Is TikTok on the Countdown to a Shutdown?

twenty ninth I analyst briefing TikTok countdown to shutdown. In it, I'm joined by my Bloomberg Intelligence colleagues Hamlin Basin and Mandeep Singh to discuss what's at stake for TikTok and its competitors and what's next in Congress, the courts, and

the EU. Please enjoy it. That's a title we phrased as a question because after recent events in the US Congress, the company is facing serious risks of an effective ban, and what we hope to do over the next couple of minutes is give you an overview of those recent events and then focus our analysis on what's next for the company in courts. In the EU and with respect to a potential divestiture. So a couple housekeeping notes before we begin. First, this presentation will be recorded and it's

available for playback. You can ask ask a question by submitting one in the Q and a box at the bottom of your screen. And after the webinar, the three of us are available to answer further questions. Just reach out to us on the Bloomberg terminal. A brief note about who we are. Bloomberg Intelligence BI Research delives an independent perspective, interactive data and investment research on companies, industries

and global markets. Our team of three hundred and fifty professionals helps our clients make informed decisions and we cover these companies, industries and markets from the perspectives of strategy, equity, credit, ESG, government, and litigation. My name is Matt Schuttenhelm. I'm a litigation and policy analyst with the I focused on the TMT sector. I'm joined today by my colleagues Tamlin Basin, our TMT analyst and the EU, and man Deep singh Our, our

TMT global team leader. So, good morning, good afternoon, guys. Hi. So we wanted the structure today's briefing as a conversation more of an exchange of questions and answers between the three of us, and I wanted to toss it to you, Tamlin, to sort of get it started.

And so that was the status quo for most of these four years of President Biden's term until March of last year, when when suddenly TikTok found itself in the spotlight. And you might remember that very very difficult hearing that that showed you Ceo TikTok CEO had before the House of Representatives when you really got torn into by you know, on a bipartisan basis about concerns about data privacy and

potential propaganda from the company. But then after that hearing, there was you know, as as often happens in Congress, very little nothing, nothing happens. That all changed thought sort of suddenly this year in March March seventh, the House Committee focused on this passed a bill by a fifty

to zero vote. That just doesn't happen in Congress. But then you know, there was a real question of whether President Biden wanted to sign a TikTok ban during an election year, and the Democrats control the Senate, so it really looked to me like this was going to slow down and be something that where you see potential action

after the US selection. Well that changed in you know, a couple of weeks ago, about nine days ago, when House Speaker Mike Johnson decided to attach this bill to the Ukraine aid package, the Foreign Aid package and tie them all into one package that was effectively must pass for the Democrats. So suddenly all the positive signals that President Biden had given about this, he really had no choice but to support this because he needed this foreign

aid to get through. So it cleared the House again on April twentieth by three hundred and sixty to fifty eight vote, and then the Senate cleared it seventy nine to eighteen on April twenty third, less than a week ago. April twenty fourth, President Biden signed the bill into law. So that's where we are. After a lot of noise around the issue and then what looked like nothing, all of a sudden, we've reached the end of the road here in the US in terms of passing. It's now become law.

it anymore. And for any of these foreign adversary controlled apps, and that is in part defined to be any app that is controlled indirectly or directly by byte Dance or TikTok. And so if a company were to keep the app and its web store or to host it after the deadlines in this law, they're at risk of severe financial penalties. The math adds up very quickly if the company were

to take on that risk. So the key deadlines are two hundred and seventy days from passage, which takes us to January nineteenth, the day before the inauguration as it is. And then if there's progress made to it for a divestiture basically TikTok or selling it to someone else, the president can give another ninety days for those negotiations to play out for a divestiture to be complete. Okay, So that's the basic position the company finds itself in now.

