Can TikTok owners afford to lose their killer app?

U.S. lawmakers could vote this weekend on the second bill in as many months that would force TikTok’s Chinese owner ByteDance to make a tough choice: sell its U.S. operations or ban it.

Congress is pushing ahead with efforts to separate TikTok from the Beijing-based company over concerns that data about millions of Americans could end up in the hands of China.

TikTok said ByteDance is “not an agency of China or any other country.” And ByteDance insists it is not a Chinese company, noting that 60% of its shares are owned by a number of global investment firms.

But the app’s extraordinary success in the United States has sparked a new flashpoint between Washington and China.

Approximately 170 million Americans spend at least an hour a day swiping on TikTok. That includes about six in 10 teens, five of whom say they take it “almost all the time,” according to the Pew Research Center. More than 40% of US users say it is their regular news source.

TikTok’s ban could be challenged as a violation of free speech. It would be difficult to police, and could be unfavorable in an election year. It would seem easier to force ByteDance to sell the app, but there are obstacles to that option as well.

For one, analysts say the Chinese government will do everything in its power to nullify the sale. But who will buy TikTok’s US operations, which by some estimates could generate up to $100bn (£80.2bn) in revenue?

And the biggest question is, will ByteDance sell the most successful apps?

Founded by Chinese entrepreneurs in 2012, ByteDance first became a huge hit in China with its short video app Douyin. A year later, he launched an international version of TikTok. TikTok was banned in China but gained 1 billion users in five years.

It is currently operated by a limited liability company based in Los Angeles and Singapore, but is effectively owned by ByteDance. Although the founders only own 20% of ByteDance’s shares, they are in control of the company. About 60% of the stock is owned by institutional investors, including major U.S. investment firms such as General Atlantic, Susquehanna, and Sequoia Capital. The remaining 20% ​​of his company will be owned by employees around the world. Three of the five board members are American.

But the Chinese government’s control over private companies in recent years has made the United States concerned about how much control the Chinese Communist Party has over ByteDance and the data it holds. These concerns are not unfounded. Last year, a former ByteDance employee claimed in a lawsuit that the Chinese government accessed TikTok user data to spy on Hong Kong pro-democracy protesters in 2018, a claim ByteDance called “baseless.” ‘ was rejected.

The United States is cracking down on China’s vast footprint on its soil as intelligence officials increasingly warn against espionage, surveillance and hacking. In 2022, the US government banned the sale and import of telecommunications equipment from five Chinese companies, including Huawei and ZTE. Suspicions now extend to infrastructure such as Chinese-made cranes commonly used in U.S. ports, including those used by the military.

The Chinese government has dismissed such concerns as U.S. paranoia and warned that a ban on TikTok “will inevitably come back to haunt the United States.”

TikTok’s Singaporean CEO Shou Zi Chew has been hounded by Congress twice in less than a year for downplaying the app’s ties and personal ties to Chinese authorities. His repeated reminders that he is Singaporean, not Chinese, went viral.and he said after the House vote. TikTok “will continue to do everything” [they] Can be done including exercise [their] TikTok pointed to his remarks in response to a question from the BBC.

Despite ByteDance’s attempts to reassure Washington, the U.S. House of Representatives in March gave ByteDance six months to sell TikTok to non-Chinese owners or sell it within the United States. passed the decision to block the app. The bill still awaits Senate approval. The same bill is scheduled to be voted on again on Saturday, except this time it is bundled with other bills pledging aid to Ukraine, Israel and Taiwan.

Under the new version, ByteDance has nine months to decide TikTok’s fate, but if the Senate passes and a potential sale looks promising, President Joe Biden could push the deadline even further. It may be extended for 90 days. Biden has already said he will sign the bill into law as soon as it reaches his desk.

Valuing TikTok for sales is difficult.

As a privately held company, the company doesn’t release financial details, but reports say its U.S. sales in 2023 will be between $16 billion and $20 billion, or 16% of ByteDance’s sales.

“In normal markets, a $100 billion valuation would not be difficult to obtain. However, given the current political risks and lack of liquidity, the valuation would take a significant hit if the deal were to materialize.” said Li Jianggan. He runs Momentum Works, a venture capital firm based in Singapore.

In other words, this is akin to a fire sale, which will further hurt ByteDance’s bottom line.

And the arm-twisting ByteDance won’t work, analysts say.

“Just shut down. [in the US] rather than making billions of dollars,” said Lynn Veissern, Asia technology advisor at Swiss private bank Union Bancare Prive.

Lee said the ban “allows for reinstatement if circumstances change, but a sale would mean a clearer outcome.”

The US is not the first to block TikTok. India banned the app in 2020, citing security concerns. But TikTok survived the ban because the Indian market, which was about the same size as the U.S. market today, wasn’t very profitable at the time, said Jayanth N., founder of technology advisory firm Convergence Catalyst. Cora says.

The US is currently TikTok’s largest market, accounting for about 17% of its total users and its highest revenue market. “If TikTok were to lose its U.S. business, it would not only lose its user base, it would lose a large portion of its revenue pie. That would be an immeasurable loss,” Cora said.

First, not many companies can afford to buy TikTok. And well-funded companies like Meta and Alphabet could be hampered by anti-competition laws.

Another big hurdle is whether the deal includes TikTok’s so-called recommendation engine. The AI-driven secret sauce of delivering content to your users is critical to your app’s success.

The last time the U.S. tried to force a sale in 2020, ByteDance said its addictive algorithms were off the table. But selling TikTok without an algorithm won’t allay Washington’s concerns or attract buyers.

Lee said algorithms are the “most contentious” part of any trading. “A potential acquirer who just wants to buy TikTok’s user base and content will likely seek a deep discount.”

And that will be difficult to replicate because analysts say these companies operating in China are much better at targeting users. Since AI has a huge market to tap into, AI models should have more information and practice to get better. With weaker regulations and the Community Party itself running a highly surveillance state, companies can also mine more data.

The sale also leaves open the question of how U.S.-owned TikTok will work with the app in other regions. “Imagine TikTok [users from outside the US] We want to bring TikTok to the United States,” said Anupam Chander, a law professor at Georgetown Law who specializes in global technology regulation.

“How do we know this isn’t Chinese propaganda? Do we need to prevent foreign accounts from being seen by Americans now? Is that what China did a quarter of a century ago? They are starting to look quite similar.”