You may have heard that the massive copyright infringer TikTok is going to be sold. I seriously doubt that’s what’s going on at all. It’s not a “sale” in any normal sense. It’s a fire sale at best. You’ve heard the (sexist) expression in mergers and acquisitions circles, put some lipstick and stockings on that pig and shove it out the door? This time the door is at 40,000 feet and there’s no parachute. So that won’t work. Here’s why.
No Species of Win
What is different about this particular deal is that TikTok parent Bytedance should not be able to transform a sale into an exit in lieu of an IPO. That is no doubt what they and their shadowy backers want to do. That’s simply not going to happen in my view. This deal can be no species of win for Bytedance.
The US Government reviews significant asset sales to foreign investors (including state owned enterprises) that implicate national security. This review is given effect in part through the Committee on Foreign Investment (CFIUS). CFIUS is currently reviewing the acquisition of Musical.ly by Bytedance, a process that began on November 1, 2019. CFIUS can require that the Musical.ly acquisition be unwound. CFIUS has also forced Chinese investors to divest from PatientsLikeMe and Grindr faster than you can say “Rosatom”. It is possible that an acquirer like Bytedance can ask for a pre-clearance from CFIUS but Bytedance did not seek that pre-clearance. Not required, but odd.
When did Bytedance acquire Musical.ly (which is the core of TikTok)?
November 10, 2017. Oopsie. That meant that the geniuses that run Bytedance thought they could slide past the Trump Administration. You can’t blame them, really. But in between the sale on November 10, 2017 and the opening of the CFIUS investigation on November 1, 2019 the world changed. In hindsight, that failure to seek CFIUS pre-clearance and the scrutiny it would entail requires explaining. Unless you already know what they had to hide.
A cynic might say that TikTok implicates national security like handing over user data to China’s State Security agency. Which is the very thing that is required by China’s National Intelligence Law but that TikTok (of course) denies doing. How could they not?
And TikTok is also probably the subject of at least one FBI counterintelligence investigation at this very moment before the Foreign Intelligence Surveillance Court. You remember them. Someone else does, too.
When you look for the TikTok employees like Kevin Mayer and Michael Beckerman, you may not see them right away because they are in way, way over their heads. Puff pieces in HITS Magazine won’t save you now, kiddies. There is no defense to massive data security breaches, willful copyright infringement and wire fraud called “Orange Man Bad.” That dog won’t hunt.
This CFIUS investigation is ongoing, so I’d say it’s pretty likely that Trump is going to jump on some version of that train. That would mean that the government could force a sale of TikTok (probably its US assets) or require TikTok to cease operations in the US.
At a Friday morning meeting, Treasury officials told the Committee on Foreign Investment in the U.S. that a Microsoft deal was imminent, said people familiar with the matter.
Others in the White House, most notably trade adviser Peter Navarro, have urged Mr. Trump to take a harder line against TikTok, the people said.
Mr. Navarro didn’t respond to requests for comment. He has previously said he doesn’t believe allowing TikTok to be sold to an American company solves the national-security issues at play.
The CFIUS option has both precedent and is already in motion. But it could get worse. A lot worse.
If anything it should be a breakeven deal for Bytedance, but if it is a CFIUS ruling, it’s possible that they may not even get their money back. Trump could also torture them for another 90 days and then drop the hammer after the election, win or lose.
Enter Mrs. Palsgraf: Microsoft’s Napster Problem
According to the Wall Street Journal, Microsoft is rumored to be a potential TikTok “buyer.” Remember that Napster (and the distributed p2p services like Morpheus and Grokster) had a real copyright infringement problem. That’s not something that is a layup to make go away (or “discharge”) in bankruptcy. Any buyer of TikTok is going to have to deal with that issue. The good news is that Bytedance has really deep pockets and is probably backed by the Chinese Communist Party which has even deeper pockets.
Therefore, Microsoft could easily take the position that it will assume no pre-sale liabilities for the infinite cost of copyright infringement claims that arise pre or post-sale. I don’t know how they could as these claims are all foreseeable by even a reasonable blind man right down to the unlicensed copyright owner. And you know what Richard Brautigan said about blind men and rats.
