Can the owner of TikTok afford to lose its game-changing app?

Can the owner of TikTok afford to lose its game-changing app?

In an attempt to prevent the US from outlawing the social media app, TikTok has launched a lawsuit in the event that its Chinese parent firm refuses to sell its ownership interest.

Congressional attempts to try to separate TikTok from the Beijing-based business ByteDance were motivated by fears that data on millions of Americans may end up in the hands of China.

As stated by TikTok, ByteDance "is not an agent of China or any other country". And ByteDance maintains that it is not a Chinese company, citing the several international investment entities that own 60% of the company.

However, the app has become yet another cause of contention between Beijing and Washington due to its phenomenal popularity in the US.

Every month, almost 170 million Americans use TikTok. This includes almost 60% of teens, who according to the Pew Research Center believe they use it "almost constantly." Over 40% of users in the US claim to regularly get their news from it.

On Tuesday, the business contested a ban on TikTok. The social network business and its millions of American users dubbed the attempted ban a "extraordinary intrusion on free speech rights" in their complaint.

Enforcing a complete ban would be challenging. Although it may seem easier to force ByteDance to sell the software, there are challenges with that approach as well.

Analysts predict Beijing will make every effort to block a sale, to start with. But who will purchase TikTok's US business, which some analysts believe may bring in high to $100 billion (£80.2 billion)?

Lastly, and maybe most importantly, would ByteDance sell its most popular app?

Tick tock

ByteDance, a Chinese startup founded in 2012, had its big break in China with the short video app Douyin. An worldwide version, TikTok, was released a year later. Despite being blocked in China, TikTok amassed a billion subscribers in only five years.

While it is now managed as a limited liability corporation with offices in Singapore and Los Angeles, ByteDance still holds the majority stake. Even though its founders only own 20% of ByteDance, they own the majority share of the business. Institutional investors, including prominent US investment companies like General Atlantic, Susquehanna, and Sequoia Capital, hold around 60% of the company. The remaining twenty percent is held by worldwide workers. Its five-member board includes three Americans.

However, Beijing's recent grasp over private businesses has the US concerned about the extent of the Chinese Communist Party's influence over ByteDance and the data it contains. These worries are not without merit. In a lawsuit filed last year, a former employee of ByteDance claimed that Beijing had used user data from TikTok to spy on pro-democracy demonstrators in Hong Kong in 2018. ByteDance called this claim "baseless."

Does the West truly face a threat from TikTok?

'Bewildered' TikTokers flood the phones of US politicians

As intelligence authorities increasingly alert the public to China's large presence on US land, the US has been taking stronger measures to stop espionage, monitoring, and hacking. Washington outlawed the importation and sale of communication equipment made by five Chinese firms in 2022, including ZTE and Huawei. The mistrust now extends to infrastructure, including military-use Chinese-manufactured cranes that are often seen at US ports.

Beijing has warned that a TikTok ban would "inevitably come back to bite the US" and rejected these worries as paranoid American fears.

In order to address security concerns, TikTok has been sending all US user data via the Texas-based technology firm Oracle since 2022. TikTok has emphasized that US data would be housed on US Oracle servers and will be ringfenced.

In two congressional grilling sessions in less than a year, TikTok's Singaporean CEO Shou Zi Chew played down the app's and his own personal connections to Chinese officials. He became viral for repeatedly emphasizing that he is Singaporean and not Chinese. In addition, he said that TikTok "will continue to do all [they] can, including exercising [their] legal rights" to safeguard the app's accessibility for US users after the House decision. In response to the BBC's inquiries, TikTok referred to his statement.

The US House of Representatives decided in March to give ByteDance six months to sell TikTok to non-Chinese owners, or have the app prohibited in the US, despite ByteDance's efforts to reassure Washington. The similar proposal was adopted by the House and the Senate last month, but this time it was attached to other laws that promised assistance to Taiwan, Israel, and Ukraine. The measure was ultimately passed into law by President Joe Biden.

The updated version offers ByteDance nine months to determine TikTok's future; if a sale seems likely, Mr. Biden may choose to extend the deadline by an additional ninety days.

TikTok valuation: TikTok is difficult to value for a sale.

Although it is a privately held business and does not disclose financial information, sources place its US sales in the range of $16 billion to $20 billion in 2023, accounting for as much as 16% of ByteDance's total revenue.

It should not be difficult to get a $100 billion value in a typical market. Li Jianggan, the head of Momentum Works, a venture capital company located in Singapore, said that "if a transaction does happen, the valuation would take a big hit under the current political risks and lack of liquidity."

Put another way, it would be like a distressed sale and represent further harm to ByteDance's financial position.

Moreover, many predict that arm-twisting ByteDance would fail.

"Instead of making a few billion dollars, it will just shut down [in the US]," said Ling Vey-Sern, an Asia technology advisor at Union Bancaire Privée, a Swiss private bank.

According to Mr. Li, a sale guarantees a more certain conclusion, while a ban would still let it to reappear "when circumstances change."

TikTok wasn't blocked by the US initially; India did so in 2020 because to security concerns. According to Jayanth N Kolla, the founder of the technology advising company Convergence Catalyst, TikTok was able to withstand the ban due to lower profitability in the Indian market, which at the time was comparable in size to the US market.

With around 17% of all users, the US is now TikTok's biggest and most valuable market. "TikTok would lose a significant chunk of its income share in addition to its user base if it were to shut down its US operations. That's a huge loss, Mr. Kolla said.

Is TikTok desired by anyone?

First of all, not many businesses can afford to purchase TikTok. Furthermore, anti-competition regulations may hinder companies like Meta or Alphabet that have sufficient financial resources.

Whether TikTok's "recommendation engine" will be included in the acquisition is the second big issue. The secret sauce of AI that feeds users material is essential to the app's success.

ByteDance said that it was not considering selling its addictive algorithm when the US attempted to compel a sale in 2020. However, offering TikTok for sale without the algorithm would neither satisfy Washington's worries or draw in customers.

According to Mr. Li, the "most contentious" aspect of every transaction is the algorithm. "Any potential acquirer just buying TikTok's user base and content will probably be looking for a heavy discount."

Furthermore, researchers claim that Chinese corporations are significantly more adept at user targeting, making it difficult to replicate. Because they can access such a large market, AI models have access to more data and training opportunities. Additionally, due of lax regulations and the Communist Party's own sophisticated surveillance state, businesses are able to harvest more data.

The issue of how a US-owned TikTok interacts with the app abroad is also left unanswered by a sale. Recall that "imagine if TikTok [users from outside the US] want to send TikToks to the US," said Anupam Chander, a Georgetown Law law professor with expertise in international internet legislation.

"How can we be certain that's not propaganda from China? Do we now need to keep Americans from seeing accounts from other countries? That starts to sound more and more like what China accomplished 25 years ago.