A breakdown of Microsoft’s potential acquisition of TikTok

The relations between the two largest economies, the United States and China, have been complex under the presidency of Donald Trump. Following an unprecedented trade war of imposed tariffs, the world hoped that the US-China Phase One Deal in January 2020 would land a truce. However, in July Trump announced that he was not focused on the next phase of the US trade deal with China, as the relationship between the two nations had been “severely damaged” by coronavirus pandemic. To make matters worse, the newly established national security law in Hong Kong by the Chinese government further increased tensions between the world leaders.

Whilst this may all seem confusing, something in particular has been hitting our headlines – the banning of TikTok. But how did we get from trade wars to this? Well, Trump’s increasing concern over China’s espionage in the US has led to him issuing an executive order in August that would ban US companies from doing business with TikTok. Fortunately, this doesn’t have to mean TikTok is gone for good.

So, what exactly is TikTok? TikTok is a viral video app that lets users record short-form videos and has become popular among young people since it launched in 2017. The app reportedly has over 1 billion active users, 100 million of which come from the United States.

TikTok’s parent company ByteDance faces a deadline of 12 November to sell its US operations to a US firm

However, TikTok is owned by the Chinese parent company ByteDance which is accused of cooperating with the Chinese government and threatening national security. US officials are concerned about the fact that the app could provide data collected from American users to China’s government, despite TikTok immediately stating otherwise.

Representatives also voiced concerns over the possibility of spreading Chinese propaganda and censoring the platform’s content to satisfy Chinese leaders. It is known that TikTok collects information, such as location data, internet address, and tracks the type of device used, in addition to storing users’ search history and the content of messages people write to other users on the app. Therefore, TikTok’s parent company ByteDance faces a deadline of 12 November to sell its US operations to a US firm.

Here comes TikTok’s potential saviour, Microsoft, which immediately announced its willingness to acquire TikTok’s US, Canadian, Australian, and New Zealand operations. Originally, Donald Trump threatened to ban the service completely, but, when Microsoft expressed interest in buying TikTok’s US operations, he agreed to a 15 September deadline to complete the discussions for a potential acquisition.

But, as the 45-day deadline was too short, the President has later signed the new executive order providing ByteDance with a 90-day deadline to divest the US operations of TikTok. The latest order also requires ByteDance to delete any data related to American TikTok users from its servers.

Several days after the first announcement of the acquisition, Microsoft reported its willingness to buy all of TikTok

Microsoft claims it would ensure that “all private data of TikTok’s American users is transferred to and remains in the US,” and it would also make sure that this data is deleted from servers outside the country after being transferred.

Several days after the first announcement of the acquisition, Microsoft reported its willingness to buy all of TikTok, not just the portion of it that operates in the US and a few other countries. This would also include India, which is TikTok’s largest market, accounting for 650 million downloads, and which banned the app this June, as TikTok was put on a blacklist of 59 Chinese mobile applications, supposedly threatening national security.

The foremost reason for Microsoft to extend the TikTok takeover to the entire global business is that buying only some parts of all operations would lead to a splintered version of TikTok’s app and operations, as it would be complicated to separate back-office functions as well as make sure that TikTok users would be able to use the app while  abroad.

This is likely to be the biggest deal in Microsoft history, surpassing the $26 billion paid for LinkedIn in 2016

Now you might be thinking, why Microsoft? Well, looking at the current environment, Microsoft appears to have little competition, as it was the only member of “Big Tech” not involved in recent antitrust hearings. Neither Facebook nor Google could think of entering talks, given anti-trust issues.  The four tech giants, Facebook, Google, Apple, and Amazon are being investigated over antitrust violations, as they are deemed to have suppressed smaller competitors to sustain a monopoly of the markets. Therefore, if Microsoft closes the deal, it would likely face less political and regulatory issues compared to the other US tech giants.

Although Twitter has also expressed willingness to buy the video-sharing platform, Microsoft is the front-runner, as Twitter would probably lack financial might, which will be needed to complete the deal swiftly. With more than $130bn in cash, equivalents, and short-term investments on the balance sheet, this is likely to be the biggest deal in Microsoft history, surpassing the $26 billion paid for LinkedIn in 2016. Although it is not yet clear how much Microsoft will pay for TikTok, ByteDance executives’ value all of TikTok at more than $50 billion.

The platform could help Microsoft to establish itself as a real consumer tech player

So why would Microsoft want to acquire TikTok? Microsoft is known as a leader in the corporate sphere, having shifted its focus away from consumer business and associated its future to its cloud business. Inevitably, the TikTok deal would be an important step back into the consumer business field.  The platform could help Microsoft to establish itself as a real consumer tech player, after many encountered failures. Whilst acquiring LinkedIn with a growing community and Xbox, which generated $11 billion in sales last year, has brought success, Microsoft Bing continues to be out-rivalled by Google. Also, their attempts at catching the mobile wave, through buying Nokia at $7.2 billion in 2013 and later acquiring game live streaming Mixer in 2016, were both unsuccessful.

The true benefit of the acquisition is a wide connection of young users. Microsoft aims to attract Gen Z and Millennials to its ecosystem as Microsoft grows older. Almost 70% of all TikTok users are 13-24-year-old-people and close to half of all users, i.e. 42%, are aged between 18-24 years old. Also, the deal may put Microsoft back in the game in terms of interactive display ads. The online ad market is expanding at a rapid rate, increasing by roughly 16% in 2019 and it is anticipated to grow further by 17% in 2021. Facebook and Google have been leaders for such ads, while Microsoft lagged behind. Clearly, the acquisition would enable Microsoft, which currently has a limited presence in social media, to enter a new market dominated by rivals. TikTok is thought to have a lot of potential, as ByteDance has forecasted TikTok’s revenues will grow from $1bn this year to $6bn by the end of 2021.

Microsoft and ByteDance will need US officials’ sign-off on the deal and might need to make a substantial payment to the US Treasury

However, there are some difficulties associated with the deal. As Microsoft committed to ensuring American users’ private information is stored in the United States, it would need to rewrite TikTok’s software within a year so as to make sure people who are working on the app’s legacy operations could not access the US data. Besides, Microsoft and ByteDance will need US officials’ sign-off on the deal and might need to make a substantial payment to the US Treasury after Donald Trump said at a press conference “the US should get a very large percentage of that price because we’re making it possible.” He paralleled the payment to money paid to a landlord by a prospective tenant to secure a lease: “Right now they don’t have any rights, unless we give it to them…Without a lease the tenant has nothing.” The following obstacle in the deal is that buying an app that was created in China could bring new scrutiny on Microsoft during  times when the US-China relationship is strained.

Although some view the acquisition as a huge opportunity for both sides, the opponents see many possible drawbacks for Microsoft buying the app. In the coming months, we will see how the arrangement progresses and if the acquisition can fulfil the needs of all engaged parties. Obviously, there is a lot of obscurity regarding the deal and many aspects still need to be discussed. But what we know for sure is that the clock is ticking and the deadline of 12 November is inevitably approaching, inducing both TikTok and Microsoft to seal the deal.­