Oracle chosen as TikTok’s technical partner as Microsoft’s bid was rejected.

WASHINGTON – The Chinese owner of TikTok has chosen Oracle as the app’s technology partner for its U.S. operations and has turned down a takeover offer from Microsoft, according to Microsoft officials and others involved in the negotiations, as time runs out for an executive order from President Trump threatening 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, people involved in the negotiations said. Microsoft was seen as the US technology company with the biggest wallet to buy TikTok’s US operations from its parent company, ByteDance, and with the greatest ability to address the national security concerns that led to Mr. Trump’s order.

“ByteDance informed us today that they would not sell the U.S. operations of TikTok to Microsoft,” Microsoft said in a statement. “We are confident 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 essentially had to strike a deal to sell its U.S. operations by Sept. 20 or risk being blocked in the United States. States. But sales talks were in a holding pattern as China issued new rules last month that prevent TikTok from transferring its technology to a foreign buyer without the express permission 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 safeguards that would essentially give it control over the computer code that TikTok uses for the U.S. 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 sweeping changes to ensure the service met the highest standards for security, privacy, online safety and fighting disinformation,” Microsoft said in its statement.

Oracle has said nothing 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 is a major concern of U.S. intelligence agencies, led by the National Security Agency and U.S. Cyber Command, which warned internally that whoever controls the computer code may be channeling – or censoring – 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 affecting 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, referring to 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 teenagers and millennials, raising the possibility of future influence.

Even if Oracle could try to strike a deal, it is unclear whether Beijing would create new obstacles to the process. And election-year politics has overlooked negotiations from the beginning. Unlike many other technology companies, Oracle has maintained close ties with the Trump administration. Its founder, Larry Ellison, organized a fundraiser for Mr. Trump this year, and its chief executive, Safra Catz, was part of the president’s transition team and has regularly visited the White House.

Last month, Mr. Trump said he would support Oracle buying TikTok. He called Oracle a “great company” and said the company, which specializes in enterprise software, could successfully run TikTok.

“I think Oracle would definitely be someone who could handle it,” he said.

Along with Amazon, Oracle tried to win a $10 billion contract to run the Pentagon’s cloud services, one of the Trump administration’s most contested technology contracts. Microsoft eventually won that one.

Oracle was also ready to provide the administration with a system earlier this year to help with a planned study that would have allowed the broad 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 possible use to treat patients infected with the coronavirus.

Oracle’s relationship with administration has attracted attention. In August, a Department of Labor whistleblower said Mr. Trump’s secretary, Eugene Scalia, had intervened in a pay 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 has taken off in the past two years. ByteDance, founded in 2012, has raised billions of dollars in funding and is valued 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 US government pressure escalated, ByteDance began talks with investors to build out TikTok.

But the deal soon became non-committal 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 biggest backers, Sequoia Capital and General Atlantic, sought to retain their holdings in its valuable subsidiary and keep TikTok from being banned in the United States. Both firms are represented on ByteDance’s board of directors.

In late 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 in studying TikTok, 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 order TikTok to transfer user data. TikTok tracks everything its hundreds of millions of users watch to send them more videos and other material. Since users cannot opt out of that tracking, the only solution would be to move the data on 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 huge pools of user data.)

Microsoft would have located that data in the United States – and in all likelihood, so would Oracle.

“Then Microsoft engineers began to see a second potential vulnerability: disinformation,” said Mr. Smith, one also identified by Australian researchers. The only way to ensure that TikTok’s Chinese engineers did not design code and algorithms to influence what users saw or did not see is for Microsoft to adopt the code and algorithms.

“We proposed to manage the datasets and algorithms from the day of acquisition, in part 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 could examine any subsequent changes and review them for security purposes by the U.S. government before putting it into production, he said.

That is the approach preferred by the National Security Agency and the Pentagon, intelligence officials said. But it is precisely what the Chinese object to, which Beijing made clear in its new regulations last month.

Source: nytimes