WASHINGTON – The Chinese owner of TikTok has chosen Oracle as the app’s technology partner for its U.S. operations and has rejected a takeover bid from Microsoft, according to Microsoft officials and other people involved in the negotiations, as the time to issue an executive order from President Trump threatens to ban the popular app unless its U.S. operations are sold.
It was unclear whether TikTok’s choice of Oracle as a technology partner would mean oracle would also take a majority stake in the social media app, the people involved in the negotiations said. Microsoft was seen as the US technology company with the largest purse to buy TikTok’s US operations from its parent company, ByteDance, and with the greatest ability to aller the national security concerns that led to Mr Trump’s order.
“ByteDance informed us today that they would not sell TikTok’s U.S. operations to Microsoft,” Microsoft said in a statement. “We are convinced that our proposal would have been good for TikTok users while protecting national security interests.”
The fast-moving series of events on Sunday came as the clock ticked on Mr Trump’s executive order, which said TikTok would essentially have to strike a deal to sell its US operations by September 20, otherwise he risked being blocked in the United States. States. But sales talks were in a holding pattern since China last month issued new rules preventing TikTok from transferring its technology to a foreign buyer without the express consent of the Chinese government. And any resulting deal could still be a geopolitical piñata between the United States and China.
Chinese regulations helped sink Microsoft’s bid. The software giant had said in August that it would push for a series of protections that would essentially give it control over the computer code TikTok uses for the American and many other English-language versions of the app.
Microsoft said the only way it could both protect the privacy of TikTok users in the United States and prevent Beijing from using the app as a location for disinformation was by taking over that computer code, and the algorithms that determine which videos are seen by the 100. million Americans who use it every month.
“We would have made significant changes to ensure that the service met the highest standards of security, privacy, online security and fighting disinformation,” Microsoft said in its statement.
Oracle has not said publicly about what it would do with TikTok’s underlying technology, which was written by a Chinese technical team in Beijing – and which Secretary of State Mike Pompeo has accused, is accountable to Chinese intelligence agencies. That’s a major concern of U.S. intelligence agencies, led by the National Security Agency and U.S. Cyber Command, which warned internally that whoever manages the computer code could channel – or censor – a range of politically sensitive information to specific users.
ByteDance and TikTok have denied helping the Chinese government.
TikTok has become the latest flashpoint between Washington and Beijing over control of technology that affects American life. The Trump administration had already banned Chinese telecom giant Huawei from selling next-generation or 5G networks and equipment in the United States, citing the risk of a foreign power controlling the infrastructure on which all Internet communications flow.
But TikTok took the fight in new directions. For the first time, the United States tried to stop a Chinese cultural phenomenon, with an intense following among American teens and millennials, raising the possibility of future influence.
Even if Oracle could try to strike a deal, it’s unclear whether Beijing would create new obstacles to the process. And election-year politics has overlooked the negotiations from the start. Unlike many other technology companies, Oracle has maintained close ties to the Trump administration. Its founder, Larry Ellison, hosted a fundraiser for Mr. Trump this year, and its chief executive, Safra Catz, was part of the president’s transition team and has frequently visited the White House.
Last month, Mr Trump said he would support Oracle in buying TikTok. He called Oracle a “great company” and said the company, which specializes in business software, could successfully run TikTok.
“I think Oracle would definitely be someone who can handle it,” he said.
Along with Amazon, Oracle sought a $10 billion contract to run the Pentagon’s cloud services, one of the Trump administration’s most contested technology contracts. Microsoft ultimately won that.
Oracle was also poised to provide the administration with a system earlier this year to help with a planned study that would have enabled the widespread introduction of the malaria drug hydroxychloroquine to treat Covid-19. While doctors had warned that the drug could have dangerous side effects, Mr Trump had promoted its potential use to treat patients infected with the coronavirus.
Oracle’s relationship with the administration has attracted attention. In August, a Department of Labor whistleblower said Mr Trump’s secretary, Eugene Scalia, had intervened in a wage discrimination case involving the company.
During a call to discuss Oracle’s earnings last week, Ms. Catz preemptively told analysts that she and Mr. Ellison would not discuss reports on their bid for TikTok.
The rise of TikTok in the United States has been remarkably rapid; It’s taken off in the last two years. Founded in 2012, ByteDance has raised billions of dollars in funding and valued it at $100 billion, according to PitchBook, which tracks private companies. The investors include Tiger Global Management, KKR, NEA, SoftBank’s Vision Fund and GGV Capital.
In July, as pressure from the U.S. government escalated, ByteDance began talks with investors to expand TikTok.
But the deal quickly became noncommittal with bids from various companies and investment entities around the world and new demands from the U.S. and Chinese governments.
As the deal progressed, two of ByteDance’s largest lenders, Sequoia Capital and General Atlantic, have sought to retain their holdings in its valuable subsidiary and protect TikTok from a ban in the United States. Both companies are represented on byteDance’s board of directors.
At the end of August, the companies teamed up with Oracle to bid against Microsoft. Microsoft, meanwhile, worked with Walmart to make its bid.
In an interview, Brad Smith, Microsoft’s president and chief legal officer, said that as TikTok studied, it became clear that there were two different potential security threats.
The first was that Chinese authorities, using existing and new national security laws, could instruct TikTok to transfer user data. TikTok tracks everything the hundreds of millions of users watch to send them more videos and other content. Since users cannot opt out of that tracking, the only solution would be to move the data about Americans to servers located exclusively in the United States, Mr. Smith said.
(TikTok currently uses a large server in Virginia, but backs up some of its data in Singapore, and there are questions about whether Chinese authorities could access one of those massive pools of user data.)
Microsoft would have located that data in the United States – and in all likelihood Oracle.
“Then Microsoft engineers began to see a second potential vulnerability: disinformation,” said Mr Smith, who has also been identified by Australian researchers. The only way to make sure tiktok’s Chinese engineers didn’t designed code and algorithms to influence what users saw or didn’t see is for Microsoft to take over the code and the algorithms.
“We proposed to manage the datasets and algorithms from the day of the acquisition, including by moving the source code for the algorithms to the United States,” smith said.
Microsoft would then have worked with TikTok’s Chinese engineers over the course of a year so that it would investigate any subsequent changes and review them for safety purposes by the U.S. government before it was put into production, he said.
That’s the approach preferred by the National Security Agency and the Pentagon, intelligence officials said. But it is exactly what the Chinese object to, which Beijing made clear in its new regulations last month.