Caixin
Aug 10, 2020 05:53 AM
BUSINESS & TECH

Cover Story: TikTok’s Ticking Clock in Trump Faceoff

Whether TikTok is sold or banned, more pressing issues remain, policy experts say.
Whether TikTok is sold or banned, more pressing issues remain, policy experts say.

The clock is ticking for TikTok, the popular short video app facing a looming ban or a possible takeover in the U.S.

ByteDance Ltd., the Chinese parent company of TikTok, is in talks with Microsoft Corp. to sell a large portion of its overseas operations after U.S. President Donald Trump said he would block the app by Sept. 15 if it does not do so. But Trump’s demand for a cut of any sale could derail a potential deal.

The U.S. president said he demanded a “substantial portion” of the purchase price in a phone call with Microsoft’s Chief Executive Officer Satya Nadella.

“I think it’s very fair,” Trump said, because “we’re making it possible for this deal to happen.”

With the talks with Microsoft still uncertain, Trump poured on more cold water. On Thursday, the president invoked emergency economic powers to impose broad sanctions against TikTok, declaring that any transactions between ByteDance and U.S. citizens would be outlawed in 45 days for national security reasons.

The order is likely to mean that TikTok will no longer provide software updates to its more than 100 million American users and that the app can be removed from Apple and Google’s app stores if a deal isn’t reached. Even if ByteDance agrees on a transaction with Microsoft, only that part of TikTok sold to the American company would be exempted, and other parts of ByteDance’s global business would still be subject to the new sanctions.

Trump’s goal

Trump’s goal is to stop ByteDance from becoming a global company rather than just wanting it to sell its U.S. operation, a person close to the talks said.

TikTok may sue the Trump administration over the president’s executive order as early as Tuesday, and the lawsuit will argue that the action is unconstitutional because TikTok did not have time to respond, the American National Public Radio network reported.

TikTok hasn’t confirmed the report but said in a statement it is reviewing all options to ensure the company and users are treated fairly “if not by the administration, then by the U.S. courts.”

According to ByteDance’s website, TikTok has four subsidiaries that operate in global markets — one in the U.S., one in Australia, one in Singapore that runs operations in Southeast Asia and India, and one in the U.K. for operations across Europe.

Microsoft said in a blog Aug. 2 that a preliminary proposal would involve the purchase of the TikTok service in the U.S., Canada, Australia and New Zealand, resulting in Microsoft owning and operating TikTok in those markets. Microsoft said it may invite other American investors to participate on a minority basis.

But ByteDance hasn’t confirmed progress in the negotiations. In a letter to employees, the company’s founder and Chief Executive Officer Zhang Yiming said ByteDance is in talks about a partnership with a technology company, but the final proposal has yet to be confirmed.

Current investors expect TikTok’s entire overseas business to be valued at $100 billion, and non-Chinese investors are leaning towards not selling their stakes, a person close to the talks told Caixin.

Some of the investors, including investment firms Sequoia and General Atlantic, have also proposed to buy a majority of TikTok in a deal that values the company at $50 billion, Reuters reported, citing people familiar with the matter.

But now with the threatened U.S. ban and regulatory scrutiny in other markets, the expected valuation is likely to fall even more. TikTok’s assets in the U.S., Canada, Australia, and New Zealand are priced at $10 billion, according to people close to the talks.

Twitter Inc. has had preliminary talks about a potential combination with TikTok, the Wall Street Journal reported over the weekend, citing people familiar with the matter.

In the U.S., TikTok has 650 million downloads, accounting for about 8% of its total downloads worldwide. TikTok brought in $103 million of revenue in July, up 860% from a year earlier, making it the world's largest revenue generator among nongaming apps, according to market research firm Sensor Tower. TikTok’s content supply and user stickiness are also better than those of Facebook and other social media platforms.

The 45-day window has created opportunities for TikTok’s rivals. Facebook’s Instagram is beefing up in North America after its Indian launch of Reels, a short-video feature similar to TikTok. A similar app called Byte has gone from 8,000 downloads to 1.3 million in the past two weeks, according to Sensor Tower. TikTok’s biggest rival in the U.S., Dubsmash, racked up 450,000 downloads in half of the month.

