TikTok is a Chinese-controlled internet portal where youngsters all over the world share hilarious videos of pets. Yet Mr Trump is determined either to supress it or bring it under US control. Why? Does it really imperil America’s security? asks Victor Hill.

Living the dream online

The American R&B singer-songwriter Jason Derulo has 31 million followers on TikTok. They can download video clips at any time of him dancing goofily around the swimming pool of his LA mansion. No doubt this has contributed to his success: he has sold 190 million albums and six billion live streams. (He also played Rum Tum Tugger in the 2019 film version of Cats, though that turned out to be a box office disaster.)

During the pandemic lockdowns in the USA, Jason has emerged as the King of TikTok, churning out sharply edited content at a rate of up to six posts a day, some of which are brand endorsements. His fans know virtually everything about him – his girlfriend, Jena Frumes, a fitness guru, and his dogs all participate in the videos. They know the layout of his house, when he has rows with his Mom and even what he’s had for breakfast.

The fear is that ByteDance/TikTok knows all of that too about Jason’s 31 million fans.

TikTok: Origins

In 2015 Zhang Yiming, a 32-year old graduate from Fujian Province, set up TikTok as a branch of his data company, ByteDance. Mr Zhang has no obvious affiliation with the Communist Party of China (CPC) as does, for example, Ren Zhengfei, the founder and CEO of Huawei. From the outset he applied AI algorithms, developed in-house (or so we are told) to grab users’ attention. TikTok is often described by its users as addictive because it offers a constant stream of video clips which correspond precisely to users’ interests. It now has between 800 million and one billion registered users.

TikTok’s rapid international expansion began when it bought the Chinese company Musical.ly which had a foothold in the US. Curiously, there was pre-cursor to TikTok in the US called Vine. This was used at its height by 200 million followers who were able to create short looping video clips, usually containing music. The app was bought by Twitter in 2012 for a reported $30 million; but in 2017 Twitter shut it down.

Until July TikTok was thought to be worth around $100 billion, making it the world’s most valuable start-up. TikTok’s revenues last year were $200-$300 million, mainly from targeted advertising (like Facebook). The corporate plan was to build revenues to $1 billion this year. Now the planned IPO may not happen. What went wrong?

Mr Trump strikes back

On 06 August President Trump gave TikTok’s owner, Chinese tech giant ByteDance, an ultimatum, invoking US security laws by executive order. Either TikTok would come under US ownership and control within 45 days or it would be suppressed in the USA altogether. Microsoft quickly emerged as a probable buyer of TikTok’s operations in the USA, Canada, Australia and New Zealand. Significantly, the US executive order does not require TikTok to sell its operations in Europe or the UK.

We are seeing the manifestation of the nascent US-China cold war in cyberspace. And this will have far-reaching consequences. The President has vowed to disconnect from all “untrustworthy” Chinese apps including the multi-functional platform WeChat (owned by Tencent (HKG:0700)). There is little that the Chinese can do by way of retribution since Facebook, Google and Twitter are already effectively locked out of China.

China described President Trump’s move as “outright bullying” which goes against the principles of the market economy. The move is also unpopular in the US where TikTok has been a key tool for BLM supporters to showcase their protests.

But it’s not just a US-China dispute. There is an EU-US dispute as well. The increasingly entrenched view in Europe is that the US-controlled internet fails to protect consumers and disadvantages European start-ups, making them prey to the US tech titans.

Then there is also a momentous China-India rift. In July India banned TikTok and 56 other Chinese-controlled apps further to China’s incursion into Ladakh in June. India was reckoned to be TikTok’s second largest user base. This is not exceptional: Brazil has banned WhatsApp several times and Iran blocks Instagram. Similarly, Russia has banned LinkedIn.

Where does this leave Britain? Reportedly, despite the reluctant defenestration of Huawei under American pressure, the Johnson government has given the nod for ByteDance/TikTok to establish TikTok’s global HQ in London. In practice, the final decision will probably be delayed until after the outcome of the US presidential election (03 November). Should we expect another Johnson government U-turn?

