Why The TikTok Deal Could Blow Up In Its Buyer's Face
A series of under-appreciated risks make acquiring TikTok anything but a sure thing
As TikTok owner Bytedance prepares to sell the app’s U.S. operation, some are already calling the deal a bargain, or the next Instagram. But this acquisition is filled with risks that the popular discussion has largely ignored.
A social app is a delicate piece of merchandise, one that will break in the hands of people who don’t know what to do with it. The leading bidders — Oracle, and a combination of Microsoft and Walmart — are understandably jumping at the chance to buy the hottest app on the planet. But the bear case on TikTok, however unpopular, is well worth considering.
Here are the main factors I’d worry about before signing the contract:
When Marissa Mayer bought Tumblr for $1 billion in May 2013, she said Yahoo would keep its hands off the app. “We won’t screw it up.” she promised, just before screwing it up. Yahoo’s uninvolved approach with Tumblr was the problem, as the app stayed stagnant and grew irrelevant. Without constant reinvention, consumer social apps go the route of Tumblr, Vine, and Myspace. They die. Facebook has only kept itself relevant through constant reinvention, transforming itself from an online directory to a broadcast platform to a series of smaller networks including Groups and messaging threads. TikTok itself is a reinvented version of Music.ly.
To persist, TikTok’s leadership must be willing to take major product gambles instead of simply protecting the asset. But it’s unclear who its leaders will be. Bytedance CEO Zhang Yiming, who led the Music.ly transformation, will not come along with the deal. TikTok CEO Kevin Mayer just quit. Many TikTok employees, who might inspire the app’s next reinvention, won’t come with either. As soon as Oracle makes a marketing automation VP the next head of TikTok, you can start saying goodbye.
TikTok’s recommendation algorithm is its key differentiator. By monitoring how you interact with its videos, the app can quickly figure out what you enjoy and show you more of it — no need to comb through accounts to follow. The Chinese government, however, is restricting the sale of that algorithm, leaving the negotiations in a lurch.
The bidders are reportedly now considering buying TikTok without the algorithm, a sign they’re not approaching this deal with the necessary level of sophistication (they’re also rushing, in part, due to the White House’s deadline). Ultimately, the algorithm is the most important part of the purchase. If the bidders settle for anything less, they are playing themselves.
Competition from Facebook
Mark Zuckerberg doesn’t like to lose. In part because he can’t afford to. When you starting spending time on another social app, you’re not spending time on Facebook. And it’s rare you’ll come back.
Facebook’s TikTok clone — Reels — got off to a shaky start. But it’s hard to imagine it stays inferior for very long. Facebook has a world-class machine learning research operation, one that’s filled with the type of people who build recommendation algorithms for a living, So Reels will catch up with TikTok eventually. (Remember: After Instagram Stories debuted, Snapchat started copying its features back into its own product.)
If you’re Oracle or Microsoft and Walmart, Zuckerberg will be coming after you the moment you sign the deal. Are you ready to go to war?
Then there’s the matter of how these companies will make money from TikTok. The ‘winner’ will say they’ll put TikTok’s algorithms into their current product offering. But as a general rule, PR statements about applying consumer algorithms to enterprise technology are misleading. TikTok’s technology isn’t likely to make a meaningful difference on Walmart.com.
The acquiring company could build some commerce features, like a Buy button, into TikTok. But social commerce is a notoriously difficult business to crack. Twitter, for instance, tried to add a Buy button and shopping pages only to dissolve its entire social commerce team.
Advertising is the other option. But competing with Facebook and Google on data and reach is exceptionally difficult, though not impossible. Amazon is making some inroads here, but it’s only growing due to its massive audience and valuable purchase data. TikTok’s data, while valuable, isn’t the same caliber.
The public will never look at a TikTok acquisition as a brilliant move. At best, they’ll see it as a savvy decision in an unusual situation. For a company like Microsoft, widely admired after its post-Ballmer resurgence, this is risky. The company may lose the goodwill it’s built in recent years and could end up looking like a kid yelling “mine” during recess while holding someone else’s toy.
When Bytedance’s Yiming apologized for content that was “in deviation of socialist core values” in 2018, and pledged to add thousands of censors to satisfy the Chinese government, it was only a matter of time until the U.S. took action against TikTok. An app that influences culture to the extent that TikTok does can’t be so beholden to a rival superpower’s government. The sale option is intriguing, but an outright ban may be the best option for all involved.
This week on the ‘Big Technology’ podcast: Box CEO Aaron Levie
Box CEO Aaron Levie joins the Big Technology podcast this week. He talks about the disconnect between the stock market and main street, what it’s like competing with the tech giants, and explains some of his more puzzling tweets.
Big Technology is off next week, returning week of 9/14. We’ll still have a new podcast and transcript with GV partner M.G. Siegler. Thanks again for reading and I’ll see you soon.