Microsoft was not included in last week’s Big Tech antitrust grilling by the House Antitrust Subcommittee, but that doesn’t mean it wasn’t paying attention.
According to the Wall Street Journal, Microsoft began covert talks with TikTok several weeks ago about a potential deal to acquire the breakout social media network as serious pressure was beginning to mount on the Chinese-owned platform in the U.S. over alleged national security concerns.
Meanwhile, the antitrust subcommittee had spent the past year investigating the data practices and M&A activity of Facebook, Google, Amazon and Apple, gathering documents, interviewing witnesses and preparing a report. Similarly, the U.S. Justice Department was conducting its own antitrust inquiry into Google.
It wouldn’t have taken much for Microsoft to figure out that its most likely competitors in a race to acquire TikTok were effectively sidelined and that it had the field pretty much to itself (The fact that Zuckerberg, et. al. seemed unprepared for the depth and directness of the committee’s questions last week speaks poorly of their public policy shops.)
TikTok’s owner, ByteDance, based in Beijing and headed by CEO Zhang Yiming, was reported to favor some sort of spin off of TikTok’s U.S. operations to an outright sale, perhaps to its U.S. investors, which include a number of major private equity firms. But without the infrastructure and resources to manage a cloud-based social media platform with more than 100 million users in the U.S., that might have left U.S. TikTok tethered operationally to China, which likely would not pass muster with the Trump Administration. Microsoft, on the other hand, brings its own cloud computing platform to the table and already owns LinkedIn GitHub.
Then on Friday, President Trump abruptly announced he planned to ban TikTok from the U.S. outright, catching TikTok and Microsoft officials, and Trump’s own advisors off guard and throwing the talks into chaos. By Sunday night, however, after speaking directly with Microsoft CEO Satya Nadella, Trump backed off, and gave TikTok 45 days to find a U.S. buyer for its U.S. operations.
So, the way it shakes out is that TikTok is being frog-marched into a deal with only one plausible and interested buyer — not an optimal situation for getting a good price (Snap might also be a plausible buyer but so far hasn’t expressed interest). It’s more a hostage situation than a business deal.
Change of course?
Since taking over as CEO, Nadella has steered Microsoft way from consumer-facing applications like TikTok to focus on enterprise services like business software and cloud computing — a strategy that has boosted Microsoft’s market cap considerably.
But a TikTok deal may be too good to pass up, purely on valuation grounds. TikTok is expected to generate about $500 million in revenue in the U.S. this year, according to The Information, but has only just begun to monetize its user base via advertising. At a low-ball price and with significant upside, it’s an attractive asset.
But TikTok may also be a better strategic fit for Microsoft than it firsts appears.
The one big exception to Nadella’s business-first strategy is Xbox, which represents Microsoft’s largest consumer-facing business, and the only one where it has achieved anything like a dominant position. The TikTok demographic overlaps significantly with the Xbox demo, with the added bonus that TikTok users include more women than men while the Xbox universe is overwhelmingly male.
TikTok has also emerged as an important avenue into and out of the music business, a realm where Microsoft has repeatedly failed to gain traction. A potential integration of Xbox and TikTok is a tantalizing prospect at a time when the Covid pandemic has accelerated the convergence of music and gaming platforms as touring-challenged artists seek alternative channels to connect with fans. Microsoft-owned Minecraft has already hosted live-streamed music shows.
TikTok has battled with both the record labels and music publishers over the unlicensed use of music in videos on the platform. But the recent hiring of one-time Disney heir apparent Kevin Mayer as CEO was a clear signal that TikTok intends to get its licensing house in order, as evidenced by the global deal with music publishers announced in May.
Even as the music industry has battled TikTok, moreover, many artists have embraced the platform to connect with fans and promote their music. Even the record labels have turned to TikTok as an important leading indicator and source of data on artists and records that may be about to break out.
Youth-oriented consumer brands have also embraced the platform, seeking out TikTok influencers to support and monitoring the often quicksilver shifts in popularity among the TikTok demographic.
Integrating that data and data on Xbox users could yield a very valuable resource and would allow Microsoft to play a role in the entertainment and consumer brands industries more akin to its comfort-zone positioning in business services — as a provider of data analytics and cloud computing resources, without having to take on Google and Facebook directly and at a bargain-basement price.
Not a bad deal if Nadella can get it done in 45 days.