(Reuters) – Microsoft Corp.’s bid to cut TikTok shares from its Chinese owner ByteDance will be a technically complex endeavor that could test the patience of President Donald Trump’s administration, according to sources familiar with the setup.
Trump has given Microsoft until September 15 to create a blueprint for a purchase that protects the personal data of Americans stored on the short video app, and he has given an order to ban it if there is no deal .
Microsoft is negotiating a transition period that will allow TikTok to technically ring Byfence of ByteDance after agreeing to a deal, Reuters reported on August 2.
The clean break that Trump and lawmakers can anticipate can last a year or more, some sources said.
TikTok is functionally and technically similar to ByyDance-owned Douyin, which is only available in China, and shares technical resources with it and other ByteDance-owned property, people familiar with the matter said.
ByteDance began working on its technological separation several months ago amid US government scrutiny, a source familiar with the process told Reuters. It began planning for a split as part of a strategy to relocate its power from China, Reuters reported.
While the code for the app, which determines the look and feel of TikTok, is separate from Douyin, the server code is still partially shared across other ByteDance products, the source said. The server code provides basic functionality of the apps such as data storage, content moderation and recommendation algorithms and the management of user profiles.
To ensure uninterrupted TikTok service, Microsoft would likely have to rely on ByteDance code as it reviews and revises the code, and moves to a new back-end infrastructure to serve users, according to cyber security expert Ryan Speers at River Loop Security, which provides services including cyber security due diligence for deals.
Any continued technical or operational confidence of the U.S. company in the Chinese company after the sale in general would have been unacceptable to the Committee on Foreign Investment in the United States (CFIUS), said Aimen Mir, former assistant professor- Secretary of the Treasury in charge of CFIUS, now a partner at the law firm Freshfields Bruckhaus Deringer.
In the past, CFIUS has needed the adoption of increased protections pending a sale, including separating the U.S. company from foreign vendors as far as possible, he said.
Another challenge Microsoft faces is how it will convey what is seen as TikTok’s secret sauce, the recommendation engine that keeps users hooked to their screens. This engine, as an algorithm, powers TikTok’s “For You” page, which recommends the following video to watch based on an analysis of user behavior.
TikTok uses recommendation algorithms that are independent of Douyin, according to two sources familiar with the matter. But what makes it tick is the content and user information that is entered into the algorithm.
“Algorithms are worth nothing without the data,” said Jim DuBois, a former Chief Information Officer at Microsoft. DuBois is a venture consultant at Ignition Partners. “Segmenting the data for those countries is an important task.”
Negotiations by Microsoft for the acquisition of US, Canadian, New Zealand and Australian operations from TikTok complicate a divorce. Not only would TikTok be separated from ByteDance, it would have to be separated from TikTok’s other regions. This adds to the technical challenges due to the amount of data involved.
“The biggest part is separating the user data – both content and user data,” DuBois said, noting that hard disks of data are likely to be transferred between ByteDance and Microsoft.
TikTok had said its user data was stored in the US, with a backup in Singapore, separate from the rest of the company.
The proposed timeline makes completing a deal very challenging, said Karen C. Hermann, an attorney for deals at Venable LLP: “It can sometimes take months and months just to identify the business needs of the distributed company, what IP and other assets it uses exclusively, and what assets and IP it shares with other companies in the business group. “
(Report by Echo Wang in New York and Paresh Dave in San Francisco; additional reporting by Katie Paul in San Francisco; edited by Kenneth Li and Grant McCool)
