Now it comes down to China.
- Its looks like Oracle and TikTok have made just enough concessions to pass the US administration but now comes the test of whether these concessions are too much for China.
- The general agreement is that TikTok (outside of China) will be spun out into a new entity (valued at $60bn (see below) of which ByteDance will maintain majority ownership and control and where Oracle and Walmart will have minority stakes.
- Oracle will be the custodian of the data which will run on its cloud infrastructure with source code access so that it can see the data, what is happening to it and where it is located or being sent to.
- This means that the critical algorithm that is central to ByteDance’s ability to offer superior video recommendations to users will be running in Oracle’s cloud and Oracle will have access to it.
- I think that this counts as an export of “personalised information recommendation services based on data analysis,“ which now requires approval from China in order to go ahead.
- The proponents of this deal claim that China’s chief objection to Microsoft’s deal was that ByteDance would have lost majority control, but I think that the algorithm is also a big issue.
- If one flips the deal on its head and imagines a situation where a world-leading piece of US software was going to be run on Chinese servers where a Chinese company had full access to it, one can start to see why China might object.
- For many years most of the technology industry has been wary of utilising critical IP in China preferring instead to make the product overseas and then send it to China for final assembly or sale.
- This is one occasion where it is China that has the edge in intellectual property and I can understand its position should it decide that such a technological edge should not be exported.
- Hence, I don’t think this deal is a slam dunk to be approved by the Chinese and so more back and forth might be required.
- The valuation of $60bn is also pretty punchy in my view.
- TikTok outside of China has around 200m users, the vast majority of which are either in India (100m) or the USA.
- The Indian user base is in dire straights as the app has been blocked in India and users are quickly moving to alternatives with no alleviation in sight.
- Consequently, the $60bn is being paid for a user population of around 100m which amounts to $600 per user.
- Users in North America are far more valuable in other regions as they generate far more in terms of advertising revenues, but ByteDance will have to get investors to swallow some pretty wild growth numbers to arrive at a fair price of $60bn.
- However, I suspect that Oracle and Walmart are so desperate to get in on the new technology bonanza that they won’t even think twice about some pretty preposterous assumptions.
- This is just one reason why I am increasingly concerned with regards to the valuation of the technology sector overall.
- Price-earnings ratios way above 100x and too much cheap money chasing too few equities has all the hallmarks of the dotcom bubble and this looks to me to be very similar to what happened 20 years ago.
- I do not want to be left holding the equity when the penny finally drops that profit growth and cash flow determine what a company is worth rather than hot air.
- The lesson of 2001 – 2003 has clearly been forgotten.
