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TikTok's Impossible Fight

by Art Dicker

TikTok has recently been banned in India on national security grounds amid rising political tensions between China and India. Officials in Washington, DC, including U.S. Secretary of State Mike Pompeo, have also been focusing on TikTok because of its Chinese ownership. TikTok will ultimately be hard pressed to come up with any plausible solution that will assuage their fears or tone down their rhetoric short of a sale of the local operations and total severance with the Beijing headquarters of their Chinese parent company, Bytedance.

The perceived threat posed by TikTok starts first with data privacy. There is concern that a Chinese company like TikTok holds personal information on a large portion of the American population, and may share access to that information with the Chinese government if requested. TikTok is so successful in part because its recommendation-based algorithm pushes content to its users based on their past viewing experience. In some ways TikTok know its users better than we know ourselves.

TikTok has not done itself any favors here with its well-documented shortcomings on privacy. This is also not the first time a Chinese-owned social media site in the US has been called out as a data privacy security risk. In 2018, the Chinese company Kunlun bought gay dating site Grindr but was later forced to sell when the US Committee on Foreign Investment in the United States (CFIUS) retroactively unwound the deal. Grindr held highly sensitive information on its users such as HIV status, and the site was being used by government employees and members of the armed services.

Second, there is censorship. This is more subtle and not about what TikTok sees from our viewing patterns, it’s about what content TikTok never shows us in the first place. Florida Senator Marco Rubio in particular has been beating the drum that TikTok and other Chinese apps are being used to censor content deemed sensitive by the Chinese government. The implication is that TikTok cannot be untangled from its parent Bytedance, which despite massive global growth still earns the bulk of its revenue from its home market. TikTok has been accused of taking down or suppressing content that would clearly be deemed too sensitive by the Chinese government related to protests and policies on Tiananmen, Xinjiang, and Hong Kong.

A third factor is fake news. That TikTok may be used to push a certain agenda, a narrative favorable to China’s interests. Government-backed campaigns to influence sentiment on election candidates via Facebook in 2016 is the obvious precedent. Another Bytedance app, Helo, was called out in India for being a conduit of misinformation which created hate between different religious groups at a time when Bytedance clearly was not seeing the positive importance of content moderation in its international markets. TikTok would not be directly involved in such campaigns, but rather the India experience is just one example showing at best how Bytedance seems to always be in policy catch-up mode given its staggering growth, and at worst, it may be pressured not to remove certain manipulative content put on its platform.

Zhang Yiming, founder of TikTok's parent company, Bytedance.   Credit Gilles Sabrie

------Zhang Yiming, founder of TikTok's parent company, Bytedance. Credit Gilles Sabrie

How has TikTok responded to all these public concerns? It has used the catch-up mode argument and stressed it is continually improving its privacy policies as it matures as a platform. Unfortunately it continues to be in the news for allegedly accessing data that it really should not be accessing from its users’ phones.

TikTok’s US content moderation team in particular has also been adamant that it does not get any instructions from Beijing. That explanation is a bit beside the point. Chinese social media companies operating in China employ armies of people and technology to self-censor sensitive content without direct instructions from Beijing per se.

On data privacy and fake news, it is probably fair at present to place a large part of the blame on inexperience and rapid growth. On censorship, TikTok is going to be stuck between a rock and a hard place so long as it has a large presence in the China and the US markets. Competitors like Tencent and its super app WeChat, having missed out on short video earlier in the shift to 4G, would be only too keen to take advantage of any such misstep in China.

The challenge this presents to TikTok in Washington D.C. and the thorn in its side for the foreseeable future is that TikTok is constantly going to be asked to prove a negative. On its own, it likely has no particular malicious intent in the way it wishes to operate. At least not materially different from the instincts of other US social media companies which seek to capture and exploit their users’ data. But TikTok will be continuously forced to defend that it does not share data with or operate in alignment with the wishes of Beijing, for example tweaking its black box algorithm to allow sensitive content to be visible but not go viral.

TikTok of course is not sitting idly by as pressure in DC is ratcheted up. Most notably it has hired the former head of Disney’s streaming business, Kevin Mayer, as global (ex-China) CEO of TikTok to put a local face on its business. Optics do not replace substance, but optics do matter. Unfair as it is to stereotype, the optics of a 40 year old former startup founder and TikTok US CEO Alex Zhu being called up to testify in Congress versus now a 58 year old former Disney executive would clearly be different for some people.

Kevin Mayer, CEO of TikTok, credit Jesse Grant

Kevin Mayer, CEO of TikTok. Credit Jesse Grant

One of Mayer’s first explicit moves has been to follow the lead of other US social media companies in response to the implementation of a new national security law in Hong Kong. TikTok has also rolled out a Content Advisory Council in March made up of outside advisors to help the company with its content moderation policies, and a Transparency Center which was to eventually give some purported access to source code (launch since delayed by COVID-19).

