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TikTok Talks Another Sign Microsoft Is ‘Not Abandoning’ Consumer Space

Microsoft will need to find a way to monetize the social media app without selling off user data, one solution provider executive tells CRN.

While Microsoft has doubled down on serving business customers in recent years, the company is proving that it continues to have strong consumer tech aspirations--as shown by the company’s talks to buy popular video-sharing social network TikTok in the U.S. and other countries.

If the TikTok acquisition were to go through, the key would be for Microsoft to monetize it without selling user data off, said Reed Wiedower, CTO of Washington, D.C.-based New Signature, an Azure Expert MSP partner of Microsoft.

For instance, Microsoft could “use it to drive subscriptions of Microsoft 365, or Xbox Game Pass, or some other subscription service that would render the effort worthwhile,” Wiedower told CRN in an email.

The company could also “position it as something that is a positive force in and of itself, similar to the Xbox--which isn’t a core ‘need,’ but thanks to Game Pass, is a great way to accomplish recurring revenue,” he said.

[Related: 10 Big Takeaways From Microsoft Inspire 2020]

Microsoft on Sunday said it was in preliminary talks to buy TikTok in the U.S. and several other countries days after the Trump administration threatened to ban the popular app.

Microsoft said it will move quickly to pursue discussions with TikTok’s parent company, China-based ByteDance, “in a matter of weeks” with the goal of completing talks by Sept. 15. During this process, Microsoft said it “looks forward to continuing dialogue with the United States Government, including with the President.”

In a blog post, the Redmond, Wash.-based tech giant said that CEO Satya Nadella and President Donald Trump had discussed the deal after the Trump administration expressed concerns about its Chinese ownership.

Microsoft said the two companies talked of a potential deal that would involve a purchase of the TikTok service in the U.S., Canada, Australia, and New Zealand and would result in Microsoft owning and operating TikTok in these markets. Microsoft said it may invite other American investors to participate on a minority basis in this purchase.

“This new structure would build on the experience TikTok users currently love, while adding world-class security, privacy, and digital safety protections,” Microsoft said.

“Among other measures, Microsoft would ensure that all private data of TikTok’s American users is transferred to and remains in the United States,” the company added. “To the extent that any such data is currently stored or backed-up outside the United States, Microsoft would ensure that this data is deleted from servers outside the country after it is transferred.”

News of a potential TikTok-Microsoft deal emerged on Friday with reports from several outlets. Trump had also threatened to ban TikTok, NBC News reported. U.S. government scrutiny has come amid worries that TikTok could be used by the Chinese government to acquire data on Americans.

TikTok features short videos posted by users and has emerged as a hugely popular social app in the U.S. in recent years, particularly among younger users.

With the deal, Microsoft “would be making an aggressive bet to transform its consumer strategy with a major social media bet,” wrote Daniel Ives, managing director for equity research at Wedbush Securities, in a note to investors.

It’s an opportunity for Microsoft in part because Google and Facebook—whose CEOs appeared at an antitrust hearing in the U.S. House last week—are hamstrung from making a bid, Ives wrote.

“TikTok essentially fell into MSFT‘s lap and Nadella recognizes that with all the FAANG tech stalwarts in major regulatory cross hairs Redmond is the only game in town to go after this asset,” Ives wrote. “Nadella has essentially had the golden touch since becoming CEO and it’s hard to argue with any bet MSFT has made over the last five years, although the missing piece in the puzzle has been a consumer trojan horse strategy which TikTok can fill along with a re-rating/sum-of-the-parts valuation.”

Wiedower said this move by Microsoft shouldn’t be as big of a surprise as some might think.

“Microsoft has made a series of announcements in the past two years, starting with the decision to place Yusuf Mehdi in charge of the ‘Modern Life, Search and Devices’ group, that reinforce the idea that they are not abandoning the consumer space,” he said.

“Obviously, over the past ten years, a lot of analysts have seen the decisions to step back from Windows Phone, Band, Cortana, etc as directly opposed to this move – but for every one of these, Microsoft has a story around Surface, or Surface Headphones, or of course Xbox,” Wiedower said. “The largest, more accurate take would be to say that Microsoft isn’t interested in launching unprofitable consumer devices that don’t fill a concrete need in the market. The growth of Microsoft 365 for Family continues to reinforce their ultimate goal here.”

Ultimately, the potential move “goes back to the core Microsoft business model: of selling profitable services to enterprises and consumers,” Wiedower said. “Not of monetizing personal data at the expense of trust and privacy.”

Google and Facebook “have created a number of different devices and services principally to keep people in their ecosystem – at some cases despite the lack of profitability of the products themselves, because they are monetizing consumer data on the backend – even if a device doesn’t make money, if it allows that monetization, it’s worth doing,” Wiedower said. “Microsoft doesn’t have that luxury.”

Ives estimated the chances of Microsoft closing the TikTok deal at 75 to 80 percent, though he did point to potential risks for the acquisition.

“Right now MSFT is a pure play cloud play still in the middle innings of transforming its massive enterprise user base to Azure and Office 365 with a trillion dollar opportunity ahead of itself for the next decade,” Ives wrote. “While its tech peers are spending much time in the Beltway around regulatory and antitrust issues, Microsoft is now in a position of strength with no regulatory, social media noise in the story and a dynamic investors appreciate.”

If TikTok is “the next Instagram-like model (which we believe it is) then if MSFT passes up on this asset it would be missing a golden opportunity,” Ives wrote. “However, if TikTok becomes the next Snapchat and has a host of user growth and monetization issues in the future, then this acquisition could detract from the valuation over time given massive competition from Facebook and others.”

Still, “we believe the deal happens and the benefits outweigh the risk,” Ives wrote.

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