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Imagine a bidder who wants to buy KFC, but is told that the deal may not include the Colonel’s 11 secret herbs and spices. That’s effectively what Beijing has told the list of American companies wanting to buy the short video app TikTok: the key ingredients may be out of reach.
At first, it seemed like the Trump administration had it all figured out.
ByteDance Inc., he decided, was a national security risk and the main product of the Chinese company had to be sold for international markets. For reasons that remain unclear, Satya Nadella entered the fray and Microsoft Corp. submitted an offer. Soon, suitors apparently lined up to buy the hot new product claiming 100 million downloads in the US A short deadline, Sept. 15, helped generate a sense of urgency. TikTok is basically going through a forced sale.
Then Beijing intervened. China’s Ministry of Commerce added new items to its list of export controls on Friday night. Now, artificial intelligence interface technologies, such as speech and text recognition, as well as methods for analyzing data and making personalized content recommendations, are matters of national security.
That means ByteDance will need Chinese government approval to sell TikTok’s US operations, Bloomberg News reported on Sunday; a person familiar with the matter said the new rule is aimed at delaying the sale, not a total ban. But with artificial intelligence and its content recommendation engine among the key ingredients of the company’s success, Beijing becomes the arbiter of TikTok’s fate. Not the US administration.
As much as critics, including US senators and the secretary of state, express concern about the data TikTok collects, it is actually the algorithms that matter most to the company and anyone who buys it. These are the magic formulas that tell the app which data points will predict future behavior and keep you staring at the phone longer. If you linger on hip-hop videos and ignore the cooking tips, you’re likely to see more lip-syncing DJ Khalid and fewer turkey-stuffed recipes. Voice and text recognition allows TikTok to drill down into content to get a better idea of what is being said and written.
Facebook Inc., Snap Inc. and Alphabet Inc. are among those who spend billions of dollars in better predicting user behavior. This is the bread and butter of search engine results and timeline feeds, helping them sell more targeted ads at higher prices. Keep in mind that Google tends to deliver better results than Bing, despite having access to the same dataset (the entire internet!), And you will have an idea why algorithms matter. *
TikTok algos are gold. At least, that’s what the bidders seem to think.
And it seems that Beijing agrees. Indeed, the Chinese government is saying, “Do you want to buy TikTok? Go ahead, but that doesn’t mean you’ll have the secret sauce in your hands. “
This development is sure to send Microsoft, Oracle Corp. and everyone else to their bankers and lawyers, trying to figure out how much TikTok would be worth without those algorithms. ByteDance, for its part, will have to find out what it can and cannot include in the package that it is forced to sell. That is not easy.
In the worst case, this may require crawling millions of lines of code to determine whether the content is allowed or prohibited. It is not black and white. What one person considers AI may be viewed by another as mundane software technology.
As bidders scramble to guess what Beijing will allow them to buy and reevaluate if they want to bid, some may simply conclude that it is too full of uncertainty. Any final transaction will surely be drafted with provisions on what they can get; management’s fiduciary duty to shareholders requires no less.
This move returns the ball to Donald Trump’s court. The president of the US may have to deal with the real possibility that TikTok will not find a buyer, and will have to decide whether one of the most popular products in the country should be removed from the app store of his most valuable company. .
Trump may think that arming China strong will increase his chances of re-election, but being outbid could backfire. It’s also possible that if TikTok ends up being banned entirely, there will be a backlash from fans of the app.
With the trade talks between the United States and China moving slowly, Beijing has become a bargaining chip. Whether Trump is found to be bluffing or not, both sides now think they have the stronger hand.
* It is important to remember that the two search engines also create and use their own data based on user behavior. This data collection is powered by its proprietary algorithms, creating a virtuous cycle of algorithms and data.
© 2020 Bloomberg LP