If TikTok doesn't divest by January nineteenth, or maybe April nineteenth, if they get that extension, we effectively have a ban. No company can can web host it or carry it in its app store to make it available for users. So TikTok now has two paths going forward. One you can try to get that law overturned in court, or it can affect a divestiture. So I'm going to dive

into both of those two options in a minute. But before we do, since we're laying out the legal risks and we've done it on the US side, Tamlin, I want to turn to you to talk about the legal risks in the EU. Is there any movement to ban TikTok in Europe? And if not, why not?

that movement in the US are also relevant here. So I think the reason the regulators don't see them on board with a ban is that, unlike in the US, the EU does have regulations impact that, if wielded aggressively, could really curb a lot of those potential negative impacts of the app. So I'll focus on three. So the first is the Digital Services Act of the DSA. Now, this is a new content moderation on regulation aimed at

social media that took effect last August. Now, some of the new rules that large platforms, and TikTok has been designated a large platform subject to these rules. Now, some of the things that they must comply with are with respect to risk assessments and risk integation measures. So, for instance, TikTok needs to do an annual assessment to determine what are some of the risks of people using the app.

And also it's probably worth noting that sort of addictive uses, especially for younger users, is definitely qualifies as a risk. And then it's going to have to show that it's putting in place in NEGA nation measures to assess these risks. And if it doesn't do so in a manner that regulators regulators think is appropriate, then maximum fines can be

six percent of byteedances animal revenue. Now GDPR is another overhang. Now, the General Data Production Regulator regulation actually took effect back in twenty eighteen, but it wasn't until September of last year that TikTok got its first taste of enforcement. I mean that came with a three hundred and forty five million euro fine there was in relation to Howard's handling

data and again mostly data of younger users. There's still pending investigations under GDPR related to TikTok's data practices, and I think a particular one to know here is looking at whether it is sending user data to China. Now, ultimately this could result and ruling forbidding TikTok from transferring on user EU user data outside of to China, and this could result in a significant pine of four percent of revenues. Now, the Digital Markets Act is the last one.

Now TikTok has been named the gatekeeper under the DNA, which is sweeping new competition law that took effect in March. Now. I don't think the DMA itself poses a significant risk to TikTok, at least not on the level of DSA or GDPR. But what it is is the potential overcame overhang for any company that might be interested in buying

the app if Bits does decide to divest. I think this is particularly true for any other d M a gatekeeper, and a list of those gatekeepers includes Apple, Amazon, Meta Alphabet, and Microsoft. So I think for now politicians in the EU are at least cautiously optimistic that there's this regulatory scheme in place that can counter TikTok's influence without needing to resort to a band.

younger users again to use the app. So I asked TikTok for TikTok's pre launch risk assessment and risk mitigation reports. So it asked for that, and then on April twenty second, it launched a formal probe into TikTok Light, and just a few days later on TikTok said it was going to withdraw tick tout Light from those markets. So I think we really did have swift resolution on that, and I think you regulators will probably a bit small gap for that, okay.

I mean, I think it's worth noting here that the US actually cannot meet that standard, and that's why every few years we have this scramble looking for a new policy that's going to allow that that uninterrupted trans atlantic data flows despite the US inadequacy here. Now that that pending inquiry into TikTok's potential transfer of China could result

in something similar to what we've seen there now. First part, TikTok has been heavily investing in building data centers in Europe so that it wouldn't need to transfer any use EU user data abroad, and it also proactively says that it's not going to let employees located in China have access to EU user data. I think the question is going to come down to whether data privacy regulators are going to take that promise at base value when there's this sort of existing Chinese law that my allow them

access to it. I think there's definitely a reason to be skeptical that that that argument is going to hold, But I think we we are going to have to wait and see how that develops.

bit more frequently than younger voters in the US. So I think as of now, EU lawmakers will sort of do everything they can to avoid taking the drastic action of the ban unless it's really the only possibility. Yeah. So that's I guess how things are currently setting out. But I want to bring men deep in here to talk sort of the business side. So, Mandy, if a US ban were to happen, who do you think benefits the most and why?

