TikTok's last dance
Why the seemingly ragtag list of potential acquirers isn’t as insane on closer look
|Aug 28, 2020||8|
Oh, to be a fly on the wall at ByteDance’s HQ in Beijing these past few weeks. The multinational is the parent company of TikTok & its Chinese cousin Douyin; the former has been the subject of all manner of speculation since the current US administration essentially issued a highly unusual ‘divest or be banned’ ultimatum in the first week of August. That’s when things started getting weird.
The first rumored suitor to emerge was Microsoft, who throughout the summer had been in conversations around a small stake in ByteDance and a potential new high-profile Azure cloud client in return. Those talks quickly took on a rather opportunistic turn. The other rumored front-runner is Oracle and as of yesterday, a rather unlikely duo:
There’s more method to this madness than may appear at first glance. TikTok was the 2nd most downloaded app in the world in 2019 according to data from SensorTower - behind Whatsapp, and ahead of Facebook, Instagram, YouTube, Snapchat, Netflix, and everyone else. It sports 800 million monthly active users. In the lawsuit TikTok filed against the US government on Aug 24th, the app states that they have a user base of 100 million Americans (numbers that would put them on par with Snap’s). In July it opened up its self-serve ad platform to marketers globally, mounting a challenge to Facebook’s dominance while sporting high engagement rates and that air of new/experimental budgets. TikTok native superstars like Addison Rae, Charli D’Amelio, and Dixie D’Amelio are successfully transitioning into mainstream culture and striking promotional deals with well-known brands. The app itself presents an interesting combination of a loose social network, video content creation and distribution platform, and commerce and advertising tool, featuring quite possibly the best mobile on-boarding experience we’ve seen to date. Wherever there’s this type of momentum there’s bound to be strategic interest, too. So let’s game out what some of the less visible candidates and strategies here might be.
Who *can*, at least in theory, acquire TikTok?
Today, ByteDance makes the majority of its revenue on Duoyin (Chinese TikTok) and Toutiao (its content sharing network and original line of business), with TikTok responsible for ~17% of the overall ~$20 billion annual pie. ByteDance is privately held with a reported valuation in the neighborhood of $100 billion. Analysts have pegged TikTok’s standalone value somewhere in the $40-50 billion range which we’d take to be the extreme high end for a possible acquisition (this valuation would be for all of TikTok globally; the parts currently for sale span only 4 English-speaking regions: United States, Canada, Australia, and New Zealand). The decision that kicked this whole mess off initially stipulated a 45 day window for resolution (amended to 90 days in a subsequent executive order which pushes the do-or-die deadline to early November). With this time-frame and high price point in mind, the only realistic and practical candidates for this acquisition are companies with the largest market caps in the world. To narrow that down further, since a new entrant is unlikely to materialize in the timeframe allotted, serious contenders are likely limited to companies that have more than $100 billion in market cap. There are about 100 of those worldwide -- this list from PWC’s Global Top 100 report (updated in June) is a good starting point; while daily rankings may vary slightly, the full report tracks companies’ movement in June, March, and December 2019 (making it easier to discount any pandemic-related anomalies).
(For the remaining 80, the full report is linked at the bottom in Dig Deeper)
The sector breakdown is interesting here, too -- companies in utilities, health care, oil & gas, financials, industrials, or basic materials wouldn’t have much use for a mobile app powered by advertising and favored by a younger audience. That really only leaves companies from technology, consumer services, telco, and, on a stretch, consumer goods as viable options. Our list is beginning to look fairly manageable. It’s time for some Fantasy M&A!
