TikTok and Microsoft’s Clock
I mean, WTF?
Just when you thought the TikTok situation couldn’t get anymore strange and dramatic, Microsoft publishes a corporate blog post today that is nothing short of remarkable. To be clear, the content of the post is rather bland, but the fact that it exists is fascinating. As is its framing.
Just read the thing. It’s almost like a letter of fealty. It reads like something a Chinese company might write under the Chinese government. To that end, it reads as if it was written at the behest of the government. Maybe that’s too strong. Maybe? How about: “Hey Satya, great conversation today. It sure would be nice if you could outline what we discussed publicly.” That kind of thing.
Microsoft fully appreciates the importance of addressing the President’s concerns. It is committed to acquiring TikTok subject to a complete security review and providing proper economic benefits to the United States, including the United States Treasury.
This is an actual paragraph in the post. The second paragraph, no less. What on Earth?! Is Treasury getting a finder’s fee here? The next paragraph:
Microsoft will move quickly to pursue discussions with TikTok’s parent company, ByteDance, in a matter of weeks, and in any event completing these discussions no later than September 15, 2020. During this process, Microsoft looks forward to continuing dialogue with the United States Government, including with the President.
That is… a very specific date? That is… a very specific third reference to the President? In three paragraphs. Wink. Wink.
I mean, clearly Microsoft wants this deal to go through. And at the end of the day, I suppose that’s all that will matter, no matter how embarrassing the blog post may be. Still, this is a private enterprise, right? I’m kidding but I’m also not. Read that post again!
Microsoft appreciates the U.S. Government’s and President Trump’s personal involvement as it continues to develop strong security protections for the country.
Folks, the secret decoder ring comes in the box! Anyway, aside from knees having been bent, and rings having been kissed, this is a very strange deal. To say the least…
On the surface, it may look like an attempt to buy the hottest startup in the world. The price may be massive, but that part actually makes sense. The prices were viewed as massive when Google bought YouTube and when Facebook bought Instagram, now they seem like absolute steals — so much so that the very same government above may now view those deals as literal steals as well. $30B or $40B or $50B may be a lot more than $1B-$2B, but times have changed. And if you do view TikTok as the next Instagram or YouTube — or even the next Facebook or Google, even $50B will be a great deal, of course.
But there are caveats galore here.
First and foremost, Microsoft would not be buying all of TikTok, just the US, Canadian, Australian, and New Zealand operations — something the company notes themselves. Why these four? It’s not entirely clear. They’re all English speaking, of course. But the UK isn’t listed, for example. It’s going to be very, very strange to have a massive network that is bifurcated between two different owners. Are they going to be able to interact? Will users in other countries beyond those listed be able to download the US version of TikTok?
If not, that would sure seem to negate quite a bit of value for both sides of this equation. The real question is: how much? And even bigger: does such an unnatural decoupling fundamentally change what TikTok is in some way?
If China split the internet in two, the US may have just split it again. This is obviously not a great precedent.
What about India? It’s not stated in the statement or any of the reports. But even before the US situation escalated, India was the first country to ban TikTok. It is also the country where the service has the most users (TikTok doesn’t operate in China itself, ByteDance has another service, Douyin, which fills that role). India also had a problem with Chinese ownership, of course, so perhaps that is in play here and just not stated? It would seemingly make a lot of sense if this was part of Microsoft’s plan.¹ But again, it’s not stated.
If Microsoft is able to buy the service and users of just the countries listed, how are they going to separate them from the rest of TikTok? Understatement: this sounds extremely complicated. How long will it take to do that? Weeks? Months? Will it operate as-is until that’s completed?
While everyone keeps talking about the idea of China potentially having access to US TikTok user data, count me in the camp with Ben Thompson — this is at least somewhat of a red herring. It’s less the input we should be worried about here, and more the output.
That is, TikTok’s true key is not what you may think it is because it is often bucketed with other social media apps. It’s not really a social media app at all. It’s a content network ruled by an algorithm. You know, like Netflix, but far more viral thanks to the length of the content and the UGC element. This also makes it far more dangerous if, say, a country wanted to tweak the dials to serve up certain types of content at certain times. Or hide other types.
