TikTok Deal's US Data Security and Algorithm Licensing Scrutiny - Episode Hero Image

TikTok Deal's US Data Security and Algorithm Licensing Scrutiny

Bloomberg Tech · · Listen to Original Episode →
Original Title:

TL;DR

  • TikTok's proposed US joint venture, involving Oracle and private equity, licenses its algorithm from ByteDance, raising questions about compliance with US law despite a US board and under 20% ByteDance ownership.
  • Oracle's significant role in securing US data for TikTok, mirroring the previously rejected Project Texas, faces scrutiny as regulators question if this arrangement sufficiently protects user information.
  • ByteDance's continued operational role in commercializing TikTok, including ad sales and e-commerce, alongside its licensing of the core algorithm, suggests a complex operational structure that may still invite scrutiny.
  • The interoperability of TikTok's global content with a US-specific algorithm, trained on US data, aims to maintain a global business while potentially offering a distinct user experience for Americans.
  • The deal's success hinges on Chinese government approval, which, while appearing likely based on current rhetoric, remains a critical, unconfirmed factor that could derail the transaction.
  • The US-China tech race extends beyond TikTok, encompassing AI, chips, and quantum computing, with China currently leading due to infrastructure investment and a coordinated national strategy.
  • OpenAI's aggressive fundraising and focus on becoming the go-to AI tool for future workers, evidenced by significant university license deals, positions it to capture future market share.

Deep Dive

A proposed deal for a U.S.-majority-owned TikTok, involving Oracle and other investors, aims to satisfy national security concerns by isolating U.S. user data and operations from its Chinese parent company, ByteDance. However, lingering questions about ByteDance's continued involvement through algorithm licensing and potential profit sharing persist, raising doubts about whether the arrangement fully adheres to the spirit of the law, even as key players prepare to move forward.

The structure of the deal, with Oracle playing a central role in data security and management, echoes "Project Texas" from a few years ago, which was previously deemed insufficient by U.S. regulators. This time, the inclusion of a U.S. board and separate U.S. company aims to create a more distinct operational entity. Former TikTok CEO Kevin Mayer believes this approach can create a "vastly different feed and content algorithm" for U.S. users, trained on U.S. data, while maintaining interoperability with global TikTok instances. This retraining of the existing algorithm, rather than a complete rebuild, is seen as crucial for preserving its sophistication and effectiveness. The deal's success hinges on China's government approval, which, while not yet explicit, appears increasingly likely based on current sentiment in Chinese media, mitigating a significant potential roadblock.

Beyond TikTok, the broader technology landscape is characterized by intense competition and evolving market dynamics. The race for AI dominance is shifting from pure innovation to a focus on balance sheets and demonstrable cash generation, leading investors to become more discerning about companies beyond their AI potential. This discernment is also evident in the private markets, where AI startups are achieving scale at unprecedented rates, prompting investors to seek exposure through private equity despite similar valuation concerns as public markets. The potential for major private AI companies to go public in the near future could significantly reshape public market indexes and introduce new scrutiny on their business models.

The U.S. and China are engaged in a broader technological competition, extending beyond TikTok to encompass chips, quantum computing, and AI development. While China is seen as currently leading due to strategic investments in infrastructure and a clear national five-year plan for AI, the U.S. faces challenges in coordinating its approach and marshaling resources cohesively. The U.S. response involves a mix of private sector innovation and government initiatives, such as NASA's ambitious plans for lunar bases and Mars missions, which rely on collaboration with private aerospace companies. The success of these endeavors, and the U.S.'s overall competitiveness in critical technologies, will depend on policy certainty, investment structures, and a unified strategic direction.

Action Items

  • Audit Oracle's role: Assess data security protocols and operational independence in the proposed TikTok US joint venture.
  • Track algorithm licensing: Monitor bytedance's adherence to licensing terms for the TikTok algorithm in the US.
  • Evaluate US board oversight: Measure the effectiveness of the US board's decision-making autonomy for TikTok US.
  • Analyze profit distribution: Examine profit-sharing agreements between bytedance and the new TikTok US entity for compliance.
  • Measure content moderation policy separation: Verify distinct content moderation policies for TikTok US from bytedance's global standards.

Related Episodes

Key Quotes

"Bytedance will have an ownership stake in this in this new us entity we've previously reported as well that you know bytedance will be licensing its content algorithm to this new us tiktok uh that they would then use that licensed algorithm to build a new one based on us user data but you know the law caroline is pretty clear which is that bytedance is not supposed to have any operational role in this new us tiktok and so this has sort of been the complaint all along is that is bytedance's involvement even if it's a small ownership stake or as a licensing partner on the algorithm is that considered too much"

Kurt Wagner explains that while Bytedance will retain a minority ownership and license its algorithm to the new US TikTok entity, the core legal complaint is whether this involvement, even in a limited capacity, constitutes an operational role, which is prohibited. Wagner highlights the ongoing question of whether this structure truly adheres to the letter of the law.

"The law caroline is pretty clear which is that bytedance is not supposed to have any operational role in this new us tiktok and so this has sort of been the complaint all along is that is bytedance's involvement even if it's a small ownership stake or as a licensing partner on the algorithm is that considered too much"

Kurt Wagner points out that the legal framework explicitly prohibits Bytedance from having an operational role in the new US TikTok. Wagner frames the ongoing debate around whether Bytedance's continued involvement, through ownership or licensing, crosses this line, indicating a potential point of contention.

