TikTok – Replaceable parts.

China does Facebook et al a favour.

• China’s move to obstruct the sale of the international operations of TikTok is a self-defeating move that increases the likelihood of TikTok being shutdown opening the way for alternatives.
• On Friday, August 28^th, China updated its list of controlled exports for the first time since 2008 to include “personalised information recommendation services based on data analysis,“ in a move clearly aimed at obstructing the sale of TikTok.
• As I expected (see here), there are now a number of suitors for TikTok meaning that the financial attractiveness of the deal will diminish.
• However, this new regulation is very likely to muddy the waters considerably and may even be a ploy to keep the service running beyond the 17^th September 2020 deadline.
• On August 3^rd, The White House issued an executive order that gave TikTok 45 days to become a non-Chinese entity or be closed down.
• Very much like India and China, this order can be executed through a firewall approach where packets that are sent and received by the app are blocked from reaching their destination.
• Hence, it is quite possible that if the deadline passes and there is no deal, that the service will stop working within the USA.
• I can see a deal being agreed before this date but then languishing for months on end while the Chinese government “decides” whether or not to approve the sale.
• In this scenario, there would be calls for the blockade to be stayed pending the approval of the deal which in most situations would be a completely reasonable position to take.
• However, it looks like this regulation has been put in place specifically to hamper the sale of TikTok’s international operations which I think could backfire spectacularly.
• This is because, at the end of the day, TikTok can be replaced which is a stark contrast to semiconductor manufacturing technology.
• I suspect that this is the main reason why the USA has used semiconductors as a weapon against China.
• The world of silicon chip manufacturing is a series of mini-monopolies where the supply of equipment for each stage of manufacturing is often controlled by one company.
• These companies are predominantly from Japan, The USA and The Netherlands but because it’s a linear process, no one can make a silicon chip without using a piece of equipment or software from a USA company.
• Furthermore, there are no alternatives meaning that if one does not have access, then no silicon chips are made.
• Software and apps are completely different, and the example of India (see here) shows that there are any number of competitors for TikTok waiting in the wings to grab users should TikTok become unusable.
• The one thing that TikTok has is its video recommendation engine which is what underpins its success as it is better than anything else at finding videos that users will enjoy on an individual basis.
• However, if this is no longer available in the market, then the competitive landscape will shift and inferior offerings will be able to take up the slack.
• This is why Chinese regulators have done Facebook, Snap et al a big favour by increasing the probability that TikTok is banned in the USA like it is in India.
• This means that they can copy the service and although they have inferior recommendation algorithms, they still have a good chance of picking up the users who can no longer use TikTok.
• Hence, this regulation may actually end up having exactly the opposite effect of that intended by accelerating the decline of TikTok outside of China.
• Unfortunately for China, regulations governing semiconductors have teeth, but those governing apps do not in this case.