Beginning of August — increasing US-China tensions or new opportunities for acquisitions?
The relations between the two largest economies, namely the United States having a nominal GDP of $21.44 trillion and China with a GDP of $14.14 trillion in 2019, have been complex and unpredictable under the presidency of Donald Trump .
In 2018, Donald Trump announced tariffs of 30-50% on solar panels and washing machines, which resulted in an unprecedented trade war; tariffs of billions of dollars imposed on a variety of China’s products. The world hoped for a truce when two sides signed the US-China Phase One Deal on January 15, 2020; the countries agreed to the rollback of tariffs and expansion of trade purchases, and renewed commitments on intellectual property, currency practices, and technology transfer. However, in July, Donald Trump announced that he was not focused on a possible next phase of the US trade deal with China, emphasizing that the relationship between the two nations had been “severely damaged” by coronavirus pandemic — Trump blamed China for not stopping the spread of the coronavirus . To make matters worse, the newly established national security law in Hong Kong by the Chinese government even further increased tensions between the world leaders. All the recent events have significantly exacerbated the relationship between the nations, as well as Trump’s increasing concern over China’s espionage in the US, leading to his issuance of an executive order in August that would ban US companies from doing business with TikTok.
But what exactly is TikTok?
It is a viral video app that lets users record short-form videos and has become popular among young people since 2017 when it was launched. The app reportedly has over 1 billion active users, 100 million of which come from the United States. In fact, TikTok had the best quarter for any app ever in Q1 with 315 million downloads of the app, according to Statista, as the pandemic swept across the world and kept people at home . However, TikTok is owned by the Chinese parent company, ByteDance, which is blamed to be cooperating with the Chinese government and threatening national security. This is explained by a Chinese law introduced in 2017, which states that Chinese companies have an obligation to support and cooperate with the country’s national intelligence work . The US officials are concerned about the fact that the app could provide data collected from American users to China’s authoritarian government, although TikTok immediately denied this. Representatives also voiced concerns over the possibility of spreading Chinese propaganda and censorship of the platform’s content to satisfy Chinese government leaders. It is widely known that the TikTok app collects information, such as location data and internet address, and tracks the type of device used. Besides that, it stores users’ browsing and search history, as well as the content of messages people write to other users on the app. Therefore, TikTok’s parent company ByteDance faces a deadline of November 12 to sell its US operations to a US firm.
Here comes Microsoft, which immediately announced its willingness to acquire TikTok's US, Canada, Australia, 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 for a September 15 deadline to complete the discussions for a potential acquisition. As the 45-day deadline till September 15 was too short, on the 14th of August US President Donald Trump has 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 relating to American TikTok users from its servers. Microsoft claims it would ensure that “all private data of TikTok’s American users is transferred to and remains in the US”, and that the data is deleted from servers outside the country after being transferred.
Several days after the first acquisition announcement, 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. Notably, India banned the app this June, as TikTok was put on a blacklist of 59 Chinese mobile applications for supposedly threatening national security . The foremost reason for Microsoft to extend its TikTok takeover ambitions 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; it would be complicated to separate back-office functions and ensure that TikTok users would be able to use the app while being abroad. Buying TikTok’s global operations excluding Douyin, the app version that ByteDance operates in China, would give Microsoft a more solid position to support TikTok. President Donald Trump agreed that it is “probably easier to buy the whole thing than to buy 30 per cent of it”.
Looking at the current environment, Microsoft appears to have little competition for acquiring TikTok, as it was the only member of “Big Tech” not involved in recent antitrust hearings. "Neither Facebook, which owns Instagram and WhatsApp, nor Google, which owns YouTube, could think of entering talks, given antitrust issues," according to the Guardian . Four tech giants — namely Facebook, Google, Apple, and Amazon — are being investigated over antitrust violations, as they are deemed to have suppressed smaller competitors to sustain a solid monopoly of the markets . Therefore, if Microsoft closes the deal, it would likely face less political and regulatory issues in comparison to the other US tech giants. Although Twitter has also expressed willingness to buy video-sharing platform, Microsoft is the front-runner, as Twitter would probably "lack financial might, which will be needed to complete the deal swiftly". To clarify, Twitter’s market capitalisation is approximately $29bn , compared to Microsoft’s at roughly $1.6tn . Also, with more than $130bn in cash, equivalents, and short-term investments on the balance sheet, Microsoft is likely to make the deal that would be the biggest in its history, surpassing the $26bn it paid for LinkedIn in 2016, according to the Guardian. The acquisition price is not clear yet, but ByteDance executives value all of TikTok at more than $50billion .
But what are the reasons for Microsoft to acquire TikTok?
Microsoft is known as a leader in the corporate sphere which has shifted its focus from consumer business and associated its future to its cloud business. Inevitably, the TikTok deal would be an important step into the consumer business field. The platform could help Microsoft to establish itself as a real consumer tech player, after many encountered failures. Surely, not all Microsoft consumer-oriented offerings have been unsuccessful, such as LinkedIn with a growing community or gaming system Xbox, which generated about $11billion in sales last year. However, there have been a substantial number of failures. Despite Microsoft’s Bing search engine being actually good, it has been outrivalled by Google search. Besides that, Microsoft tried to attain the goal by buying the Finnish smartphone legend Nokia at $7.2billion in 2013, hoping to catch the mobile wave at last, and later in 2016 acquiring video game live streaming platform Mixer, but those both failed too .
From today’s perspective, TikTok may be seen as Microsoft’s huge possibility to be in the consumer tech game. Another reason the acquisition makes sense for Microsoft is that TikTok would provide a connection with millions of young users. Microsoft aims to attract Gen Z and millennials to Microsoft ecosystem as it grows older. Almost 70% of all TikTok users are of 13-24 years of age, 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 let Microsoft, which currently has a limited presence in social media, to enter a new market dominated by rivals such as Google, YouTube, Facebook, and Twitter. Although TikTok has not yet started to meaningfully generate revenue (average revenue per user to be roughly $1 per quarter, versus about $33 for Facebook), it surely has a lot of potential. ByteDance has forecasted that TikTok’s revenues will grow from $1bn this year to $6bn by the end of 2021 . Also, TikTok users seem to be highly engaged, spending even 52 minutes on the app per day, compared to Facebook and Snapchat, which are being used on average of 58 and 50 minutes a day, respectively .
However, there are some difficulties associated with the deal. As Microsoft is committed to ensuring American users’ private information is stored in the United States, it would need to rewrite TikTok’s software within a year to make sure those 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,” claimed Donald Trump. The following obstacle in the deal is that buying an app that was created in China could bring new scrutiny on Microsoft during the times when the US-China relationship is strained.
Although some view the acquisition as a huge opportunity for both sides, 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 fulfill the needs of all engaged parties. Obviously, there is a lot of obscurity regarding the deal and many aspects yet need to be discussed. But what we know for sure is that the clock is ticking and the deadline of November 12 is inevitably approaching, inducing both TikTok and Microsoft to seal the deal.
By Ugne Staraite - BSc Accounting & Finance student at Warwick University
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