A change of control
Donald Trump has ordered an unspecified ban on transactions with the Chinese owners of consumer apps TikTok and WeChat. The executive ban will take effect in 12 days, setting the deadline as September 15th, 2020. The legality of the decision has been challenged and may lead to Beijing reacting negatively. To continue operations in the US, Trump’s administration left TikTok no other choice but to sell their app to an American company.
TikTok has enjoyed tremendous success since its launch in the Western World as the pandemic led to increased usage of the app. The application is owned and designed by Chinese Company ByteDance. This has led to concerns over data protection and spyware being installed in the app by the Chinese. For this reason, the US may soon join India in banning the application from operating. The US blocking TikTok (unless it’s sold to a non-Chinese company) could lead to more countries following as we have seen with the US banning Huawei and how the UK quickly followed over similar security concerns.
TikTok has tried to retain its position and home market in the US. The company has attempted to instil confidence in their data protection schemes by refusing to share consumer data with Hong Kong completely. The application has also launched an Open Data Transparency Centre in the US. Despite these measures taken up, the Trump administration’s security concerns surrounding the app have continued. The new US laws were constructed in a way to only allow the application to run if it were to a US company.
This could lead to adding into the political tension between US and China and, as a result, negatively impact trading deals. This shift will lead tech businesses to rethink contracting with Chinese-owned companies in the US, as they may fear their closure on the grounds of national security. Thus, making their contracts difficult to perform.
A gap in the market
The group has, accordingly, entered into discussions with Microsoft to potentially sell the application to them so as to continue TikTok’s operation in the US. The software giant is also planning to purchase the service in Canada, Australia and New Zealand. This is an intelligent move as they are able to benefit from the streams of revenue from multiple locations the application is used in. Microsoft has also invited other investors to participate by offering them a minority stake and, in turn, the deal could increase confidence in the use of the app and safeguard the national security of US citizens. This is because Microsoft would also ensure that all the data held by Chinese is transferred to the US.
Purchasing TikTok would yield great benefits for Microsoft to break into a new consumer market and allow the software giant to gain a competitive advantage over Google and Facebook growing platforms. The difficulty of implementing the deal lies in the Trump administration signalling that any purchaser of the entire global business will be ordered to pay a “substantial” fee to the US treasury. There are also problems that surround the structure of the corporation because of the number of stakeholders, government involvement and other minority shareholders in ByteDance. The purchase of the US TikTok entity without the Chinese branches requires separating out the technology from the group which can be time-consuming. It may take approximately a year to implement and address all security concerns and reservations the government has surrounding the app. Microsoft may also find itself stuck in between a crossfire between China and US since Microsoft supports 90% of Chinese computers with Windows. Participating in the “forced” sale of TikTok could result in a weakening of Chinese ties with Microsoft and a loss of revenue as Beijing has already begun to find an alternative to Microsoft.
Does China care?
The prospects of negative consequences may only be faced by Microsoft. The measures taken against TikTok are less likely to anger Beijing when compared to the government’s reaction to the blocking of Huawei’s 5G technology. First, the app is centred around entertainment whilst 5G technology supports China’s mobile technology revolution. Second, TikTok is more difficult to control because of its social nature and so is not of much value to the Chinese government. Third, Bytedance is a relatively newer entity than Huawei that has been operating for 33-years. The US sanctions against Huawei is, therefore, more costly and could hinder the 40% revenue that Huawei receives from international trade. As a result, the forced sale of TikTok to Microsoft is unlikely to generate political tension of the same magnitude.
The bigger picture
What’s the key-take away? the government concerns over security have heightened. The ban of TikTok, followed by a forced sale, should not be seen as an independent event. We could expect to see many more Chinese-tech companies to be asked to do the same as TikTok. This would most likely increase political tension between the US and China and hinder their international trade relationship. China has already promised that governments who participate in banning their technologies (could possibly extend to applications) will face “consequences”. On the other hand, the surplus of Chinese companies for sale will mean that we could expect to see an increase in Mergers & Acquisition transactions. The withdrawal of applications like TikTok from the market also leaves a gap that can be filled by other big-tech companies. Facebook is already taking the lead by trying to design a similar platform to TikTok by the name of “Instagram Reels”. This would aid Facebook in gaining an even greater share in the tech consumer market. Businesses in technologies need to be alert to such changes in the market and be able to respond promptly.