Microsoft’s TikTok Acquisition — Are the Risks Worth the Rewards?

Sulabh Gupta
Aug 6, 2020 · 6 min read
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If you have followed tech news lately, you may have heard about the president of the United States wanting to ban TikTok in the US over privacy-related concerns and later providing the company with a 45 days ultimatum to either negotiate a deal or get shut down. Microsoft has been the front-runner in companies interested in acquiring TikTok’s operations in the USA.

Microsoft’s interest in a video-sharing app that involves teenagers dancing and singing along to popular tunes seems unusual, especially because outside of the success of Xbox, Microsoft has been relatively weak in consumer services. The increased focus on enterprise software and services, over the past several years, has resulted in great success for Microsoft. So, is TikTok an exception and how does it tie into the overall business strategy of Microsoft. Let’s dig a bit further.

A Little Background

TikTok is owned by a Chinese technology company named ByteDance. The reason that the US government wants to ban TikTok is that Chinese technology companies are obligated to share the data they collect with the Chinese government. This justifiably has the US government concerned.

President Trump has given a hard deadline of 15th September 2020 for TikTok to strike a deal to get its US business acquired. Microsoft has jumped on the opportunity and seems very interested in this acquisition. Microsoft wants to operate TikTok in four markets: The United States of America, Canada, Australia, and New Zealand. Some reports suggest that Microsoft has shown interest in buying TikTok’s global business as well.

What is in it for Microsoft?

Although Microsoft doesn’t have a great track record when it comes to consumer services, there are a lot of possible opportunities that Microsoft can cash-in on if it manages to acquire TikTok.

Ad Revenue: The digital Ad industry is getting bigger every year and the market share lies majorly with 2–3 major players. A report from eMarketer predicts that Amazon, Google, and Facebook are expected to take nearly 70% of digital spending in the US by 2021. Microsoft can capitalize on the existing TikTok’s user base to generate Ad revenue in addition to the Ad revenue Microsoft generates from Bing and LinkedIn. TikTok’s expected ad revenue in the US is projected to hit $500 million this year.

Data, Data, Data: No surprises here, the acquisition of TikTok would provide Microsoft with access to a lot of data. The software giant, for a long time, has used the data collected from Xbox Live to fuel its research projects, assist game developers, and to understand how people use their Xbox. In the past, the data collected by Microsoft about the usage of its Kinect accessory helped the company improve the customer experience with HoloLens. Data collected from TikTok could provide Microsoft with a much-needed insight into user behaviors and connect with the consumers — something the tech giant hasn't done a good job of in the past. Furthermore, just like Google is using YouTube data to integrate with Stadia, Microsoft could ponder about the possibility of integrating TikTok with its xCloud game streaming.

New Consumer Segment and the “Cool” factor: TikTok already has a very big user base. It has over 100 million monthly users in the US with a majority of these users belonging to the 18–24 age group and younger. Microsoft has a great opportunity to learn and connect with a demographic that they don’t have a lot of exposure to. Microsoft is mostly an enterprise software and services company and while everyone loves the convenience that different cloud offerings provide, no one finds the conversation about virtual machines and data centers “cool” and this may be a chance for Microsoft to reclaim its coolness.

Competitive Advantages: Microsoft has got several things working in its favor — Microsoft is already thoroughly vetted by the government because of its recent Azure DoD contract and it would be very difficult for ByteDance to find another big tech company with the resources to handle the complexity of absorbing TikTok’s operations and alleviating the data-sharing concerns of the government.

The fact that TikTok is on a clock to negotiate a deal puts more pressure on them and Microsoft could be able to negotiate a better deal than in normal circumstances, especially because none of the other big tech companies have shown any interest in acquiring TikTok.

Artificial Intelligence and Augmented Reality: Microsoft is all-in when it comes to Artificial Intelligence. If you haven’t watched their “AI for good” videos already, I recommend you watch them, they are awesome. TikTok is a great consumer testing ground for Microsoft’s AI work. TikTok already utilizes AI for facial recognition with its filters that are very popular and Microsoft can re-engineer some of TikTok’s AI algorithms to further improve its AI capabilities. TikTok has also been utilizing Augmented Reality (AR) with its Ads and filters and it could be a great opportunity for Microsoft to venture into the mobile world of AR in addition to Hololens.

Bolstering Azure: Despite all the focus around the consumer services business, I believe the acquisition of TikTok is consistent with Microsoft’s cloud focus strategy. If the deal goes through, TikTok has the potential to be the biggest customer of Microsoft and a proof-point for Azure that they can compete with the scalability that Amazon’s AWS offers to its biggest clients like Netflix. Microsoft’s focus has been on landing big contracts and clients over the last couple of years and TikTok falls in line with that trend.

Are the Risks Worth the Rewards?

Along with all the great reasons why acquiring TikTok makes sense for Microsoft, there are several risks that seriously undermine the potential benefits for Microsoft:

Political Risk: When it comes to privacy and data security, there has been an increased focus from the regulatory government bodies about how the big tech operates and uses data. Microsoft was the only big tech company not in the antitrust hearing last week but with several privacy-related concerns about TikTok, this deal could present Microsoft with considerable political risk.

Not sure why but President Trump thinks that the US treasury should get a cut from the Microsoft- TikTok deal. This could make the deal less lucrative to Microsoft. Based on the track record of President Trump, I won’t be surprised if he threatens to pull out of the JEDI contract to strong-arm Microsoft.

Also, the Chinese government views the deal as “hypocritical” and could potentially cut-off Microsoft’s access to the $3 billion of revenue they generate in the Chinese market every year.

Logistics: It is uncertain how Microsoft would go about running an app in 4 markets while it remains available in 100s of other markets. A report from CNBC estimated that it may take Microsoft well over a year to move all the data to its US data centers and to re-engineer the code to decommission any connections with China’s operations of TikTok.

People move on: In the current digital age, consumers don’t wait too long to move to the next cool thing. It could take Microsoft a long time to work out the kinks of how to address all the privacy-related concerns that are associated with TikTok and there is no guarantee that the users wouldn’t move to other similar platforms. Facebook launched Instagram Reels yesterday which is reported to be very similar to TikTok (probably the reason Facebook wasn’t interested in acquiring TikTok). This acquisition has the potential to be a lot less sweet for Microsoft if they lose users to other platforms.

Final Words:

There is no doubt that Microsoft has all the resources and capabilities to make this work and there are a lot of potential upsides, especially with TikTok’s AI capabilities and the data it generates. However, in what could be the biggest Microsoft acquisition ever, there are so many blind spots that have the potential of making this acquisition a failure but in my opinion, the acquisition is still lucrative especially for a company with a strong balance sheet like Microsoft. Microsoft has the potential to improve and feed into a lot of its existing research if they acquire TikTok. It would be interesting to see how all this plays out in the next few years.

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