the times | Thursday August 6 2020 2GM 37

CommentBusiness

The West must assert its values in

the battle with China over TikTok

Tim Cook, of Apple,

has visted Zhang

Yiming in Beijing

S

atya Nadella has only a few

weeks to seal a deal that’s

anything but straightforward.

By the middle of next month,

Microsoft’s chief executive

must tie up many loose ends if he’s to

seize control of TikTok’s North

American operations. If he fails,

Donald Trump will blacklist the

video app, dashing Mr Nadella’s

hopes of becoming a serious player

in digital advertising.

The acquisition looked fraught

with danger before the US president

attempted to shake down TikTok’s

Chinese owner for a cut of the

proceeds. The software giant faces

financial, political and reputational

risks from its push into social media.

Does Mr Nadella really want the

scrutiny that would come with

policing a sprawling network of user-

generated content? Microsoft’s chief

executive was an absentee during the

mauling of his peers last week.

Owning TikTok would put the

software group at the heart of a

sector neck-deep in scandal.

So why is Microsoft even

considering entering the social

media maelstrom? TikTok is just too

tantalising a prospect to pass up. The

app is the big success of social media

in the past five years. It has hooked

more than 100 million Americans,

mainly in their teens, with its

carousel of zany lip-sync, dance and

comedy videos.

Mr Nadella is betting that TikTok

could be a viable rival to Instagram

and YouTube. Bytedance, its Chinese

parent, has barely begun to monetise

the three-year-old app. TikTok is

loss-making and is set to generate

only $1 billion of advertising

revenues globally this year, but sales

of $6 billion are expected next year.

Microsoft would not pocket all of

these spoils. Under the deal it is

negotiating with Bytedance, the

American company would acquire

TikTok’s operations in the United

States, Canada, Australia and New

Zealand. Still, these are advanced

economies where revenue per user is

high; the suggested price tag of

$15 billion to $30 billion does not

look outlandish, given TikTok’s steep

growth rates.

Advertisers are crying out for

alternatives to Facebook and Google.

Twitter, Snapchat and Pinterest have

failed to disturb this duopoly, but

TikTok is threatening the status quo

with its vast Gen-Z audience. Why

else would Facebook be so anxious

to launch TikTok clones?

For Microsoft, TikTok’s trove of

data could have broader benefits.

Under Mr Nadella, Microsoft’s

market value has quintupled to

$1.6 trillion thanks to his obsession

with pleasing corporate customers.

Results from his drive to connect

with consumers have been patchier.

The $2.5 billion acquisition of

Minecraft in 2014 looks like a snip

and under Microsoft’s ownership

Linkedin has expanded its customer

base. But the Bing search engine still

struggles to compete against Google.

The TikTok dataset could enrich all

of these businesses, as well as its

Xbox franchise. It also could provide

grist to train Microsoft’s artificial

intelligence algorithms.

Before then, Mr Nadella must

agree what would be a complex

break-up of TikTok. The app’s secret

sauce is its machine-learning

software, which selects the content

to put on users’ phone screens based

on what captivated them in the past.

At present, engineers in China

manage this computer code, which is

the engine for Douyin, TikTok’s

domestic lookalike. It is unclear

whether Microsoft will license this

technology from Bytedance. If it

does, how would Mr Nadella ensure

that user information wouldn’t end

up in Bytedance’s vaults? If

Microsoft decides to use its own AI

tools to choose content, users in the

US could have a different and quite

possibly inferior experience to those

elsewhere. Over time, the schism

would dilute the economies of scale

and network effects of operating a

global platform.

Disentangling TikTok could be

costly and time-consuming, but the

potential rewards are big enough to

justify the bet. Even if Mr Nadella

cops some flak in Washington.

Simon Nixon

Simon Duke

pull the rug from under the entire

Chinese technology sector.

But even if the US government’s

fears are well-founded, Mr Trump’s

approach is surely counterproductive.

The US is perfectly entitled to ban

TikTok from the American market or

to demand that it divest its US

operations if it believes its national

security interests are threatened.

Indeed, the talks between TikTok and

Microsoft were precipitated in part by

a retrospective investigation by the

committee on foreign investment in

the United States into the Chinese

company’s 2017 acquisition of

Musical.Ly, a US-based social media

app. What matters is that this process

is conducted transparently and on the

basis of evidence — not simply

because transparent, rules-based

economies are more likely to attract

investment, innovate and grow, but

because the West is engaged in a

global battle of values with the

Chinese Communist Party.

