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Politics risks overshadowing business strategy in TikTok sale talks – analyst


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Politics risks overshadowing business strategy in TikTok sale talks – analyst

As the field of potential bidders for TikTok Inc.'s U.S. operations widens, the political ramifications of the deal are only getting more complicated, at times overshadowing business considerations, analysts said.

The latest to join the fray is reportedly Oracle Corp., which drew praise from President Donald Trump in a recent briefing where reporters asked whether Oracle or Microsoft Corp. would be a better fit for the deal. Microsoft is the only company so far to confirm it is in deal talks with TikTok's owner, Beijing Byte Dance Telecommunications Co. Ltd., though Twitter Inc. is also reportedly interested in TikTok.

When contacted by S&P Global Market Intelligence, a ByteDance spokesperson said the company does not comment on rumors or speculation, while spokespeople from both Twitter and Oracle declined to comment.

The Trump administration is pushing hard for ByteDance to divest TikTok's U.S. operations, giving the Chinese company a mid-November deadline to complete a sale or face a U.S. shutdown. When asked which company he would rather see buy TikTok, Trump said both Microsoft and Oracle as well as "other people" who may be interested in a deal "have to also make sure the United States is well compensated because we're the ones making it possible."

Aynne Kokas, a Kluge fellow at the Library of Congress who specializes in US-China media and tech relations, said in an interview that there are multiple issues with Trump naming specific companies as prospective buyers of TikTok.

"TikTok is a sensitive property and it has a lot of potential upside, but also a lot of potential downside, so it actually risks sinking the deal by foregrounding them as U.S. government-targeted acquisitions," said Kokas. "It puts pressure on the corporations to approach the deal in a different way," she said.

For example, with Trump applying pressure on Microsoft and Oracle, Kokas said it makes it look like the companies do not necessarily have agency in the deal, and that they could potentially face political consequences if talks do not result in an acquisition.

Kokas also said that by naming potential buyers, Trump is shining a spotlight on the potential strengths and weaknesses of the transaction and creating a situation where TikTok looks like an "even more distressed potential asset." That, in turn, creates a public perception that Trump is potentially forcing the named companies to "acquire a distressed asset that he himself distressed," she said.

TikTok recorded 315 million downloads in the first three months of 2020, topping all apps in the world, according to mobile research company Sensor Tower. Total downloads surpassed 2 billion globally. India was TikTok's biggest growth driver with 611 million downloads, followed by China and the U.S., the latter of which had 165 million downloads.

India recently banned TikTok, impacting its third-quarter downloads.

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Despite Trump's assertion that the U.S. Treasury should be compensated in a potential deal, foreign investment experts previously told S&P Global Market Intelligence that they are unaware of any legal authority to do so, barring extreme circumstances.

Kokas said Trump's TikTok comments leave a number of questions unanswered, such as whether he is seeking a payment from ByteDance or a prospective buyer. "It's not even clear how that would work, from my perspective," she said. "Plus, the legalities of it are very, very unclear to seemingly fantastical."

As for which company would be a better strategic fit to acquire TikTok, Kokas said that in terms of business integration, she thinks Oracle makes less sense than Microsoft.

"It's not clear to me how TikTok and Oracle would work together," Kokas said.

Microsoft has demonstrated more interest in consumer platforms, she noted. "They have been trying out different consumer platforms with less success, so this might be a way for them to enter a new market or build business customers at an earlier stage," Kokas said of a potential Microsoft deal.

However, Daniel Elman, a technology analyst at Nucleus Research who is primarily focused on the data analytics space, said while TikTok is "dramatically different" from Oracle's current roster of products and offerings, an acquisition could help Oracle catch up to competitors in the increasingly lucrative cloud computing business.

"Oracle missed the initial wave of cloud customers to Amazon Web Services and Microsoft's Azure and is now forced to play catch-up," Elman said. "TikTok would be a massive feather in the company's cap and would show potential customers that Oracle has the capability to support consumer-facing businesses as well."

Oracle's cloud services and license support segment grew revenue 0.7% year over year to $6.85 billion in its fiscal quarter ended May 31. In comparison, cloud market leader Amazon Web Services grew revenue by 29% year over year to $10.81 billion for the quarter ended in June, while Microsoft's intelligent cloud segment, which also includes server products and enterprise services, reported revenue of $13.37 billion, up 17.4% year over year for the same June quarter.

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Although Oracle does not have any prior experience within the consumer-focused sector, the company has the scale and resources to acquire the talent to support the acquisition, Elman said. Moreover, like Microsoft, Oracle has the cloud infrastructure to support the massive amount of data TikTok's more than 100 million users generate from uploading and streaming videos on the app.

"A company that does not own and operate its own cloud infrastructure would need to spend billions in payments to external cloud vendors to support an ecosystem and user base the size of TikTok's," Elman noted.

He suggested that aside from supplementing its cloud business, Oracle could also use TikTok to enrich its Data Cloud unit, which includes a data collection business that creates customer profiles and sells them to advertisers.

"Oracle would be able to tap TikTok's wealth of consumer data, including granular insights about customer and user behavior, to boost their marketing and advertising efforts," Elman said.