Does it make sense for Mi­crosoft to buy TikTok?

National Post (National Edition) - - FINANCIAL POST - YUAN YANG AND NIAN LIU

Mi­crosoft Corp. has said it wants to buy the U.S. arm of TikTok, the Chi­nese vi­ral short-video app that is in the crosshairs of reg­u­la­tors and the White House.

But a deal, which is likely to run to sev­eral bil­lion dol­lars, faces myr­iad tech­ni­cal and po­lit­i­cal chal­lenges and will have to sat­isfy Zhang Yim­ing, the app’s founder, his pow­er­ful in­vestors both in China and the west, and the Trump ad­min­is­tra­tion.

Mi­crosoft said it would aim to com­plete a deal by Sept. 15, but in an in­ter­nal letter to staff on Mon­day, Zhang said the talks were “pre­lim­i­nary” and the ex­act de­tails had not been worked out.

Here is what is left to be de­cided:

• How much is TikTok’s U.S. business worth? The two sides have not agreed on a price, said one per­son close to the deal.

How to value TikTok’s U.S. business unit, which in­cludes Canada, Aus­tralia and New Zealand, is tricky. TikTok has spent heav­ily on pro­mo­tion and con­tent in order to grow its pop­u­lar­ity and is not prof­itable in the U.S. It also faces in­creas­ing com­pe­ti­tion, in­clud­ing from Face­book Inc., which plans to launch a ri­val ser­vice, In­sta­gram Reels, as early as this week.

En­ders Anal­y­sis, a con­sul­tancy, es­ti­mated TikTok has about 50 mil­lion daily ac­tive users in the U.S., giv­ing it a larger au­di­ence than Twit­ter and al­most as big as Snapchat.

That makes TikTok a “very hot prop­erty” for Mi­crosoft, said Jamie MacEwan, an an­a­lyst at En­ders, who de­scribed TikTok’s ad­ver­tis­ing business as “nascent” and es­ti­mated that it would have US$500 mil­lion of U.S. rev­enues this year.

The cur­rent range un­der dis­cus­sion is be­tween US$15 bil­lion and $30 bil­lion, the per­son said, but the gap be­tween the sides re­flects the un­cer­tain prospects for the app, as well as the forced nature of the sale.

Mi­crosoft has said it may also in­vite some cur­rent U.S. in­vestors of the video app’s Chi­nese owner ByteDance, such as Gen­eral At­lantic and KKR, to have mi­nor­ity stakes. The White House is keen not to be seen as ex­pro­pri­at­ing a com­pany from one set of U.S. own­ers to give it to another, said one per­son close to the deal.

CAN TIKTOK BE CARVED OUT OF

BYTEDANCE?

It re­mains un­clear ex­actly what Mi­crosoft would buy and how TikTok’s U.S. business can be sep­a­rated from its global op­er­a­tions.

Cur­rently, TikTok shares much of its code, in­clud­ing the al­go­rithms that dic­tate which videos are shown to users, with its Chi­nese sis­ter app Douyin and Chi­nese en­gi­neers work on both plat­forms, according to em­ploy­ees.

ByteDance has spent some time split­ting the app’s back-end op­er­a­tions, said one project man­ager in Bei­jing, who added: “We’ll have to do it in a big rush now.”

How TikTok evolves in the fu­ture, if Mi­crosoft de­vel­ops code for the U.S. app but ByteDance con­tin­ues to make code for other ter­ri­to­ries, re­mains a big ques­tion.

Un­der the terms of the pro­posal put to the White House, Mi­crosoft would al­low TikTok to op­er­ate in­de­pen­dently in the same way that it has done since it ac­quired LinkedIn in 2016, said one per­son fa­mil­iar with TikTok’s think­ing. Users would still be able to ac­cess global con­tent -- from Euro­pean and Asian TikTok users — through a shar­ing agree­ment with ByteDance, the per­son said.

Such ma­noeu­vring may put off users and lead them to switch to ri­val apps. “Carv­ing it up into pieces would put a huge damper on its over­all growth,” pre­dicted De­bra Aho Wil­liamson, an an­a­lyst at eMar­keter.

COULD ANY­ONE ELSE MAKE A RI­VAL BID?

While there are ru­mours that another com­pany may swoop for TikTok, Face­book and Al­pha­bet Inc. would face an­titrust con­cerns.

Other po­ten­tial buy­ers might in­clude Ap­ple Inc., which has failed to make any progress into so­cial media over the past sev­eral years, and Walt Dis­ney Co., whose fam­ily-friendly brand could dove­tail with the gen­er­ally young and light­hearted nature of TikTok.

