TikTok: time is running out in the war over data

10 August 2020

By Ken Rayner, Verbatim RSMR Model Portfolio Manager

Has anyone else suffered the humiliation of appearing in a TikTok video with their kids recently? It’s become a standard household activity during lockdown. For those who haven’t had the pleasure, TikTok is a Chinese video and music-based social media app launched in 2017 that allows users to create and share short videos with special effects. It was the world’s second most downloaded app in the third quarter of 2019, with an estimated 176 million downloads and is most popular with children under 16.

The Trump administration has accused TikTok of providing data to the Chinese government and has stated that the app poses a national security threat. There is no proof of this allegation and it is fully denied by Beijing and TikTok. The concern is over the potential manipulation of the app’s algorithm and how it could affect the US audience but given that TikTok is most popular with under 16s, it would seem unlikely that voters would be adversely influenced. India, one of TikTok’s largest markets, banned the app in June, citing security concerns and Donald Trump is now considering whether TikTok should be banned in the United States.

To save the business from being curbed by the Trump administration, ByteDance, the Chinese internet giant that owns TikTok, has offered to sell its American operations. The Microsoft Corporation have been in talks to buy TikTok for a potential $30 billion. Donald Trump has subsequently made a demand for a ‘substantial portion’ of the purchase price and has warned that he will ban the app on 15th September if there is no deal. Trump has said ‘The United States Treasury should get a very large percentage of the price, because we’re making it possible’. It looks like TikTok is between a rock and a hard place; if it doesn’t break away from its Chinese owner and sell its US operation to Microsoft, Trump will simply ban it, putting TikTok’s access to its 100 million active American users in jeopardy.

This move by the Trump administration represents another step in the deteriorating relations between Washington and Beijing and tensions are running high. Legal experts have commented that such a demand to secure regulatory approval for a takeover deal would be highly unorthodox and the state-run China Daily newspaper has said that Beijing won’t accept the ‘theft’ of a Chinese technology company. Beijing has also warned that China has ‘plenty of ways to respond if the administration carries out its planned smash and grab’. The US has recently raised concerns over US tech giants being too big but now Trump seems to be trying to make one of them even bigger.

Microsoft is also in talks to buy TikTok’s operations in Canada, Australia, and New Zealand - countries that make up four of the Five Eyes intelligence alliance. The UK is also a member of the alliance and there has been speculation that TikTok could base its global headquarters in London. Given the current stance of the Trump administration, ByteDance has been evaluating the possibility of establishing its global headquarters outside of the US. There is something to be said for the fight over these social media platforms and the long-term winners from a financial point of view. The next phase of our economic expansion will be powered by machine learning and Artificial Intelligence (AI) which will be fuelled in part by vast sets of quality data. The applications to businesses are potentially a key driver of economic growth as we find ever more sophisticated ways to drive consumer spending and increase the efficiency of production and distribution. This intellectual property will doubtlessly become vital as we transition more fully into the digital age.

The commoditisation of personal data could be used for legitimate corporate reasons rather than for nefarious purposes and the US may be looking to keep their data close to home. China is the biggest economy in the world in terms of purchasing power parity and projections are that China will be the biggest economy by 2030 in terms of nominal GDP. Data will power economies forward and China is actively encouraging the growth of companies that hold big data sets. Despite the US calling into question the size and power of Facebook, Amazon, Apple and Google, they seem to be looking to prevent China from surging ahead in the race for digital intelligence.

You could draw the conclusion that the US are trying to insulate their own economy by not letting the Chinese take their data but is the demand for a large proportion of the purchase price with the threat to ban the app in the background reasonable? The BBC’s Today programme has called it ‘almost Mafialike behaviour’; threatening a ban pushing down the price then insisting on getting a cut of the deal does seem quite extraordinary!

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