Oracle Wins TikTok, Microsoft Dodges A Bullet

A boy wearing face mask poses for a photograph as he making TikTok videos at a park in Dhaka, ... [+] Bangladesh on September 11, 2020. TikTok-a Chinese video-sharing social networking service, is most popular for Bangladeshi teenager for making fun videos and its popularity vastly increasing day by day. (Photo by Rehman Asad/NurPhoto via Getty Images)NurPhoto via Getty Images

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:

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.