Tech: Who will buy TikTok and is it worth US$60 billion?

This article first appeared in The Edge Malaysia Weekly, on August 24, 2020 - August 30, 2020.

Only a handful of firms can afford an acquisition as big as TikTok. (Photo by Bloomberg)

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THE long-running saga of Chinese short-video sharing app TikTok took a new twist this past week when yet another suitor, database software firm Oracle, jumped into the fray. Is Oracle’s bid for real, or just an effort by TikTok’s parent ByteDance to extract a higher price from the only serious bidder, software giant Microsoft, instead of being forced to dispose of it in a fire sale?

I wrote about it in my column last month but if you have not been following the TikTok saga, here is a quick recap: US President Donald Trump in early August restricted the use of TikTok and super app WeChat in one of the most controversial executive orders of his 3½-year term. Under the order, after 45 days, all transactions by US entities and individuals will be prohibited on the two apps. Last week, he set a 90-day deadline for the sale to be completed. The Trump administration wants TikTok banned because it could be used to extract data from Americans for the use of Chinese security agencies.

The restrictions on TikTok, WeChat and telecom equipment maker Huawei are all part of a simmering cold war between the US and China. In early 2018, the world’s two largest economies took each other on in a trade war that led to tariffs worth hundreds of billions of dollars being slapped on each other’s products. The tensions have since spilled over into the technology arena. Many fear a forced sale of TikTok and an escalating tech war will lead to Splinternet, a US-led internet and a separate Chinese one.

To be sure, there are only a handful of firms that can afford a transaction as big as TikTok. Social media giant Facebook and search behemoth Google are staying on the sidelines as the bidding war gets underway because any purchase by them will only lead to more anti-trust concerns. As for Apple, even if TikTok fell onto its lap, the iPhone maker would not be able to cream off enough data to maximise the video-clip app’s advertising potential the way firms like Facebook, which collect data for a living, can. E-commerce giant Amazon.com is itself battling other anti-competitive issues and would not want to be scrutinised more closely by looking at TikTok.

In better times, media giant Walt Disney Inc might have toyed with the idea of buying TikTok but with its theme parks partially closed in the aftermath of Covid-19, and its movie and TV business hit hard, the operator of the Magic Kingdom is in no way prepared to do any deal, let alone one the size of TikTok. Moreover, Disney’s image as a wholesome family entertainment creator is seen as a deal breaker. Even if it could afford to splurge, the Disney board would drag its feet over buying TikTok, which had to remove 49 million offensive videos last year alone.

A deal might make sense for video streaming giant Netflix, which with its hugely overvalued stock has the currency, even if it does not have a lot of actual cash. But Netflix prefers to make its own content rather than peddling user-generated content, though TikTok’s algorithms could come in handy in pushing just what its streaming service viewers want. Unlike Facebook, Google, Amazon and Apple, which are being scrutinised by regulators and the US Congress, Microsoft is the only large tech player not currently in the crosshairs of investigators. Ironically, Microsoft got a reprieve 20 years ago after a long anti-trust case was settled out of court, avoiding the break-up of the software giant.

Another bidder is microblogging and social networking service Twitter, which is said to have reached out to ByteDance about a potential tie-up. A lot of investment bankers hungry for fees are running around floating trial balloons and a Twitter deal is as close as it comes to a trial balloon rather than a real deal. Twitter has a market cap of US$29 billion (RM121 billion). Its stock is down over 43% from its post-IPO peak in 2013. Think of Twitter as an app used by media people, celebrities, political junkies and, of course, the US president. The rest of the world does not really care about Twitter, which is why it does not attract many advertisers and remains one of smaller social media apps.

What is TikTok worth?

So, how much is TikTok really worth or, rather, what will it get sold for? You have probably seen figures of up to US$60 billion quoted in the media. There is no way TikTok would command anywhere near that number if Microsoft was the only serious bidder. Granted it has a huge, to-die-for user base — and the right demographics — but it does not rake in anywhere near the ad revenues that Facebook’s Instagram is able to attract.

Moreover, buying TikTok is not just about money. Among other things, the buyer needs to transfer millions of lines of code and data from ByteDance’s China servers to its own servers in the US and then build, indeed improve, on that code to make TikTok even more attractive and stickier as Facebook and Snap roll out their own TikTok-lookalike apps. That whole process will be complicated, time consuming and will require a lot of programming and artificial intelligence chops to pull off. Simply put, it is not easy, and right now, the only American tech company that is interested, has the money and can do it quickly is Microsoft, which has a market capitalisation of US$1.6 trillion and US$136 billion in cash. It could take 12 months to move all the data and code to US servers if a transaction was finalised tomorrow. And the Trump administration is only likely to allow a buyer to proceed if it can give the assurance that millions of lines of code can be securely transferred within 12 months.

