ByteDance – Brothers’ shadows.

TikTok needs independence to remove the growing regulatory risk.

• TikTok has joined Huawei as one of only two Chinese technology companies that have enjoyed great success in markets outside of China, but at the same time, this leaves it vulnerable to becoming another pawn in the long-running battle between China and the USA.
• ByteDance has had a fantastic 2019 generating $3bn of net profit on $17bn of revenues (Bloomberg) up more than 100% YoY largely due to its short video platform Douyin and TikTok.
• Douyin and TikTok are effectively the same thing except that one is designed for overseas use (TikTok) while the other works at home (Douyin).
• This has driven the valuation of the company from $75bn a year or so ago to $105bn – $140bn based on private secondary share transactions.
• Much of this value is being derived from TikTok which now has 1.5bn users outside of China and it is looking to expand beyond short videos into e-commerce and gaming.
• This makes complete sense and has become a standard strategy for every player in the digital ecosystem.
• However, TikTok’s international success lays it open to regulatory oversight from government bodies that are increasingly concerned with the influence that the Chinese Communist Party (CCP) has outside of its borders.
• In order to allay this concern, TikTok has hired Kevin Mayer from Disney to become its CEO but as long as TikTok remains a wholly-owned subsidiary of ByteDance, this is window dressing.
• ByteDance is no stranger to controversy as it rose to prominence with an app (Neihan Duanzi) where fairly edgy (in Chinese terms) content could be found.
• ByteDance was forced to close this app in 2018 and its CEO (Zhang) issued a letter criticising the company’s strategy blaming “deficiencies in education on the socialist core values and deviation from public opinion guidance.”
• ByteDance also announced that it would give preference to the hiring of CCP members (of which there are around 90m) and increase the number of censors which monitor its platforms.
• Consequently, the notion that ByteDance and TikTok are any more independent from the Chinese government than Huawei simply does not hold water.
• This creates a problem because it is clear that Huawei’s status as a symbol of Chinese technological excellence and success is being used by the USA to improve its long-term bargaining position for a trade deal that must happen at some point.
• TikTok is gathering vast amounts of data on non-Chinese users that it uses to understand their viewing preferences but how much of this information can be accessed by the CCP is unclear.
• The USA has recently ratcheted up its pressure on Huawei in a way that may cause real problems in its domestic smartphone business as well as its infrastructure business (see here), which should serve as a warning to TikTok.
• Hence, I think that ByteDance’s continued expansion of its ecosystem ambitions outside of China are likely to be best served by splitting TikTok off from its parent and reducing its interest to economic ownership only.
• Failure to do this will mean that the risk of regulatory interference from both sides will remain very high which will need to be taken into account when working out what ByteDance is worth when it comes to an IPO.
• The hiring of Kevin Meyer may be the first step in this direction but ByteDance needs to go much further if it wants its listing documents not to be full of uncomfortable risk warnings.
• The IPO is not imminent as ByteDance has around $6bn of cash on its balance sheet and is already profitable and generating cash.
• Hence, it can take its time but even this needs to be judged carefully as a regulatory strike could seriously damage the growth of TikTok and ByteDance outside of China.