A Closer Look at TikTok

TikTok is enjoying a rising profile, with an ever-growing domestic user base now believed to number 100 million people in the US. The company’s success, however, has also raised the eyebrows of American politicians on both sides of the aisle, as part of broader concerns about China’s burgeoning prominence in the global technology sector. The video app, which is owned by Chinese company ByteDance, has since drawn the attention of the Trump administration and prompted an executive order restricting the company’s US operations.

TikTok’s US dilemma may have resolution in sight – recent news reports indicate legacy tech giant Oracle could become a “trusted technology provider” for TikTok’s US operations. What could the deal mean for TikTok, and what does it signal about broader US and Chinese relations?

TikTok Tension

TikTok is one of several Chinese tech companies enjoying worldwide success, cementing its status as a source of concern among US politicians. Present relations between the US and China are tense at best – the result of a trade war, battles to establish a dominant foothold in the market for nascent or popular technologies, and other disagreements. Intrinsic to the fears about TikTok are questions about security of American user data: TikTok is beholden to Chinese law, and the Chinese government’s track record of censorship, content manipulation, and possible foreign influence campaigns prompted a letter from Senators Tom Cotton (R-Ark.) and Chuck Schumer (D-N.Y.), who believe enhanced scrutiny of the company is warranted.

Facebook founder Mark Zuckerberg helped fan the flames in Washington over the past year, though perhaps for different reasons: a chance to deflect scrutiny on his own company while maintaining social media market share. Zuckerberg painted TikTok as “at odds with American values” – concerns he “reiterated… during [a] White House dinner with [President] Trump… Jared Kushner, and Facebook board member Peter Thiel.” Additionally, Zuckerberg “reached out to members of Congress who are tough on China… [to ask] them why TikTok should be allowed to operate in the US, when many American companies, including his own, can’t operate in China.”

Executive Order and a Potential Sale

While it is unclear how much influence Zuckerberg’s comments had on the proceedings, the combination of factors led the Trump administration to announce “sweeping restrictions on… Tik Tok and WeChat” as of August 6, 2020. The executive orders “cited national security concerns to bar any transactions with WeChat or TikTok by any person or involving any property subject to the jurisdiction of the United States. The order essentially [set] a 45-day deadline [of September 20] for an acquisition of TikTok.”

TikTok voiced their unhappiness with the ruling in a statement, announcing they would “pursue all remedies available to us in order to ensure the rule of law is not discarded,” while “Chinese Ministry of Foreign Affairs spokesman Wang Wenbin called the executive orders a ‘nakedly hegemonic act’ and added, ‘on the pretext of national security, the U.S. frequently abuses national power and unreasonably suppresses relevant enterprises.’” The Chinese government then revised rules relating to technology transfers with foreign buyers, requiring a license to sell what it deems “sensitive” technologies.

Amid this chaotic backdrop, Microsoft was moving to purchase “TikTok’s service in the United States, Canada, Australia and New Zealand.” With “the deepest pockets to buy TikTok’s U.S. operations from its parent company, ByteDance, and with the greatest ability to address national security concerns that led to Mr. Trump’s order,” it seemed to be a logical choice – until ByteDance informed the company “they would not be selling TikTok’s US operations to Microsoft.”

Oracle Moves In

Instead of a true purchase, TikTok announced on September 13 that global software firm Oracle would be their “trusted technology partner.” According to sources, the proposal “would invest in a newly restructured global TikTok, with operations based in the U.S… Bytedance would maintain majority ownership and at least three shareholders in TikTok’s Chinese parent company – General Atlantic, Sequoia Capital and Coatue Management – would take stakes in the new business.” Complete details, however, have not been revealed.

The deal has yet to receive official approval, but optics look good for the tech company – Oracle founder Larry Ellison has held fundraisers for the president, while CEO Safra Catz “served on the president’s transition team and has frequently visited the White House.”

Positive relationships with the White House or no, Oracle has another factor working in its favor: their proposal “does not appear to involve TikTok’s coveted artificial intelligence algorithm, according to Chinese state-run media CGTN, who cited anonymous sources saying that ByteDance will not give the app’s ‘source code’ to any US buyers.” Dan Ives, an analyst at Wedbush Securities, told CNN that he “believe[s] Microsoft would only buy TikTok with its core algorithm which the Chinese government and ByteDance was not willing to budge.” The Oracle deal would be the best of both worlds to Beijing: TikTok would instead retain its vital intellectual property while also “get[ting] an infusion of cash for a big Chinese tech company.”

What Comes Next?

As Oracle and TikTok await White House approval, “China skeptics in both parties” are voicing criticism of a deal that “doesn’t sever TikTok from ByteDance entirely.” Senator Josh Hawley (R-Mo.) “urged [Secretary of the Treasury Stephen Mnuchin] to reject ByteDance’s proposal” and seek a full sale – or ban the app entirely – instead. Senator Marco Rubio (R-Fl.) announced his own concerns, along with five other senators, citing opposition “to any deal that would allow China-based or controlled entities to retain, control or modify the code or algorithms that operate any U.S.-based version of TikTok.”

TikTok’s saga is only the latest cross-sector salvo between China and the United States. As technology further cements its global importance, it figures to be far from the last flashpoint as the two nations battle for economic supremacy.

Quandary Peak Research

Based in Los Angeles, Quandary Peak Research provides software litigation consulting and expert witness services. We rapidly analyze large code bases, design documents, performance and usage statistics, and other data to answer technical questions about the structure and behavior of software systems.