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Cybersecurity, Data and TikTok: When business leaders become diplomats

Peter Cotsopoulos, Anton Mifsud, Gary Palar, Campbell Rickard


Contents

  1. Contenders and pretenders
  2. The rise of data
  3. National security
  4. Allegations and fines
  5. Souring relations, increasing tensions
  6. Conclusion

The global arrival of TikTok in August of 2018 was humble, to say the least. But in two years, it has garnered an international name due to its wide, addictive appeal: within the app it’s short videos feature anything from dance to lip-sync and comedy, and they have become synonymous with making you grin. However, its meteoric rise has not come without criticism. It has turned into the centre-point for discourse within cyber security, due to its origins in China and position as soft technology. The rise of the becoming data giant hasn’t come without far-reaching concerns.

With 800 million active users worldwide spending about 52 minutes a day on the app, the propensity for data-mining to keep users on, liking and commenting to continue exponential revenue growth can be huge. TikTok’s unique AI technology is a case-in-point. It collects users information, processes it and recommends new videos based on what users have watched and what they may be willing to watch. 

However, as the app’s popularity surges, so do concerns by the White House over TikTok’s access to personal data of its U.S. users which U.S. officials claim may subsequently be misused by Chinese authorities. This has landed the company in hot water – and now it’s at the centre of an executive order demanding TikTok’s U.S operations be sold, or cease to operate in the U.S within 90 days. 

Zhang Yiming: Founder of ByteDance and developer of the popular apps Toutiao and TikTok

Contenders and pretenders

There are two likely buyers of TikTok’s American business. One is a partnership between Oracle, Sequoia Capital and General Atlantic and the other a joint effort between Walmart and Microsoft. Whilst Twitter is also rumoured to be in talks with ByteDance, it is believed that the company does not have access to the necessary funds to complete the transaction. It was speculated Google’s parent company Alphabet was in talks. However, they are unlikely contenders.  

Both Sequoia and General Atlantic already have an equity stake in ByteDance as well as one board representative each. This may create a conflict of interest as investment managers decide between maximising the value of their current investment or getting the best price for the American offshoot. Trump has been vocal in stating that he expects America to be “well compensated” from China as a result of the deal. ]

The two firms should prove valuable to Oracle in the event of a successful bid, as synergies can be inferred from the firm’s expertise in tech. Oracle’s interest in TikTok came as a surprise to many industry insiders with the company having no experience in a consumer facing business. There is some speculation that the company is motivated to find new growth drivers after its traditional business software segment comes under threat from cloud computing services such as Amazon Web Services (AWS) and Microsoft’s Azure as well as the growing value of data harvesting in the technology sector.

TikTok was the most downloaded app, had the 6th highest consumer spending and 6th highest monthly active users (MAUs) in Q1 2020

At this stage, Microsoft and Walmart’s partnership have emerged as the most likely to pursue and complete the deal. Unlike Oracle, Microsoft has experience managing social networks in it’s successful integration of Linked-In into its fold. It hopes that by targeting the younger demographic of TikTok, it’ll gain greater market insights into the behaviours of younger users who will be the target of Microsoft’s products and services.  Satya Nadella has indicated his companies intent on purchasing the Indian and European arms of TikTok’s business potentially creating difficulties as ByteDance has made it clear that it is only interested in splitting off the American arm and its affiliates. From Walmart’s perspective, their interest in the deal can be seen as diplomatic given their exposure and bulk purchases of Chinese produced goods.

The rise of data 

Data has become a lifeblood in growing economies. The way we use it is seen as the solution to increase productivity as economic growth in developed nations starts to slow down.. According to consultants at McKinsey and Co., the amount of cross-border bandwidth in-use increased 148 times between 2005 and 2017. In a similar time-frame, the number of data regulations has risen from ~50 worldwide in the early 2000s to just under 250 in 2019, according to the OECD. 

From ‘The ascendancy of international data flows’, by Jacques Bughin, Susan Lund 

The data-space has long been dominated by U.S tech – think Amazon, Google, Facebook. 

Arrive TikTok, and it has become uniquely exposed to criticism that the private data of its users ultimately fall under the hand of Chinese authorities, something unthinkable in the land of the free.

National security: the name of the game 

Servicing approximately 150 markets, with reports of the company being worth more than $100 billion, TikTok has undoubtedly experienced exponential growth which many are comparing to the success of the Chinese goliaths, Tencent and Alibaba, in their infancy. Having become so deeply entrenched into Western households, it is unsurprising that U.S. officials believe that if user data lands in the hands of Chinese authorities, TikTok could pose a significant national security risk, being described by some as a ‘trojan horse on people’s phones.’

