Microsoft faces complex technical challenges in TikTok carve-out

Despite stiff challenges, Chinese small video app could be a worthy investment bet

by Reuters
Microsoft faces complex technical challenges in TikTok carveout
Microsoft is studying a possible takeover of TikTok's operations in the US and several other countries. Image: AFP.

Microsoft Corp's bid to carve out parts of TikTok from its Chinese owner ByteDance will be a technically complex endeavour that could test the patience of President Donald Trump's administration, according to sources familiar with the setup.

Trump has given Microsoft until Sept. 15 to put together a blueprint for an acquisition that safeguards the personal data of Americans stored on the short-video app, and he has issued an order to ban it if there is no deal by then.

Microsoft is negotiating a transition period that will give it time to ringfence TikTok technologically from ByteDance after they agree to a deal.

The clean break that Trump and lawmakers envision could take a year or more, some of the sources said.

TikTok is functionally and technically similar to ByteDance-owned Douyin, which is available only in China, and shares technical resources with it and other ByteDance-owned properties, people familiar with the matter said.

ByteDance started working on their technological separation several months ago amid scrutiny from the US government, a source familiar with the process said. It began planning for a split as part of a strategy to shift its power from China, Reuters has reported.

While the code for the app, which determines the look and feel of TikTok, has been separated from Douyin, the server code is still partially shared across other ByteDance products, the source said. The server code provides basic functionality of the apps such as data storage, algorithms for moderating and recommending content and the management of user profiles.

To ensure uninterrupted TikTok service, Microsoft would likely need to rely on ByteDance’s code while it reviews and revises the code, and moves to a new back-end infrastructure to serve users, according to cyber security expert Ryan Speers at River Loop Security, which provides services including cybersecurity due diligence for deals.

Any continuing technical or operational reliance of the US business on the Chinese company after the sale generally would have been unacceptable to the Committee on Foreign Investment in the United States (CFIUS), said Aimen Mir, former Deputy Assistant Secretary of the Treasury responsible for CFIUS, now a partner at the law firm Freshfields Bruckhaus Deringer.

In the past, CFIUS has required adoption of increased protections pending a sale, including separation of the US business from foreign sellers to the furthest extent possible, he said.

Another challenge Microsoft faces is how it will transfer what is viewed as TikTok's secret sauce, the recommendation engine that keeps users glued to their screens. This engine, or algorithm, powers TikTok's "For You" page, which recommends the next video to watch based on an analysis of user behaviour.

TikTok uses recommendation algorithms that are independent from Douyin, according to two sources familiar with the matter. But what makes it tick is the content and user information that is fed into the algorithm.

"Algorithms are not worth anything without the data," said Jim DuBois, a former Chief Information Officer at Microsoft. DuBois is a venture adviser at Ignition Partners. "Segmenting the data for those countries is a significant task."

Technical challenges

Microsoft's negotiations for the acquisition of the US, Canada, New Zealand and Australia operations of TikTok complicates a separation. Not only would TikTok have to be separated from ByteDance, it would have to be broken up from TikTok's other regions. This adds to the technical challenges because of the amount of data involved.

"The biggest part is separating the user data – both content and data about users," DuBois said, noting hard disks of data would likely need to be transferred between ByteDance and Microsoft.

TikTok had said its user data was stored in the US, with a backup in Singapore, separate from the rest of the company.

But there are other geopolitical headwinds as well making the deal a tough nut for Microsoft.

TikTok advocates in China, for instance, feel that US software giant is trying to squeeze out an easy deal as the Chinese social media gets surrounded by problems in the US.

The South China Morning Post (SCMP), the Jack Ma-owned Chinese newspaper predicted on Monday, that the probability of Microsoft buying TikTok is "not higher than 20%" since the initial price offered by the US software giant was akin to "robbing the owner when his house is on fire".

SCMP also said that ByteDance is set to step up its fight against US President Donald Trump's executive order to ban its TikTok app in the US.

Still, for Microsoft, which has no big offering in the social networking space dominated by the likes of Facebook and Twitter, TikTok could be a worthy investment bet.

Despite terming the potential buyout a “poison chalice” in an interview with Wired last week, Microsoft co-founder Bill Gates said that if the deal goes through, having more competition with the likes of Facebook is “probably a good thing.” 

Yet, it is fairly certain that a deal is unlikely to be consummated by the  proposed timeline of Sept 15.

"It can sometimes take months and months just to identify the business needs of the divested business, what IP and other assets it uses exclusively, and what assets and IP it shares with other businesses in the company group," Karen Hermann, a deal lawyer at Venable LLP, said.