Tencent

By the terms of the executive order of 31 July, Tencent was also given 45 days to dispose of WeChat’s operations in the USA. The move knocked $30 billion off Tencent’s market cap. WeChat is a super-app which offers a range of functions from messaging to games to financial services. It is the largest online payments platform within China. The main users of WeChat in the USA are people of Chinese heritage who communicate with friends and family back in China where WeChat is ubiquitous. Globally, it is used by 1.2 billion people.

The ban could force Apple (NASDAQ:AAPL) to remove the WeChat app from its App Store. That could make iPhones less appealing to Chinese consumers. Last Friday (14 August), at a press conference, a reporter asked if the President was concerned that by banning WeChat in the US Apple’s sales of iPhones would be adversely affected. Mr Trump replied: “Whatever”. He might have pointed out that China has already removed about half of the games available on Apple’s App Store available in China, so the tech giant is already at a disadvantage in the Chinese market.

But there could be consequences. Tencent is a big investor in the US economy. It has stakes in Tesla (NASDAQ:TSLA), Spotify (NYSE:SPOT), Snapchat (NYSE:SNAP), Uber (NYSE:UBER), Lyft (NASDAQ:LYFT) and Warner Music (NASDAQ:WMG). It has large stakes in Epic Games which makes Fortnightand Riot Games which makes League of Legends as well as many other computer game specialists.

Getting round the ban

When an app is banned in the USA, it cannot be accessed by any computer with a US IP address. (Every computer in the world has a unique ID.) But by using a virtual private network (VPN) a user can choose an IP from anywhere in the world they want – and then access the internet. Apparently, Google searches for VPNs have increased massively since the executive order.

The irony is that many of these VPNs operate out of China – where the state can demand computer encryption keys at any time. Many VPNs have been storing encryption keys in Hong Kong which was – until now – outside China’s Great Firewall. Until now Hong Kongers could surf the internet pretty much as any American or European can. That is about to change.

Rival bidders

The US administration seems to have assumed that Microsoft would be the natural buyer for TikTok. But in a recent interview the company’s founder, Bill Gates, said that such a deal would be a “poisoned chalice”. (Mr Gates is still an Advisor to the company’s board.) Microsoft is not a social media company – it has even shut down Windows Live Messenger in recent years to focus on its core markets; and its purchase of Skype in 2011 for $8.5 billion is regarded as a disaster. The logic of its ownership of LinkedIn (Facebook for professionals) has been questioned.

While it still has a substantial gaming business with its Xbox and Minecraft products, Microsoft’s core business is the Windows operating system, cloud computing and its Office software (now rebranded as Microsoft 365). On the other hand, unlike the other tech titans, Microsoft has a very substantial business in China – LinkedIn is the only US social network permitted to operate there. And at least Microsoft has incited fewer data privacy scandals than its advertising-funded tech peers Facebook and Google.

On Wednesday (19 August) the Financial Times reported that Oracle (NYSE:ORCL) had emerged as a rival suitor for TikTok’s business. Oracle is normally thought of as a software developer rather than as a social media company. But Oracle has the advantage of close ties with the White House. Both co-founder Larry Ellison and CEO Safra Catz are among the few prominent Trump supporters in Silicon Valley. On the other hand, Oracle has little experience of running consumer-facing businesses.

Twitter is also thought to be interested. But Twitter is a minnow: it has a market cap of around $30 billion as compared to Microsoft’s $1.6 trillion. So, the price tag for TikTok’s US operation of around $30 billion would be a bit of a stretch. That said, some of Twitter’s original backers such as Silver Lake Partners and Elliott Management have deep pockets. Twitter already streams music and video, so the two businesses would meld well. Further, it is unlikely that Twitter would encounter any regulatory objections on grounds of unfair competition.

