Complex Made Simple

Understanding the upcoming TikTok sale and the underlying US-China drama

As discussions about a sale of TikTok's US operations continue to escalate, we recap how we got to this point, and the underlying political drama underpinning the whole situation.

On August 7, US President Donald Trump said he will ban TikTok in 45 days if it does not sell its US operations On top of this, he would demand a cut from the sale that would go to the US Treasury Microsoft and Twitter are the most prominent contenders, though TikTok-owner ByteDance seems like it has different plans

When your app becomes one of the world’s most popular almost overnight, you can expect some scrutiny to come your way. That has been the fate of the mega-hit Chinese app TikTok, which derives its origins from many places, mostly the now-extinct Musical.ly lip sync app. 

TikTok reached more than 738 million downloads and grossed nearly $177 million globally—more than five times its 2018 revenue—in 2019, according to Sensor Tower Store Intelligence data. In 2020, the app has around 800 million monthly active users, according to DataReportal, and continues to be one of the most downloaded apps across the world, owing in part to people having been locked in their homes due to the ongoing pandemic. 

Chart: Sensor Tower

These big numbers were bound to attract the attention of government officials and watchdogs, and TikTok has earned the scrutiny of the US President of all people. The app has come under fire by President Donald Trump several times over its Chinese roots, user privacy often cited as the number one concern. US Secretary of State Mike Pompeo claimed in a conversation with Fox News that TikTok was among those “feeding data directly to the Chinese Communist Party”.

Trump threatens TikTok with ban, and wants a cut of potential sale

In fact, President Donald Trump issued executive orders on August 7 that would ban TikTok (as well as Chinese app WeChat) from operating in the US in 45 days if they are not sold by their Chinese-owned parent companies, CNN reported. With a US ban increasingly likely, TikTok is now looking to appease American concern through the sale of its US operations. 

Regardless of who makes the purchase, Trump has insisted that the US Treasury gets a cut, which has raised some questions worldwide. 

TikTok’s US operations “will close down on September 15 unless Microsoft or somebody else is able to buy it and work out a deal, an appropriate deal so the Treasury… of the United States gets a lot of money,” he said, as quoted by BBC. “The United States should get a very large percentage of that price, because we’re making it possible.” 

Given that the sale will be a transaction between two private companies, this has raised a few questions as to why the US government would demand a cut. The Trump administration is known for being particularly critical of Chinese firms, such as the now-blacklisted Huawei, but this sets an interesting precedent. Many see the potential purchase as a political transaction between the US and China, first and foremost, and with such an ultimatum swinging over its head, what choice does TikTok have?

“If the video app doesn’t break away from its Chinese owner, ByteDance, and sell its US operation to Microsoft, Mr Trump will simply ban it – putting TikTok’s access to its 80 million active American users in jeopardy,” BBC correspondent Dearbail Jordan said. “But what makes the situation with TikTok unprecedented is the demand for a cut of the sale price. The US Treasury has not explained how this extraordinary demand for a cut of a private transaction would work.”

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Twitter and Microsoft step up as potential buyers

As to whom the potential buyers are, Twitter and Microsoft are the highest profile bidders so far. 

Twitter is seen as the less likely buyer, as the US company has a market capitalization of close to $30 billion, almost as much as the valuation of TikTok’s assets to be divested, and would need to raise additional capital to fund the deal, two people familiar with the matter told Reuters.

Microsoft, on the other hand, has much deeper pockets. The PC-maker has a market cap of over $1.5 trillion, and could easily make the purchase if need be, even if the company’s recent direction has been more B2B in scope. If it does purchases TikTok, Microsoft could finally have a big player in the mainstream social media market (aside from their more professional LinkedIn platform). 

As per CNN, Microsoft would probably pay around $50 billion to take control of the app’s operations in the United States, Canada, Australia and New Zealand.  

TikTok will fight back

Of final note is that a recent report by the South China Morning Post (SCMP) indicates that acquisition talks for TikTok’s US operations are “unlikely” to end in a deal, citing a source involved with the matter. 

The person said the probability of Microsoft buying TikTok is “not higher than 20 per cent” since the initial price offered by the US software giant was akin to “robbing the owner when his house is on fire”. And the chances of Twitter buying TikTok were said to be even smaller, according to the person, as the US social media platform “just doesn’t have enough money.”

The outcome, it seems, as reported by SCMP quoting sources, will involve ByteDance escalating its legal and public relations battle against the US President executive order to ban the app in the United States unless it is sold.

We’ll have to see in due time how ByteDance comes to terms with President Trump’s demands.

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