Analysis: Are the synergies in place for a successful Microsoft-TikTok deal?

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Microsoft is actively pushing ahead in its discussions to purchase TikTok in the US, following a conversation between CEO Satya Nadella (pictured) and US President Donald Trump. The company said in a blog post that together with ByteDance, TikTok's parent company, both parties have provided notice of their intent to explore a preliminary proposal that would involve a purchase of the TikTok service in the US, Canada, Australia, and New Zealand. This would result in Microsoft owning and operating TikTok in these markets. Microsoft may invite other American investors to participate on a minority basis in this purchase.

Microsoft added that it will move quickly to pursue discussions with ByteDance "in a matter of weeks" and in any event completing these discussions no later than 15 September. "During this process, Microsoft looks forward to continuing dialogue with the US government, including with the President," the company said. The new operating structure would build on the experience TikTok users currently love, while adding world-class security, privacy, and digital safety protections. The operating model for the service would be built to ensure transparency to users as well as appropriate security oversight by governments in these countries.

Among other measures, Microsoft would ensure that all private data of TikTok’s American users is transferred to and remains in the US. Microsoft added:

To the extent that any such data is currently stored or backed-up outside the US, Microsoft would ensure that this data is deleted from servers outside the country after it is transferred.

The company said it fully appreciates the importance of addressing the President’s concerns. It is committed also to acquiring TikTok subject to a complete security review and providing proper economic benefits to the US, including the US Treasury. As a result of the announcement, Microsoft's share price rose more than 5%, CNBC said.

This came shortly after Microsoft and ByteDance halted negotiations to buy TikTok following Trump voicing opposition of the deal, the Wall Street Journal reported quoting its sources. Trump said last Friday that he would sign an executive order as soon as 1 August to ban TikTok in the country over privacy concerns, multiple media outlets including Reuters reported. According to WSJ, Trump's statements led to TikTok making "additional concessions", including adding as many as 10,000 jobs in the US over the next three years. Additionally, Reuters also reported that ByteDance has agreed to completely divest its US operations of TikTok.

What would TikTok bring to the Microsoft business?

This is not Microsoft's first foray into the networking world, having acquired LinkedIn for US$26.2 billion in 2016, as it looked to integrate the platform with Microsoft's enterprise software such as Office 365. According to Reuters, the LinkedIn acquisition was Nadella's "biggest and riskiest", with the company's shares falling 3% when it was announced. Analysts previously showed their concern regarding slowing revenue growth and an expected cap on usage. However, Microsoft has since dodged antitrust and privacy scrutiny with its "cautious approach" to connecting LinkedIn to its other products, such as Outlook, Reuters added. Other prominent buys for Microsoft include Skype for US$8.5 billion in 2011 and Hotmail in 1997.

Microsoft's potential purchase of TikTok is "a significant move" as it strengthens Microsoft’s position in the social media space, Prashant Kumar, founder and senior partner at Entropia, said. This is especially so against Google, as TikTok as the defining Gen Z platform is "a huge threat" to the likes of Google-owned YouTube, he added. The acquisition also allows Microsoft to tap into powerful consumer data that can be leveraged for further product extensions and scalability.

Kumar said while TikTok is "a great complement" to LinkedIn, the former is still a platform in its early stages despite its vast scale and explosive rise. "There could be huge opportunities for social commerce and socially mediated OTT style paid entertainment, that could disrupt the current OTT space," he added.

But commenting on Microsoft's track record, Kumar added:

The only worry is Microsoft’s record in handling consumer-centric entertainment businesses has been quite underwhelming historically.

"There are many who believe that Hotmail, MSN, Skype, Xbox, LinkedIn, Minecraft and several other acquisitions or inventions of Microsoft, would have had a much bigger impact than they did if Microsoft understood people as well as it does businesses and technology. If the deal goes through, Microsoft will need to save TikTok by letting people who understand the space have a free rein," he explained.

