Microsoft (MSFT) apparently never gave up its dreams of having a giant consumer mobile presence.
That was the first thought that came to mind for me as reports emerged that the company is in talks to buy a portion of TikTok's operations from China's ByteDance, which is facing immense political pressure to divest TikTok in the U.S..
There's no guarantee at this point that a deal will happen, particularly given all the political machinations involved. But with Microsoft officially declaring its interest in buying TikTok's operations in the U.S., Canada, Australia and New Zealand and stating it wants to conclude a deal by Sep. 15, it does look like the company sees ByteDance's current dilemma as a golden opportunity to make up for past consumer Internet missteps.
And though its enterprise efforts have understandably received a lot more investor attention in recent years, Microsoft's products and services are still a big part of the daily lives of hundreds of millions of consumers, thanks to the massive installed bases claimed by Windows, Office and Xbox. Also, while their active user bases can't compare with those of Alphabet (GOOG) and Facebook's (FB) most popular services, offerings such as Bing, Xbox Live and Xbox Game Pass do give Microsoft some experience with running consumer Internet services at scale.
However, at a time when many consumers easily spend more hours in front of a smartphone than they do in front of any other computing device, the absence of a large-scale consumer mobile platform -- one that lets Microsoft become an important part of the daily smartphone usage of hundreds of millions of consumers -- is pretty glaring.
Perhaps Skype could have become that platform with better execution, but (as Facebook and Zoom (ZM) will gladly tell you) that ship has sailed. TikTok, which just said it has 100 million U.S. users (including, undoubtedly, many younger consumers who don't use Windows PCs), would amount to a pretty nice second chance.
The second thought that came to mind: While a Microsoft acquisition of TikTok isn't as clean of a fit as, say, a Google acquisition would be, the company does have some assets that it can leverage to strengthen TikTok's user growth and profitability.
Between Bing, the Bing ad network (used to run ads on Yahoo and other Verizon (VZ) properties) and LinkedIn's news feed ad business, Microsoft already has a decent-sized online ad business. That gives it some experience as it tries to effectively monetize TikTok -- a platform that's a pretty good fit for Instagram Stories-type video and display ads, and which recently stepped up its efforts to win over brand advertisers.
Meanwhile, having TikTok hosted on Azure's data center infrastructure should lower its hosting costs. And with a large portion of TikTok viewing involving content surfaced via AI/machine learning algorithms or (to a lesser extent) pulled up via searches, Microsoft's own AI and search expertise should come in handy.
In addition, as The Verge's Tom Warren has observed, TikTok stands to give Microsoft a lot of data about consumer behavior and interests, and could act as a prime vehicle for promoting Xboxes, games, Surface devices and other Microsoft products and services. There might also be some opportunities to integrate TikTok with Xbox's game content-sharing services, although TikTok's 60-second video limit would (if left unchanged) be a handicap.
If there's a major risk here, it might be that successfully running a social media platform over the long run is something a little different than running a search engine or gaming service. It's in many ways an art more than a science, and making sure that a platform's mechanics keep user growth and engagement on an upwards trajectory requires skilled leaders who have a good, intuitive feel for what consumers want and don't want changed about the platform. And if Microsoft drops the ball here, Facebook and/or Snap (SNAP) are likely to make them pay for it.
Also, the fact that Microsoft is for now only negotiating the purchase of TikTok's operations in a handful of non-Chinese markets, rather than all of them, does raise some questions about how TikTok would operate following a deal. Would a U.S. TikTok user be free to follow, watch videos from and message, say, a British or Brazilian TikTok user? And if so, how and where would data related to those interactions be stored?
This transaction would be a lot cleaner if Microsoft was buying TikTok's non-Chinese operations wholesale. And considering that TikTok is also seeing intense scrutiny in many non-U.S. markets -- among other things, it has been banned in India and could soon be banned in Japan -- such a transaction would arguably make more sense on multiple levels.
Those concerns aside, TikTok does fill a pretty major hole in Microsoft's consumer portfolio. And the success that the company has had with major M&A transactions in the Satya Nadella era, along with its experience to date in running large-scale Internet, advertising and cloud services, provides reason to be cautiously optimistic that it can make a TikTok deal pay off as well.