these companies will stand to benefit. I don't think there is like one company where all the users will end up moving to. And you have to remember with a TikTok, a lot of the original content starts there and then it shows up on Instagram and other platforms, YouTube shorts, and so the real question is where do the creators go. You know, if TikTok is banned, which platform do they

curate this content on? And then what is the policy of that platform in terms of you know, letting that content flow through to their competitive So that is TBD because clearly that is still operating in a lot of the creators that are on the platform are still finding a ton of engagement on TikTok and then on other platforms as the content flows through. So I answer a question, all the others will stand to benefit, notably Snapchat because

of its size. So you know, when you think about two to five minutes a day per user, it will be the percentage stems the impact would be the most noticeable on a platform like.

that's not what it seems to be. I mean, given what we have heard so far from the parent company, one they don't like the idea of divesting the aset, and the other it sounds like the decoupling didn't take place in Folk. So when you think about that aspect

that you know, the operations aren't fully decoupled. And for a prospective buyer to buy this asset just for the app and you know, the current data and not knowing how to recommend content or what else could be there, that is you know, very important for the data day operations.

You have to apply a discount to the market multiples, And the closest comp I would say is the Twitter deal elon Mask acquisition at forty four billion, and that was probably at the high end in terms of multiple almost you know, seven times forward sales tv DO sales. So if you were to apply something like that to TikTok, based on our estimates, TikTok's revenue is less than ten billion and it's less than ten percent of the overall

by dance revenue. So with that kind of discount, our original valuation was around forty billion, but then we kept lowering it because of the chance that you know, the app may be ban and any prospective buyer may not be able to retain that sort of engagement that they

currently have because the algorithm goes away. So when you apply that discount, you come closer to more around thirty billion in value, and you can actually undo the maths using ev per user based on where the current market multiples are for slamp interest in you know, some of the competitors. I mean, obviously for Meta it's much higher than the others, But if you were to look at the ev per user for the other competitors and use the media and you would come close to the thirty

billion number that I mentioned. So that's evaluation minus the algorithm. Obviously you can apply a steeper discount, but that's the framework we've been using.

social media asset. So a microsoftware in Amazon may uh look a lot better from that sense than a Meta or for the matter, in Alphabet and uh, you know, a company like Oracle or Salesforce, even if they end up buying it at a steep discount, you could argue because it's not core to their overall business. Like, an acquisition of this size always puts a lot of pressure in terms of you know, ROI and what you can

show around revenue synergies. And I think it will be hard for them to justify it to their shoulders spending something off the order of this for buying a very unique asset. But given the complications around the algorithm and the data, I think it's still a pretty large acquisition for them.

regulators and that process. And we talked about this process. We have until January nineteenth is two hundred and seventy days. You know, that process by itself can can take at least that or longer in the typical scenario as the DOJ or the FTC looks to review these things. So that's one of the puzzles about how this fits together and whether they can get anti trust clearance within the

within the timeline. And you know, probably the best way to do that is to avoid these sort of big tech names that would raise the most concerned with regulators. But it's still tight no matter what. And all that, as we said, is leaving aside kind of as in its potential m and a review and the fact that it may simply say no, at least with respect to the algorithm. So there's a real subct and kind of beyond what we can cover today without knowing the potential buyer.

But there's a big difficult legal problem in terms of just getting the antitrust review in the US as well.

TikTok's options. It says, you can only this court has exclusive jurisdiction to challenges to this law, so we know where it's going. And in the DC Circuit is sometimes called the second most important court in the United States. It takes more cases challenging government action than any others, so they're they're very familiar with this sort of dispute, although it's rare that it's constitutional. Usually it's an agency looking at a record and deciding whether it was appropriate

or not. But this is a court seven Democrat appointed active judges for Republican active judges. Sending it to the d C Circuit does make TikTok's case a little bit more difficult, I think, and I think we'll dive in a little bit more into the details of the case, but you know, I think TikTok starts as an underdog here before the d C's Circuit. It has a serious case from the First Amendment perspective, there's no question about that.

