Microsoft nears big bet on TikTok

Microsoft nears big bet on TikTok
The US is effectively forcing TikTok’s Chinese parent, ByteDance, to sell by threatening to ban the app over security concerns. (Reuters)
Short Url
Updated 03 August 2020
Follow

Microsoft nears big bet on TikTok

Microsoft nears big bet on TikTok
  • Deal could help Microsoft build on its $27 billion purchase of job-search social network LinkedIn in 2016 to become a bigger player in internet advertising
  • TikTok has taken the world by storm, and emerged as a significant competitor to platforms like Facebook and YouTube

Microsoft has said its potential acquisition of short-form video app TikTok’s US, Canada, Australia and New Zealand operations could be completed by September.

The company set a provisional date of Sept. 15 for a move that carries myriad risks, and which would thrust the computer giant into the politically fraught social media business amid Sino-US tensions and increased scrutiny of big-tech companies.

The deal, though, could help Microsoft build on its $27 billion purchase of job-search social network LinkedIn in 2016 to become a bigger player in internet advertising, currently dominated by Facebook and Google.

Microsoft is likely to have an edge in pricing negotiations, as the US is effectively forcing TikTok’s Chinese parent, ByteDance, to sell by threatening to ban the app over security concerns.

TikTok has taken the world by storm, and emerged as a significant competitor to platforms like Facebook and YouTube. But like its rivals, TikTok faces substantial new costs for content moderation due to the spread of misinformation and allegations of political bias.

Increased oversight costs accounted for much of the 10 percent drop in gross profit margins for Facebook and Alphabet, Google’s parent company, over the last three and a half years, Refinitiv data showed.

“Does Microsoft really want to own an app that breeds conspiracy theories in tweens (teenagers and people in their twenties)?” said Hank Green, YouTube star and CEO of educational media company Complexly. He added that TikTok often removed content from its platform to maintain “a certain feel,” and could face public challenges over such decisions more often under a bigger name such as Microsoft.

At $1.55 trillion, Microsoft is the world’s second-largest company by market capitalization after Apple, but has in recent years faced less criticism than its peers over antitrust, data protection and China-based projects.

Microsoft has done several big deals since Satya Nadella became CEO in 2014, with acquisitions including LinkedIn and virtual world-building game Minecraft. They have fared better than those under predecessor Steve Ballmer, whose failed deals included Nokia Oyj’s phone business.

The LinkedIn acquisition, at 50 percent above its share price, was Nadella’s biggest and riskiest. Microsoft shares fell three percent when it was announced, with analysts expressing concern over slowing revenue growth and an expected cap on usage.

Some concerns may have been overblown. Microsoft has avoided antitrust and privacy scrutiny with a cautious approach to connecting LinkedIn to other products, such as Outlook, and analysts have largely viewed the deal as a success.

Though the coronavirus disease pandemic has slowed sales, LinkedIn advertising  revenue was among Microsoft’s fastest-growing over 2017-2019, as the global economy roared.

Overall, LinkedIn has generated $14.3 billion in revenue for Microsoft through ads and subscriptions, though analysts suggest it remains unprofitable.

TikTok is a bigger gamble, as it caters to a less-affluent audience than LinkedIn, where advertisers typically pay more to attract wealthier consumers. TikTok’s ad sales team and technology are also far less mature than LinkedIn’s were in 2016, and TikTok faces greater competition.

About 11 percent of US adults use TikTok at least once per week, versus 49 percent for YouTube and 62 percent for Facebook, a survey by tech consultancy Vorhaus Advisors showed last month.

LinkedIn came to Microsoft already 13 years old, with 11,000 employees and 105 million monthly users globally. Six-year-old TikTok, by contrast, has about 1,000 US employees and has been downloaded 226 million times in the four countries targeted by Microsoft’s deal, data from app tracker Sensor Tower suggested.

LinkedIn “was bought on domination of a sector, good revenue, and good margins,” said Mike Vorhaus, head of Vorhaus Advisors. “TikTok is going to be valued based on its incredible user growth and mobile advertising revenue opportunities.”

TikTok would make Microsoft relevant among both young engineers looking for a hip place to work and advertisers clamoring for alternatives to Facebook and Google.

YouTuber Green, said he doubted Microsoft ownership would hurt TikTok, noting he amassed 600,000 TikTok followers since he began posting a month ago.

“I don’t see anything at all standing in the way,” he said.