Similarly, Ranga Somanathan, industry veteran and former CEO of Omnicom Media Group Singapore and Malaysia, also said the possible TikTok acquisition gives Microsoft the potential to help it "step up" in the social content space. "Microsoft has been very successful in B2B business and has had some false starts in direct to consumer business, especially in the area of digital platforms. It will be exciting to see how its gaming practice (Xbox), mixed reality aspirations (Minecraft) and social content investment can come together to create a breakthrough in experience for consumers," he added.

On a broader level, Somanathan explained that if TikTok were to exit the US market, its revenues "will get decimated" and the whole ecosystem of content creators and consumers "will scatter away to other platforms". Without a doubt, this will be a major hit to the investors backing ByteDance.

"To me it looks like an investor initiated action as TikTok finds itself in a precarious situation in the US. Also, it is highly likely that if the US bans TikTok, very soon Western allies, might follow suite, majorly curtailing TikTok’s global footprint," he said.

While the sudden announcement of Microsoft's desire to acquire TikTok might surprise some, Jeffrey Seah, partner of Quest Ventures, said there is a possibility for Microsoft to become China's next best friend through the deal. "Microsoft never talked about a fire sale, meaning whatever TikTok asks for, it will pay. China's marketplace is important and the acquisition signals that Microsoft is here to rescue Chinese companies when Trump is bullying them," he explained.

He also added that Microsoft tried to launch its Microsoft Audience Network without success and as such, this could indicate that the company "does not know much about consumers' personal lives and does not have much data to sell". "With TikTok, it will know the personal lives of consumers and can link that personal life to one's professional life, since it has LinkedIn under its wing," he added.

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What will this mean for Microsoft in terms of ad dollars?

From an advertising business standpoint, eMarketer principal analyst Debra Aho Williamson said, the value of TikTok to Microsoft could potentially be very large. That said, TikTok is very early in the development of its ad business, and there is no guarantee that it will attract a large share of ad dollars. According to Williamson, what TikTok has going for it is that it has already proven to be attractive to a wide range of marketers (not just those targeting the youth audience) and its ad formats are highly creative and unique.

But to build a lasting ad business, TikTok also needs to develop easy self-serve tools that allow marketers to buy ads in bulk, using automated buying tools.

Microsoft could help with this, although it is not particularly well known for its ad technology, Williamson added. Nonetheless on the bright side, TikTok would boost Microsoft’s share of the US digital display ad market. "This year, we expect Microsoft to hold just 1.5% of that market, slightly ahead of Snapchat but well behind Facebook’s 42.0% and Google’s 10.4%," she said.

Potential risks and pitfalls

While the news might bode well for Microsoft, there are also potential pitfalls that Microsoft would experience. According to Forrester's senior analyst Wang Xiaofeng, there is the question of whether Microsoft is able to maintain the young, chic, pop and innovative gene of TikTok as a startup today. Additionally, this brings about the question of whether TikTok is able to maintain brand consistency when two very different parent companies are running TikTok America and TikTok International.

Microsoft will also have to consider an important aspect - balancing monetisation and consumer data privacy - the latter being of importance to the US government in particular. Nonetheless, Wang said TikTok is already a strong competitor to Facebook today.

"If Microsoft can successfully carry on TikTok’s momentum in attracting young consumers and content creators and influencers, it is possible to make it a third important digital ecosystem to brands beyond Facebook and Google, and will definitely take a share of marketers’ advertising dollars from the two platforms," she explained.

Similarly, Entropia's Kumar cited data security as "the deal breaker". It is also important for TikTok to steer clear from the content filtering and algorithm issues that has plagued Facebook and Google consistently and remains unresolved despite several congressional hearings. Beyond that, it is important to let the platform flourish to its true potential, he said, adding that TikTok's rivals such as Facebook and Google should feel threatened.

Microsoft has the deep pockets as well as the credibility to bring tons of advertisers onboard. TikTok is the gateway to Gen Z and probably the Gen Alpha that is coming after it.

