Investors in Chinese startup ByteDance Technology Co. are watching with increasing concern as countries around the world are closely scrutinizing the company’s popular social-video app TikTok because of security and intelligence concerns.
TikTok, an app popular with teenagers to share user-created short videos, has come under fire for its potential as an espionage tool for the Chinese Communist Party (CCP). While ByteDance has frequently denied that it would hand such information to the CCP, TikTok has been banned by India, while companies including Wells Fargo have warned their employees about installing the app on company-issued smartphones.
The app company has repeatedly sought to distance itself from Beijing, pointing to its U.S. board members, the segregation of data, and the recent appointment of former Walt Disney Co. executive Kevin Mayer as TikTok’s CEO. Earlier this year, TikTok reportedly held discussions with the UK government about relocating its headquarters to London as part of TikTok’s strategy to convince foreign governments of its independence from the communist regime; London is one of a handful of cities under consideration.
But security concerns related to TikTok are real, and such public platitudes are unlikely to convince governments to permit widespread usage of the app. A former internet censor in China recently told The Epoch Times that he was once interviewed by ByteDance for the role of monitoring and censoring videos posted by TikTok users.
Assuming that company executives are truly set against sharing data with the CCP, it’s still not up to them. Every Chinese company, public or private, government-owned or non-government-owned, is required to abide by the CCP’s intelligence, censorship, and security laws.
In a much more widely reported case of TikTok kowtowing to the CCP, ByteDance founder Zhang Yiming had to issue a letter of self-criticism in 2018 after running afoul of Chinese internet content censors.
“Our product took the wrong path, and content appeared that was incommensurate with socialist core values,” Zhang wrote at the time.
Massive Value Destruction
The Trump administration is considering a ban on TikTok in the United States—a move that would threaten the app’s future growth and perhaps its existence. It’s enough of a threat that could cause existing ByteDance investors to debate options to ringfence the app and save its value.
ByteDance is a private technology startup with some powerful and influential investors. In its latest fundraising round in 2018, it raised money from Japanese conglomerate SoftBank Group and U.S. private equity firms KKR and General Atlantic. That round valued ByteDance at $75 billion.
The company’s most recent valuation is reported to be as high as $100 billion, according to the South China Morning Post, citing people familiar with the most recent private share transactions.
That’s a staggering valuation. But consider this: TikTok has 800 million estimated average monthly users, and the app was downloaded more than 738 million times in 2019, according to the website BusinessofApps. In the United States, it was downloaded more than 46 million times in 2019.
The app has been downloaded 2 billion times globally and 165 million times in the United States, according to Caixin, citing data from Senso Tower.
Those are all metrics that support TikTok’s popularity and its supposed economic value. Politics and security concerns aside, TikTok has an established platform with user-generated content that is valuable to advertisers.
But ByteDance investors can only fully realize that value if the app continues to grow, adds users, and eventually goes public, or is bought out.
A US Buyout to Save the App?
But the increasing worldwide scrutiny, due to the app’s Chinese background and association with the CCP, is a grave threat to achieving those lofty goals, and a U.S. ban would be catastrophic. That’s why ByteDance has spent $500,000 in the second quarter of 2020 on lobbying efforts in Washington, according to the firm’s lobbying disclosure reviewed by Bloomberg.
Investors are mobilizing to save TikTok from getting the Huawei treatment, which would instantly destroy the company’s value.
According to technology industry website The Information, certain U.S.-based investors are actively discussing a buyout of the TikTok app from ByteDance. Investors including venture capital firm Sequoia Capital and existing investor General Atlantic have held discussions with the U.S. Department of Treasury (which oversees the Committee on Foreign Investment in the United States) and other federal regulators about the future ownership, data, and technology requirements that would satisfy federal government concerns about the app.
ByteDance also appears to be preparing for an eventual divesting of TikTok. Alex Zhu, the former CEO of TikTok, has been tasked by the parent company to scour for new technology investments, according to a CNBC report. ByteDance’s most recent acquisition was a deal in May to purchase Baikemy.com, a health content website. In this sense, ByteDance may view itself less as TikTok’s parent company but as a holding company for startup assets, of which TikTok is a portfolio company that may eventually exit.
A deal for TikTok wouldn’t be easy to pull off; the parties would have to thread the needle on a valuation that would be palatable to existing ByteDance investors as well as presenting enough future upside for its new owners. And without the crown jewel of TikTok, would existing ByteDance investors stick around?
Regardless, a U.S.-led buyout to ringfence TikTok away from ByteDance could work—assuming the U.S. government could get comfortable with the app, for example, after its code is scrubbed to ensure zero access of the app from CCP or Chinese sources.
It may be the most constructive scenario for all parties. Existing ByteDance investors would be paid out, its users would have greater assurance that they aren’t spied on by the CCP, and it would allow TikTok to continue its growth.