The Trump and TikTok Tale — Ethics, Politics, and Corporate Tensions

1. TikTok and ByteDance — Org structure

The news about the sale of TikTok’s U.S. operations has been doing the rounds for a few weeks now. Despite all the attention and effort that the deal has received, it is currently stuck in limbo with a final decision just around the corner. Or at least, that’s the hope.

Before I get into the specifics of the deal and its implications, here’s a bit about the origins of TikTok and where it sits within its parent organization, ByteDance.

ByteDance is a Chinese (headquartered in Beijing) company that was founded in 2012. ByteDance owns the video-sharing and social networking application, TikTok (Developed in 2017). In November 2017, Byte Dance also acquired the Shanghai-based social media startup, Musical.ly, for US$1B. They combined it with TikTok in August 2018 into a single global application, keeping the ‘TikTok’ name.

Interesting fact- TikTok does not exist as ‘TikTok’ in China. The Chinese equivalent is ‘Douyin.’ While the interface of Douyin and TikTok is almost the same, Douyin is entirely Chinese — operated by Chinese management to serve a Chinese audience. TikTok, on the other hand, has a global presence as well as global management, less influenced by Chinese politics and Chinese privacy laws. This was the intention behind ‘TikTok’ anyway — to make it a global brand attractive enough for people (and influencers) all over the world to create and share videos.

Fig. ByteDance and TikTok valuation (approximate)
Fig. ByteDance and TikTok valuation (approximate)

And just to emphasize the lighting fast rate at which TikTok has grown, this stat helps paint that story — TikTok America has accumulated a 70m user base in just two years, equal to what Snapchat has amassed over all these years.

ByteDance Ltd. is reportedly worth over $100B. It is currently private but is only a matter of time before it announces an IPO. TikTok itself is worth around $20B. Some other investors have valued ByteDance at $140B and TikTok at $50B. So at this point, TikTok can be valued anywhere between $20B — $50B.

2. What caused the news of TikTok’s potential acquisition in the U.S.?

With the app’s growing popularity in the U.S., the U.S. government became concerned about the risks associated with American data ownership by a Chinese company. Given ongoing US-China tensions, American president Donald Trump did not need a reason to find fault with China. He was already annoyed with the Chinese government. Hence, all it took was one mention of the data threat posed by TikTok for Trump to turn red (from orange).

On a more serious note, this data threat does seem like a legitimate problem. By law, Chinese companies are required to share their data with the government, which is a significant cause of concern (it’s not like the NSA is not spying on you). While TikTok has insisted that it does not share any of its data with the Chinese government, Donald Trump does not believe that.

“There is credible evidence that leads me to believe that ByteDance … might take action that threatens to impair the national security of the United States,”

— Trump’s Order

The U.S. officials were concerned about the potential long-term negative consequences of TikTok algorithms on the American audience. Algorithms, as we have seen in the past, can influence the audience on the kind of content they consume, political ideas they hold, and the cultural interests they develop.

“With the app’s growing prominence, U.S. officials became concerned that the Chinese government might be able to access user data and influence content moderation.”

— Business Insider

“For the first time, the United States was trying to stop a Chinese cultural phenomenon, with an intense following among American teenagers and millennials, which carries with it the possibility of future influence.” — The New York Times

Because Donald Trump was keen on keeping the American data within the country, he announced that TikTok would be allowed to continue its operations in the U.S. only if an American tech company owned the operations and data of TikTok in the U.S.

He made it very clear that Chinese ownership will not be tolerated in U.S. borders (more on that below).

This TikTok fiasco is reminding us of Huawei and the treatment given to it by Trump’s administration. Huawei was driven out of the country with executive orders from the Trump administration because of its links to the Chinese government.

3. TikTok’s long-existing threat

Interestingly, the concerns with TikTok’s handling and ownership of data did not start with Donald Trump’s alarm. TikTok has been under the fire for a long time now wrt data, censorship, and privacy concerns.

Some example news pieces in the past year that highlighted these concerns-

  • Illegal collection of children’s data– Allegations of illegally collecting personal info from children under age 13 without parental consent
  • Censoring anti-China content — Allegations of censoring content that criticizes/angers the Chinese govt. For example, the Hong Kong pro-democracy protest videos were taken down by TikTok
  • Islamic propaganda — Islamic State militants have been posting short propaganda videos to TikTok
  • Monitoring phone’s clipboard — TikTok has been caught red-handed by monitoring what is on your phone’s clipboard

If you’re wondering what it would be like for influencers in a country without TikTok, India is a good place to look at. The TikTok ban (along with 69 other Chinese-owned apps) went into effect in India on June 29, 2020, and is still in place owing to the rising geopolitical tensions on the Indo-China border.

There are no signs of taking the ban down in the foreseeable future. 30% of TikTok’s market i(wa)s in India, and obviously, TikTok is not enjoying this.

