US legislators may vote on a second bill this weekend that puts pressure on ByteDance, the Chinese owner of TikTok, to either sell its US business or face a ban. Concerns about American data potentially ending up in China have prompted efforts in Congress to separate TikTok from its Beijing-based parent company. Despite ByteDance’s claims that it is not affiliated with China, the app’s popularity in the US has intensified tensions between the two countries. Approximately 170 million Americans, including a significant portion of teenagers, are active users of TikTok, with many relying on it for news.
A potential ban on TikTok may face legal challenges as a breach of free speech. Furthermore, it presents difficulties in enforcement and may be unpopular in an election year. While compelling ByteDance to divest the app may seem like a simpler solution, this option also encounters obstacles.
Analysts suggest that Beijing will make every effort to thwart a sale. The question remains: who would be interested in purchasing TikTok’s US operations, which could potentially command a price tag of up to $100 billion (£80.2 billion) according to some estimates?
The most pressing question of all: Would ByteDance be willing to part with its most successful app?
TikTok
Established in 2012 by Chinese entrepreneurs, ByteDance initially found success with the short video app Douyin in China. A year later, it introduced TikTok as its international counterpart. Although TikTok was prohibited in China, it amassed a billion users within five years.
Currently, the company is operated by a limited liability company headquartered in Los Angeles and Singapore, but is fundamentally owned by ByteDance. Despite the fact that the founders only possess a 20% stake in ByteDance, they maintain controlling interest in the company. Approximately 60% is held by institutional investors, including prominent US investment firms such as General Atlantic, Susquehanna, and Sequoia Capital. The remaining 20% is owned by employees across the globe, while three of its five board members are American.
The increasing influence of Beijing over private enterprises in recent years has raised concerns in the US regarding the extent of control exerted by the Chinese Communist Party over ByteDance and the data it possesses. These apprehensions are not without merit. In the previous year, a former employee of ByteDance claimed in a lawsuit that Beijing had gained access to TikTok user data in 2018 for the purpose of surveilling pro-democracy demonstrators in Hong Kong. ByteDance refuted these allegations as “baseless”.
The United States has intensified its crackdown on China’s significant presence within its borders, as intelligence officials increasingly sound the alarm on espionage, surveillance, and cyber intrusions. In 2022, Washington prohibited the sale and import of communication devices from five Chinese companies, including Huawei and ZTE. Presently, suspicions have extended to infrastructure such as Chinese-manufactured cranes commonly used in US ports, including those utilized by the military.
Beijing has dismissed these concerns as American paranoia and has cautioned that a ban on TikTok will “inevitably rebound on the US”.
Since 2022, TikTok has been directing all US user data through the Texas-based technology giant Oracle in response to security apprehensions. TikTok has emphasized that US data will be isolated and stored on Oracle servers within the US.
TikTok’s CEO, Shou Zi Chew, who is Singaporean, faced questioning by Congress on two occasions in less than a year, downplaying the app’s ties to Chinese authorities as well as his personal connections. His repeated emphasis on his Singaporean identity, rather than Chinese, gained widespread attention. Following the House vote, he stated that TikTok “will continue to do all [they] can, including exercising [their] legal rights” to safeguard US users’ access to the app. TikTok referred to his statement in response to inquiries from the BBC.
Despite ByteDance’s efforts to reassure Washington, the US House of Representatives voted in March to provide ByteDance with a six-month ultimatum to sell TikTok to non-Chinese owners or face the app being blocked in the US. This bill is still awaiting Senate approval. On Saturday, they are expected to vote again on the same measure, which is now bundled with other bills offering assistance to Ukraine, Israel, and Taiwan.
The revised version grants ByteDance nine months to determine TikTok’s future. If the Senate approves it and the prospects for a sale appear promising, President Joe Biden can extend the deadline by an additional 90 days. President Biden has already indicated his intention to sign it into law once it reaches his desk.
Putting a price on TikTok
Assigning a value to TikTok for a potential sale presents challenges.
As a privately-held company, it does not disclose financial specifics, but estimates suggest its US revenue ranged from $16 billion to $20 billion in 2023, constituting as much as 16% of ByteDance’s overall revenue.
“In a normal market, attaining a $100 billion valuation wouldn’t be difficult. However, given the current political risks and lack of liquidity, the valuation would suffer a significant blow if a transaction were to occur,” remarked Li Jianggan, the head of the Singapore-based venture capital firm Momentum Works.
In essence, the situation could resemble a distress sale, dealing another blow to ByteDance’s financial performance.
According to analysts, attempting to pressure ByteDance through coercion will likely be ineffective.
“It would rather cease operations in the US than yield to make a few billion dollars,” stated Ling Vey-Sern, an advisor for Asia technology at Swiss private bank Union Bancaire Privée.
A ban would still permit TikTok to re-enter the market “when circumstances change, whereas a sale would result in a more definitive outcome,” Mr. Li remarked.
The US wouldn’t be the first to prohibit TikTok – India banned the app in 2020, citing security concerns. However, TikTok survived the ban because the Indian market, which was then approximately the size of the current US market, was not as lucrative, as per Jayanth N Kolla, founder of technology advisory firm Convergence Catalyst.
The US is presently TikTok’s largest market, representing about 17% of its total user base and generating the most revenue. “If TikTok were to lose its US operations, it would not only lose its user base but also a significant portion of its revenue. That would be a substantial setback,” Mr. Kolla noted.
Who wants TikTok?
There are few companies with the financial capacity to acquire TikTok, and those with substantial resources, such as Meta or Alphabet, could encounter obstacles due to antitrust regulations.
Another significant hurdle is whether the deal would encompass TikTok’s essential “recommendation engine.” This AI-powered algorithm, which drives content delivery to users, is pivotal to the app’s success.
When the US previously attempted to compel a sale in 2020, ByteDance stated that the proprietary algorithm, which it owns, was not up for discussion. However, selling TikTok without the algorithm would not assuage Washington’s concerns nor attract potential buyers.
According to Mr. Li, the algorithm is the “most contentious” aspect of any potential deal. “Any prospective buyer seeking to acquire TikTok’s user base and content alone would likely be expecting a significant discount.”
Replicating it is challenging because analysts suggest that companies operating in China are significantly more adept at targeting users. They have access to a vast market, providing AI models with more data and opportunities to improve. Moreover, these companies can gather extensive data due to lax regulations and the operation of a sophisticated surveillance state by the Communist Party.
Furthermore, a potential sale raises questions about how a US-owned TikTok would interact with the app in other regions. “Imagine if TikTok users from outside the US want to share content with American users,” remarked Anupam Chander, a law professor specializing in global tech regulation at Georgetown Law.
“How can we ensure that it isn’t Chinese propaganda? Would we need to restrict foreign accounts from being visible to Americans? This starts to resemble what China did a quarter-century ago.”