Category 1: Current front-runners
This one seems straight out of the ‘what were they thinking’ department, especially if you have a mental image of Oracle as a legacy tech infrastructure provider. They’ve been working hard to modernize and have made significant inroads into advertising and marketing technology mainly through M&A. In the past 6 years alone Oracle has acquired CrowdTwist (customer loyalty provider), Grapeshot (contextual advertising solution), Moat (advertising measurement), AddThis (early identity provider/pivot), Datalogix (digital marketing data aggregator), and BlueKai (early DMP); earlier pertinent acquisitions include Responsys (email), Eloqua (marketing automation), and Endeca (e-commerce and commerce-related analytics). While Oracle today is a strictly enterprise technology play, the addition of a scaled, mobile-first self-serve advertising platform lets them mount an interesting contender to the likes of Facebook and Google. The real reason here may be more mundane: TikTok would be a significant cloud infrastructure customer and could help further Oracle’s own ambitions in this department. It would be interesting to see how would Oracle’s very buttoned-up, traditionally enterprise culture and TikTok’s creative upstart one mix/possibly explode. We can sum this one up in one gif:
Microsoft + Walmart
This started with just Microsoft and has now congealed in an unlikely pairing of Microsoft and Walmart. Microsoft is acting opportunistically here, and Walmart is the ambitious driver: acquiring a platform like TikTok and using it as an e-commerce front-end would catapult Walmart’s digital and e-commerce efforts into new territory, making them instantly competitive with both Instagram and Amazon. Layer in payment processing and the self-serve ads platform (to capture not just advertising but shopper marketing/co-op budgets, too), plus the Azure cloud and things are starting to get interesting.
The Verge’s Julia Alexander sums it up well in a tweet:
Ryan Broderick @broderickThis is spot on. I read two great pieces last year about how Chinese e-commerce portals have turned Douyin accounts (Chinese sister app to TikTok) into virtual storefronts. https://t.co/zZfTMBJwmN https://t.co/ThPSCAjVI9 TikTok's final form was always meant to be monetization. https://t.co/JnRfEvtkud
It’s this social & video commerce angle that we find the most interesting here. The big unknown would be if Walmart and Microsoft can make a joint acquisition operationally work together. On paper it seems like a Frankenstein-style nightmare but it’s clear from Walmart’s moves that they’re serious about e-commerce .
Category 2: Makes sense
Per CNBC reporting, Alphabet and Softbank were meant to play supporting roles to Walmart’s leading bid for TikTok, before Walmart reoriented to partner with Microsoft. Alphabet could consider acquiring TikTok defensively to prevent any potential audience and creator dilution on YouTube. While this might not be an immediate concern it’s hard to argue against the momentum that TikTok has. For Alphabet it likely wouldn’t be worth to acquire just the 4 territories that are in play, especially as this could potentially disrupt their Chinese subsidiaries. With increased regulatory scrutiny and open calls for regulatory action it may make more sense for Alphabet to wisely sit this one out.
Facebook is in a similar position like Alphabet vis a vis regulatory interest, although they certainly seem to enjoy a mutually beneficial relationship with the current US administration. Adding TikTok to their stable would further solidify their dominance as the go-to self-serve advertising platform. That said they can also continue to use their market dominance to simply clone features that have worked in other popular apps and expose them to a wider audience. Facebook recently launched its TikTok clone Reels on top of Instagram with apparent feature parity but lacking a certain je ne sais quois that makes TikTok magical (and Reels at best a ‘meh’). Like Alphabet, it seems more prudent for Facebook to sit this one out and to continue their strategy of copy-pasting/ever so slightly modifying other apps’ roadmaps.
Amazon’s angle here sits on a couple of chairs: the cloud provider one (winning TikTok for AWS shrinks the market for other cloud contenders), the social & video commerce one (with everything from better video product reviews to shopping livestreams), and the ad inventory one (given the rapid growth in Amazon’s ad business, adding new formats and creative options could help put that already impressive growth on steroids). Yet they don’t seem to need any more additions here and the prospect of just the 4 markets in play may be dampening the opportunity for them, too.
All roads eventually take us back to telcos and the enduring question of whether telcos should just be the pipes that facilitate communication or should they also own content and advertising assets on top. Of the three, T-Mobile’s younger-skewing and mobile-only user base seems like it would have the most overlap with TikTok’s. That said, activist investor campaigns like Elliott Management’s pressure on AT&T last year are probably making this consideration an unlikely one for telcos. If professionally produced programming distributors like Directv and HBO Max are opening up all sorts of viability questions, then user-generated content would be a bridge too far.