In fact, there’s an argument that Microsoft should assume no copyright infringement liabilities at all, pre or post sale, that arose due to Bytedance’s conduct (negligent or willful). Not only will Microsoft assume no liabilities, Microsoft will probably require Bytedance to indemnify Microsoft. That’s where the less than zero selling price comes from.
This is the Napster problem. When you knowingly put a copyright infringement machine into service, you bear the consequences. TikTok is so arrogant about copyright infringement that in bankruptcy the infringement claims could be deemed a nondischargeable bad act claim by a non-debtor IP owner particularly if TikTok’s infringing business model will continue post a bankruptcy stay. Remember–Napster shut down and sold off assets (which is why the current Napster service is called Napster when it has nothing to do with the original Napster). See Hazelquist v. Guchi Moochie Tackle Company, Inc., 437 F.3d 1178 (Fed. Cir. 2006) for interesting discussion.
Either way, TikTok should not be able to profit from piracy and MSFT should not take responsibility for TikTok’s bad acts be they copyright infringement or national security breaches or a slip and fall.
Asset Sale of the Trust Ledger?
The only way I can see TikTok continuing would be if someone tried to leverage the brand and the subscriber base using only licensed music–existing licenses could be assigned and unlicensed tracks blocked. That’s such a flyer that the asset value would be zero or less than zero. This means that somehow you would have to leave users alone, but change the location of the servers from China to the U.S., cut off all access from CCP or the CCP State Security Service, find and close any backdoors, filter infringing content, etc.
And then make people believe you really did that, starting with the FBI.
How would that be done? TikTok pre the sale would have to look like TikTok post the sale, with infringing videos deleted or you risk losing your user base. This is very unlikely to happen, much less happen seamlessly. Why? Copyright infringement is what gives the TikTok enterprise any value. (Hellooo RICO.)
At best MSFT could push out a mandatory update to TikTok’s US installed base that would convert the app to a US operation and close up all the problems. That way your TikTok app would update in the background, stop being spyware with a soundtrack, and function correctly when you launched it.
The Flying Pig’s 40,000 Foot Belly Flop:
If TikTok were determined to be a front for a foreign government (this time the Chinese Communist Party), Americans could be prohibited from working for TikTok and advertisers could be prohibited from doing business with the company under the International Emergency Economic Powers Act 50 U.S.C. § 1701. There are several different angles that could support that prosecution from espionage to election meddling to compromising Hong Kong, Tibetan, Taiwan or Uyghur human rights, or the decertification of Hong Kong.
If the shutdown is given effect under the International Emergency Economic Powers Act, it’s likely that installed versions of the TikTok app would continue to launch, but would gradually degrade in user experience as the U.S. installed base could not lawfully be supported. You might see the return of spoof files that would essentially grind the network to a halt.
Plus, TikTok is not a Morpheus-style distributed network. So it’s possible that the government could simply go to ISPs, telcos, Apple and Google and tell them to stop supporting the app. Remember, all the tech CEOs say they comply with “lawful court orders”. And if you believe that one, I’ll tell you another. Even so, it is not a great time for Big Tech to be defiant to save TikTok. They have bigger fish to fry. And then there’s that whole Foreign Agent Registration Act thing. You remember that one. Someone else does, too.
Microsoft already seems to be getting cold feet. As they should. They don’t need this. The good guys need to stick together.
UPDATE: The Street.com reports today (8/3/20) that:
Microsoft Corp. MSFT, is ready to step in and purchase the U.S. operating of TikTok, the China-based social media group with over 100 million users, following weekend talks with President Donald Trump.
Trump has grown concerned with the influence of TikTok, a short-form media app popular with teenagers and young adults around the world, following reports that users may have influenced the low turnout at his July rally in Tulsa, Oklahoma. Trump has also noted issues with privacy and data protection linked to the app, which is owned by China-based ByteDance and valued at around $50 billion.
The Committee on Foreign Investment in the United States has said ByteDance must fully divest its U.S. operations, and Trump has given Microsoft 45 days to complete the transaction following a Sunday phone call with Microsoft CEO .