Sep 21, 2020 - Technology

The TikTok deal's for-show provisions and flimsy foundations

Illustration of a TikTok logo cut out from behind, propped up on stilts, as if it is a Potemkin village element.

Illustration: Aïda Amer/Axios

The new deal to rescue TikTok from a threatened U.S. ban — full of provisions aimed at creating the temporary appearance of a presidential win — looks like a sort of Potemkin village agreement.

How it works: Potemkin villages were fake-storefront towns stood up to impress a visiting czar and dignitaries. When the visitors left, the stage set got struck.

  • Similarly, many elements of this plan look hastily erected and easily abandoned once the spotlight moves on.

The big picture: TikTok's drama has unfolded as trade and security tensions between China and the U.S. deepen. The process has been driven by three demands from President Trump.

1. ByteDance, TikTok's Chinese owner, must sell it to a U.S. company. After Microsoft's effort to acquire TikTok failed, Oracle emerged as the leading bidder.

  • But the actual deal, according to reporting by Axios' Ina Fried and Dan Primack, involves ByteDance handing TikTok over to a newly constituted U.S. company named TikTok Global.
  • Oracle and Walmart will take 20% ownership of that company — valued, according to many reports, at between $50 and $60 billion. The rest of it will be owned by ByteDance's existing shareholders, who include both Chinese and U.S. investors.
  • Yes, but: On Saturday, Trump said of the deal, "It will have nothing to do with China," and that looks simply wrong.
  • ByteDance's Chinese owners will likely own roughly a third of the new firm, and its founder Zhang Yiming will sit on its board.
  • TikTok Global plans a U.S. IPO within the next year, and the deal's backers promise that will make the new company more transparent and ultimately more U.S.-owned.
  • It's still unclear exactly how TikTok Global will get to operate TikTok's coveted recommendation algorithm, or how its U.S. operation will be able to vet it.

2. The deal must secure American users' data. ByteDance, as a Chinese company, can't protect U.S. users' data from Chinese government spying, the firm's critics charge.

  • ByteDance has long insisted that it stores all U.S. data outside of China's reach.
  • Under the new deal, Oracle will take over all of TikTok's cloud operations in the U.S. market. Oracle has a close relationship with the White House, and Trump says he's confident in its security capabilities.
  • A separate, U.S.-only board and security apparatus will oversee TikTok's U.S. operation to further placate U.S. concerns.
  • Yes, but: TikTok's security threat remained hypothetical, not evidence-based, and it's unclear how different in practice the new arrangement will be from the old.

3. The deal must benefit the United States. In August, Trump insisted that the U.S. Treasury get a cut of the deal.

  • It was never clear on what legal basis the president made this claim, which sounded like a shake-down to many observers.
  • Oracle's deal announcement cites a promise by TikTok Global to add 25,000 new jobs to its U.S. workforce and says that would ultimately funnel $5 billion in new tax revenue to the U.S.
  • The deal also involves an educational fund that the new TikTok Global plans to set up "to develop... an AI-driven online video curriculum." Most of the money for this effort is expected to come post-IPO.
  • Over the weekend Trump claimed that this fund would set aside $5 billion for his recently announced "patriotic education" initiative.
  • Yes, but: That last part was news to ByteDance. The jobs could materialize, but the Trump administration has a long record of extracting promises of jobs that never arrive — as happened with a 2017 Foxconn factory deal in Wisconsin.

The bottom line: Trump blessed the deal this weekend, but he got little of what he wanted.

  • "Make the owners sell to an American firm" has turned into a complex transaction with plenty of Chinese involvement and a lot hanging on an IPO that might never happen.
  • The U.S. won some security concessions, but no one can be sure that the TikTok threat — if it was ever real — has been eliminated.
  • The U.S. cut is deferred and conditional. The terms save the president's face but don't actually give him what he demanded.

Our thought bubble: The murk surrounding this process is a sign of just how far outside the norms of business everything about it has been from the start.

What's next: Between now and a Nov. 12 deadline, lawyers for all the parties will fill in the many blanks, seek to satisfy U.S. regulators' reviews, and try to make this deal fly. China, too, needs to bless the plan. Meanwhile, TikTok users' consumption of short videos and memes will continue undisrupted till after the election.

Editor's note: This story has been updated to clarify wording around the new TikTok Global's ability to use TikTok's recommendation algorithm.

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