Clearly, Microsoft, which sells software and services mainly to the corporate sector, has a choppy track record of buying assets and executing in the consumer space. Its track record of executing in the consumer space is choppy, at best. Aside from the Xbox gaming console, where it has run neck-and-neck with PlayStation creator Sony,  the software giant has not done well in the consumer arena. Think of Bing, its search engine that has long been a distant second to giant Google. Or MSN, its fledgling Yahoo-lookalike portal, an assorted collection of internet services, or smartphone maker Nokia, which it bought for US$7.2 billion to compete against ­iPhone, only to close it down two years later.

Or think back to the time it purchased video-conferencing app Skype for US$8.2 billion and the billions it wasted on Zune, its rival to Apple’s music player, iPod. While the jury is still out on Microsoft US$26.2 billion acquisition of LinkedIn, in part because there is currently no real competition to the professional networking site, the software giant cannot talk of successes outside its core cloud and enterprise businesses that CEO Satya Nadella turned to in remaking the firm six years ago.

Oracle in the picture

But if Microsoft thought TikTok was a steal, it had not taken into account Oracle’s last-minute entry. Founded by Larry Ellison, who has helped raise money for Trump’s re-election campaign, and run by Safra Catz, who was in Trump’s transition team in 2016, Oracle certainly has political connections. Known for its database software and business applications, the company sells a range of products that help marketers organise data and track the effectiveness of their digital advertising efforts, notes tech news outfit The Information. TikTok will help funnel a trove of data to fuel that business. Oracle also famously missed the cloud computing race to Amazon, Microsoft and Google; TikTok could help kick-start its fledgling cloud strategy.

Oracle will buy a 20% stake in TikTok, with a bunch of American venture capital firms that have stakes in TikTok’s owner ByteDance, including Sequoia Capital, General Atlantic, SoftBank and New Enterprise Associates, taking up the remaining 80%. The consortium is only interested in buying TikTok’s US, Canadian and Australian operations, leaving out the Indian, European and UK operations. TikTok, currently suspended in India, has 200 million users there and JioPlatform, the digital arm of oil and petrochemical giant Reliance Industries, has expressed interest in buying its Indian units.

I am not sure how will that work. Will ByteDance first transfer tens of millions of lines of code to the US buyer, but still keep codes on its own Chinese servers only to later sell them to buyers of the Indian unit? What happens if the European, UK and Japanese units of TikTok are also sold separately? Will millions of lines of codes again be transferred to those buyers? And, oh, what if Jio or the buyer of TikTok’s European operations wanted to expand into the US market in future? Clearly, the White House has not thought the whole thing through.

Whether Trump finally approves the sale to Oracle, Microsoft or another entity is irrelevant. By selling to another tech player, the US loses the opportunity to create a formidable rival to Facebook, which has become too powerful by exploiting data that it surreptitiously gathers. TikTok as a division of Microsoft or an affiliate of Oracle will not be as big and powerful a challenger to Facebook as it would be as a standalone company. That is why an initial public offering strategy would have worked far better. If an IPO strategy is considered too risky given the tight 90-day deadline, the best thing might be for Microsoft or Oracle to buy it and spin it off within three years. That way, they would still get a decent return on investment and allow for a more competitive social media space. Otherwise, you risk Facebook becoming even bigger and continuing its anti-competitive behaviour.

Trump’s idea was to play hardball with Beijing and then somehow use his The Art of the Deal strong-arm tactics to force the Chinese to allow Google, Amazon, Facebook and Netflix to enter the world’s second-largest market. But he really does not understand how China and Chinese leaders conduct diplomacy. They do not want to be pushed to the wall and have a gun to their head. Trump thinks like a 1980s-era New York property developer. If you are building an apartment tower in Manhattan, you might strong-arm rival developers, neighbouring property owners, construction firms, unions, even the New York Mayor’s office, but this is not how you deal with the second-largest economy in the world — a huge supplier of cheap goods and services to the US and also its largest creditor through its ownership of over US$2 trillion worth of US Treasuries.

TikTok has an incredible algorithm that has made it very addictive, particularly for teenagers, but whether Microsoft, an Oracle-led consortium or any other buyer can build on that to create a platform that is a strong challenger to Facebook and a viable advertising alternative to the Google-­Facebook ad duopoly remains to be seen.

 

Assif Shameen is a technology writer based in North America

 

 

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