Of the major global technology players from the US, Microsoft is among the few having a viable business in China. As such, Somanathan said it will be interesting to see how it is perceived within China - will it get roses or brickbats from the Chinese citizenry? That said, the biggest pitfall to him would be the egos and sentiment surrounding the deal. "The more psychologically palatable the deal making process it, the higher the chances of a successful outcome," he added. He also pointed out that there are three parties involved in the deal - Microsoft, ByteDance and ByteDance's investors.

It will be a win for the investors, risky play for Microsoft and loss of face for ByteDance.

As such, the energies are not ideal, leave alone the cultural synergies (or lack of) between the two companies, Somanathan added. He explained that Facebook and Google have gained back some lost ground as a result of the recent headwinds faced by TikTok. As such in the short term, both parties will benefit from this distraction. In the long term, however, if Microsoft gets this acquisition right, creates the right synergies with gaming and mixed reality, it will emerge a strong third player.

Quest Ventures' Seah said this could be a new global dominance model by Chinese companies - having strategic partners in different countries. There will certainly be head on competition for rivals, as the acquisition will remove TikTok's heritage as a Chinese company, which also happens to be its "weakness", Seah explained.

"TikTok in the US will have an American cultural lens because Microsoft owns it. With the acquisition, Microsoft will now have a complete picture of what is going on in consumers' heads due to the vast amount of data it will have, allowing Microsoft to strengthen its advertising model and direct-to-consumer model," he said.

TikTok's future in Europe up in the air

Microsoft's proposed acquisition only covers TikTok's service in the US, Canada, Australia, and New Zealand. According to CNBC, if the deal is finalised, Microsoft would operate TikTok in four countries while ByteDance still has control over 100 other countries. While governments in Europe have raised concerns, CNBC said they have not voiced the intention to ban TikTok yet. EMarketer's Williamson said TikTok has massive appeal not only in the US but in many countries around the world.

Carving it up into pieces would put a huge damper on its overall growth. The better strategy, in my opinion, would be to work out a deal where the entire business (except China) is acquired.

According to Williamson, doing so would preserve TikTok as an international company serving many markets. Since July, TikTok has been thrown into the media spotlight after it exited the Hong Kong market following the national security law and was banned in India at the end of June, along with 58 other Chinese apps. White House adviser Peter Navarro previously said that even if TikTok were to become a separate American company, it would not help in the matter, South China Morning Post reported. In fact, "it is going to be worse", Navarro said, explaining that the US will have to offer China "billions of dollars for the privilege" of allowing TikTok to operate on its shores.

US GM Vanessa Pappas recently said in a video that when it comes to safety and security, it is building the safest app and that is the right thing to do. She added that TikTok appreciates the support and it is here for the long run and urged consumers to stand for TikTok. The company also introduced a US$1 billion creator fund to show ts support for creators as they turn their creativity into opportunity.

Meanwhile, ByteDance said on TouTiao, a news and information content platform it owns in China, that it has always committed to becoming a global company. In the process of doing so, it has faced "all kinds of complex and unimaginable difficulties", including the tense geopolitical environment, collision of different cultures, as well as the plagiarism by competitor Facebook.

However, ByteDance said it will still adhere to the vision of globalisation and continue to increase investment in markets around the world, including China, to create value for global users. "We strictly abide by local laws and will actively use the rights granted to us by the law to safeguard the legal rights of the company," it said.

TikTok was initially created in 2016 as an international version of Chinese app Douyin and both are owned by ByteDance. Over the years, ByteDance has made efforts to separate TikTok from its Chinese operations and give it an international feel. Its chief executive Kevin Mayer wrote in a letter to the Indian government in June explaining that the Chinese government "has never requested user data, nor would the company turn it over if asked", Reuters reported. Mayer added that the data for Indian users is stored in servers in Singapore and that it would not comply with any request for user data. Last November, Reuters also reported that ByteDance was working to offer assurances to the Committee on Foreign Investment in the United States that personal data obtained by TikTok, is "stored securely in the US and will not be compromised by Chinese authorities".