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TikTok buy 'unique deal of a decade opportunity' for Microsoft

This is part 1 of our coverage on recent developments around the short-video sharing app TikTok. Part 2 analyzes the impact of a potential TikTok sale on its parent company.

Though it faces challenges in Washington, analysts are bullish on Microsoft Corporation's intended purchase of video-sharing app TikTok Inc., noting that the deal should bolster the tech company's portfolio and broaden its appeal beyond enterprise software.

Microsoft recently said it will move forward with plans to acquire the U.S. operations of Chinese-owned TikTok, with the goal of completing negotiations with parent-company Beijing Byte Dance Telecommunications Co. Ltd. by Sept. 15. However, the proposed deal has already encountered significant pushback from the Trump administration and several top lawmakers, who claim the app shares data collected from American users with the Chinese government. TikTok has denied that claim.

In spite of these concerns, analysts largely expect the deal to gain regulatory approval and say such a combination will enable TikTok to capitalize on Microsoft's software expertise while boosting Microsoft's social-networking offerings.

Wedbush Securities analyst Daniel Ives in an Aug. 3 report predicted that there is at least a 75% chance the deal will secure approval given that Microsoft has remained largely out of the regulatory spotlight compared to peers. Microsoft has said it would ensure all of the private data of TikTok's American users is transferred to and remains in the U.S. if the deal goes through.

"[Microsoft CEO Satya Nadella] recognizes that, with all the ... tech stalwarts in major regulatory crosshairs, [Microsoft] is the only game in town to go after this asset," Ives wrote. "We believe from a management and board perspective this is a unique deal of a decade opportunity with a price tag that could easily be consummated."

News of a potential Microsoft-TikTok deal comes as the chief executives of Facebook Inc., Inc., Google LLC-parent Alphabet Inc. and Apple Inc. are defending their business practices to lawmakers amid widespread calls to crack down on big tech's market power. The CEOs were called to testify at a July 29 congressional hearing, which aimed to document competition problems online and to assess whether current antitrust laws and enforcement levels are adequate.

Microsoft received the Trump administration's blessing to proceed with TikTok deal talks following an Aug. 2 phone call between Microsoft's CEO and Trump, marking a reversal from the president's prior comments expressing opposition to a deal and calling for an outright ban of TikTok in the U.S. Trump recently told reporters that the TikTok app will be shut down in the U.S. if it is not sold by Sept. 15 to Microsoft or another U.S. company and argued that the U.S. should receive money in return for allowing the deal to proceed. He did not provide specifics on how that plan would be carried out.

While chatter has circulated that Apple might also be eyeing TikTok, an Apple spokesperson said in a recent statement to Axios that the company is not interested.

Michael Goodman, director of television and media strategies at Strategy Analytics, said in an interview that Microsoft's TikTok purchase would help the company develop a stronger consumer strategy by expanding beyond its core focus of providing software services to businesses.

"They get a tremendous amount of information on their users, particularly on the business side, and they certainly get a lot of data from the game side, from the Xbox side, and how consumers are using gaming consoles," Goodman said. "But in the bigger picture of gaming, and particularly millennials and social networks and the consumer side, they've got a bit of a black hole there. TikTok will provide them with an awful lot of information on a generation that they are not that well connected to."

While Goodman conceded such a purchase will bring more scrutiny on Microsoft as large tech companies continue to be probed, he expects the benefits of the deal to outweigh any potential risks.

TikTok counted 315.0 million global downloads in the first quarter of 2020, up from 187.3 million in the same period a year prior, according to SensorTower, which provides research and data on the global app market.

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Daniel Castro — vice president of ITIF, an independent, nonpartisan research group based in Washington, D.C., that focuses on the intersection of technological innovation and public policy — cautioned the Trump administration against banning TikTok, noting the U.S. has the most to lose from such a move.

Millions of Americans already use TikTok to create and share content, and banning the service could put over 1,000 U.S. jobs directly at risk, he said. Castro acknowledged that the app is owned by a Chinese company, but all of its data centers are located outside of China, and "there is no evidence that it presents a national security threat."

"In a week where many policymakers have called for more competition in the tech sector, undermining one of the fastest-growing social media platforms would be a step in the wrong direction," Castro said in a statement.