TikTok, the popular social media app created by Chinese internet company—ByteDance, is under pressure to sell its US entity or risk a ban.
On August 6, US President Trump signed an executive order to prohibit transactions with ByteDance from September 20. According to the statement, "mobile applications developed and owned by companies in the People’s Republic of China (China) continue to threaten the national security, foreign policy and economy of the United States".
The statement adds that TikTok “has reportedly been downloaded over 175 million times in the United States”. In its rebuttal, TikTok acknowledges that "100 million Americans” use their platform. Thus, making America one of its key operating markets.
By Americans using the TikTok app, they relinquish data about their internet activity and preferences. All of which the US says could allow "China track the locations of Federal employees and contractors, build dossiers of personal information for blackmail, and conduct corporate espionage".
At this point, it is pertinent to note that the rivalry between China and America goes beyond TikTok. Their strife is as political as it is economical. There are concerns over trade, cybersecurity and even the spread of coronavirus. According to Trump’s statement, TikTok can be used for disinformation campaigns that favour the Chinese Communist Party, which is the second-largest political party in the world.
How did TikTok get here? A trip down memory lane
First released in September 2016, TikTok allows users to create, edit and share short videos, akin to Musical.ly. Musical.ly, the Shanghai-based video-sharing and lip-syncing service launched two years before ByteDance introduced TikTok to the market.
Although headquartered in China, Musical.ly had a US office in California. This move contributed to their acceptance and popularity amongst teens in the US and abroad. By the end of 2017, they had a total of over 200 million users. Musical.ly had 60 million monthly users, which is about 30% of its gross user base.
One of Musical.ly’s creators was Nigerian user, Maraji, who ended up cross-posting her lip-sync videos on Instagram. Maraji’s popularity on the internet has since grown as she now has 1.2M followers on Instagram where she serves skits.
In November 2017, ByteDance acquired Musical.ly for an estimated $1 billion, owing to its user base and secured content partnerships. Nine months later, Bytedance merged Musical.ly into their app, TikTok. The consolidation was completed on August 2, 2018, as they kept the name “TikTok” in the US while keeping the Chinese version, Douyin, separate. Douyin is not on Android and iOS app stores. It’s only available to the Chinese market. Also, TikTok is not downloadable in China. Similarly, the content on Douyin is not on TikTok and vice versa.
This TikTok, Douyin distinction is not the first of its kind. In fact, most giant American tech brands aren’t accessible in China, rather there are Chinese variants operating in the country. ByteDance was fortunate enough to be the maker of both the US version and the Chinese variant. See the table below:
Unlike in ByteDance's case where they made both the US and Chinese variants, some of the US/Chinese apps were made by different companies.
This is a strategy by the Chinese government to 'protect' or 'restrict' its population from Western culture and lifestyle. Hence why a different local company makes the app substitutes that operate in China.
Post-Musical.ly’s acquisition, downloads surged for TikTok as they rose to become the 4th most downloaded app of 2018. Unlike Musical.ly, it has less emphasis on music in videos, and its users focus on making stunts, pranks, jokes and other "cringe-worthy" activities.
TikTok’s popularity has refused to slow-down. Now, thanks to the pandemic, it has grown even faster. Artists inspire TikTok challenges to grow the popularity of their songs. Teens and Tweens keep themselves busy by participating in these online challenges, using a suitable song as the soundtrack.
This year alone, TikTok has seen 100 million downloads. Cumulatively, TikTok has over two billion downloads with a presence in 150 countries. So, assuming its user base was split equally across all its operating countries, each country will account for 13.3 million downloads. But the US alone accounts for about 9% of its downloads, which is equivalent to 13 of TikTok’s operating markets. Thus, why it makes sense for them to prioritise and preserve their US business.
US-China power tussle
The emergence of the internet has given rise to a new set of rules and rulers. Some power has shifted from legacy rulers to newcomers. Companies and Governments, alike, are feeling this shift of power. No one dominating party will want to see power transfer to another, not even a credible competitor. This power tussle is the case of the United States of America and the People's Republic of China.
For 25 years, America had dominated the internet; setting the policies and rules of engagement. This was because the majority of the most influential internet companies were from America. Those companies were helped from early-stage to growth and almost monopolies by unfettered access to capital. But that American dominance may be changing.