This was a point made by Mike

Pompeo, the US secretary of state,

last week. “The free world must

triumph over this new tyranny,” he

said. “Free nations have to work to

defend freedom.” He was right, even if

his comments may have rung

somewhat hollow coming from an

administration that has refused to

work with partners in confronting

China, has undermined multilateral

institutions and has treated allies as

enemies while indulging authoritarian

regimes.

Mr Trump deserves credit for being

one of the first leaders to recognise

the scale of the challenge posed by

China. His administration is right to

demand a more assertive western

response. But the battle of values will

not be won by aping China in pursuit

of a predatory mercantilist economic

policy, as Mr Trump appears to be

doing, not least with his demand for a

cut of any deal.

Of course, it’s not clear that he has

the legal authority to demand a

finder’s fee. This may have been more

of his usual bluster. Nonetheless, the

perception that the United States is

turning away from the principles that

underpin the global rules-based order

can only weaken the West

economically and politically. That’s a

message that Britain

and its allies need to

send loud and clear

to Washington and

Beijing.

There was certainly

something

remarkably

hypocritical about

Beijing’s response to

the American government’s attempts

to force TikTok, the Chinese-owned

social media app, to sell its US

operations to Microsoft. A Chinese

foreign ministry spokesman accused

the United States of “double

standards”, complaining of a

“violation of market economy rules”

that undermines America’s self-

proclaimed values of “fairness” and

“freedom” and runs counter to World

Trade Organisation principles of

transparency and non-discrimination.

Meanwhile, the state-controlled

Global Times described President

Trump’s demand that the US

Treasury receive a “very substantial”

portion of any sale proceeds as “open

robbery” and accused Mr Trump of

turning the US into a “rogue

country”.

These complaints are pretty rich

coming from a country that over the

past four decades has systematically

expropriated western intellectual

property and data on an industrial

scale via forced transfers and outright

theft. Meanwhile, many US consumer

technology companies remain

effectively barred from the Chinese

market because they refuse to comply

with strict Chinese censorship laws.

And Beijing itself stands accused of

consistently undermining WTO

principles with its elaborate subsidies

that have distorted global competition

and hollowed out many western

industries.

Even so, Beijing has a point.

President Trump’s threat to ban

TikTok if it does not conclude a sale

of its US business to Microsoft within

six weeks and his demand for what

amounts to a “finder’s fee” for the US

government for engineering the

deal is a watershed moment.

It looks more like a

shakedown, or at the very

least the kind of hardball

tactics that one might

imagine at the murkier end

of the New Jersey real

estate market, than the

behaviour of the

leader of a country

built on open

markets and the rule of law. What’s

more, his decision to drive out of the

US market the first globally successful

homegrown Chinese consumer

technology business marks a dramatic

escalation in America’s technology

and trade wars with China. The result

may be to hasten the destruction of

what until now has been regarded as

the global public good of a single,

open global internet.

True, the US government appears

to believe that TikTok poses a

genuine national security risk, both in

its potential to gather data from US

citizens that could be transferred to

Beijing for nefarious purposes, or as a

possible channel to push Chinese

propaganda in the US. As things

stand, these risks would appear to be

purely theoretical, since the US

government has not presented any

evidence that TikTok has been used

in this way and the TikTok’s parent

company, the privately owned,

Beijing-based Bytedance, insists that

it has never been asked to do so, nor

would it comply if ordered. Nor has

any evidence emerged that links

Zhang Yiming, TikTok’s 37-year-old

founder, to the Chinese Communist

Party. Indeed, he has more often

appeared to be a thorn in the party’s

side as the creator of a popular news

aggregation service that is distrusted

by officials.

Nonetheless, the suspicion relates

to the loosely worded 2017 national

security law that requires all Chinese

companies to share information with

the Chinese security services, if

required. Whether and how that law

might apply to TikTok, which does

not operate in China itself and whose

servers are located in the US and

Singapore, is an open question. Nor is

it clear to what use the Chinese

intelligence services might put the

kind of data that can be

gathered from tracking the

location and usage data of

western teenagers, who

are the primary users of

TikTok. Indeed, it is

hard to see why

Beijing would

try to seize

such data,

since that

would

confirm

the

world’s

worst

fears and

‘‘

’’

Simon Duke is Technology Business

Editor of The Times

... while Microsoft is

focused only on cashing

in on social media boom

Nadella’s takover deals

$2.5bn

$7.5bn

$26bn

$54bn

2014 Minecraft

2016 LinkedIn

2018 Github

Sources: Microsoft, DealogicTotal since 2014