Category 3: Longer shots
While most of the focus on TikTok has been around its new ad format potential, an interesting twist would be to think of it as more of a creator tool for short-form video or what we’ll lovingly label long-form gif (with sound). Both seem like a fit for Adobe’s Creative Cloud.
There is an advertising angle here, too -- through Adobe’s Advertising Cloud and a bevy of unique inventory that would now give the Adobe platform a leg up on other mainly programmatic media competition. Adobe’s methodical with their corp dev efforts and really, really good at acquisitions which likely makes it harder for them to respond to potentially opportunistic acquisitions like this one.
Micro-form videos and an active user community could make for an interesting opportunity for Netflix to buy their way into an advertising and promotional platform for their own content. In 2019 they spent $2.65 billion on marketing efforts; could the addition of TikTok let them reach the same audience more cost-effectively while increasing community content creation around their content? This, too, might be more of a tangible opportunity if the TikTok conversation wasn’t limited to just 4 markets.
TikTok’s now former CEO (and former ByteDance COO) Kevin Mayer is a Disney alum. Disney’s DTC strategy doesn’t currently involve user-generated content and is focused squarely on the rollout of Disney Plus (whose results are exceeding early expectations handsomely). TikTok’s younger-skewing audience could be attractive for The Mouse House but too many gaps would need to be filled to integrate it into their current setup. This one doesn’t even make sense on the PowerPoint.
Category 4: Let’s spice things up!
The luxury powerhouse spent $7.45 billion on ads in 2019 and has been steadily shifting spend to digital (mainly social) channels worldwide. Given the cultural impact that TikTok has, it could be an interesting play to acquire a content platform and use it as a basis for a variety of DTC activities. Think highlights from Fashion Week, snapshots of the design process, timed drops, video commerce, and just about every other variant of mobile shopping we’ve seen in China and the rest of Asia could easily become reality on top of TikTok. That said, the ‘4 markets only’ curse strikes again here and puts this more in the category of ‘what should LVMH do on TikTok’ rather than ‘what should LVMH do with TikTok’.
Prosus’ portfolio of consumer internet companies could put a platform like TikTok to good use for its own promotional needs (which across their entire portfolio tally up to a pretty penny). They’re no strangers to unusual investments: Prosus’ parent Naspers is known for their legendary, extremely lucrative bet on Tencent. To date they haven’t placed much focus on the 4 markets currently in consideration so we see more of a case for the ‘rest of world’ acquisition, should that ever become available, than what’s in play now.
With content and commerce continuing to overlap/merge, companies that own the commerce bit can start thinking about what makes sense as an expansion to the media side. With Shopify’s strength across North America, Australia, and New Zealand we can start to contemplate scenarios where, with the addition of TikTok, Shopify is able to deliver the types of social commerce experiences that are common in China (for example, shopping livestreams, group shopping a la Pinduoduo, product discovery & recommendation channels, etc). These also seem like features that Shopify can build in-house and add over time vs. making a splashy big acquisition.
The Chinese e-commerce phenom could potentially use an acquisition of TikTok to catapult into North America, Australia, and New Zealand -- although given the history here, it’s highly unlikely that the current US administration would look favorably upon a bid from another Chinese company. As much as this might make sense strategically, it’s doubtful it would fly in the current political climate (and also why Alibaba and Tencent aren’t part of Fantasy M&A).
When Google bought YouTube back in 2006 for the then outrageously generous sum of $1.65 billion initial reactions veered more towards incredulity and heavy doses of skepticism. Today that’s widely considered one of the most successful consumer internet tech acquisitions of all time. In 2006 it wasn’t so easy to see the future and impact that YouTube will have on the world; we’re in a similar position today with TikTok -- there’s enough potential there to make it interesting to a wide swath of companies. Only time will tell if the winner ends up being the best fit.
The success of any acquisition is really up to post-acquisition integration. Among our fantasy M&A participants there are companies that are better at integrations and those that come up short, especially on larger acquisitions. Which one is more likely in 10 years time: that we’ll consider TikTok’s acquisition in the same light as YouTube’s or Skype’s?
PWC Global Top 100 report
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