That’s the real issue here. The WSJ article on the deal has the following almost in passing:
The proposed transaction gained the blessing of senior Trump officials, including Treasury Secretary Steven Mnuchin, who saw value in an American company getting access to sophisticated TikTok algorithms that decide what videos users are served.
I mean, would Microsoft gain access to those algorithms? By most accounts, they’re tied to the other services ByteDance runs as well. Again, they’re the key. The secret sauce. Even if ByteDance agrees to give them over (and they’ve started saying they’ll be more transparent with regard to them, in light of this fiasco) is the Chinese government going to let them? Especially in light of the US government intervention here? Why would they do everyone this solid?
And if Microsoft doesn’t get those algorithms, again, I go back to: is TikTok still TikTok? Or is it just a fun, but decidedly less addictive video service? And even if they do get the algorithms, can Microsoft maintain and evolve them from here? Presumably they won’t be allowed to work with ByteDance on those!
Lastly, everyone — including Microsoft themselves — are noting that other investors may be a part of this transaction. What is that about?² Is it simply trying to placate the current US investors in ByteDance who aren’t happy enough with the $30B or $40B or $50B price? Perhaps. But if Microsoft is buying the vast majority of the company, what is the exit strategy for those other investors? Is there some notion that Microsoft will spin-out and take TikTok public at some point in the future? Or just that they’ll buy out the other investors at a future date at a set valuation at the time? All of these things are possible. It’s just sort of weird that this is a stated part of the deal.
Actually, reading this over again, there’s nothing about this deal that isn’t weird.
Again, I get it. We all get it. ByteDance is in a tricky spot. TikTok is in an even worse one. The US is playing hardball. And Microsoft is the white knight. Have we mentioned how odd it is that this is all happening not even a week after all of Microsoft’s big tech peers were testifying in front of Congress about antitrust and competitive issues? And that Microsoft, of course, wasn’t there? Even though they’re the second (or third or fourth, depending on the day) largest company in the world)? Even though they’ve… been through the antitrust ringer before?
If last week’s absence of Microsoft was sort of a joke, this is the company laughing all the way to the bank… to pull out tens of billions of dollars to do a deal. It’s laughing in the face of the competition who are the only other companies which could afford to buy TikTok, and would probably want to compete for it, but very obviously cannot in the current environment.³ Not only can Microsoft do this deal, again, it is being government sanctioned. Like I said, weird.
As is the very idea of Microsoft buying the hottest consumer company in the world. Yes, they did something in a tangential vein before with Mojang, makers of Minecraft. But that seemed to make more sense in the context of Xbox. And it’s not clear how that is actually going. Mixer, their latest consumer foray is… well, dead.⁴ As is nearly everything else Microsoft has tried in consumer beyond the aforementioned Xbox. And even there, it’s a distant second to Sony. Retail? Yikes. Windows Phone? Poof. ZUNE!!!
So… is this some sort of Hail Mary to get back in the game? Is it about Xbox? HoloLens? Mobile? Their cloud prospects? Bolstering the advertising business? How do you do, fellow kids? All of those? Something else? Or just the most opportunistic deal ever, with the price tag to boot?
Something about this whole thing feels off. Very, very, very off. Unsettling, in a way. Actually, in quite a few ways. When you consider the highest level: that one of the largest companies in the world is buying one of the hottest startups in the world, that would seemingly make sense in a vacuum. But we don’t live in a vacuum. Though Microsoft may need one after this mess is over.
¹ Satya Nadella was born in India, of course.
² Update: Bloomberg is reporting that the inclusion of the investors element is very specifically to note that it would only be American investors involved here. Still, it’s not clear why any investors need to be involved here. Unless they’re refusing to sell and have some ability to block a deal?
³ Here’s where I will note that GV, where I’m a partner, is a sister company to Google under Alphabet, one of those peer companies to Microsoft. My views are my own, of course.
⁴ Dead after spending a massive amount of money to lure creator talent and eyeballs to their service. That wouldn’t seem to augur well here…
