The challenges Microsoft faces in buying TikTok’s US arm

[Karlston]

The challenges Microsoft faces in buying TikTok’s US arm

Tech group has until September 15 to resolve myriad problems in securing deal.

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Microsoft has said it wants to buy the US 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 September 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 US business worth?

The two sides have not agreed on a price, said one person close to the deal.

 

How to value TikTok’s US 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 US. It also faces increasing competition, including from Facebook, 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 US, 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 $500 million of US revenues this year.

 

The current range under discussion is between $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 US 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 US 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 US 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 US 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 maneuvering 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 rumors that another company may swoop for TikTok, Facebook, and Google would face antitrust concerns.

 

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

 

“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 $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 US 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 US company would have to buy TikTok by September 15 or it would be banned.

 

In China, Microsoft is by far the most trusted US tech company, where it has had a presence for 28 years. Its largest R&D centre outside of the US 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 US attacks go on and on, TikTok could go down the drain if the US 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 US 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 arch-rival 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 $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.”

 

 

The challenges Microsoft faces in buying TikTok’s US arm