China throws a wrench into TikTok acquisition plans

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Over the past year or so, the TikTok video-sharing app has become one of the hottest mobile services. But it has also become one of the largest political footballs in recent memory, thanks to an executive order that Donald Trump issued in early August, banning TikTok and a chat app called WeChat. Why? Because they are both owned by Chinese companies: TikTok is owned by a company called ByteDance, which also runs a news aggregation app called Toutiao, and WeChat is owned by Tencent, a holding company that controls a variety of media and entertainment services, including the online game League of Legends. In his vaguely worded order, Trump barred any American firm from having “dealings” with either TikTok or WeChat as of September 20, because he said they “threaten the national security, foreign policy, and economy of the United States.” The order cited legal authority from the International Emergency Economic Powers Act and the National Emergencies Act, and it immediately sparked a race to acquire TikTok’s assets before the September deadline, with Microsoft, Oracle, and Walmart all in the running.

But those plans hit a rather large roadblock this week after the Chinese government issued new restrictions on the sale or export of artificial-intelligence software. The “secret sauce” for the app is the algorithmic recommendation engine that decides which videos to show new users, and analysts say if ByteDance is prevented from including it as part of a sale, then interest in the acquisition could dry up—or at least interest in an acquisition in the $30 billion range. The Wall Street Journal reported that “a person close to the talks” compared TikTok without its algorithms to a fancy car with a cheap engine, while another person close to the sale talks said that not getting the algorithms would be a surprise, and “was skeptical that the deal would proceed without them.” Dan Primack, who writes about mergers and acquisitions for Axios, said selling TikTok without the algorithms would be “akin to McDonald’s selling a Big Mac without the meat.”

When Trump issued his executive order (which TikTok launched a lawsuit over), it was widely seen as a slam-dunk for whoever won the bidding for the company, albeit one based on a questionable legal foundation—the forced sale of a massively successful mobile app, delivered into the hands of any US company that could come up with the right deal. It may have caused a brief surge of emotion in Facebook chief executive Mark Zuckerberg as well, since he just added a TikTok-like feature to his Instagram video-sharing service, and any roadblock for a major competitor could be seen as a good thing. Database-software giant Oracle joined the bidding, along with a number of private equity firms, and Microsoft teamed up to make a bid with Walmart. A retail chain might seem like an odd fit for a mobile video-sharing app known for appealing to dancing teens, but analysts say the company could expand its reach to new customers and also move into the area of social commerce.

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Now, however, the sale of TikTok is caught between two giant nations fighting a political war by proxy. Chinese authorities said that the updates to the country’s technology sale and export laws were overdue, since they hadn’t been updated since 2008, but the artificial intelligence clause seemed designed specifically to apply to services like TikTok and to make their acquisitions more difficult. On Saturday, China’s official Xinhua News Agency quoted a government trade adviser as saying that ByteDance should study the new export list and “seriously and cautiously” consider whether or not it should halt its sales negotiations, according to a report in the Wall Street Journal. In order to go ahead with a sale, the company would have to get a license from the Chinese commerce ministry, but it’s not clear whether it would be granted. ByteDance founder Zhang Yiming is said to be reconsidering his options, according to a report in the South China Morning Post.

The Trump ban is seen as somewhat capricious, a finger in the eye of a country that has drawn the president’s ire in a number of ways. The ban on doing business with Huawei, which makes Android smartphones among other products, is seen as a similar saber-rattling effort by the White House. The justification for both bans is that Chinese apps and hardware are a security risk, but experts say there are far greater risks than a video-sharing app—for example, some of the most popular internet routers are made in China, and they can provide a backdoor into the internet connections of millions of people. It seems more likely that Trump views attacking China as an easy way to score political points heading into an election. And then there’s the fact that the president appears to still be looking to get a financial cut of any TikTok deal, something political analysts say has no precedent in recent political memory. 

Here’s more on TikTok and the US ban:

• Escalation: The implications of the TikTok ban are very worrisome, argues the Harvard Business Review. Not just because the data that TikTok collects pales in comparison to what many American tech companies—as well as banks, credit agencies, etc.—collect and share, but because banning a company and its technology is an extreme measure, and could escalate to a dangerous level. “Setting a precedent of banning everyday technologies could quickly spiral out of control and seriously disrupt almost all international trade,” the HBR says.
• Anxiety and rage: Employees of TikTok are feeling a range of emotions in the wake of the executive order, NPR reports. “Sometimes it’s anxiety. Sometimes it’s anger. Sometimes it’s disappointment. Sometimes it’s rage. It’s a mixture of things,” technical manager Patrick Ryan said. He filed a lawsuit against Trump and Treasury Secretary Wilbur Ross, representing all of the staff at the Chinese-owned company. The suit calls Trump’s action unconstitutional, alleging due process and other violations, and Ryan also writes in the suit that the president’s official actions against the company have “defamed and disgraced” TikTok employees.
• Overdue: Tim Wu, the Columbia law professor who coined the term “net neutrality,” argues in an op-ed for the New York Times that a ban on TikTok is justified because of the way that China blocks foreign apps and services, and censors content everywhere it can. “The threatened bans on TikTok and WeChat, whatever their motivations, can also be seen as an overdue response, a tit for tat, in a long battle for the soul of the internet,” Wu writes. “China keeps a closed and censorial internet economy at home while its products enjoy full access to open markets abroad. The asymmetry is unfair and ought no longer be tolerated.”

