I'm not surprised that TikTok is going to sue the Trump administration. And I won't be surprised if it wins.
TikTok correctly says it has been unfairly targeted as a national-security threat by U.S. President Donald Trump, whose two executive orders against it would force TikTok's sale into U.S. hands. The short-video app says it has been deprived of due process, and I think it's right.
TikTok plans to file suit this week, as early as Monday. I said at the time of Trump's August 6 order that I thought it was mafia-style overreach, a move to tackle a hyper-popular app that just happens to be Chinese-owned. That order, which bans dealings with TikTok by U.S. companies within 45 days, was followed on August 14 by another executive order mandating that TikTok and its American operations be sold within 90 days.
TikTok's lawsuit would target the first executive order, according to Reuters, which first reported the pending lawsuit. The order marks the first use against a tech company of the International Emergency Economic Powers Act, which has mainly been used by past presidents to target terrorists, hostile governments and drug kingpins.
TikTok will argue that it does not deserve to be classed a national-security threat, Reuters reports, citing "sources familiar with the matter." It will also claim the order deprives it of due process. It's not yet clear in which court TikTok will sue.
Like most tech, TikTok could be used inappropriately. But it's of limited if any threat to U.S. home security or its military capabilities. Inappropriate language and lewd dance moves, and tension at home, are the more likely result of its heavy use.
TikTok says it tried "for nearly a year" to negotiate with the U.S. government "in good faith" to solve its concerns. "What we encountered instead was that the Administration paid no attention to facts, dictated terms of an agreement without going through standard legal processes, and tried to insert itself into negotiations between private businesses."
Sounds about right.
U.S. President Donald Trump on August 6 issued separate executive orders against the U.S. operations of both TikTok and the chat app WeChat, which is run by Tencent Holdings (TCEHY). Essentially, those are the two most-popular Chinese-owned apps. If the U.S. businesses weren't sold off, U.S. companies had to stop doing business with them.
Trump has even said that the U.S. government should get a "substantial portion" of the proceeds of any TikTok sale. Quite where he gets the idea that the U.S. government should be getting a finder's fee for, presumably, using its powers equitably and fairly is anyone's guess.
The price thrown around for TikTok's U.S. operations is US$30 billion, when earlier estimates suggested it would be worth at least US$50 billion. It's likely that left to its own devices, TikTok would have gone public as a separate entity comprised of its operations outside China.
The rushed nature of the sale leaves the company less time to find its preferred partner. Knowing it was under pressure, the company had already ensured that all U.S. data is held outside China, in the United States with backup in Singapore.
Microsoft (MSFT) and the enterprise software company Oracle (ORCL) are the frontrunners in the bidding. But TikTok's original backers, including the venture capital companies Sequoia Capital and General Atlantic, had also been preparing an offer, with little word on how that has advanced.
TikTok was the world's most-popular app in 2018 and 2019. It has been downloaded around 1.5 billion times worldwide and by 175 million people in the United States. It ramped up overseas after buying the U.S. lip-synch app Musical.ly in 2018.
In a sign of how influential TikTok has become, it announced a deal last week with indie music distributor UnitedMasters to distribute music through the app to streaming services. The move helps the artists go straight to the consumer and to streaming charts without ever using a record label. TikTok has been instrumental in helping artists like Lil Nas X and StaySolidRocky go viral.
TikTok of course has a Chinese parent, ByteDance. But it has been doing plenty to separate its international business from its domestic one, where it runs an equally popular Chinese-language version of TikTok, called Douyin.
It is a sign of that startup's efforts to distance itself from China that it has shortened its name to ByteDance Ltd., from its original Beijing ByteDance Technology Co.
In May, ByteDance hired the head of the streaming business at Walt Disney (DIS) , Kevin Mayer, as COO of the entire company, and CEO of TikTok. Mayer, who had been passed over in February for the CEO role at Disney, remains based in Los Angeles, working on the company's global expansion. I've heard here that Chinese executives have left the company in Beijing, fearing their roles are being sidelined.
If all the TikTok data is stored outside China, it is not subject to Chinese law, and out of the spying eyes of the Communist Party. TikTok says it never removes material because it is sensitive to China. The U.S. government could ensure the data storage and use claims are true without forcing a sale.
TikTok has found itself in Trump's sights simply because it is so successful. Trump knows that many parents are concerned about their teens (and pre-teens who lie about their age) spending time on TikTok. Parents being parents, they don't really know what's going on on the app.
It's mainly lip synching and dancing. Yes, TikTok data could be harvested and provided to the Chinese government, allowing them to track people's movements, although that would mainly be movements to Drake tunes. The data could be fed into artificial intelligence programs and used to develop facial recognition.
But frankly the Chinese government has plenty of other much more efficient ways of getting its hands on that kind of information. It could equally be mining public images on Facebook (FB) or any other popular app. Facebook has taken up the time-honored Chinese practice of imitation, rolling out in June via Instagram its TikTok competitor Reels.
U.S. tech companies such as Amazon.com (AMZN) , Facebook and Microsoft have all developed businesses in which they sell artificial intelligence. The Facebook function Deeptext deciphers the content posted on its sites, then uses that to send users ads based on their conversations. I have friends who swear those companies are listening through their phones to their voice conversations and doing the same...
Is U.S. Big Tech discerning about where it sells its wares? Not always. In June, Amazon said it would pause a program in which it had been selling its facial-recognition tool to U.S. police forces.
Microsoft's M12 Ventures private-equity arm was forced to sell off its investment in the Israeli facial-recognition company AnyVision. But only after it became public knowledge that its technology was being used by the Israeli government to surveil people movements in the West Bank.
ByteDance, founded in 2012, is the world's most-valuable "unicorn" tech startup. In mulling an IPO of the entire business, it was looking at a valuation of US$150 billion to US$180 billion. Now it faces losing the crown jewel in its international empire at a cut-rate price.
TikTok is to 2020 what Juul was to 2019. A fad that's super-popular with teens and very worrying to parents. That attracts the attention of vote-seeking politicians.
TikTok's not a national security threat any more than any other app, foreign-owned or not. It's being hustled by the U.S. government, and I agree that's not fair.
(Microsoft, Disney, Amazon, and Facebook are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
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August 24, 2020 at 07:25PM
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