TikTok Ready to Fight US Ban With 170 Million Users at Stake (1)

Four years ago, when the Trump administration threatened to ban TikTok in the US, its Chinese parent company ByteDance Ltd. worked out a preliminary deal to sell the short video app’s business. Not this time.

Once again, the US government is aiming to shut down TikTok unless it’s divested from Beijing-based ByteDance. But the company has made clear it has no intention of selling. Indeed, TikTok’s management vowed in an internal memo to staff “we will move to the courts for a legal challenge” if the bill winding its way through Congress is signed into law.

That sets the stage for a watershed legal battle between the US government and the offspring of a $240 billion startup that’s come to define China’s growing technological muscle. The outcome could define the business landscape for Chinese companies like Tencent Holdings Ltd. and PDD Holdings Inc.’s Temu with growing US ambitions. And it’s a test of how Beijing will respond to growing pressure on homegrown champions from ByteDance to Huawei Technologies Co. The proposed bill in fact deliberately calls out the potential to circumscribe apps from countries that count as foreign adversaries.

“It’s not just TikTok, since we saw the US also took actions before against Huawei and now hundreds of Chinese companies are under US sanctions,” said Wu Xinbo, a director at Fudan University’s Center for American Studies. “In the future, other companies like Temu and other commerce platforms could also be affected and US allies may follow suit to ban TikTok as well. This may have a domino effect.”

WATCH: TikTok is vowing to launch a legal battle if the US passes a law forcing its parent company to divest its ownership stake. Alex Barinka reports.

Source: Bloomberg

The US House of Representatives on Saturday put legislation requiring ByteDance to divest its ownership stake in TikTok on a fast track to become law. The Senate is expected to vote on the bill in coming days. President Joe Biden has said he will sign the legislation promptly. The legislation under consideration gives ByteDance almost a year to divest of TikTok. That deadline would mean TikTok would likely survive through the US presidential election in November.

ByteDance has compelling reasons to take on Washington. For starters, it has a much bigger business in the US than it did in 2020 — 170 million users now, up from less than 100 million then — and revenue far surpasses any other market.

Since Trump’s abortive assault, TikTok has also built up a fledgling e-commerce business that hinges on influencers hawking goods to young Americans. That’s linked it inextricably to swaths of the US economy, from millions of content creators to small business owners that rely on the platform. It’s preparing to debut live shopping in Mexico around July, a person familiar with the matter said, taking it into a different part of the American continent. A US ban could affect an international rollout more broadly.

US lawmakers aren’t the only ones currently going after TikTok.

Across the Atlantic, European Union officials have also threatened the company with hefty fines and temporary curbs on part of its new TikTok Lite app, which was recently debuted in France and Spain. Regulators contend that TikTok Lite, which includes a rewards system for users, could be addictive to young people, and claims the company didn’t complete a full risk assessment.

EU regulators gave TikTok until April 23 to submit the missing report and until April 24 to defend itself against the suspension of the rewards program “pending the assessment of its safety.”

It was also handed a May 3 deadline to respond to other questions about how the app plans to protect minors and the mental health of users.

In the US, ByteDance thinks it stands a good chance of pushing back on the proposed law in US courts. It’s arguing that forcing 170 million Americans off the platform will deprive them of their First Amendment rights to free speech, a forceful approach in the American judicial system.

“We’ll continue to fight,” Michael Beckerman, TikTok’s head of public policy for the Americas, said in a memo to TikTok’s US staff. “This is the beginning, not the end of this long process.”

For now, it appears neither side is willing to budge. But ByteDance has seen how quickly the tides can turn in Washington.

The preliminary 2020 sale agreement didn’t go through after Donald Trump was voted out of office and Biden showed less interest in pursuing his predecessor’s deal. Trump last month raised concerns that a ban against TikTok could boost its rival Meta Platforms Inc., which previously suspended Trump from its platforms. Americans go to the polls again this November. ByteDance expects it can get a restraining order on the legislation and then wage a legal battle that could last more than a year, according to one person familiar with the matter.

“It’s also a US election year, so no matter what you do, they can only wait until after the election to see what the situation is like,” said Zhu Feng, executive dean of Nanjing University’s School of International Studies.

Beijing is a big hurdle to any sale of TikTok. A TikTok divestiture would require approval from Chinese regulators, who are unlikely to accommodate Washington’s plans. The government there has made it clear it wants neither TikTok’s prized algorithms nor its valuable data to fall into American hands, a person familiar with TikTok’s thinking said, asking to remain anonymous discussing company deliberations.

TikTok’s technology — most apparent in the platform’s addictive scroll of recommended videos that keep users hooked and wanting more — was an issue even back in 2020.

Under Trump, TikTok struck a complicated deal to spin out and sell a slice of TikTok to Oracle Corp. at a $60 billion valuation, upon which the US software firm would become its sole US data management partner. But ByteDance would retain control of the actual technology.

That year, ByteDance’s revenue more than doubled to about $35 billion, a chunk of which stemmed from its US arm. That’s about when TikTok challenged the Trump ban in court, winning a temporary reprieve from a judge who ruled the White House may have overstepped.

The issue began to fade from the public consciousness. The idea of banning TikTok only resurfaced around 2023, when Biden began confronting China in a number of areas.

Read More: China Braces for Worst as It Becomes Punching Bag in US Election

The crux of the situation is Tiktok’s future in the US. Handing the service over to a local competitor means ByteDance gets shut out. Abandoning ship raises the prospect of a return at some stage, perhaps during a friendlier administration.

“A ban would be the better option of the two. If you shutter the US business, there’s always a chance you could win back the market, despite how difficult that is,” said Ke Yan, a Singapore-based analyst with DZT Research. “The divestment is much more complicated since it involves technology transfers.”

The solution now likely lies with the courts — though that too comes with its own risks.

A protracted legal fight could surface information both sides may prefer remain private. It threatens to tie up and distract TikTok, giving its rivals an opening to poach users. Corporate sponsors may drop off if exchanges turn nasty. And influencers, ever on the hunt for the next shiny object, may gravitate toward less turbulent platforms.

It remains unclear how a ban might work. Simply getting Apple Inc. and Google to remove the app from stores may not be enough, since users who’ve downloaded the software can stay engaged. The bill makes it clear that hosting the service will be illegal — suggesting a direct impact on usage.

“At the end of the day, ByteDance may be forced to choose to leave the US market,” said Wei Zongyou, a professor on American security and foreign policy at Fudan University.

(Updates with EU details in paragraph eight)

--With assistance from Peter Chapman.

To contact the reporters on this story:
Zheping Huang in Hong Kong at zhuang245@bloomberg.net;
Sarah Zheng in Hong Kong at szheng244@bloomberg.net

To contact the editors responsible for this story:
Edwin Chan at echan273@bloomberg.net

Peter Elstrom

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