TikTok’s Time is Ticking

Over the past year, TikTok has quickly become an integral part of pop-culture in many parts of the world, including the United States. The platform has provided a unique and trendy platform for comedy, activism and political satire. Recently, this growth has been challenged at the highest levels due to data concerns. Specifically, the US government has become a direct threat to the app’s expansion as Washington has cited security concerns pertaining to national security. This has led to a highly speculated and forced divestiture as the US administration has outright ordered a sell-off of American operations. When considering the undertones and implications of the challenges the US division is to face, from political workings, stakeholders and drawing on similarities from the failure of Vine—TikTok’s future is in question. As Tik Tok and many of its users have risen to stardom, a forced sell-off of American operations will hurt the app in the long run, leading to the failure of its American division.

As the concept grew in popularity, in 2017 the app expanded outwards and rose to top charts within key Asian markets including Thailand and Japan under the new name: TikTok. As the app saw great initial success and growth, the US saw the rise of a competing platform: Musical.ly. Later that year, Musical.ly was purchased by TikTok’s parent company at a deal valued at $1 billion. By the summer of 2018, ByteDance announced the merger of apps TikTok and Musical.ly with all profiles being moved to the new and enhanced TikTok platform which would soon witness instrumental growth in global markets.

"Combining musical.ly and TikTok is a natural fit given the shared mission of both experiences — to create a community where everyone can be a creator," Musical.ly co-founder Alex Zhu said at the time.

As of 2020, the app has amassed over 2 billion downloads, asserting itself and ByteDance as forces to be reckoned with. With this recent success, ByteDance has become the world’s most valuable private company, receiving funding from some of the largest financial groups in the world including, Sequoia Capital, SoftBank Group, K3 Ventures and KKR. Globally, firms and investors are confident in TikTok with the heightened interest expected to further enable TikTok’s growth and mission to leverage AI.

The app's unique implementation of AI has been interesting. TikTok’s algorithm alone is credited with a lot of success, but trying to understand the complexities behind how TikTok is powered presents both opportunities and concerns. A user’s “For You” page reflects user preferences and interests on a combination of factors ranging from user interaction with content, video information, activity and device/account settings—culminating in a new approach to content creation. The app has essentially taken factors and information to curate unique feeds for users which has in large part become why the app has grown in popularity. The way TikTok has encapsulated and used the information, however, has been under scrutiny across the world, especially in the US. In 2019, the US government launched an inquiry into ByteDance stemming from concerns of the app’s usage of user data and the potential access of the Chinese government. Specifically, 3 senators in the US led the charge for an inquiry into Bytedance by citing the app as a “potential counterintelligence we cannot ignore”.

In China, the perception of US claims is seen as “bullying and extortion”. ByteDance, now caught in the middle, has applied for licenses to streamline operations and tackle the challenges it faces in the US. Specifically, ByteDance in September applied for an export licence submitted to the Beijing Municipal Bureau of Commerce after China in late August updated its list of technologies that would be subject to export restrictions. For TikTok, this would be its algorithm and ultimately its operations overseas, such as the US. “Tiktok has found itself in the crosshairs of US lawmakers, who had raised national security and privacy concerns over ByteDance’s ties to the Chinese government”.

To further add fuel to the fire, an investigation by US officials concluded that TikTok violated the Children’s Online Privacy Protection Act following several complaints with the Federal Trade Commission, resulting in a $5.7 million fine. Problems with governments don’t end there. In the summer of 2020, in a highly politicized move, India banned TikTok and other Chinese apps. For TikTok, this is a sure cause for concern as the US market makes up almost 30% of the user base.

During the summer, US officials reignited their concerns about the app, further suggesting a ban of the app as a way to mitigate cited concerns. President Trump explicitly expressed intent to ban the app as a way to punish China over politics. With the current US administration, the leading solution seems to be a divestiture of American operations. An executive order issued in August ordered ByteDance to sell American operations by Nov 12th, culminating in a deal with Walmart and Oracle being front runners to acquire the US operations, a deal still up in the air. This joint venture would be a combined 20% stake in a new company, TikTok Global with 80% of TikTok Global’s board being American. In plans regarding post acquisitions, Oracle committed to hosting all US user data on its cloud platforms. Walmart has a vested interest because of its e-commerce presence, something TikTok has experimented with in the past year. Walmart is expected to “bring its omnichannel retail capabilities”. In this bout, there is still a lot of uncertainty and looming court battles as the Chinese government is averse and simply will not agree to such a deal. Beijing is not comfortable with the forced sale and TikTok assets cannot be sold without China’s approval.

Even with a sale, Walmart and Oracle would still have to abide by rules, conditions and guidelines the US administration sets out while also abiding with requirements from China and specific deal terms with Walmart and Oracle. Competing interests, requirements and politicization are inherently unprecedented and cannot support or further enable growth or even operations. One such example of competing interests is a proposed monetary reward for the US. In a political rally hosted by President Trump, the President expressed as part of the deal, the parties involved would “do me a favour” by establishing a $5 billion education fund out of this deal with the goal to teach American children “the real history of our country”. With the hyper politicization alone, it's difficult to see a viable solution with current developments.

When considering the interests of Walmart and Oracle, it’s hard to see how their potential control of American operations would solve anything, simply due to logistics, external factors and circumstances.

