CHINA’S FIRST GLOBAL INTERNET SUCCESS CAUGHT UP IN TECH WAR
The Chinese video-sharing social networking service TikTok owned by ByteDance, a Beijing based company founded in 2012 by entrepreneur Zhang Yiming, has since the launch in 2016 experienced huge user growth globally. As of July 2020, TikTok had 800 million active users, this makes TikTok the 9th biggest social network site (ahead of LinkedIn, Twitter, and Snapchat). What makes TikTok stand out from the competition is that the app is mainly an entertainment platform rather than a lifestyle platform.
What makes it so attractive is that anyone can become a content provider and do not need to have many followers for their content to go viral. The app also has an advanced algorithm which quickly learn what content the user wants on their feed.
It’s safe to say that TikTok has been a huge success and nothing is showing this growth would stop any time soon. That is if the company wouldn’t be dragged into the ongoing technological battle between the US and China. On the 6th of August, President Trump issued an executive order banning TikTok operating in 45 days if they are not sold by its Chinese parent company ByteDance. The order prohibits after 45 days (15 of September) “any transaction by any person, or with respect to any property, subject to the jurisdiction of the United States, with ByteDance Ltd.,” The reasoning behind Trump’s order is a national security concern, the President have expressed concerns that the Chinese mother company will share user data with the Chinese government. Those with security concerns believe that if the Chinese government would put pressure on ByteDance to share the user data, the company would have no other choice than comply with the demands. TikTok responds by preparing to take legal actions against President Trump’s executive order calming it was issued without any due process and no rational underlying argument for the order. TikTok also issued the following statement “TikTok is not available in China. Its US user data is stored in Virginia with a backup in Singapore and strict controls on employee access. TikTok has never provided any US user data to the Chinese government, nor would it do so if asked. Any insinuation to the contrary is unfounded and blatantly false. ”President Trump has since the response extended the deadline to 90 days (November 12th) instead of 45 days, which will be highly valuable for the dealmakers.
Who and how much?
The American tech giant Microsoft has confirmed that talks to buy the US operation of TikTok are ongoing. A purchase from Microsoft would enable the company, which has pivoted the last few years to enterprise software and cloud computing to enter the lucrative advertising market. It would mean Microsoft would become a meaningful player in the ad market, competing with Facebook and Google. In recent days, Oracle has also initiated talks to purchase the TikTok US operations. Oracle has some advantages over Microsoft regarding the negotiations. Oracle co-founder and CTO Larry Ellison, the fifth richest man in America, is also publicly a Trump supporter having thrown a fundraising event for his re-election. The political connections could give oracle an advantageous price for TikTok given the interest President Trump has the transaction. President Trump argued in August that the US state should get a cut of the proceeds since the President has allowed a deal to be made. Since TikTok is a private company, financial information is not public making it hard to put a value on the company. However, analysts expect a reasonable price would be between $10 and $30 billion.
The TikTok story is an example of companies becoming the victims of the political tech war between the US and China. The next following months will be highly interesting and will reveal whether TikTok will find a new owner or if its rapid success story in the US has come to a bitter end.
Article published in our August Newsletter
Max Römbo, MSc in Finance