Should Mi­crosoft buy U.S. arm of Tiktok?

Be­yond busi­ness fun­da­men­tals, U.S. firm hasn’t done well with con­sumer prod­ucts

Windsor Star - - NEWS - 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 in 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 Septem­ber 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 ready-made 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.”

BLOOMBERG

The Tiktok app is es­ti­mated to have cur­rent U.S. ad­ver­tis­ing rev­enue of about US$500 mil­lion, but cur­rent val­u­a­tions be­ing dis­cussed for the U.S. por­tion of busi­ness range be­tween US$15 bil­lion and US$30 bil­lion given un­cer­tainty over a pos­si­ble sale to Mi­crosoft.

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