Another possibility is that the two US private equity firms that first backed ByteDance may decide to increase their stakes. Sequoia Capital has a 10 percent stake in ByteDance. General Atlantic has a similar stake. Even SoftBank (TYO:9984) is reportedly interested.

But in practical terms, whoever comes forward to buy TikTok’s US operation will face technical challenges. The code on which TikTok operates will have to be picked out of a pre-existing Chinese operating system and it is unlikely that that could be accomplished by the 15 September deadline. Another consideration is that Instagram (owned by Facebook) and Snapchat are rumoured to be working on platforms that would compete with TikTok.

Why it matters

Why should we care if the CPC is harvesting data about teenagers in Manchester or Bangkok? Nigel Inkster of the International Institute of Strategic Studies recently explained that China’s security services were adept at finding digital weak spots for high-profile targets. One such weak spot could be their children. For its part, TikTok claims that its UK user data is stored in the US and Singapore and will soon be transferred to a new data centre in Ireland. TikTok does not operate in China and has an American CEO. Figures from Ofcom reveal that almost half of 8-12-year olds in the UK use TikTok.

Indeed, why would we worry that Grindr, the gay hook-up app, was acquired by a Chinese gaming company four years ago? Beijing Kunlun was forced to sell its majority stake in Grindr to a US investment in March this year, having been declared a national security threat by the US government. The allegation was that data concerning the app’s 27 million US subscribers – including their HIV status – was made available to the Chinese government.

The US authorities (and ours) have legitimate concerns about China which has increasingly become in recent years a surveillance state. It is harnessing new technologies – facial recognition technology amongst them – to harass supporters of democracy in Hong Kong, Uighurs in Xinjiang and dissidents in Tibet. Its citizens, even members of the CPC, are being adjudged according to a social credit system. WeChat has almost certainly been used by the Chinese police to track citizens.

The CPC, which runs China, has a seemingly insatiable appetite for personal data. Fantastical as it sounds, some security analysts think that China is systematically building a database which embraces every single human being in the world. Somewhere on a hard disk in the bowels of a Chinese data centre, there is a file on you, dear reader. Your opinions, your likes and dislikes, have been mined and analysed. And they know exactly what you think about China and its future.

One day they might use that data for their own ends.

***

The travails of President Alexandr Boris de Pfeffell Lukashenko-Johnson

President Lukashenko-Johnson has been around, in one role or another, for a long time and for many years his upward trajectory seemed unassailable. As we know, he succeeded in taking control of a smallish and somewhat marshy country on the European periphery. His governance has been characterised as rule by decree from an impenetrable bunker – where he is apparently surrounded by third-rate cronies who lack communication skills. Though, he does occasionally surface in public for histrionic stunts – which normally involve the wearing of hard hats and high-viz jackets and much braying in an obscure dialect.

The President’s extraordinary career has been much adumbrated by the coronavirus pandemic, which he is considered to have handled both incompetently and insensitively. In the early stages he denied there was a problem at all – and then he surrounded himself with a clutch of scientists who couldn’t agree with one another and jostled like ferrets in a sack. His government made a sequence of promises about protecting care homes, virus testing and a world class tracing app – which it proved totally incapable of delivering. Even the ideologically and intellectually emasculated media in his country could see through that.

The country’s economy has experienced its greatest downturn ever recorded. Unemployment is about to rise precipitously. The country’s fiscal deficit is about to surge to unprecedented, and unsustainable, levels. Yet the President asserts that all will be well once a high-speed train is constructed between its first and second cities – a project that will entail the destruction of primary forest.

Very little is known about the President’s private life, though he is occasionally photographed in the company of a small mongrel. More importantly, commentators cannot work out his strategic game-plan. Should the country make concessions to its powerful neighbour and trading partner to the East? Or is it more likely to embrace its neighbours to the West, with some of whom its language is comprehensible?

Alas, no one can answer these questions, as the President has gone underground again. But above ground no one can doubt that the vultures are circling.