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Microsoft Nears Big Bet on TikTok After Risky LinkedIn Deal Shows Promise

Microsoft Nears Big Bet on TikTok After Risky LinkedIn Deal Shows Promise

TikTok deal could help Microsoft build on its LinkedIn purchase to become a big player in online advertising.

By Reuters | Updated: 3 August 2020 17:47 IST

Microsoft Nears Big Bet on TikTok After Risky LinkedIn Deal Shows Promise

TikTok will make Microsoft relevant among young engineers looking for a hip place to work and advertisers

Highlights

Microsoft's potential acquisition of TikTok carries myriad risks
The deal can help Microsoft build on its $27 billion purchase of LinkedIn
Microsoft on Sunday said it aims to complete a deal by September 15

Microsoft's potential acquisition of short-video app TikTok carries myriad risks, thrusting it into the politically fraught social media business and Sino-US conflict amid increased scrutiny of big-tech companies.

But the deal could help Microsoft build on its $27 billion (roughly Rs. 2.03 lakh crores) purchase of LinkedIn to become a bigger player in Internet advertising now dominated by Facebook and Alphabet's Google.

Microsoft on Sunday said it aims to complete a deal by September 15 for TikTok's US, Canada, Australia, and New Zealand operations. It is likely to have an edge in pricing negotiations as the US is effectively forcing TikTok's Chinese parent, ByteDance, to sell by threatening to ban the app as a security risk.

Microsoft Talks to Buy TikTok's US Operations Spurs Ire in China

TikTok has taken teenagers around the world by storm and emerged as a significant competitor to Facebook and Google's YouTube. But like rivals, TikTok faces substantial new costs for content moderation as the spread of misinformation and allegations of political bias roil social media.

Increased oversight costs accounted for much of the 10-percentage-point drop in gross profit margins for Facebook and Alphabet over the last 3-1/2 years, Refinitiv data showed.

"Does Microsoft really want to own an app that breeds conspiracy theories in tweens?" said Hank Green, YouTube star and chief executive of educational media company Complexly. He said TikTok removes content to maintain "a certain feel", and could face public challenges over such decisions more often under a bigger name such as Microsoft.

TikTok Parent ByteDance Accuses Facebook of 'Plagiarism and Smears'

At $1.55 trillion (roughly Rs. 1,16,61,448 crores), Microsoft is the world's second-largest company by market capitalisation after Apple but has in recent years faced less criticism than peers over antitrust, data protection and China projects.

Nadella's deals

Microsoft has done several big deals since Satya Nadella became chief executive in 2014, with acquisitions including world-building game Minecraft and job-search social network LinkedIn. They have fared better than those under predecessor Steve Ballmer, whose failed deals included Nokia Oyj's phone business.

The LinkedIn acquisition in 2016, for 50 ppercent above its share price, was Nadella's biggest and riskiest. Microsoft shares fell 3 percent when it was announced with analysts expressing concern about slowing revenue growth and an expected cap on usage.

Trump to Act on Chinese Apps Beyond TikTok in Coming Days, Says Pompeo

Some concerns may have been overblown. Microsoft has avoided antitrust and privacy scrutiny with a cautious approach to connecting LinkedIn to other products, such as Outlook, and analysts have largely viewed the deal as a success in terms of synergies.

Though the COVID-19 pandemic has slowed sales, LinkedIn ad revenue was among Microsoft's fastest-growing over 2017-2019 as the global economy roared.

Overall, LinkedIn has generated $14.3 billion (roughly Rs. 1.07 lakh crores) in revenue for Microsoft through ads and subscriptions, though analysts estimate it remains unprofitable.

TikTok is a bigger gamble because it caters to a less-affluent audience than LinkedIn, where advertisers typically pay more to attract wealthier consumers. TikTok's ad sales team and technology also are far less mature than LinkedIn's were, and TikTok faces greater competition.

About 11 percent of US adults use TikTok at least once per week, versus 49 percent for YouTube and 62 percent for Facebook, showed a survey last month by tech consultancy Vorhaus Advisors.

LinkedIn came to Microsoft at 13 years old with 11,000 employees and 105 million monthly users globally. Six-year-old TikTok, by contrast, has about 1,000 US employees and has been downloaded 226 million times in the four countries targeted by Microsoft's deal, showed data from app tracker Sensor Tower.

LinkedIn "was bought on domination of a sector, good revenue, and good margins," said Mike Vorhaus, head of Vorhaus Advisors. "TikTok is going to be valued based on its incredible user growth and mobile advertising revenue opportunities."

TikTok would make Microsoft relevant among both young engineers looking for a hip place to work and advertisers clamoring for alternatives to Facebook and Google.

Green, the YouTube star, said he doubted Microsoft ownership would hurt TikTok, noting he amassed 600,000 TikTok followers since he began posting a month ago.

"I don't see anything at all standing in the way," he said.

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