Indeed, bans against companies driven by concerns over cyber security risk are not novel. In May of 2019, Trump issued an order prohibiting American companies from supplying Huawei with components in addition to restricting domestic networks from using their equipment. This was over concerns that Huawei may leave backdoor vulnerabilities in its networks to provide access to Beijing. Further, the UK, New Zealand, Canada and the U.S. were all unwilling to potentially compromise the security of an immensely sensitive part of their societies, all banning the use of Huawei’s 5G networks.

Americans will continue to measure up their candidates in the lead-up to the 2020 United States presidential election, to held on November 3rd.

Allegations and fines

The Trump administration’s principal concern in its August executive order to ban TikTok is the risk that Chinese authorities may access the vast volumes of data collected on its approximately 100 million U.S. users. Trump purports this data may be used for “corporate espionage”, to “build dossiers of information for blackmail”, or to drive disinformation campaigns by Chinese authorities. This follows allegations earlier in the year that TikTok scrubbed videos of pro-democracy protests in Hong Kong, and locked the account of an individual who criticised the ill-treatment of the Muslim minority in China. 

Founder of TikTok’s parent-company, Zhang Yiming, denies ties with Chinese authorities and insists the company has never turned over information on Americans, and that even if requested to do so, he asserts that “it would be impossible” because of the various practices the company has instituted such as storing the data in the U.S., and blocking the access of user data by its parent-company ByteDance. Such arguments will be used by TikTok in its lawsuit against the US government, in which it seeks to dispute the anti-Constitutional treatment it has received by U.S. officials.

Souring relations, increasing tensions

Banning products because of the perceived cyber security threat they face does not come without costs for the business community, however. The order against Tencent’s WeChat to be removed from the Apple store in the U.S., coinciding with Trump’s order against TikTok, is predicted by some analysts to significantly hurt Apple, with estimates of a subsequent fall in iPhone sales of up to 30%.

TikTok has been confirmed that it will not be banned in Australia. However, Australian businesses are not immune to the rising tensions between the U.S. and China. Most recently, Australian-listed wine-producer Treasury Wine Estates was reminded of the perils of doing business with China, after the Chinese government launched an anti-dumping investigation, which caused a 14.3% intra-day slump in the share price, destroying approximately $1.2b of TWE’s market capitalisation. As recent as Tuesday, September 1, China dumped an 80% tariff on Australia’s largest grain exporter, CBH, which affected 3,900 Western Australian barley growers.

Conclusion

Beyond TikTok’s potentially forced divestiture or it’s halting of operations in the U.S., the former being less likely, this has wholly been one of a long string of cases sparked by concerns over national security. In the age of innovation and the expanding reach of technological globalisation, this may only be the tip of the iceberg.


Sources

https://www.abc.net.au/news/2020-05-19/barley-china-australia-tariffs-trade-dispute-explained/12263298

https://arstechnica.com/tech-policy/2018/08/trump-signs-bill-banning-feds-from-using-huawei-zte-technology/

https://www.bloomberg.com/opinion/articles/2020-09-02/u-s-and-china-should-seek-a-truce-in-tiktok-fight

https://www.bloomberg.com/news/articles/2020-08-26/tiktok-s-legal-arguments-must-overcome-trump-s-broad-power

https://www.bloomberg.com/news/articles/2020-09-01/bytedance-chief-reconsiders-tiktok-options-after-new-china-rules

https://www.bloomberg.com/news/articles/2020-05-27/bytedance-is-said-to-hit-3-billion-in-profit-as-revenue-doubles

https://www.bloomberg.com/opinion/articles/2020-08-09/tiktok-is-the-superweapon-in-china-s-cultural-warfare

https://www.businessinsider.com.au/wechat-is-helping-chinese-buy-us-homes-2015-11?r=US&IR=T

https://www.ft.com/content/272cfc69-b268-45ac-88d6-d55821f27e78

https://www.reuters.com/article/us-netherlands-huawei-tech-idUSKCN1SM0UY

https://www.theguardian.com/world/2012/dec/07/wechat-chinese-social-media-app

https://web.archive.org/web/20181129042843/https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12167860

https://technode.com/2018/03/05/wechat-1-billion-users/

https://voxeu.org/article/ascendancy-international-data-flows

https://www.wired.com/story/inside-chinas-massive-surveillance-operation/


Disclaimer: The views expressed in this article are solely that of the author’s, and do not necessarily reflect the position of UNIT nor the University of Melbourne. The advice given is general in nature and does not consider an individual’s personal financial circumstance. Transacting off this information is done so at one’s own risk, and individuals are encouraged to consult a finance professional before making investment decisions based off of this article.

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