 

Other notable stories:

• Fox News’ Chris Wallace, NBC News’ Kirsten Welker, and C-SPAN’s Steve Scully will each moderate one of three Presidential Debates leading up to the 2020 election, taking center stage in seminal events in the campaign to win the White House later this year. The non-profit Commission on Presidential Debates said Wednesday that the three debates would each be 90 minutes long, as would a separate vice-presidential debate moderated by Susan Page of USA Today. In a break with tradition, none of the moderators are evening or weekend news anchors from any of the major broadcast or cable networks.
• The upheaval of 2020 has complicated the succession planning at the New York Times, reports Joe Pompeo in Vanity Fair. For a while, he writes, the conventional wisdom surrounding an eventual replacement for executive editor Dean Baquet consisted of three names: Joe Kahn, James Bennet, and Cliff Levy, “a trio of long-serving Times soldiers seen as the most seasoned and carefully groomed journalists in line for the throne.” But the controversy over an op-ed by Tom Cotton led to Bennet’s departure, and national editor Marc Lacey is increasingly being seen as a potential contender, Pompeo says.
• Andrew McCormick, deputy director of Covering Climate Now, writes for CJR about the president’s utter lack of a climate plan. “Too often, the press meets the president on his terms—and, in doing so, fails to interrogate something that is unacceptable from the nation’s leader, no matter one’s political sympathies,” he writes. “Does the president have a plan on this issue? a journalist asks. Of course not, goes the answer. Who would be fool enough to ask? And so the issue goes undiscussed. The effect, however inadvertent, is that journalists are giving a pass to the president on an issue of supreme and urgent importance to the country’s—and, indeed, humanity’s—future.”
• The fate of the BBC is up in the air in more ways than one, the New York Times reports. Prime Minister Boris Johnson hinted Wednesday he will soon roll out a plan to overhaul the BBC that would address the compulsory license fee that finances its operations. Meanwhile, there are two well-financed entities—including one from Rupert Murdoch—looking to create 24-hour channels offering opinionated news, in contrast to the BBC’s impartiality. “The BBC is uniquely vulnerable at this moment,” said Alan Rusbridger, a former editor in chief of the Guardian. “There is a convergence of interests between the government and media owners in damaging the BBC. For them, this story is almost too good to be true.”
• Spotlight News and the Institute for Nonprofit News announced Wednesday that many of the INN’s 250 members will be aggregating their 2020 election coverage through Spotlight News, an app that provides local news coverage via college newspapers and other publications like ProPublica. The service offers news publishers digital tools for both desktop and mobile applications and promises to give them 70 cents of every advertising dollar their work generates. INN members will feed their coverage into the Spotlight platform, where it will be featured on an Election 2020 dashboard along with coverage from other outlets.
• Ariana Pekary, CJR’s new public editor for CNN and a former producer for MSNBC, writes about how the only important thing for broadcast news is whether a story will help a network’s ratings. “The television news producers I know are whip-smart and want to do the right thing. The problem is the job itself, which forces them to muffle ideas of substance and moderation. The biggest roadblocks, as I observed, are not ideological bias, or outside influence from corporate interests. Those things are juicy narratives. But they aren’t what really drive the decisions. The largest obstacle to reliable news and information is this: hardly any programming decision is made without considering how it will ‘rate’.”
• Facebook removed two posts from a Republican member of Congress representing Louisiana on Tuesday in which he threatened to shoot protesters, suggesting he would “drop any 10 of you where you stand” if they showed up armed. “If this shows up, we’ll consider the armed presence a real threat,” Rep. Clay Higgins, a former law enforcement officer, posted Tuesday on his personal, verified Facebook page along with a picture of an armed Black militia group that has protested the police killings of Breonna Taylor and George Floyd. “We don’t care what color you are. We don’t care if you’re left or right. If you show up like this, if We recognize threat… you won’t walk away,” said Higgins.
• Andrew Wilkinson, a venture investor in British Columbia, Canada, started a local news provider in his home town of Victoria last year in the form of an email newsletter called Capital Daily, and says the venture now has 40,000 subscribers, more than the 100-year-old print newspaper that also serves the city. Wilkinson said that his biggest expense so far was $200,000 spent on Facebook advertising, and added that he has started hiring full-time journalists to do original reporting and “covering topics that other newsrooms (focused on short form quick bites) can’t or won’t cover.” 

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Mathew Ingram was CJR’s longtime chief digital writer. Previously, he was a senior writer with Fortune magazine. He has written about the intersection between media and technology since the earliest days of the commercial internet. His writing has been published in the Washington Post and the Financial Times as well as by Reuters and Bloomberg.