ByteDance to pursue partnership with Oracle to avoid US sale of TikTok | Business| Economy and finance news from a German perspective | DW | 14.09.2020
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ByteDance to pursue partnership with Oracle to avoid US sale of TikTok

ByteDance has rejected Microsoft's bid to buy TikTok's US operations and sources say the Chinese firm will instead seek a partnership deal with Oracle. But will TikTok's valuable algorithm be part of the deal?

Chinese tech company ByteDance will seek a partnership deal with US tech company Oracle Corp, sources familiar with the negotiations said Monday, hoping for a workaround that will avoid a forced sale of TikTok in the US.

Instead of the expected buyout of the video-sharing app's US operations, the latest proposal would see Oracle become ByteDance's tech partner, taking over management of TikTok's US user data and storing it in Oracle's cloud servers.

Former frontrunner Microsoft Corp. on Sunday announced ByteDance had rejected its bid to buy its US business outright, leaving only Oracle in the running for ByteDance's US operations.

Microsoft had said it was "confident our proposal would have been good for TikTok's users, while protecting national security interests."

While US media outlets reported Oracle had won the bid for TikTok's US business, ByteDance and Oracle have yet to confirm a deal, and China's state-run English television channel CGTN said ByteDance would sell its US business to neither company, citing sources familiar with the matter, nor would it share TikTok's source code with any US company. 

US President Donald Trump has said he would ban the app in the US due to concerns over US data being potentially accessed by the Chinese government. He ordered ByteDance to sell all US-based operations to an American company by mid-September, or risk being shut down. 

TikTok refutes claims that it is a national-security risk. The company has filed a lawsuit contending that the US crackdown under the International Emergency Economic Powers Act is illegal as the platform does not pose "an unusual and extraordinary threat."

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Details unclear, approval pending

Details of the proposed restructuring are not yet known, but a likely scenario could give Oracle a stake in a newly formed US business, one source told news outlet Bloomberg.

The deal still requires the approval from both the US and Chinese governments. It is unclear whether the Trump administration would approve of such a deal, which is more akin to a corporate restructuring than a buyout.

A partnership-style deal could, however, be more attractive to Chinese authorities, who have said they would rather shut down TikTok in the US than allow a forced sale to go through. 

To this end, China in August updated technology export laws to give its government greater authority over the transfer of algorithms like those used by TikTok. ByteDance would require government approval to move TikTok's key algorithm out of the country. The Beijing-based company has said it will "strictly abide" by the new regulations. 

Algorithm at core of agreement

It is also unclear whether TikTok would continue to use its powerful algorithm in the US following the deal.

The South China Morning Post, citing a source briefed on the matter, on Sunday reported that access to the algorithm, which quickly adapts video recommendations to TikTok users' preferences and has been key to its popularity, would not be part of any sale. 

"The company will not hand out source code to any US buyer, but the technology team of TikTok in the US can develop a new algorithm," the source said.

A deal that excludes US access to the algorithm is now a make-or-break point in any potential agreement, they said. 

"While Oracle is technically the remaining bidder, without willing to sell its core algorithm we see no TikTok sale on the horizon," Wedbush analyst Daniel Ives said in a note on the proposed deal. "Oracle could be a technology partner, but a sale/divestiture of the US operations for TikTok remains the focus."

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"Given the need now to get a green light from Beijing after its export rules were changed a few weeks ago, TikTok's days in the US likely are numbered with a shutdown now the next step," Ives said.

Early offers from both Oracle and Microsoft valued TikTok's US business at around $25 billion (€21 billion), according to Bloomberg reports, but that was before changes to China's export laws threw access to the algorithm into question.

US President Donald Trump has also made controversial demands that the US government be cut in on any deal, a move that critics have likened to extortion.

If the White House and Committee on Foreign Investment in the United States, which audits such agreements for national security risks, does not approve the deal, there remain no options for selling TikTok and the app could be shut off to its 100 million American users within the week.TikTok has around 700 million global users and is worth an estimated $110 billion.

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