TikTok – Chewed up.

Judged guilty before proceedings started.

• TikTok has been eviscerated by both sides of the house in what was a pretty unfair hearing that looks likely to end in an outright ban of TikTok handing an advantage straight to Meta Platforms and Snap.
• TikTok CEO Shou Chew testified before the House Energy and Commerce Committee where he received a universally hostile reception and where he was unable to shift the opinion of lawmakers.
• There are two issues at stake which are TikTok’s targeting of young people with harmful content and whether or not the CCP is using TikTok to spy on American citizens as well as appropriate their data.
• I think that this hearing was unfair as the harmful content problem is shared among US social media companies but it was twisted up with the China issue to make TikTok look really bad.
• The first real problem in this hearing arose during Mr Chew’s opening statement when he claimed that ByteDance is not owned or controlled by the Chinese government which while technically true, I think is untrue in practice.
• This is because the brutal regulatory crackdown on the Chinese technology industry has resulted in the Chinese government taking golden shares in most of the large technology companies in China.
• ByteDance was one of the first to issue these shares to the Chinese government which grants it special rights over certain business decisions as well as over the content that is distributed to Chinese citizens.
• These shares are mostly about keeping a very tight grip on what Chinese citizens can and cannot see, but they are also a mechanism by which the state can order companies to do its bidding.
• I think that in practice this means that if ByteDance has access to TikTok’s US data and the state demands access to it, then ByteDance will obey without question.
• This means that the efficacy of the firewall that TikTok has built around its data and whether or not ByteDance can access it is central to the security of US-generated TikTok data.
• Here, Mr Chew was adamant that TikTok is not being used by the Chinese state to spy on US citizens but he got into really hot water when questioned by Congressman Dunn from Florida.
• When confronted with the allegations made by Forbes in its article (see here) a flat denial of spying on American citizens became “I don’t think that spying is the right way to describe it”.
• This is a tacit admission that the allegations made in the Forbes article which Mr Dunn entered into evidence, are in fact true.
• In the face of this Mr Chew was steamrollered by the committee and in many instances was not given an opportunity to address the accusations which in my opinion is pretty unfair as everyone is supposed to have a fair chance to defend themselves.
• I think that there is very little doubt that the company has already been judged guilty on all counts by the committee meaning that something has to change or the app will soon be banned.
• The best option would be for ByteDance to sell all of its shares in TikTok and for TikTok to become a completely independent, non-Chinese company.
• The problem with this is that the algorithm that TikTok uses and which is the key differentiator that makes its service so much better than anyone else’s.
• This algorithm is also central to ByteDance and by separating the companies, ByteDance would, in effect, be selling IP central to its businesses to a foreign and potential competitor.
• In China’s eyes, this would mean that IP central to its technological competitiveness coming under the influence of a foreign and hostile power.
• China has already passed a law to prevent exactly this kind of IP leakage and has stated that it would “firmly oppose” any forced sale of TikTok by ByteDance.
• Given the mood of the committee and Mr Chew’s inability to sway opinion in his favour, I suspect that the firewall deal with Oracle is not going to be enough leaving the situation at an impasse.
• Hence, it looks to me like an outright ban is now much more likely which will also greatly increase the probability of similar action in the UK and the rest of Europe.
• This will completely destroy the value of TikTok as its network size will collapse leading to a very large fall in the utility of the network to those users that are left.
• This would be a gift for Meta Platforms and Snap who have suffered at the hands of TikTok and are now in a great position to quietly take back the users that they lost and the revenues that those users were generating.
• This in turn will hurt the valuation of ByteDance which is now somewhere around $300bn as a significant portion of its revenue will be lost to Meta Platforms and Snap.
• I missed the turn in Meta Platforms by deciding to wait for the shares to hit $70 rather than buy them at $90 but I am not inclined to chase them here due to the valuation.
• For those smart enough to have bought at $90 I would sit tight as momentum looks like it is going to carry the shares upward for a while yet.