These are rough notes for my video
Last year, lawmakers told ByteDance - the Chinese company that owns TikTok - either sell to a U.S. company or get banned from the US
Why? National security. They didn’t want China to store sensitive data about US citizens or worse, didn't want China to tweak the algorithm to push a certain narrative that would benefit China.
Fast forward to a couple of weeks ago: a deal was finally struck to keep TikTok alive in America and under U.S.-controlled ownership.
Deal Structure
The plan
The initial plan was for TT US will store all the US data at Oracle in the US and license the TT algorithm.
Issues: Algorithm not under US control
Now if you don’t know what the TT algorithm is about. It is an AI powered recommendation software that is the strength of TT. Without it users would get some random videos.
Last week the White House announced that TT US ‘would lease a copy of the algorithm from ByteDance that would be installed in the US and controlled by the new TT US.
Impact: What the algorithm learned about US users will be lost so the algorithm will then be retrained “from the ground up” with Oracle’s oversight”
This new deal would solve the national security concerns BUT what does it mean for the US users and especially for using TT for business.
Users will need to install the new US Application. Some followers would be lost due to transition over to the US Application.
Conversion rate will be impacted because the algorithm has to relearn. May learn differently.
The Price Tag
What is the value of TikTok US? Look at gross revenue and apply a typical revenue multiple for that type of business.
US Gross revenue for TikTok is currently $10B. Assuming a 4-6 revenue multiple you could justify a price tag of $40-60B but the price tag that we heard was $14B which seems low but is it low?
Here is what you need to consider:
The government will ban TT in the US if there is no deal.
Attrition: Some users may not transfer to the new TT US app. 20% impact on revenue in year one.
Algorithm not optimized yet. 20% impact on revenue in year 1
$6B in revenue now => $24-$36B valuation
Oracle currently making $2B in revenue hosting TT. Assuming $1B profit
ByteDance will be responsible for operations, handling the algorithm, ecommerce, etc. => 50% profit.
Oracle is an infrastructure company not social media, ecommerce
US Investors need an attractive return on investment.
Oracle is putting in $7B (Assuming)
Low scenario | Best Scenario | |
Revenue | $6B | $10B |
Infrastructure to Oracle | $2B | $2B |
Operations to ByteDance | $2B | $2B |
Profit | $2B | $6B |
ByteDance Share 50% | $1B | $3B |
Oracle Share | $0.5B | $1.5B |
ROI from Oracle’s perspective:
Low Scenario: ($1B + 0.5B)/$7B = 21%
Best Scenario: ($1B+1.5B)/$7B = 35.7%
If the price tag is higher then it affects the return dramatically. If you assume a $28B that means Oracle’s investment will be double what they which means their returns will be between 10-16% which is a low return considering the risk.
At RBE I can get an apartment building and the minimum return you will get is 15% on a much lower risk.
How it will impact you?
If you are an Oracle investor then you’ll have to consider how this deal will impact oracle stock price and the risk associated with it.
This new deal would solve the national security concerns BUT what does it mean for the US users?
Users will need to install the new US Application. All your videos will be there still.
Assuming that some followers would be lost due to transition over to the US Application
The algorithm won’t know your video preferences anymore.
Still Unclear:
Will users outside the US still be able to access your content?
Will you be able to access foreign content?
Will you be able to keep the International version of TT or will US users be forced to the new TT US app
What do you think? How will this new TikTok affect your business and personal life. Drop your thoughts in the comments.