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The biggest problem with Microsoft’s fractured TikTok deal

The biggest problem with Microsoft’s fractured TikTok deal


No one has ever split up a social network along regional lines — is it even possible?

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Illustration by Alex Castro / The Verge

Microsoft has six weeks to close one of the strangest deals in tech industry history. On Sunday, the company publicly announced it was in talks with President Trump to buy portions of TikTok from its Chinese parent company ByteDance. For months, Trump has been raising national security concerns about TikTok, even threatening to ban the app, and now he’s presenting a sale to Microsoft as a last chance effort to save it. If the deal goes through, it would give Microsoft a new vantage on social networks and solve a variety of US national security concerns around TikTok’s newfound popularity.

But there’s a problem at the heart of the deal that no one on either side has addressed — and it’s serious enough to doom the entire project if it can’t be resolved. Microsoft isn’t bidding for TikTok; it’s bidding for the portion of TikTok in four countries: the US, Canada, Australia, and New Zealand. No one has ever split up a social network along regional lines, much less under threat of a national ban from the president. Peeling those four countries away from the rest of TikTok would be enormously difficult, and even if it were successful, it would leave Microsoft with an undersized and strangely regional social network, presenting significant investment and revenue challenges. Trump, ByteDance, and Microsoft have a lot to hash out over the next six weeks, but if they can’t solve that central problem, then none of it matters. And that central problem is much harder than anyone is willing to admit.

Microsoft would be buying less than a third of TikTok’s total platform

In practical terms, Microsoft is probably limiting the deal to four countries because it has to. Through the Committee on Foreign Investment in the United States (CFIUS), Trump has the power to force ByteDance to sell its US holdings. Canada, Australia, and New Zealand are the countries most closely aligned with the US in national security matters — most notoriously, as part of the Five Eyes intelligence sharing network (minus the UK) — and it’s likely that they’re on this list because they’re willing to make a similar move. When the US raised similar doubts about Huawei, the UK followed America’s lead, but only under duress, and Europe still hasn’t made the leap. Given the muddled justification and Trump’s pariah status among other major democracies, this is likely as far as the US can extend its influence in this particular fight.

But while the four-country approach makes sense for Trump, it’s not clear that it makes sense for Microsoft. No one has ever acquired a regional section of a social network before, and peeling away the Microsoft-owned portion of TikTok will be harder than it looks. As TikTok officials keep reminding us, the app is based in California, but the majority of its users are still in Asia or Europe. India’s TikTok ban has put a dent in those numbers, but Microsoft would still be buying less than a third of the total platform. We don’t know exactly which portions of TikTok’s operations Microsoft would get in the deal, but if the point is to sever TikTok from China, the company will have to rebuild any teams or infrastructure that are currently operated by ByteDance. 

In essence, TikTok will split into two apps (let’s call them MS-TikTok and BD-TikTok), with separate servers, a separate codebase, and separate users. That would impact nearly everyone who works with the app: advertisers would reach fewer users with a single ad buy, influencers would have a smaller pool to go viral in, and users would have less content to pick from. TikTok succeeds when it can show users interesting posts, and without K-Pop stans or African dance memes, it will be harder to deliver on that. Even letting users share content from one network to another — sharing a Turkish TikTok to a US account, say — would require significant engineering work, work that would only be more difficult as the two apps continued to develop on different tracks. Given the concerns about algorithmic propaganda, it’s not clear such sharing would even be allowed.

The new TikTok would have less scale, and lower profits as a result

Splitting the network would also be expensive. Even after the initial shock of rebuilding the ByteDance infrastructure, Microsoft will be stuck with a smaller audience and a smaller pool of revenue. Any investments into the platform — important work developing new features, say, or a new ad format — will be spread out over a much smaller pool of users, which means less money, less investment, and less growth. This is the iron law of scale, the power that let Facebook become so profitable so quickly as its user base grew. MS-TikTok would be taking that journey in reverse, assuming similar costs with far fewer users and far less revenue as a result. That new version of TikTok would be wildly less profitable, and with BD-TikTok already owning the market in the rest of the world, it’s not clear how much room there would be to scale up.

That’s not the only factor in the deal, to be sure. As Tom Warren laid out yesterday, there would be lots of advantages for Microsoft in owning a social network, even a small, region-locked one. The threat of CFIUS action really is an extraordinary circumstance, and it’s possible that ByteDance will sell at fire-sale prices, making the whole thing worthwhile. There’s so much we don’t know about the deal and so much still to be determined, so it would be foolish to discount it completely.

But the deal that’s been proposed relies on an unprecedented kind of corporate and technological fission. The internet is borderless by nature, and most social networks take advantage of that to run globe-spanning empires from comparatively regional headquarters. Paring the network back into national terms, with users in Korea seeing a different app from those in Hawaii, is a monumental task. It would be difficult under the best of circumstances. But doing it on a frantic six-week timetable, cheered on by a belligerent president and an ever-changing set of national security restrictions, seems downright impossible.