• Star Magnolia Capital

Monthly Global Views - Byte Cannot Dance Anymore? (August 2020)

Byte Cannot Dance Anymore?

By Star Magnolia's Analyst (Jiawei He)



If you were asked, one thing started in China and got blown up in the US, what is it?


It is COVID-19 for sure, but also TikTok. Over the last month, there have been dramatic changes for TikTok as the app is at the edge of being banned in the US, following the ban in India where TikTok was the most profitable and popular app. The Trump administration is increasingly more aggressive on Chinese software companies that it perceives as a risk to data security, in a sign that Washington is set to broaden its offensive beyond the video-sharing app TikTok (today, it added Wechat to the list of apps American companies should not conduct any transaction). ByteDance, the Chinese owner of TikTok, is racing to save the app’s US operations with a plea to the administration to allow it to sell the unit to Microsoft.


The news was a huge bomb to the tech world, especially the Chinese entrepreneurs, because no one saw ByteDance becoming the next Huawei. If we follow the US government’s logic, it is banning TikTok because of the concern on national security and the data privacy of American users. Although it seems to be a good reason, it is actually not. Some people may say, didn’t China prohibit Facebook and Google as well? But it was a completely different story, Facebook and Google pulled out of China because they decided not to follow the China’s regulations (whatever they are), while Microsoft’s Bing is still operating in China now (despite very few people using) because they made changes accordingly (of course, censorship is another issue, but we won’t discuss it today). As for TikTok, even though ByteDance is doing everything they can to find a solution with the US government, they are still forced into the situation. After all, according to my last check, the US invaded Iraq without any solid evidence of mass destruction weapons, Mr. Powell probably was holding a small tube of washing powder.



“It's not what you know, it's what you can prove.” – from Training Day the movie

TikTok’s user base and revenue have been growing rapidly in the last few years. ByteDance reached 800 mm MAU in 3 years. Moreover, as the 2019 revenue was quintupled compared with 2018, and many investors believe that TikTok has a huge potential on converting traffic into revenue.



Many people say that the US government is trying to take away good assets created by Chinese companies, but, selling TikTok to an American company is not really what President Trump or Facebook wants. They would be happier if TikTok was gone for good from the US market because there will be less competition or no platform for many young people who are against President Trump, especially after the Tulsa election campaign failure. Besides, selling TikTok to Microsoft does not mean Microsoft will get a free ride, given their history of failed consumer-focused acquisitions (e.g. Nokia, Skype and Yammer). TikTok US will mean nothing without the strong algorithmic back end and operating experience of ByteDance. If we look at the products launched by Facebook to date—including Lasso, their first attempt to copy TikTok—it seems like TikTok’s US competitors have not figured out what makes TikTok unique and successful. We will see if Facebook’s new Reels can replicate TikTok’s success.


What really brought TikTok into this situation is the fight for discourse power, both politically and economically. Politically, President Trump wants to use a series of initiatives against China to create a common enemy. Economically, Facebook desperately wants to eliminate the competition from TikTok to maintain its monopolistic, but fragile, influence. That is why Mark Zuckerberg was the only tech executive at July 29’s antitrust hearing who unequivocally said China is stealing technology from American companies. “Many other tech companies share these values, but there is no guarantee our values will win out. For example, China is building its own version of the internet focused on very different ideas, and they are exporting their vision to other countries,” Zuckerberg said.


No one has ever tried to use values prevailing in the society to divide the tech companies in China and US into two different groups, we can certainly tell that is an escalation on tension between the two countries, it is also the true problem behind ByteDance or Huawei.


Many people see these two companies as global companies in the true sense because they broke into oversea markets and changed people’s opinions on products from China, particularly in an industry where the US has been ahead years, technology and the internet. ByteDance is the first internet company in China to penetrate overseas markets and gain an advantage over local peers; not even Tencent, Alibaba, or Baidu have passed this milestone yet.The hegemony of the United States is built upon the power of its military, technology, and Hollywood. Military and technological powerare easy to understand, but what is the power of Hollywood? Put another way, after listening to U.S. music and watching Hollywood movies, you begin to believe the US is advanced in every aspect. I personally do not have any problems with that, I actually love US movies and music, and that is the how soft power should work. Soft power can certainly change the way you think about the world, but the scary part is that it can be weaponized. A positive example would be the Arab Spring was used to overthrow the Gadhafi regime.


Therefore, the US elite will not tolerate public opinions or values being controlled by ByteDance, a Chinese company from a socialist society. The education and information received by people can shape our mindset on things we do not understand. It is very easy for us to be naturally biased when we look at different societies or cultures for this reason, which is exactly why TikTok brought up the fear of Facebook and the Trump administration. Facebook fears competition, and the U.S. government fears that ByteDance could wield its platform to change U.S. public opinion—whether in favour of communism or against the Trump administration, even though ByteDance has “almost” no relation with the government at all.

Conclusion


There have been many debates around the TikTok incident, and we cannot really prevent this kind of thing from happening since the world will always follow the “Law of the Jungle”. But, as an allocator, we should not be trapped by the biases naturally existing in our head. In order to generate good returns, we need to overcome prejudice and understand the world as much as we can. Although it will not be easy to jump out of our own perspective and comfort zone, we should always try to find the truth first or we risk pushing away good opportunities.

As my favourite character Rick from Rick and Morty said, “Good and bad are just artificial concepts,” same for dictatorship and democracy. Personally, I am more into the argument of Deng Xiao Ping, “No matter it is a white cat or black cat, as long as it catches rats, it is a good cat.”

 

©2020 by Star Magnolia Capital Limited