But at the end of the day, I think there's there's ultimately going to be deference to the federal government on national security questions that is difficult for the company to overcome. And so with that and the potential even for a review to the Supreme Court that could also be deferential on questions of national security, I put it, you know, TikTok. TikTok's starting is the underdog in this court. The federal government wins most of the cases that go

before it. As I said, about half of the DC's Circuit's cases involve the federal government. The federal government wins about about two thirds of those. So I start with TikTok is an underdog.

a major disruption in free speech rights. So they're going to make that case. They're also going to bring in a bill of a tainder argument, I suspect, and that is because the lawn specifically singles out Byte Dance and Take Tucking names them in this legislation. And so you know, there there is this clause in the constitution that's rarely used because companies are rarely named in federal laws. But but basically it says you can't single out a company

for punishment without giving them due process. And so generally laws are written, you know, broadly to apply across an industry, for example, not to single out a company and say, you know, we're going after you. And so I think I think that that will be the second challenge they'll bring.

It's like broadcast licenses can't be owned by foreign companies. It's not speech at all. I don't think that will work. When you look at some of the president here, Montana's TikTok ban, they the government tried tried to make a similar argument, and the Court said, no, this is a serious First Amendment issue. We have to look at it

as a First Amendment concern. When President Trump banned we chat because again of national security concerns, again the court reached the First Amendment questions and said, look, this is it's basically going to ask whether there is an important governmental interest to do that, and whether this regulation is tailored properly to serve that interest. Does it burden substantially

more speech than necessary. And I think if the US has a vulnerability, it's there that this this passed so quickly that Congress really didn't have a lot of time to build a record analyzing alternatives and and and really building the record of the risk here. And so there is some vulnerability there. This court is is what its core mission is, is really asking did the government look at the evidence properly? And and and here you know, there's not that much evidence that's public, and there's not

much evidence of of looking at at balancing it. So I think there's some vulnerability there. But at the end of the day, this is Congress acting. This isn't just the president trying to fit within some old laws to try to do it. This isn't an agency trying to squeeze power in the authority, you know, in pre existing authority. This is Congress directly looking at a national security risk and saying we need to make a predictive judgment that

there's risk here. That's a really hard thing for three unelected judges who don't know anything about national security to second guests. And I think you need to see a really compelling First Amendment argument to overcome that. As a practical matter, and so I'm not sure that that TikTok can get there.

So TikTok right now is huddled together trying to put together a strategy to get this reviewed, maybe to be able to go to the Supreme Court, all before January nineteenth.

more likely scenario. The DC Circuit, when it grants stays or preliminary injunctions, it typically does it when there's like five days before a deadline, not when there's two hundred and seventy days before a deadline. So to me, I think a requesting a stay of Congress's timelines is going to be a heavy lift. And I don't know that they want to start with the loss right out of the gate on that. So if I were TikTok, I would probably try to go that route, but ask the

court to expedite this. Let's set a briefing schedule that gives us still time to if we lose before the d C Circuit, go ahead and file with the Supreme Court and try to get some sort of check or a pause on it there. So that's what I think is most likely the reason. I think they probably haven't

filed yet. And it's sort of surprising because there is such urgency here, But the DC Circuit every thirty days changes the motion panel that reviews these these preliminary requests, and you can kind of take a look at see who what three judges are deciding those. I suspect it could be that TikTok doesn't love the April panel that's deciding those right now and wants to wait and see, Okay, what are we going to get in May we might have a better set of three judges to look at

our early requests there. So I expect as soon as you see them to file this lawsuit in probably in the next week. You're also going to see that separate procedural request that's going to give us a much better sense at the timing.

We don't even need to take this case. I think it if the d C Circuit, you know, strikes down Congress's law on First Amendment grounds, we definitely have a Supreme Court battle. Then that's probably going to slow everything down for a couple of years, because that's going to effectively hit pause on all of this. If the d C Circuit rules for the federal government, as I think they will, I'm not sure that the Supreme Court is going to to feel the need to take it up.

And so I think there's a real possibility that the d C Circuit by the end of this year upholds this law and the Supreme Court gets a chance to take a look and say do we take it or not. I'm not sure they would. I think they might say, look that that decision from the d C Circuit, you know, is reasonable, and we don't need to to take it up as well. So I think that's sort of the big picture on it. So I think with that, if there are no other questions. I think we can, I

think we can lead it. There that gives an overview of where TikTok stands both in the in the U. S.