Why Is The U.S. Government Investigating TikTok?
If you’re older than 25, you might not have heard of TikTok, but this video-sharing app has been one of the fastest-growing social media platforms over the past few years.
Owned by the Chinese company ByteDance, TikTok has been making all the right moves as of late. The app was downloaded more than a billion times in 2018. It reportedly has 500 million active users globally as of this year, with roughly 41% of those between the ages of 16 and 24 — a key advertising demographic. In the first half of 2019, the company booked revenue of between $7 - $8.4 billion. The app has even drawn the attention of Facebook’s (NYSE: FB) Mark Zuckerberg, who now sees it as a competitor to be destroyed like Snapchat — a sure sign of success indeed.
Recently, however, TikTok has hit the headlines for very different reasons that might ultimately be very bad news for the company and a wider indication of growing international tensions.
Why is the U.S. government investigating TikTok?
As the trade war between the U.S. and China heightens, more and more scrutiny has fallen on this immensely popular app that is rapidly capturing the mindshare of U.S. teens.
At the start of October, Republican Senator Marco Rubio issued a letter calling for a formal investigation into TiKTok because “these Chinese-owned apps are increasingly being used to censor content and silence open discussion on topics deemed sensitive by the Chinese Government and Community Party.”
These comments came against the backdrop of pro-democracy protests in Hong Kong. To date, there has already been a litany of incidents where U.S. companies have come into conflict with the Chinese government over the protests, including the NBA, Nike (NYSE: NKE), Activision Blizzard (NASDAQ: ATVI) and Tiffany & Co (NYSE: TIF).
TikTok has been similarly accused of bowing to pressure from Beijing by featuring virtually no footage of the unrest on its platform, though the company has rebuffed these claims and said it "does not remove content" based on Chinese sensitivities. However, former U.S. employees have said that moderators based in Beijing had the final call on whether flagged videos were approved or not and that attempts to persuade Chinese teams not to block or penalize certain videos were routinely ignored.
This has led the U.S. government to launch a review of the company through the Committee on Foreign Investment in the United States (CFIUS). Specifically, this review is focusing on ByteDance’s acquisition of Musical.ly — an American app bought for $1 billion back in 2017. At the time, Musical.ly had about 60 million users across the U.S. and Europe and, less than a year after it was purchased, the service was subsumed into TikTok.
CIFUS has the scope to look at deals conducted by non-U.S. forms to see if they affect or undermine the national security of the U.S. Specifically, CIFUS is now investigating the claims of censorship in the light of Tiktok’s growing influence on U.S. audiences, as well as reports that user data is being sent to China.
If found guilty of threatening American national interests, ByteDance could be ordered to divest Musical.ly property from its portfolio and TikTok could potentially be banned from the U.S.
What does this mean for investors?
First off, there will be one person that’s probably quite pleased by these developments — Mark Zuckerberg. It’s no secret that Zucks sees TikTok as an ever-growing threat to his social media empire. For example, leaked audio from an internal meeting at Facebook a few months ago revealed that Zuckerberg is banking on Facebook’s own short-video app, Lasso, to claw back some market share. Zuckerberg also publicly blasted TikTok in a speech at Georgetown University earlier this month, castigating the young company for censoring protests.
More broadly, this unfolding investigation will also contribute to animosity towards Chinese companies in the U.S. and a potential worsening of trade relations. Many commentators like Casey Newton from The Verge are likening this case to that of Beijing Kunlun Tech acquiring the popular gay dating app Grindr back in 2016. This acquisition was retroactively investigated by CIFUS and, earlier this year, it was determined a national security risk with relation to the data it handles. As such, the U.S. government is now forcing Kunlun to sell off the company. It also likens to other points of tension between the two countries such as the blacklisting of Huawei equipment in the U.S. through the summer and the blocking of Broadcom’s (NASDAQ: AVGO) acquisition of Qualcomm (NASDAQ: QCOM) last year.
Finally, it’s worth pointing out that ByteDance is also part of the multi-billion dollar Vision Fund operated by Softbank, who has most recently been in the news over the catastrophic collapse of WeWork’s IPO ambitions. With other struggling companies in the fund like Uber (NYSE: UBER), fund manager Masayoshi Son will be desperately hoping that he doesn’t have another very public problem on his hands.
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