Oracle Wins TikTok, Microsoft Dodges A Bullet

Oracle — whose CEO Larry Ellison threw a fundraiser this year for Donald Trump, according to the Wall Street Journal — appears poised to win its bid for video platform TikTok’s U.S. operations.

The terms of the deal are vague — but one thing is clear: Microsoft’s joint bid with Walmart for TikTok was rejected.

And that is great news for Microsoft shareholders. How so? On August 5, I argued that Microsoft should walk away from the bid because a win would put it at a competitive disadvantage to Facebook and YouTube; TikTok’s rapidly growing popularity could be a flash in the pan; and the deal presented Microsoft with considerable political risk.

What Winning TikTok Means For Oracle

TikTok is a fast-growing, unprofitable service. Its monthly user count in the U.S. has increased at a 133% annual rate from 11 million in early 2018 to “around 100 million” who are considered among the “most lucrative” of its 689 million users, noted the Journal.

Details of Oracle’s bid are vague. The Journal reports that Oracle will announce that it will be a “trusted tech partner” to TikTok’s U.S. operation. Unnamed sources told the Journal that this partnership would alleviate “concerns around data security raised by the U.S. government.”

It is unlikely that Oracle’s deal will involve a sale of assets — such as TikTok’s AI-driven algorithms for recommending videos. The Chinese government last month issued export restrictions on such algorithms. Oracle’s vaguely specified deal has yet to be approved by the White House and the Committee on Foreign Investment.

For its part, Microsoft saw two distinct security threats. As Brad Smith, Microsoft’s president and chief legal officer, told the New York Times. Chinese authorities could use their laws to order TikTok to share its user data and TikTok engineers could design its recommendation algorithm to serve users disinformation. Smith said that Microsoft’s bid would have mitigated these risks by taking control of the user data and the algorithm.

TikTok’s parent, ByteDance told Microsoft on September 13 that its bid had been rejected. Microsoft’s statement noted, “We are confident our proposal would have been good for TikTok’s users, while protecting national security interests. To do this, we would have made significant changes to ensure the service met the highest standards for security, privacy, online safety, and combating disinformation, and we made these principles clear in our August statement.”

Oracle views TikTok as a way to increase revenue for its cloud computing business, noted the Journal, which lags those of Amazon (60% market share, according to ZDNet), Microsoft (31%), and Google (9%). Oracle has a mere 6% of the cloud software as a service market, according to Kinsta.

Why Microsoft’s Loss Could Be Good For Its Shareholders

The terms of the losing bid from Microsoft and Walmart were not clear. The Journal reported that Microsoft wanted to acquire TikTok’s video recommendation algorithms and wanted access to its “treasure trove of data on young and mostly female users, an area it doesn’t have much insight into now.”

Here are three reasons I think Microsoft shareholders will be better off as a result of losing the deal because the loss enabled its shareholders to dodge three risks:

• Competitive. Although Microsoft does compete in the computer gaming business, it has not been a strong player in social media — where Facebook is king of the hill. Facebook is not shy about creating its own versions of social media apps that gain traction. For example, it copied Snap with Instagram Stories and plans to launch Instagram Reels to rival TikTok. Facebook is providing “financial incentives to lure influential TikTok users to its platform,” noted the Journal. I think Microsoft would have been poorly matched to compete with Facebook in social media.
• Obsolescence. While TikTok is growing fast now, that growth is likely to slow down. Facebook used to be very popular among high school and college students — then their parents starting using Facebook. To avoid being on the same social media platform as their parents and to tap the mobile web, youngsters moved to Instagram which Facebook famously acquired before its May 2012 IPO. Data suggest that the average age of TikTok users is increasing. “The percentage of U.S.-based TikTok users age 18-24 fell from 41.1% in January to 35.3% in April, a 5.8% drop. During that same time period, the share of 25- to 34-year-olds rose from 22.4% to 27.4%, and the 35-44 demographic grew from 13.9% to 17.1%,” according to Wallaroomedia. That could be a precursor to a slowdown in growth and leave open the opportunity for a new platform that would appeal to high school and college students. Had Microsoft won, it could have acquired TikTok only to watch its growth decline.
• Political. Trump could be using this deal to bolster his reelection chances. On August 3, Trump added a new condition for Microsoft to conclude the TikTok deal — paying the U.S. government “a lot of money” — which the Wall Street Journal wryly wrote is “an assertion of presidential power that appeared to lack precedent.” Not winning this deal means that Microsoft does not need to face the decision of whether to pay what Trump demanded. Moreover, China viewed Microsoft’s proposed deal as “hypocritical,” according to the Journal — which could have retaliated by cutting off Microsoft’s roughly $3 billion in revenue in China. Losing this deal means that Microsoft is less likely to be in the political cross-hairs of Trump and China.

It is unclear how much Microsoft/Walmart offered to pay — though CNBC estimated last month that it could be as much as $30 billion. I think Microsoft will find better ways to invest the money.

Meanwhile, until more details emerge about its deal, I can’t tell whether it will benefit Oracle’s shareholders.