by Jim Lundy
The Wall Street Journal reported over the weekend that Microsoft is in talks to buy ByteDance’s subsidiary TikTok. There are many reasons for Microsoft to buy TikTok and there are many reasons why they should avoid it. This blog discusses the positives and negatives of a Microsoft-TikTok deal.
The US-China Privacy Issue and the need to Sell TikTok’s US Operation
The US has accused China of espionage and has recently closed the Chinese Consulate in Houston, Texas. TikTok is owned by China-based ByteDance and the US has accused China of potentially using TikTok for espionage on US Citizens. So, the sale of the US arm of TikTok is due to the pending US ban of TikTok for these privacy reasons.
The Good—Why TikTok Would Be Good for Microsoft
The key reason that TikTok would be good for Microsoft is that consumer stocks like Twitter and Facebook have high valuations in the public markets. Since ByteDance’s TikTok US operations only had revenue of $300 million in the US, we expect a lower price—say $5-10 billion, but not the $50 billion some are worried that Microsoft CEO Satya Nadella could be convinced to pay.
Microsoft has a history of overpaying for companies. Just a few years back they pay 26 billion for LinkedIn and they have yet to recoup even a fraction of that price.
The other benefit of Microsoft buying TikTok is the potential revenue upside. All Microsoft needs to do is to keep up the viral usage of Tick Tock and continue to build it out to add revenues that compete with Instagram and Pinterest—then it has a cash machine. Hold on though, consumer businesses are not that easy.
Microsoft has seen success as an enterprise provider but struggled with consumer markets. A TikTok acquisition may be a move to change this.
The Bad—Why TikTok Would Be Bad for Microsoft
TikTok will be bad for Microsoft because Microsoft is an enterprise company. Over the years they’ve proven repeatedly that their company culture is not good at focusing on selling to consumers. The Xbox franchise is now delivering revenue (up to $10 billion a year) after years of losses.
TikTok, however, is not gaming, it is an advertising play. That puts it in the gunsights of Facebook/Instagram and Snapchat, which has seen significant success with ads spliced in between consumer videos.
Satya may be thinking, “if Google can do it, why not us?” Google is mainly an advertising play. It makes money off of search. So, if Google can do it, why not Microsoft? Well, for starters, Bing is only now seeing success after years of struggling. As Microsoft has surged in the enterprise, Google continued to double down on search, and it has had to only recently decide to upgrade its executive staff for Google Cloud to compete head-on in the enterprise with Microsoft and Amazon AWS.
Microsoft is not good at consumer businesses and, just like the mobile phone disaster, which eventually led to Steve Ballmer’s departure from Microsoft, TikTok could be a distraction that Satya doesn’t need.
Bottom Line
Microsoft is all about the enterprise. TikTok, while appearing to offer some great revenue potential to Microsoft—is out of Microsoft’s enterprise domain expertise. Microsoft is doing quite well under Satya Nadella. So, while the deal is tempting, in our opinion, Microsoft is better off passing on it.
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