You have to laugh when Senator Lindsey Graham says that the forced sale of a promising software startup to the world's largest software manufacturer "keeps the competition alive."
But that's exactly what the Republican from South Carolina insists will be happening if TikTok sells its U.S. operations to Microsoft (MSFT) . President Donald Trump is on the verge of taking action against TikTok, possibly banning it, he says, as a national-security risk.
The Senate has literally just completed antitrust hearings on Big Tech to consider whether Silicon Valley's giants have behaved like a tech mafia. (That's a "Yes," by the way). The proceedings echoed the Senate Judiciary Committee hearings that resulted in the forced breakup in 2000 of Microsoft, the O.G. of Big Tech, due to its anti-competitive behavior over software.
Of course, TikTok is owned and designed by a Chinese company, ByteDance Ltd. (originally called Beijing ByteDanceTechnology). U.S. regulators are concerned that TikTok will hand over user data to Chinese authorities if they request them to do so.
TikTok is an app that lets you make short dance clips to pop songs. The only threat is to your rhythm, and how silly you feel like looking. It is not building the nation's 5G network or its 5G phones, as Chinese phone-and-tower maker Huawei Telecommunications was set to do. It is not even Grindr, the gay-dating app that the Chinese owner Beijing Kunlun Tech was forced to sell this March to a U.S. investor for US$609 million.
It has me chuckling to hear Treasury Secretary Steve Mnuchin say that TikTok is under review by the Committee on Foreign Investment in the United States. What are the committee reviewing? 14-year-old girls bopping to Doja Cat in their bedrooms?
Does Senator Graham post his Toosie Slide to TikTok? It's about time we passed a law insisting that lawmakers making laws about tech must actually use the tech that they're legislating. How can they create sensible policy about a tech tool they don't remotely understand?
I'll freely admit I don't use TikTok. But my kids do. They post and watch endless videos of their teen selves and other teens performing the same synchronized moves to quick music clips.
That is, they used to post to TikTok. We live in Hong Kong, and ByteDance decided to pull out of the market following the passage of the draconian treason-and-sedition law here at the start of July. It was in a no-win situation. Refuse to provide data to the Hong Kong authorities, and it would be banned in China. Provide data to the Hong Kong authorities and it would face sanctions from Washington.
All of a sudden last month, TikTok stopped working on phones here. Disappeared. Click on the app, and nothing happened. In India, TikTok also vanished when the government banned it and around 59 other Chinese apps, following a deadly border clash in June that left 20 Indian soldiers dead.
The biggest threat I can imagine from TikTok is that the Chinese authorities would demand user information, then use the videos to train facial-recognition software. But there are plenty of other ways to do that, not least the images on Facebook (FB) that companies such as Israeli surveillance specialists Verint have been stripping for years to train their programs, which they sell to the U.S. Navy and National Security Agency.
Microsoft - the mooted buyer of TikTok - has developed a database of millions of facial images for its own use, while there's a public one at Stanford University. Amazon.com (AMZN) sells its Amazon Rekognition image and video analysis program to all and sundry. In June, Amazon said it would pause a program in which it had been selling its facial-recognition tool to U.S. police forces.
The rules do state that Chinese data on Chinese users must be stored in China. And Chinese companies must turn that data over to Chinese authorities - the Chinese Communist Party - if demanded to do so.
But ByteDance is getting around this issue by storing all U.S. data on U.S. users in the United States. The Chinese authorities can't touch it. ByteDance says it will refuse to hand over any data that the CCP requests. I believe them.
The fervor around TikTok stems purely from it being Chinese-owned, and also from it being wildly popular. There's nothing quite like a massive craze to stoke the interest of attention-seeking U.S. politicians. TikTok also = teens. Concerned parents. It's the 2020 version of the vaping furor that developed last year.
It is because TikTok comes from a Chinese company that it has been as successful as it has. Other than India, there aren't any other single-nation markets besides China that would allow a tech company to grow to the size of ByteDance. And it is precisely that scope which allows TikTok to take on, say, Instagram, the photo-and-video app that most closely competes with its short-form video content.
What happened to Instagram? It made great headway. Then it got bought by Facebook. Big Tech faces a promising upstart, eats it, then uses that popular app to increase its own dominance.
In China, ByteDance runs the Mandarin-language version, Douyin. Its messaging functions are making it a formidable competitor to Weibo (WB) , the parent of microblogging site Sina Weibo. Celebrities like actors and pop stars are among the most-popular posters among the 500 million or so users of Weibo, China's equivalent of Twitter (TWTR) .
TikTok can provide a similar competitive threat to Twitter as well as to Instagram in the United States. Perhaps if President Trump made more use of TikTok - and who wouldn't want to see the 74-year-old perform the Renegade - he would see greater merit in allowing the company to thrive.
ByteDance has already taken steps to distance itself from Beijing by appointing Disney's former head of streaming, Kevin Mayer, as CEO of TikTok and COO of parent ByteDance. Mayer remains based in Los Angeles, and company insiders are reportedly leaving Beijing unhappy that their power over the company's future direction has been transferred stateside. ByteDance founder Zhang Yiming remains the global CEO.
So it should be easy enough to split out U.S. TikTok from the Chinese parent. Besides Microsoft, private-equity investors are also taking a look at the U.S. operations. For good reason. More than one billion people have downloaded either TikTok or Douyin, and it was the most-downloaded app on the Apple (AAPL) store in both 2018 and 2019.
Existing U.S. investors in ByteDance including Sequoia Capital and General Atlantic are looking at a buyout, Reuters reports. That would value the U.S. operations at US$50 billion, 50 times its existing revenue of around US$1 billion. Its management is targeting revenue of US$6 billion in 2021. Douyin is targeting 2021 sales of US$28 billion.
The current reports suggest Microsoft is most-advanced in talks. Investment earlier this year by shareholder Cheetah Mobile valued the entire ByteDance, including U.S. and Chinese operations, at US$140 billion.
The Microsoft breakup never happened, by the way. I was working at CNN's financial-news Web site at the time, writing pieces considering what MSFT shareholders should do with their two new holdings. One portion of Microsoft would have made operating systems, while the other would make third-party software. In the end, it was a moot point. They never had to worry because Microsoft won a 2001 appeal that set aside the original judgement.
There was talk last year that ByteDance might go public with a blockbuster initial public offering in Hong Kong or New York. Now Reuters reports it may list solely its Chinese business, which alone may be worth US$100 billion, on Shanghai's new tech-focused, Nasdaq-style board instead, or in Hong Kong, where it's easier to appeal to international investors. Given its international ambitions, management seems to favor Hong Kong.
I'm sure U.S. TikTok will get sold, and continue to thrive. ByteDance will survive and do even better with its Chinese operations. Our data will be safe. No one will ever see your Electric Slide, unless you want them to. Your secrets are safe, seen only by, oh about a billion teens.