“It’s estimated that India’s top 100 influencers have collectively lost over the equivalent of $15 million since the ban.”

The Wire

All in all, managing TikTok hasn’t been easy this past year, and the news of its U.S. buyout has only made the operational and regulatory nightmares for TikTok, worse. (more on that, below)

4. The deal and where it stands today

When Trump’s administration issued the executive order that has forced TikTok to sell its operations in the U.S. (for reasons listed above) to an American company in 90 days, Microsoft was the first company that exhibited interest to buy.

However, the Microsoft bid was rejected by TikTok (more on the reasons of rejection, in a later post)

On 22nd September 2020, Oracle and Walmart announced their successful negotiations with TikTok to buy its U.S. operations. As per the deal, a new company called TikTok Global will be created with an 80% American board.

However, this was not all.

A spokesman for TikTok said on Sunday that ByteDance would hold 80 percent of the new company until a planned public offering for the service took place on the U.S. stock market in about a year. Oracle and Walmart would hold a 20 percent stake. (NY Times)

Trump wasn’t happy that the entire ownership (100%) was not transferred to the American companies (Oracle and Walmart in this case) right away. The fact that it would take one more year to transfer full ownership to America is not something he is willing to accept.

Either TikTok U.S. sells entirely to an American company, or it goes home — Trump’s government was loud and clear about that.

China, however, doesn’t seem to want to transfer fully to the U.S., and the deal is yet to see the light of day.

“Based on what I know, Beijing won’t approve current agreement between ByteDance, TikTok’s parent company, and Oracle, Walmart, because the agreement would endanger China’s national security, interests and dignity,” — Global Times, China.

Latest Development as of 27th September 2020 — The US district judge Carl Nichols granted TikTok temporary respite by allowing the app to remain available for download in US app stores. While TikTok has seen a reputational crisis/risk with the entire episode, this decision comes as a welcome respite to continue negotiations with the Trump administration and find a permanent solution. At least, there is no immediate fear of the app not being available for download from the app stores.

Fig. Timeline of events — TikTok Deal

5. Three angles to the deal:

The deal negotiations are on and the world (especially American influencers on TikTok) is hopeful of a final agreement in a few days or weeks from now.

With all that we’ve learned and read so far, it is evident that the deal has many layers. There is more than what meets the eye and in the next part of this post, I will attempt to deep dive into the varying implications of TikTok’s impending acquisition.

I have identified three angles of influence that the TikTok deal has had on the tech industry and beyond- 1. Political Angle, 2. Data Security and Privacy Angle, and 3. Corporate Angle.

There are many more layers to the deal (for example — legal, regulatory, financial among others) that I am not touching on, in this post.

First, the political Angle

The deal has politics written all over it. At a time when the US-China relations have hit rock-bottom, the US is exercising its muscle power to show China who the boss is. Donald Trump has openly blamed China for the outbreak of COVID-19, a pandemic that has halted lives for millions of people across the world for over 6 months now. Not a day passes without Donald Trump and Xi Jinping exchanging barbs, threatening political actions, and communicating the fearlessness which they hold while dealing with the other.

“In early July, both President Trump and Secretary of State Mike Pompeo publicly said they were considering a TikTok ban in the US: Trump said the ban would be a way to punish China over its role in the coronavirus pandemic, while Pompeo cited national security concerns.”

— Business Insider

The Trump administration has launched multiple ads all over social media to communicate the threat that TikTok poses, to Americans. These ads also have a link to a petition that the Trump administration is trying to get as many signatures, on, to ensure that the TikTok ban is democratically supported by its citizens.

Apart from just political power at play, the actions of the US is also motivated from a place of fear and caution. We saw how Russia influenced the election results in the US in 2016. While that intervention worked in Trump’s favor, he definitely knows that China’s involvement in the ongoing U.S. elections will not help his campaign in any way.

“The world today is like remote-controlled warfare. One country can manipulate another country without invading its physical borders.”

-The Social Dilemma, Netflix Documentary

Second, the Data Security and Privacy Angle

As detailed above, there is a considerable risk of data security that the U.S. is worried about. The fact that TikTok’s parent company (ByteDance) operates from China poses a threat of the Chinese-government influence on the use of that data. The U.S. officials do not want its citizens to be monitored or influenced by a Chinese company/government in any way, shape, or form.

However, TikTok has attempted to convince the Trump government that none of TikTok’s data is shared with the Chinese government. While TikTok does not have an official headquarters, its major offices are spread across California. This adds support to TikTok’s argument of the absence of a data security threat since most of TikTok’s data is actually hosted in the U.S. (or at least not exclusively in China).

However, ‘you can’t be too careful’ is what Trump is thinking. He is not buying into that story and believes that the threat is real.

Apart from just where the data should be hosted/stored, there is a bigger problem at play here. It has got less to do with who owns the company and more to do with who is writing and controlling the codes and algorithms for TikTok. The algorithms and codes are arguably the most prized possession of TikTok that makes the app so widely popular.