“In 2008, the US was 80% of global VC investing; now it's 50%”, according to a report from Benedict Evans, an Independent Tech Analyst. Similarly, in 2018, six of the top ten unicorns came from China.
For years, China has been developing its own ecosystem, startup hubs, and even, stock exchanges. Thereby, creating their own rules. Before now, that wasn’t the case. A Chinese tech startup looking to go public in 2008 would have filed on NASDAQ, an American Stock Exchange. But in 2019 when the Chinese smartphone manufacturer, Transsion wanted to go public, it chose Shanghai’s STAR Market, a tech board by China’s President Xi Jinping.
TikTok is not the only Chinese company going through it in the US. Tencent’s WeChat is also up for a ban on grounds of national security.
Speaking of national security, earlier in the year, the US accused TikTok for stealing user data and sharing it with the Chinese Communist Government. Hence, why Trump has asked TikTok US to find an American buyer, or risk being shut out of operating in his country. If TikTok is owned by an American company, the data privacy and other business laws of the US will fully apply. Plus, there will be short and long-term economic benefits to the US if the TikTok ownership transfer takes place.
With a less than two month ultimatum, ByteDance is under pressure from the US government to sell TikTok. TikTok believes the President is boycotting due process and has promised to “pursue all remedies available...”.
But who can afford a startup valued at $50 billion? Enter Microsoft and more recently, Twitter.
Which American company is most likely to acquire TikTok? Microsoft
As at the time of this writing, the American multinational led by Satya Nadella had a market capitalisation of $1.61 Trillion. Its market cap placed it second in the league of big tech companies (GAFAM), with Amazon coming a close third.
Microsoft, in particular, has had an interesting relationship with the Government of America. In 2019, Microsoft won a Joint Enterprise Defense Infrastructure (JEDI) deal from the Pentagon, US Department of Defense. They have gone from being sued by the Government over concerns of being a monopoly to being a favourite to buy TikTok.
Part of Trump’s provision for the acquisition of TikTok is that some of the proceeds go to the US Treasury. This financial benefit could pose legal concerns to the US Government. But Microsoft has signalled its commitment to “providing proper economic benefits to the United States, including the United States Treasury”.
The conversation between Microsoft and TikTok has been ongoing for a while, and the former expects to reach a conclusion no later than September 15, 2020 which is five days before Trump’s ban will take effect.
Both parties have notified the Committee on Foreign Investment in the United States (CFIUS) of their intent to explore a preliminary proposal that would involve a purchase of the TikTok service in America, and three other markets; Australia, Canada and New Zealand. This CFIUS involvement is an important step that was missed at the time TikTok was negotiating deals with Musical.ly.
According to Microsoft, "this new structure would build on the experience TikTok users currently love, while adding world-class security, privacy, and digital safety protections". They are currently having discussions with the presidency to guarantee the safety of American citizen’s data.
If the deal is signed, there are speculations as to whether the app would be integrated with the current Office apps, or would be a standalone software. Also, how likely is it that Microsoft is able to maintain the "coolness" of TikTok?
Can Twitter acquire TikTok?
There’s been a recent update by The Wall Street Journal about Twitter being in early talks with TikTok about a possible ‘combination’. However, it’s not yet clear the details of the combination: an acquisition. Neither Twitter nor TikTok is yet to confirm this news.
Recently, Twitter had a security breach, where the accounts of high profile people were hacked. And the hacker(s) made similar posts across all the platforms, soliciting for funds.
In conclusion, TikTok has had an incredible run and will now have to decide its fate in the United States and many other markets. Whatever the fate of TikTok is in the US will set "a dangerous precedent for the concept of free expression and open markets". Guess who wins if TikTok exits America? Other American rivals like Snapchat, Instagram and even 5-year-old Triller. Instagram has already launched a TikTok competitor, Reels.
And then, what happens if China chooses to retaliate? For instance, China’s Tencent has invested in some US companies like Epic Games, maker of Fortnite, valued at a $17.3 billion valuation. What will happen to American multinationals like Apple, who have a large customer base and their supply chain partners in China? As The Verge puts it, "If Apple can’t offer WeChat on the iPhone due to Trump’s ban, then its Chinese business will almost certainly evaporate overnight".