For Walmart, a stake in the TikTok app would allow the retail giant to establish a mobile marketplace driven by data and supported by stars and videos on the app promoting products.

In the past few years, Walmart has been on a mission to compete with Amazon. A strategy driven by the concepts of e-commerce and digital marketplace. In 2018, Walmart paid $16 billion for a stake in an Indian online retailer, Flipkart. The company over the past few years has bought stakes and made similar acquisitions to drive their digital strategy. For Walmart, ownership of TikTok would enable the retail giant to further develop its own digital strategy and service offerings to customers. Paving a path to become the digital consumer platform it hopes to, in order to compete with Amazon. With Walmart’s digital dash and TikTok’s large user base in the US, data for Walmart on their consumers would prove to be invaluable as it can help gauge online habits. TikTok has been able to keep users on their app and keep them engaged. Walmart would be able to use this strength of TikTok to better understand users, converting them into lifelong shoppers. Ultimately, Walmart attributes its interest in TikTok to better-accessing consumers to enable their e-commerce and digital marketplace growth. Specifically noting the possibilities to ”integrated e-commerce and advertising capabilities in other markets,", provided by the app. In Oracle’s case, their reasons to pursue TikTok are more clear when it comes to business operations.

The world’s second-largest software maker would benefit from data. Using TikTok’s user data and social interaction would bolster Oracle’s existing cloud, data and advertising businesses. The US administration expects Oracle to become TikTok’s “secure cloud provider and host US user data”, however, ByteDance has explicitly stated the company would not transfer its algorithm and technology to Oracle as part of the proposed deal. “The current plan does not involve the transfer of any algorithms and technologies. Oracle has the authority to check the source code of TikTok USA”.

If TikTok were to somehow divest operations, the involvement from the US government, reservations from China and conflicting business interests with a lot of uncertainty suggest troubles ahead. It simply is not plausible to foresee a future where a divestiture will allow the continued development and growth where all stakeholders and key decision-makers are pleased, which will only hurt the operations.

While TikTok has seen unprecedented growth, their ability to perform long term is in question. In fact, a very similar social media app that failed to perform long term serves as a red flag to TikTok’s future.

Vine, the short-form video platform, launched in 2013 and climbed quickly to the top of the social media ladder. At it’s peak, Vine had 200 million monthly users however they ceased their operations in late 2016. Similar to TikTok, Vine was new and quickly caught the attention of younger demographics through it’s usage of short videos. The concept of those short videos was quickly replicated and integrated within other social media platforms. Ultimately, Vine failed as it lost market share to apps with less limitations but continued innovation and updates. As is, TikToK has many similarities to Vine, which previously failed. In order to grow and navigate its operations in the US, it's critical to draw from key issues, similarities and impediments Vine encountered. First, TikTok needs to improve its funnel. Similar to Vine and other social media apps, there is a fad phase which enables quick short-term growth. After which, innovation tapers- taking away from the user experience as new competition enters the market. TikTok has so far been able to keep users hooked by continuing to improve their algorithm and overall user experience on the app’s platform. With new ownership for the American operations, Oracle would need to recreate the app’s powerful and intuitive algorithmic feed to continue this. TikTok’s team grew and evolved in a hyper-competitive environment where replication is imminent. Such a team enabled TikTok to get to where it is. Oracle’s developers and management have simply not been in such a position where speed and innovation are critical to combat competitors and replication, specifically within the social app industry. Within the industry, key players are also influencers. Vine’s relationship with and the ultimate lack of appeasement for influencers who garnered large followings was another reason for their failure. Celebrities and influencers ultimately seek opportunities where they can best gauge their audience and in turn, earn income. According to Daniel Saynt of casting agency Socialyte, Vine’s lack of innovation and integration killed it, “The allure of it has dropped off completely.”

Directly affecting influencers and their decisions. In a 2016 report by Markerly, the firm found that the top 50% of users on Vine frequently posted their content first on other platforms such as Facebook, Instagram and YouTube. In 2016, CEO of Viral Nation (influencer marketing agency), Joe Gagliese said “Facebook and Youtube have much larger scale than Vine, so you can reach more people and make the most money there…[Lots of my clients] turned all their attention to Facebook because it allows for way better analytics and os always innovating which is what I feel Vine doesn’t do,”. In the US, TikTok currently does not offer users a direct way to earn money. Influencers are subject to leave if the audience and money is better elsewhere, which is something Vine experienced. Vine failed to develop an ecosystem for top creators and influencers. Specifically, Youtube and Facebook have also incentivized influencers onto their platforms and into their ecosystems by providing perks such as professional studio space, tools and education to help them reach more people in addition to offering social stars lucrative contracts to produce live videos. Further helping the influencers grow their following, brand and ultimately ROI.

Considering the actual operational challenges which TikTok will need to mitigate and overcome in the short-term to even enable their growth and stability in their US operations and attempting to manage the rapidly changing regulatory environments from countries across the world creates issues and uncertainty for TikTok’s US operations. Finally, hyper-politicization and competing business interests within a potential divestiture of the US operations with Walmart and Oracle pose too many obstacles and barriers for the app to successfully divest its American operations. Further drawing on similar challenges Vine faced from their business model and operations, TikTok has too much going on and it’s improbable for a US version of the app to succeed or even sustain itself now, and in the near future.