If Oracle only manages and operates TikTok’s cloud without having any rights to the algorithms, ByteDance/TikTok will still have significant power and potential to influence and inform the opinions and sentiments of its audience. The role of Oracle will only be a pseudo-owner with the real power of the data and insights still remaining with ByteDance/TikTok. As the app becomes deeply embedded in the fabric of the American ecosystem, TikTok will not only be a place to learn the renegade challenge but also a place to form a political and cultural opinion. And without controlling the algorithm and codes, Oracle will not be able to curtail this threat of a Chinese company influencing American opinions.

“China has a multi-prong strategy to win the tech race. It invests in American technology, steals intellectual property and now develops its own technology that is coming into the U.S., as TikTok did with remarkable success in just two years. We don’t have to guess what their intentions are. They have written what their intentions are, and it’s called ‘Made in China 2025, and yet we think we can counter this by banning an app. The forest is on fire, and we are spraying a garden hose on a bush.”

-Amy Zegart, senior fellow at the Hoover Institution and Stanford’s Freeman-Spogli Institute

“There is a potential threat.” To make TikTok tick, the company collects vast amounts of data on Americans’ viewing habits. And the same algorithm that picks your next dance video could, in the future, pick a political video. (There is already more than a whiff of political content on the app.)”

-Brad Smith, President at Microsoft USA

Third the ‘Corporate War’ Angle

The world was talking about Microsoft owning TikTok as if the deal was already through. However, it came as a huge shock when TikTok rejected the big tech’s bid and instead went with Oracle and Walmart. Microsoft issued a statement on Sep 13, announcing that TikTok rejected their bid.

Why did TikTok reject Microsoft’s bid?

While there is no credible information on why Microsoft’s offer was rejected, the recent conditions of the Oracle deal give us some potential reasons as to why Microsoft’s bid may have been rejected.

Here’s my hypothesis- Microsoft must have submitted a deal to buy TikTok operations in the U.S., entirely without allowing any Chinese intervention from day 1 of its operation (should the deal have gone through). TikTok, however, was not happy with this since it is evident that they want to retain the rights to the TikTok algorithm (mentioned in the data security angle above) that makes the company tick 😉

Microsoft was very clear that it would not let ByteDance retain any operational/algorithmic control. This probably did not go down well with TikTok and its parent company, ByteDance who pushed for Chinese ownership and continue to do so even in the Oracle deal.

Oracle, as we have seen has accepted the terms that Microsoft was opposed to. The bargaining power of ByteDance almost led to Oracle agreeing to the terms of the deal without having too much wiggle room to state its own terms. I say ‘almost’ because the deal has not been approved yet. Trump has cited concerns about Chinese ownership and is very clear that the deal will not go through until it is certain that the Chinese company/government will have zero influence on TikTok’s U.S. operations and data.

Looks like Trump is negotiating what Oracle couldn’t.

“According to ByteDance, however, the deal would not involve the sale of TikTok’s valuable algorithm; instead, Oracle would merely be able to monitor the source code for security purposes.”

— The New York Times

Another aspect of the corporate angle is how TikTok pursued and achieved the image of a global brand. It did everything to show that there is almost no Chinese influence on the ownership and day-to-day management of the company. To ensure that TikTok could appeal to a global audience and not just a Chinese one, it appointed Disney’s Head of Streaming (Kevin Mayer) to be the CEO of TikTok. It hired Facebook exec ‘Blake Chandlee’ as the Vice President of global business solutions for TikTok. And many such appointments that give TikTok the necessary global leadership that it needs to cater to its global audience.

An interesting competitive response — Instagram has capitalized on the ban of TikTok in the US by introducing a similar feature as TikTok on their platform (Reels, anyone?). This was done with the intention to lure the influencers that were previously on TikTok to build their audience on Instagram, instead.

“Since Trump first publicly threatened a TikTok ban in early July, American users and creators have started to panic about the app’s disappearance. Other US tech companies, like Facebook, have capitalized on the chaos to try to lure TikTok’s loyal following to their competing platforms.”

The last perspective on the corporate angle is the close relationship that Oracle co-founder, John Ellison, and Donald Trump share. Trump was recently heard confessing his support for Oracle in being a potential acquirer of TikTok’s US operations. This could have played a role in the negotiations to make Oracle the deal winner. However, Oracle has zero experience in customer-centric solutions and it sure will be interesting to see how the operations of this deal, unfold for the months and years after.

The tick-tock on TikTok is currently paused and we’ll learn more as the days go by..

P.S — If you are looking for a nice story form with pictures of the TikTok deal, I would recommend reading this post by Business Insider. It gives you all the need-to-knows about the TikTok episode while making the details digestible.

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Perpetually beta. More at www.ashwinchhabria.com

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Ashwin Chhabria

Ashwin Chhabria

Perpetually beta. More at www.ashwinchhabria.com

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