The popular social media and video sharing platform TikTok has continued its meteoric rise to become one of the most popular social media platforms worldwide.
Where other tech companies have faced difficult days due to the coronavirus, due to ongoing geopolitical tensions between the United States and China, TikTok is instead facing imminent acquisition by Microsoft Corp. or the prospect of being banned by the Trump administration due to alleged data concerns.
Deals in the time of coronavirus
TikTok’s potential acquisition by Microsoft has little in common with broader trends seen within the tech and startup industry. As a result of the pandemic, acquisitions and purchases have increasingly been made on the cheap.
Startup companies, which already led perilous existences prior to the pandemic, now face what Martin Pichinson, head of Sherwood Partners – an advisory firm that helps failed startups to restructure – calls “the great unwinding.”
Between March and April this year, Public Knowledge reports that some 7,000 tech startup jobs were lost. As Alex Petros writes, the fraught times brought about by the coronavirus pandemic have left Big Tech companies such as Apple Inc., Amazon.com Inc, Google Inc., Facebook Inc. and Microsoft “uniquely poised to exploit [startups’] misfortune through acquisition offers [they] can’t refuse.”
Apple, for instance, has already used the pandemic to push forward with a series of significant mergers and acquisitions. It has purchased the popular Dark Sky weather app, the speech recognition startup Voysis and the VR event streaming company NextVR, since the pandemic began. Apple has been “reportedly taking advantage of compressed valuations due to the pandemic to buy companies cheaply” according to CBInsights.
TikTok’s acquisition, arguably the largest this year and the most significant in terms of news coverage, has deviated from this recent trend. The reason is that it is the Trump administration and its continued protests over data concerns that is forcing the sale of TikTok from its Chinese parent company ByteDance Ltd. in the US and elsewhere.
The TikTok boom
TikTok, founded by Chinese company ByteDance in 2016, has quickly risen to become one of the world’s foremost social media platforms.
As of February 2019, TikTok had been downloaded one billion times. By April 2020, just over a year later, it had reached two billion downloads on both Apple’s App Store and Google Play.
More impressively, TikTok’s vast growth has continued unabated during the coronavirus crisis, as “stay at home” messages have turned people toward indoor entertainment.
During the first quarter of 2020, TikTok was downloaded 315 million times worldwide, an increase of 58 percent from the previous quarter.
With such high user counts, revenue has flowed into ByteDance. Although the company began to launch ads relatively late into TikTok’s life (ByteDance only began significant ad spending in 2019), TikTok recently experienced its best quarter ever with some US$176.9 million in revenue. With a growing user base and increased spending on ads, these figures are only expected to continue their upward trajectory.
This future projection, however, may have been disrupted by President Trump’s announcement that TikTok would not be able to continue operating in the US amid concerns that user data on the platform is compromised. According to US Secretary of State Mike Pompeo, that data is being fed “directly to the Chinese Communist Party, their national security apparatus.”
Microsoft’s potential acquisition of TikTok in the US and elsewhere stems not from ByteDance or TikTok’s COVID-era struggles. Rather, it is the uncertainty surrounding TikTok’s future in the US that has forced the sale. If ByteDance does not manage to sell the company, TikTok’s operations will likely be banned by President Trump, either through executive order or under the International Emergency Economic Powers Act.
ByteDance’s previous efforts to make TikTok’s continued operations in the US more palatable – including bringing on an American CEO and highlighting its American investors – have failed. A sale appears to be the only opportunity left to keep the platform from having to cease its operations in the US.
As Bloomberg reports, if Microsoft manages to acquire TikTok, it would represent “a huge coup for Microsoft” and would give the company the social media foothold it has long lacked against its Big Tech competitors.
TikTok would give Microsoft “a crown jewel on the consumer social media front” according to analyst Dan Ives, largely as a result of the Trump administration’s continued threats to ban the platform.
But the acquisition is more complex given the unprecedented circumstances it is taking place under.
Microsoft is aiming to take over operations of the app in the US, Canada, New Zealand and Australia, a move that is inherently complex due to national boundaries. Much uncertainty remains over how TikTok’s operations in the US may differ from TikTok’s operations in other markets such as the EU and China.
Divorcing the US TikTok from ByteDance’s TikTok may also cost Microsoft the valuable algorithms that drive much of the app’s success, which ByteDance will almost certainly guard closely, and could negate the future success of an “American” TikTok.
Although he is largely responsible for stirring up the controversy that has facilitated the potential acquisition, President Trump’s demands also add an extra layer of complexity to the deal.
This week, Trump demanded that the US Treasury be given a “very large percentage” of the purchase price for facilitating the deal. Such a move is unprecedented and there is little understanding of how this payment will be made, who will make it, or even what powers the president has to enforce this. Trump’s deadline of September 15 for a deal means that exceedingly complex negotiations must be concluded swiftly.
Microsoft recently stated that discussions remain “preliminary” and there can be no assurances that they will be wrapped up in time.
But if Microsoft can overcome this, the company would have acquired “a new growth vector with consumers,” according to consumer and technology consultant Michael Norris. Such a deal would allow Microsoft to challenge rivals in a sector in which it has long been uncompetitive.
If Microsoft’s deal goes through, it would mean that geopolitical tensions between China and the US, not the coronavirus, would be responsible for derailing ByteDance’s aspirations in the US.
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