Meanwhile, content creators on TikTok are preparing for the possible shutdown of the app. Devin Caherly, a 19-year-old college freshman who has more than 2.6 million followers on TikTok, posted a tearful video Aug. 1 asking fans to follow him on Instagram and YouTube.

With less than three months before the American presidential election, some Chinese analysts say TikTok’s U.S. prospects could be reversed if Trump is not reelected. But ByteDance doesn’t want to put its hopes on that. The election is scheduled for a month and a half after Trump’s Sept. 15 deadline for a sale or a ban.

“There’s no essential difference between Republicans and Democrats in their attitudes towards China and Chinese companies,” said a lawyer who has been involved in overseas mergers and acquisitions by Chinese companies. In the medium to long term, a mutual “ban” in the high-tech sector between China and the U.S. is almost a certain trend, the lawyer said.

While Trump is threatening a ban on TikTok, his Democratic opponent former Vice President Joe Biden told his campaign staff to delete the app from their work and personal devices out of security concerns. The Democratic National Committee previously warned Democratic campaigns, committees and state parties to take additional security precautions when using TikTok.

The U.S. State Department, the Department of Homeland Security, the Department of Defense and the Transportation Security Administration already banned TikTok on federal government devices due to cybersecurity concerns and fear of spying by the Chinese government.

Republican Senator Josh Hawley of Missouri, who introduced legislation in March to ban all federal employees from using TikTok on government devices, called TikTok a “Trojan horse” that could collect Americans’ personal data and provide it to the Chinese government, a claim TikTok has been repeatedly denied.

Some China hawks warn that TikTok could become a propaganda tool used to influence the U.S. election. TikTok users were blamed for sabotaging a Trump campaign rally in June in Tulsa, Oklahoma, after a number of them posted videos urging people to register for tickets and not show up. Only 6,200 people were present in an arena with 19,200 seats after Trump’s campaign manager Brad Parscale bragged on Twitter of receiving more than 1 million ticket reservations.

New purge wave

TikTok is just the beginning of a wave of purges aimed at Chinese internet companies. U.S. Secretary of State Mike Pompeo announced a plan to expand the administration’s so-called “clean network” initiatives, listing five areas of critical importance that the government will seek to prohibit Chinese companies from accessing. The plan is one of the most ambitious and wide-ranging efforts of the Trump administration to restrict the U.S. reach of Chinese tech companies.

Pompeo singled out apps like TikTok and Tencent’s WeChat as “significant threats to personal data of American citizens” and demanded their removal from U.S. app stores. Smartphone companies, such as Huawei, will also be restricted from pre-installing or making available for download popular U.S. apps.

The clean network plan goes well beyond smartphones and apps. Under the broad proposals, Chinese cloud service providers and a major undersea cable network that links the U.S. to the global internet could also be restricted.

In response to the new plan, China’s Foreign Ministry spokesman Wang Wenbin called the U.S. moves “sheer malicious slander and political manipulation in an attempt to maintain its high-tech monopoly.”

Implementing the clean network plan still needs further specific measures. An American expert on global public policy told Caixin that he doesn’t believe the State Department actually has the authority to implement any element of the plan, but he does believe the two countries’ dispute over data issues can only further escalate.

Whether TikTok is sold or banned, the more pressing issues about the future relationship of the world’s two biggest economies are being left by the wayside, some experts warned.

“I just think the notion that TikTok is the big issue in U.S.–China relations is silliness, and I think it distracts from very important issues,” said Graham Webster, a China digital economy fellow at the think tank New America.

Samm Sacks, a cyber policy fellow at New America, said selling TikTok to American investors wouldn’t address the core problems. An American-owned TikTok could still legally sell data to third-party data brokers, for example, which could then feed it back to Chinese authorities, she said.

Instead, Sacks said, the American government should enact a strong federal privacy law that could protect TikTok users’ data without banning the app altogether.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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