TikTok: Clock's Ticking

TikTok has been operating for more than three years, and yet, if you mentioned the name to your friends or family a mere 12 months ago, it would likely be lost on them. But, as we all know, a lot has changed in the last 12 months. While for the vast majority of us it has been a year of change that we could have done without, for TikTok, it has been a year that will have exceeded even the most optimistic expectations and forecasts for the app. As we enter September 2020, TikTok has now been downloaded more than two billion times globally. Two billion. It is estimated to have 800 million active users, which is already more than the number of Twitter and Snapchat users combined. It occupies all corners of the globe, taking the younger generation by storm as they post content ranging from popular viral dances and various challenges, to educational videos on a plethora of topics. The range of content truly knows no bounds, and thus, it’s not difficult to see why it’s so popular among so many. However, while this sort of rapid growth warrants the substantial attention it has received, it is currently making headlines for all the wrong reasons. Beyond the elated dancing videos and overwhelming popularity lies a crisis for the app and its founding parent company, ByteDance. Its very existence in the U.S., its largest user audience, is in serious jeopardy as a result of the Trump administration’s intolerant stance towards Chinese technology, with TikTok now being directly in its crosshairs.

The last decade has been one of vast political and economic divisiveness in many of the major Western democracies. But a scarce example of cohesion between opposing political ideologies has been the scepticism and caution shown towards the increasingly elusive Chinese regime, fronted by President Xi Jinping. The escalating censorship of their population has served as ammunition for sharp criticism of the ruling Communist Party from governments of all persuasions. But since President Trump took office in 2017, tensions between China and the west have reached a new level. A slew of tariffs on Chinese exports implemented in 2018 by the Trump administration

has led to a worsening trade war between the two economic superpowers; a war that technology and social media now fronts. It started with an effective ban on Huawei, but now, President Trump’s attention has turned to TikTok. TikTok was created by Zhang Yiming, founder of Chinese technology company ByteDance, and is the first Chinese social media app to have found vast success around the globe. But this global success may have been poorly timed, as President Trump’s continuously restrictive stance against Chinese companies has meant that TikTok’s meteoric rise has been met with significant scepticism from his administration, who allege that the app does not uphold data privacy regulations and thus must be banned, or acquired by an American company within a 90 day timeframe. While ByteDance has mounted a legal challenge against this order, it is aware that it may have no choice but to sell its social media venture to a U.S. company, but its awkwardly sensitive position as a Chinese company with a large Chinese audience means that it must not be shown to give in to U.S. pressure - thereby alienating many of their users. Despite the controversy surrounding TikTok, its rapid growth and exciting revenue prospects has attracted serious interest from U.S. companies, namely Microsoft, Oracle and Walmart. But with little experience in social media ventures, are these potential acquirers best suited to further advance TikTok?

Which company is best for TikTok?

It is immediately clear that out of the companies being touted as potential bidders for TikTok, Microsoft is in the best position. The U.S. tech giant has had a strong relationship with China for over two decades, with over 90 per cent of Chinese computers running Microsoft windows, when other foreign companies would otherwise be kept out. In the late 1990s, it created a research centre in Beijing and has continuously hosted Chinese talent since then. Zhang Yiming, ByteDance founder, worked at Microsoft, and Bill Gates, Microsoft founder, is the only foreign executive to have met three consecutive Chinese presidents. This strong relationship puts them in the driving seat, and their colossal market capitalisation of nearly $1.6 trillion means that any asking price, which is reportedly around $30 billion, is merely a drop in the pond for them, which has meant a potential acquisition of ByteDance as a whole, rather than just TikTok’s U.S. operations, has been considered. It also makes sense for Microsoft given their strategy going forward, which ultimately focuses on expanding into social media platforms, and thus TikTok may place them in this market, while also attracting a younger generation.

However, Microsoft has a mixed record with its previous acquisitions and may not be the preferred option for President Trump, whom has a close relationship with Oracle Chairman and Trump donor Larry Ellison. Oracle is a U.S. tech company that focuses primarily on database software and corporate computer systems that was frequently compared to the likes of Microsoft in its prime over a decade ago. But since then, it hasn’t adapted to the times as effectively as Microsoft, and thus, revenues have been largely flat for many years. It also has no experience in consumer product platforms, and subsequently, there is no obvious strategic logic to a potential acquisition of TikTok, indicating that its place as a potential bidder is purely political.

Twitter have also reportedly contacted ByteDance, but it is unclear whether they have sufficient funds for a potential acquisition. The reality of the situation is that any negotiations about asking price and potential composition of the deal may be redundant, as the time pressure of President Trump’s executive order could prove too much and thus TikTok could well be facing a nationwide ban in the U.S., a disastrous outcome for ByteDance that it fiercely objects to.

Is ByteDance right? Is its potential ban justified?

The short answer is that, unfortunately, we don’t know. Concerns about potential Chinese nefarious activity across Europe and America are justified to an extent, largely due to the interventionist nature of the Chinese government. In almost all Chinese private companies, the Chinese government requires these companies to have a Communist party committee that are responsible for ensuring all content associated with the company conforms to restrictions set out by the party, such as avoiding politically sensitive subject matter. This focus on tight censorship is heavily opposed by western democracies who champion free speech and thus many governments, particularly the U.S., approach Chinese companies with caution.

This is particularly evident with Huawei, a Chinese technology company, whose expansion across Europe and the U.S. was cast into doubt in 2018 over concerns regarding their close ties with the Chinese communist party. Huawei’s founder, Ren Zhengfei, is a member of the communist party and a former member of the Chinese military, and vague Chinese intelligence laws surrounding data protection amplified concerns among western intelligence services that Huawei would hand over western intellectual property to the Chinese government. This led to an almost outright ban of Huawei in the U.S. and their phasing out of the U.K.’s new 5G infrastructure.

There are similar concerns about TikTok owner ByteDance - however ByteDance’s proximity to the Chinese government is completely different to Huawei’s. Huawei is much more important than ByteDance to China’s economy and thus is of greater importance to Beijing and according to the Financial Times, ByteDance has very little affiliation with the government, particularly as it offers social media apps that concern the vast censorship adopted in China. TikTok is also given much more autonomy than other Chinese companies with regard to restrictions on their content and is predominantly made up of non-Chinese staff. Its founder, Zhang Yiming, is also unlike the executives of other Chinese tech behemoths that wholeheartedly support the Chinese regime. He isn’t a communist party member and previously worked at U.S tech companies such as Microsoft, seeking to emulate the behaviour of Silicon Valley, rather than Beijing. The U.S. government has never even publicly shown any evidence that Chinese tech companies are keeping user data with the Chinese government, so it could be argued as mere speculation from a notoriously temperamental President.

The clock is ticking

With only 64 days until the deadline for TikTok, the next few weeks will prove to be very interesting in this unprecedented saga. There may still yet be further complications in any potential deal, particularly as President Trump has repeatedly floated the idea of a ‘treasury cut’ in a deal between Microsoft and ByteDance while not expanding on how this could be possible. The sudden exit of TikTok chief Kevin Mayer has also concerned those who seek a deal for TikTok, as his instalment as a U.S. head of a Chinese social media app was supposed to alleviate national security concerns but proved unsuccessful; suggesting that the chances of a deal are rapidly fading. Continuously escalating trade tensions is only exacerbating the situation, as new Chinese technology export restrictions that could directly impact a U.S. acquisition of TikTok have just been imposed. Taking all this into consideration, it appears as though the chances of a deal are markedly slim and come November 12th TikTok may no longer be active in the U.S.