How TikTok Could Threaten American Innovation: Term Sheet

Let’s talk about TikTok, the popular short-form video app
that’s been popular with teens for quite some time and that their parents are
just now learning about. TikTok videos are everywhere. Even if you don’t know
you’ve seen one, you’ve seen one. (Here
are examples.)

The app has been downloaded more than a billion times since
its launch, and young people churn and swipe through videos at warp speed. In a
recent New Yorker profile, Jia Tolentino wrote: “Some social
algorithms are like bossy waiters: they solicit your preferences and then
recommend a menu. TikTok orders you dinner by watching you look at food.”

Now, ByteDance, the Chinese owner of the social network, is
reportedly considering going public on the Hong Kong stock exchange as soon as
the first quarter of next year. ByteDance raised $3 billion in funding last
year in a round led by SoftBank, doubling its worth from a year earlier. An IPO
would create a big windfall for early investors such as the Chinese arm of
Sequoia Capital, and would also help SoftBank at a time when the value of its
investments in companies such as Uber and WeWork has sharply fallen, according
to the Financial Times.

The company has denied the timing of the IPO, but I still
think it’s important to take a look at the short video juggernaut valued at $75
billion. ByteDance is one of the few Chinese companies to take the U.S. by
storm. But the company is under serious scrutiny. 

Earlier this month, Sen. Marco Rubio asked the U.S. government
to
open an investigation into TikTok out of concern that the company is
“censoring content” around the world to satisfy Beijing’s leaders. “China
is using these apps to advance their foreign policy and globally suppress
freedom of speech, expression and other freedoms that we as Americans so deeply
cherish,” he wrote in a letter. 

In a separate letter, Sen. Tom Cotton and Senate Minority
Leader Chuck Schumer wrote, “TikTok is a potential counterintelligence threat
we cannot ignore.” TikTok vehemently denies these accusations and claims it
does not house data from U.S. users in China, and that its video app isn’t
censored by the Chinese government. (The Guardian reported
that it does, based on a document leak; ByteDance said the document The
Guardian viewed had been retired.)

There’s no question that TikTok looms a shadow over the
United States during a time of fraught relations with China, and American
social media networks are
finding it hard to compete with the wildly popular app. It’s going to be a
messy fight over things much larger than a 15-second lip-syncing video — we’re
talking a threat to good ole’ American innovation, expression, and
values. 

“Until recently, the internet in almost every country
outside China has been defined by American platforms with strong
free-expression values,” said
Facebook CEO Mark Zuckerberg during a speech at Georgetown University earlier
this month. “There’s no guarantee these values will win out.”

… MEANWHILE, Chinese investors are continuing to pour
money into startups and venture capital funds, emboldened in part by
ambiguities in U.S. efforts to limit foreign access to technology deals. In a
well-reported investigation, The Wall Street Journal found that the specific
guidance is yet to be defined for implementing a 2018 U.S. law that intends to
curb foreign access to sensitive technologies.

In the VC world, people refer to this law as Cfius. The law
expanded the power of the Committee on Foreign Investment in the U.S. to probe
minority investments in critical tech companies through which foreign investors
could influence said company’s business decisions.

But, as the report notes, Cfius hasn’t exactly stopped U.S.
tech entrepreneurs from wanting to nurture connections to China. “The policies
we have put in place have not been all that effective in limiting China’s
technology ambitions,” Nicholas Eftimiades, a retired senior U.S. intelligence
officer, told The Journal. Read
the full story here.