But a move by ei­ther com­pany would bring new ex­po­sure to the le­gal and rep­u­ta­tional risks of polic­ing a vast net­work of user-gen­er­ated con­tent. On Tues­day, Ap­ple said it has no in­ter­est in ac­quir­ing TikTok, deny­ing a re­port by news web­site Ax­ios from ear­lier in the day, Reuters re­ported.

“Legacy media is sim­ply un­will­ing strate­gi­cally or un­able fi­nan­cially to look at a trans­for­ma­tive ac­qui­si­tion, with TikTok per­haps the most exciting growth story in media right now,” an­a­lysts at LightShed TMT wrote in a note on Mon­day.

The com­pany that might pro­vide the best prod­uct fit with TikTok is Snap, given Snapchat’s sim­i­lar young au­di­ence and of­ten play­ful con­tent. But Snap’s val­u­a­tion of about US$31 bil­lion would likely leave it too small to take on a bid for TikTok alone.

WILL A DEAL FIX TIKTOK’S PO­LIT­I­CAL

PROB­LEMS?

The Trump ad­min­is­tra­tion ap­pears split over how to treat TikTok, with sev­eral fig­ures keen on forc­ing a sale to a U.S. com­pany, but some, in­clud­ing Peter Navarro, the White House trade ad­viser, call­ing for an out­right ban on the app.

Pres­i­dent Don­ald Trump on Mon­day said ei­ther Mi­crosoft or another U.S. com­pany would have to buy TikTok by Sept. 15 or it would be banned. Mi­crosoft stock weighed on the mar­ket, drop­ping 2.6 per cent to a shade un­der US$211.

In China, Mi­crosoft is by far the most trusted U.S. tech com­pany, where it has had a pres­ence for 28 years. Its largest R&D centre out­side of the U.S. is in Bei­jing, and sev­eral Chi­nese tech founders — in­clud­ing ByteDance’s Mr Zhang — are Mi­crosoft alumni.

“Mi­crosoft could be seen as a white knight,” said a for­mer Mi­crosoft China ex­ec­u­tive who still does business with the com­pany. “The most im­por­tant thing is to set­tle this quickly. If U.S. at­tacks go on and on, TikTok could go down the drain if the U.S. can rally other coun­tries against it. If another com­pany had pur­chased it, it would have in­flamed more nationalis­m in China.”

DOES IT MAKE SENSE

FOR MI­CROSOFT?

The U.S. group’s strat­egy has long been to ex­pand into the main ap­pli­ca­tions on its com­put­ing plat­forms — though in the con­sumer world, act­ing as the provider of back-end com­put­ing has been a more nat­u­ral fit than try­ing to become the op­er­a­tor of pure con­sumer ser­vices.

A 2007 strate­gic in­vest­ment in Face­book failed to bring it a deeper role as a plat­form provider for a boom­ing area of online ac­tiv­ity — some­thing it could make up for with TikTok, while also latch­ing on to a younger gen­er­a­tion.

The soft­ware com­pany has said own­ing Skype taught it how to op­er­ate mass online con­sumer ser­vices, and bringing another anchor tenant to its Azure cloud plat­form would give it a big leg up against archri­val Ama­zon. It would also give it one of the rich­est online video repos­i­to­ries, a ready­made data set for train­ing its AI al­go­rithms.

But Mi­crosoft has of­ten failed with pure con­sumer products and has a de­cid­edly mixed record with ac­qui­si­tions. The ex­cep­tion has been gam­ing, where the Xbox console and Minecraft — chief ex­ec­u­tive Satya Nadella’s first ac­qui­si­tion — have thrived as stand­alone ser­vices.

But jump­ing into so­cial media would put the group un­der a po­lit­i­cal spotlight and it would high­light a business weak­ness: apart from its Bing search en­gine, Mi­crosoft has had lit­tle success at us­ing ad­ver­tis­ing to mon­e­tize its online ser­vices, no­tably writ­ing off more than US$6 bil­lion after one failed ad­ver­tis­ing ac­qui­si­tion.

“Mi­crosoft has the resources, bal­ance sheet, and ex­pe­ri­ence to cre­ate a dig­i­tal ad­ver­tis­ing ecosys­tem while also pro­vid­ing other syn­er­gies such as a cloud and search of­fer­ing that could be used as well,” said Youssef Squali, an­a­lyst at Truist Se­cu­ri­ties. “That said, we cau­tion that Mi­crosoft has not been very suc­cess­ful his­tor­i­cally with deals fo­cus­ing on con­sumers (or) ad­ver­tis­ing.”

HOLLIE ADAMS / BLOOMBERG

The cur­rent range un­der dis­cus­sion for Mi­crosoft’s pur­chase of TikTok is be­tween US$15 bil­lion and US$30 bil­lion.

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