Other hypothetical corporate governance measures could include a separate board of directors overseeing the entire US business. The primary question being would the board have the ability to see the whole picture of operations, not just be making high-level decisions on company initiatives, direction, and strategy.

The reality though is despite these types of measures, the pressure is unlikely to let up. Although it has brought on former members of Congress as lobbyists, TikTok, like other Chinese companies and like China itself have no natural allies in Washington for this fight. In the past, China could rely on the support of the US multinational business community to smooth out some of the edges particularly following a tough election campaign where it is a perennial target. That support has evaporated.

Only a few short years ago under the Obama administration, practices like industrial espionage were arguably overlooked in favor of maintaining a positive bilateral business and investment environment between both sides. Those days now also feel like a distant memory in Washington.

In India, the government has banned TikTok and Google and Apple have removed the app from their app stores, although many expect the ban to eventually be lifted as it has been in the past. Secretary Pompeo has recently confirmed that the US is looking at similarly banning Chinese apps in the US including TikTok. Some relatively extreme measures like putting TikTok on the “entity list,” similar to the U.S. approach to Huawei, have been floated in the media but are easily open to legal challenge.

The agency tasked most directly with data privacy and security - the Federal Trade Commission (FTC) - has relatively limited powers on its own and often relies on fines as its chief enforcement mechanism. Recently, privacy advocates have claimed that TikTok in fact has violated a FTC consent decree reached last year that resulted in a US$5.7 million fine for violations of the Children’s Online Privacy Protection Act (COPPA).

Without a standalone end-to-end process on data security like the process CFIUS has on national security foreign investment review, FTC may not be the agency that poses a mortal threat to TikTok in the current environment. Some thought has been given to providing the FTC with power (in conjunction with the Department of Justice) to impose personal liability on company executives for gross privacy violations. But that will still be a distant possibility in the current political standoff in Congress and the core problem will remain – more fines on TikTok cannot really solve perceived national security concerns.

CFIUS is a committee made up of various Departments of the Executive Branch.  Credit CSIS.

CFIUS is a committee made up of various Departments of the Executive Branch. Credit CSIS.

Instead it is CFIUS that more likely poses the mortal threat to TikTok in the US. CFIUS is now retroactively investigating TikTok and its acquisition of lip-syncing app Musical.ly in 2018. It seems hard to fathom that should that investigation proceed to its natural conclusion – that some sort of national security risk is present – a mitigation plan could be agreed to with US regulators under this bilateral relationship where trust is totally gone. TikTok would be given no margin for error, no benefit of the doubt in implementing such a plan and its actions will continuously be viewed through a national security lens. Even though TikTok claims US user data is stored in the US with backup in Singapore, one might worry that engineers in Beijing might still need access at a minimum to improve the app and the algorithm that drives addictive user engagement.

That natural conclusion could instead be that Bytedance will be forced to divest TikTok in the US just as Kunlun was forced to sell Grindr. In 2018 Alibaba’s affiliate Ant Financial was prevented from buying Moneygram also on data privacy concerns related to the financial information of its US users. How hard is it to then make the national security argument on data security and TikTok?

In undisclosed but widely rumored private market secondary sales, Bytedance’s value may have already surpassed the US$100 billion mark. TikTok US as a standalone company, given its recent US$500 million revenue forecast and growth prospects, could also have substantial value. Forced to sell, Bytedance would almost certainly prefer a private equity group buyer (as was the case with Grindr) rather than a strategic competitor like Google or Facebook which are still global competitors of TikTok. A covenant not to sell and not compete outside the US would likely be part of the deal, although enforceability down the road could be complicated if the new owners ever wanted to exit via an IPO and public floatation of shares.

Those new owners would likely keep the TikTok name at least in the short-term given the brand recognition and most of its users being unaware of the political discussions surrounding it. Some technical difficulties would need to be worked out, and some links to centralized AI engine technology and technical support in Beijing may need to be severed after an initial transition period. For better or for worse, any subsequent local AI engine in the US with less global data and R&D support might not be as “effective” in tailoring content to its users.

All of this of course would be a grim outcome for Bytedance and TikTok. It may not ultimately get to this point, but at a minimum TikTok is in for a very bumpy ride over the next few years regardless of a Biden administration or a Trump second term, especially given the prevailing bipartisan consensus on many China-related national security issues. Even if China did not try to exert influence on companies like Bytedance when operating overseas, convincing Washington that it was not doing so would be another matter entirely. Only an improving overall bilateral relationship could take off some of the pressure. But by all accounts that prospect seems unlikely to happen any time soon, and until then TikTok’s fate will remain precarious every step of the way no matter what measures it takes.

Art Dicker is a lawyer and the co-founder of Ganbei. Ganbei is a podcast and opinion piece platform for China-related business issues written by real practicing business professionals.

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