledge about its most valuable asset - the For You Page (FYP) algorithm. TikTok uses artificial intelligence to analyse users’ behaviour with every swipe, tap, and video viewed, curating a custom stream of personalised niches. It is speculated that data from one country’s users may be used by the AI to influence another country’s recommendations, perhaps even from a completely different app owned by ByteDance. Losing access to this data may mean that the new acquirer of TikTok will have to build the algorithm from scratch, potentially taking months or years. Therefore, without these giant shared databases of relevant data, transitioning to an American TikTok algorithm could potentially harm the app’s most valuable asset, losing an audience of hundreds of millions in an instant.
So what if Microsoft does not acquire TikTok? The threat of a ‘ban’ technically is not a real option. US law will not be able to impose a flat ban on the free social media app with an American userbase of millions. What the United States can do, however, is attack TikTok and ByteDance’s corporate relationship through the Committee on Foreign Investment in the United States (CFIUS). CFIUS can force TikTok to place US data outside of ByteDance’s reach to address these data privacy concerns. Other methods include deplatforming TikTok by removing it from app stores under the International Emergency Economic Powers Act, as well as targeting TikTok through law enforcement actions. But ultimately, the United States must find a balance between protecting national security and maintaining its commitment to global free markets.
Popular, rapidly growing social media platforms are rare, and the opportunity to take over TikTok while it is desperate is even rarer. The platform has proven its value, with plentiful monetisation opportunities in e-commerce and live-streaming. Now, all we can do is wait and see how these players respond.
By Nicole Woo