Tik Tok deal with Oracle mired in uncertainty as US deadline looms

Early on Monday came the news that Oracle, Donald Trump’s sole darling in Silicon Valley, had occupied pole position — beating arch rival Microsoft — in the battle to take control of the wildly popular Chinese app TikTok’s operations in the United States. But it may yet prove a pyrrhic victory.

A day later it emerged that this was to be no outright sale. Instead, TikTok’s owner ByteDance, under pressure from the Trump administration’s vague warnings about “security threats” and the safety of data of US citizens, would offer Oracle a ringside seat in the company’s US operations to oversee the working of the prized software. Oracle would be responsible for the firewall between the data of US users and ByteDance.

There has been no word yet whether the deal would result in the payment of a cut to the US Treasury, a demand made by Trump while setting the deadline for the forced sale in August, and considered in business circles to be a preposterous demand. The Financial Times reported that Oracle may only have a minority stake in the entity that would own TikTok in the US.

Not a done deal yet

By no means is it a done deal. The agreement is be reviewed by the Committee on Foreign Investment in the U.S. (Cfius), under the auspices of the US Treasury. A separate review would also be undertaken to rule out “national security concerns”.

Even if the Treasury approves the deal, it is by no means certain that the Chinese Government will give its nod. That is no small matter for ByteDance, the Chinese internet technology company that owns TikTok. After all, TikTok’s Chinese version, Douyin, is a hugely popular money spinner for ByteDance in its home base.

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The choice of Oracle by ByteDance in what is widely regarded as a Trump-enforced shotgun marriage is seen by commentators as being ByteDance’s desperate effort to appease Trump. The Wall Street Journal reported that Oracle co-founder Larry Ellison hosted a fundraiser for the US President Trump earlier this year at his house. Chief Executive Safra Catz had also served on the executive committee of Trump’s transition team in 2016.

In August as he turned the heat on TikTok, Trump said: “I think Oracle is a great company, and I think its owner is a tremendous guy,” Trump said. “I think that Oracle would be certainly somebody (sic) that could handle it,” he remarked.

But there remain many imponderables that could yet derail the deal. For one, belying initial expectations that TikTok would be sold outright by ByteDance to an American suitor, it is now becoming clear that what is now on offer is only a “technology partnership”.

Moreover, the deal would also allow for other investors in TikTok, a short video app, to own a part of the newly structured entity. According to The Wall Street Journal ByteDance’s “existing investors, including U.S. investment firms Sequoia Capital and General Atlantic, will get stakes in the venture as part of the deal.”

According to the The Wall Street Journal ByteDance has been seeking $30 billion for TikTok’s US operations. No details of the financial side of the transaction have been revealed by the parties concerned.

The Chinese trump card

But an even more important caveat to the deal that is hurtling towards a tight deadline set by Trump is the fact that TikTok, in order to be in compliance of Chinese regulations, may keep key technologies, particularly the algorithms that make the app so unique, outside the deal.

TikTok’s attractiveness to young audiences, and its runaway success in markets as far apart as India and the US, has primarily been its unique algorithm that determines what video to serve next to its users.

August 28 the Chinese Government unleashed its trump card by issuing an updated set of rules governing export of technologies it considered sensitive. The following day The New York Times, quoting the Chinese news agency Xinhua, said a Chinese academic had interpreted the amended rules to mean that ByteDance would need a license from the Chinese government to proceed with a sale of the company’s assets inclusive of its proprietary technologies.

Specifically, of relevance to the TikTok sale, the modified rules forbade or restricted sale of  technologies relating to “personalised information recommendation services based on data analysis.” Although this did not immediately imply a ban on technologies possessed by TikTok, they nevertheless place restrictions on when, where and who can access those technologies. As expected, this is exactly what has happened.

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The Hong Kong-based South China Morning Post quoted a ByteDance source as saying, “The car can be sold, but not the engine,” implying that the company may be sold but not its algorithms. The media outlet quoted a ByteDance source as saying that a potential acquirer of TikTok may buy the app but would have to develop afresh new algorithms for use in the US market. It quoted sources as categorically insisting that ByteDance “will not hand out source code to any US buyer.” The Post reported that the company had already notified American authorities and bidders of its decision. It quoted a Chinese government official as saying: “ByteDance can sell all of TikTok but the algorithms”.

TikTok’s chutzpah

TikTok has taken the social media landscape, hitherto dominated by Facebook, YouTube (owned by Google) and Twitter, by storm. TikTok is reportedly used by nearly 700 million users, of which 100 million are in the U.S. ByteDance bought musical.ly, a lip-syncing app in 2017 for $1 billion. It later rebranded it to create TikTok.

That Microsoft, which was the first to throw its hat in the ring to buy TikTok, had lost the race was surprising. It was widely regarded as a front-runner because of the massive cash chest at its disposal.

In contrast, Oracle, which recently lost a $10 billion contract for the Pentagon’s cloud services to Microsoft, was a surprising late entrant to the fray.

Moreover, Walmart had teamed up with Microsoft in an unlikely combination for acquiring a tech company’s assets. But on September 13, after Microsoft’s exit, The Wall Street Journal reported that Walmart may be switching camps by joining Oracle’s bid. It is not clear whether the retail giant will be an investor in the restructured entity that will control TikTok’s US operations.

Oracle is best known for its pioneering work in the enterprise software space. It may be hoping to use the TikTok to boost its own its cloud computing business. Microsoft has a thin presence in the mass consumer market, and an even thinner presence in the social media space, which offers tremendous scope for revenues through advertisements.

But if Microsoft has a feeble presence in the social media space — LinkedIn being one after its acquisition — Oracle has been almost non-existent. What is however clear is that both companies would have benefited tremendously by bringing the platform as a client to their cloud offerings.

Trump had set a deadline of September 15 before which he said TikTok would need to be sold to an American company. Later, in a move that caused much confusion, he issued an Executive Order on August 6, which gave ByteDance 45 days to transfer TikTok’s operations in the US to an American entity; this effectively gave the Chinese company time till September 20 to complete the sale process. TikTok has filed a lawsuit against the executive order, alleging violation of due process.

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Trump’s aggressive move has been seen by Chinese commentators as forcing the sale of a hugely successful company at bargain-basement prices.

Without the app’s algorithm any American company buying TikTok will be acquiring a dud asset. It is not difficult to see why. The app’s runaway success has rested on its ability to serve each user content that is apparently curated to individual user preferences.

The unique ability to deliver personalised content rests on ByteDance’s expertise and mastery of artificial intelligence and deep learning. The app is thus able to “learn” the individual tastes and preferences of an individual and then use those in determining what and how it serves the next video to that user. The focus in the media that this is merely a meme video app for kids misses the role of sophisticated technologies that lie at the heart of the app.

The Financial Times quoted Theresa Payton, a cyber security expert, as saying: ““This is the sale that is not a sale, but kind of gives everyone a face-saving moment.” That is a far cry from the Trump Administration’s initial demand that TikTok be sold outright to an American company.