Microsoft’s (MSFT) Bid for TikTok is About Much More Than it Seems

The original Cold War between the United States and the Soviet Union was fought through deploying military assets in strategic locations, manipulating trade, and even sponsoring coups.

Today’s New Cold War between the U.S. and China has opened a new front: Social media.

For months now, the quickly growing Chinese-owned TikTok social media app has been criticized in the U.S.

Security experts have found it sends highly personal information back to Chinese servers for no apparent reason.

The Department of Defense and all four branches of the military even banned it from the phones of military personnel.

Last week, things escalated even further when President Trump declared he would ban the app completely in the U.S.

From a security standpoint, that’s probably not a bad idea. But TikTok’s more than 50 million daily active users in America were less than thrilled.

Suddenly, into the middle of this tech Cold War came Microsoft Corp.’s (MSFT) CEO, Satya Nadella. Over the weekend, he announced his company was looking to buy TikTok’s U.S. division.

After a conversation with Nadella, President Trump said he was open to the idea and set a deadline: September 15.

Unfortunately, a deal acceptable to everyone is not going to be easy to find.

And in the meantime, the whole TikTok affair has revealed Microsoft’s biggest weakness…

Microsoft Has an Achilles’ Heel

Microsoft has a lot going for it.

Its Windows and Office software are used everywhere, at work and at home. Its Surface line of tablets and laptops are some of the best you can get (and a very high margin item for the company).

The Xbox video game and console division continues to make money (with the next iteration coming out this fall sure to make a big splash), while the company’s Azure cloud platform is a strong competitor to Amazon.com Inc.’s (AMZN) AWS.

In fact, Microsoft is one of my favorite tech stocks, and CEO Satya Nadella is doing a fine job.

So I take no pleasure in saying this: Microsoft’s CEO rushed into the middle of an international stand-off this weekend because he’s desperate.

He’s desperate because when he looks at his Big Tech competitors, they all own huge and very profitable social media networks.

Amazon’s web store and review system is a huge social network in and of itself, as is its GoodReads book review website. But Amazon also owns Twitch.tv, by far the largest live-streaming service in the world, where viewers connect and chat to video producers live.

Apple Inc. (AAPL) may not have a traditional social media network, but it doesn’t need one. The company has such devoted fans that there’s a whole subculture of websites devoted to nothing but talking and speculating about, reviewing, and predicting what Apple will do next.

The company’s strict guidelines on its Appstore also gives it huge control over what appears there, even if other companies do the heavy lifting of creating the apps.

Facebook Inc. (FB) and Twitter Inc. (TWTR) go without saying – they’re nothing but social media networks.

Alphabet Inc. (GOOGL) owns a few social media networks, but the key one is YouTube. As the world’s largest video service, it’s possibly as important as Facebook, even though it gets less coverage. The built-in social functions and Google’s technology also make it a very profitable social media network, something that’s not always easy to create.

Microsoft, by comparison, is a social network pauper.

It has owned Skype and LinkedIn for years, but neither have taken off beyond their niches, while the less-known Yammer and Microsoft Teams are only available for businesses.

The company has also never been able to expand the Xbox gaming console’s social features beyond just gaming, despite years of trying.

That’s why Microsoft decided to go after TikTok, despite the risks.

And the risks are definitely there…

Nadella Has His Work Cut Out for Him

Microsoft’s stock jumped 5% Monday morning, on the news that it was pursuing TikTok.

It fell 2% the next morning, after Chinese state media called the idea that TikTok had to be sold to Microsoft or be shut down as a “smash and grab” and “theft” that China would not accept.

As a company that’s been in China for 20 years and employs about 6,000 people there, Microsoft has a lot to lose here.

Nadella has to be careful to not appear as an opportunist that’s benefitting from TikTok’s weakness. If he fails, not only could the deal fall through, but Microsoft’s other businesses in China could become a victim in this new tech Cold War.

Failure could also end up turning the White House against Microsoft.

But Nadella sees the writing on the wall. Apple, Amazon, Google and of course Facebook are making huge amounts of money in social media, and Microsoft isn’t even a significant competitor there.

Yes, it means the CEOs of those four Big Techs had to appear in front of an antitrust hearing at the House of Representatives last week. But that’s a minor inconvenience compared to the money their social media networks are bringing in.

Maybe Microsoft could have created something similar when it had a practical monopoly on accessing the world-wide web back in the days of Internet Explorer. But that advantage was neutered in the 2000s, when Microsoft was taken to account for anti-trust violations.

Now, all Microsoft can do is try to catch up.

TikTok is a fine choice. The app boasts 50 million daily active users in the U.S., making it larger than Twitter and almost as large as Snapchat.

More importantly, TikTok is growing so fast both Snapchat and Facebook’s Instagram are about to roll out new features to compete with the Chinese app.

Even at an estimated price tag of $15-30 billion, that might be a good deal. As long as Nadella can manage to appease China and its wounded sense of pride, satisfy President Trump and his recent requirement that any deal also pay the U.S. Treasury a cut, and come up with a plan to make TikTok profitable.

Because right now, it isn’t.

If he doesn’t close the deal, it’s not the end of Microsoft. But they’ll be looking for another social media network to buy, and that’s where it gets interesting.

In 2016 MSFT bought LinkedIn for $26.2 billion. Another little social media property that the current president seems to favor for communications of all kinds has a current market cap of $28.7 billion. And a buyout of Twitter by any number of suitors has been discussed since Microsoft’s 2016 LinkedIn deal.

Another social media company that would be on the radar should the TikTok deal fall through is one that has been on MSFT’s radar before – rumors of a buyout of SNAP, the parent company of Snapchat swirled back in 2017, when a figure of $30 billion was bandied about. SNAP market cap stands at $31 billion now, and that after the stock has popped 3x since March.

Both SNAP and TWTR stock dropped on the TikTok news on Monday and both could be good buyout hedges to hold as this drama plays out…

Great trading, stay safe out there, and God bless you,

— D. R. Barton, Jr.

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Source: Straight Up Profits