"I think it works operationally i think having a company like oracle a very trusted company run run by you know larry ellison who's a trustworthy figure obviously being in the center in charge of of looking after and securing that us data that's crucial and i think they're licensing the algorithm from china so bytedance will still own the code but i do think this license will take another instance of the algorithm all the code put on oracle servers and then trained on the us data that oracle alone has access to"

Kevin Mayer expresses confidence in the operational viability of the proposed TikTok deal, emphasizing Oracle's crucial role in securing US data. Mayer explains that Bytedance will license its algorithm, which will then be housed on Oracle servers and trained on US user data, suggesting this separation will lead to a distinct content feed for US users.

"I think bytedance has an operational role commercializing tiktok selling ads making sure e commerce works and all the other commercialization factors but really it will be run by a us board and it'll be a separate us company it works it works but the proof is in the pudding as to whether the algorithm is as powerful"

Kevin Mayer clarifies that while Bytedance will maintain an operational role in commercial aspects like advertising and e-commerce, the new US TikTok entity will be governed by a US board and function as a separate company. Mayer notes that the ultimate success will depend on whether the licensed algorithm can maintain its power and effectiveness.

"The fact that they'll have access to that it will remain interoperable with all the other tiktok instances around the world i think that matters quite a bit and i think it's just re training that same code base that same algorithm with us data should provide a very robust solution i think it will be seamless"

Kevin Mayer highlights the importance of interoperability, suggesting that maintaining the connection with global TikTok instances is significant. Mayer believes that retraining the existing algorithm with US data will result in a robust and seamless solution for the US market.

"I think bytedance deriving profits i mean they do that i mean they built this entire ecosystem this entire um code base the technology the app they paid a lot of money in marketing to get that app downloaded on hundreds of millions billions frankly of devices around the world they've earned that right to have a participation in profits and i think it's structured in such a way that's very fair"

Kevin Mayer defends Bytedance's right to profit from TikTok, arguing that they built the entire ecosystem and invested heavily in marketing. Mayer believes Bytedance has earned participation in profits and that the proposed structure is fair.

Resources

External Resources

Books

  • "The Internet Era" - Mentioned in relation to a comparison with current AI company scaling.

Articles & Papers

  • "The Wall Street Journal" - Mentioned as the source for Open AI's fundraising target and valuation.

People

  • Larry Ellison - Mentioned as a trustworthy figure in charge of securing US data for TikTok.
  • Mike Shepherd - Mentioned as Bloomberg's technology editor in Washington.
  • Amy Webb - Mentioned as CEO of Future Today Strategy Group.
  • Jared Isaacman - Mentioned as the confirmed next head of NASA.
  • Ed Ludlow - Mentioned as Bloomberg Tech's correspondent.
  • Tiffany Wade - Mentioned as Senior Portfolio Manager at Columbia Threadneedle Investments.
  • Liam Knox - Mentioned as Bloomberg's reporter covering higher education.

Organizations & Institutions

  • TikTok - Mentioned as the subject of a US-majority ownership deal and its role in the media landscape.
  • Oracle - Mentioned as playing an outsized role in the proposed TikTok deal and as a potential investor in Warner Brothers Discovery.
  • Bytedance - Mentioned as the current owner of TikTok and its role in licensing the algorithm.
  • Candle Media - Mentioned as the company where Kevin Mayer is co-CEO.
  • Disney - Mentioned as having an unassailable position due to its IP and brands.
  • Netflix - Mentioned in the context of potential mergers with other media companies.
  • Warner Brothers Discovery - Mentioned in the context of potential mergers and its financial position.
  • Paramount - Mentioned in the context of potential mergers with other media companies.
  • Google - Mentioned in relation to its AI models and historical strategy with Chromebooks.
  • Microsoft - Mentioned in relation to its AI models and as a competitor to OpenAI in educational deals.
  • Nvidia - Mentioned in relation to pending approval for chip sales to China.
  • SpaceX - Mentioned in relation to its valuation and as a private sector player in space exploration.
  • Blue Origin - Mentioned as a new company playing a part in the Artemis program.
  • Columbia Threadneedle Investments - Mentioned as the firm where Tiffany Wade is Senior Portfolio Manager.
  • JP Morgan - Mentioned as the firm where Stephanie Aliaga is Global Market Strategist.
  • Bloomberg Intelligence - Mentioned as the firm where Mandip Singh is Global Head of Tech Research.
  • Future Today Strategy Group - Mentioned as the company where Amy Webb is CEO.
  • NASA - Mentioned in relation to its plans to return to the moon and its role in space exploration.
  • OpenAI - Mentioned as aiming to raise significant capital for growth and as a provider of AI tools to universities.
  • The Chinese Government - Mentioned as needing to approve the TikTok deal and its role in technology development.
  • The US Government - Mentioned in relation to its stance on TikTok and technology competition with China.
  • The CCP (Chinese Communist Party) - Mentioned in relation to its annual five-year plan for AI.

Websites & Online Resources

  • omnystudio.com/listener - Mentioned for privacy information.
  • optum.com - Mentioned for learning more about Optum.
  • cohesity.com - Mentioned for learning more about resilience.
  • mintmobile.com - Mentioned for switching to Mint Mobile.
  • shopcolgate.com/total - Mentioned for purchasing the Colgate Total Active Prevention System.
  • odoo.com - Mentioned for business software solutions.
  • discovercart.com - Mentioned for learning more about CAR T-cell therapy.

Other Resources

  • Project Texas - Mentioned as a previous arrangement with Oracle for TikTok data protection.
  • CAR T-cell therapy - Mentioned as a personalized treatment for multiple myeloma.
  • AI (Artificial Intelligence) - Mentioned as a central theme in technology development, competition, and its impact on the economy and labor market.
  • Short-form entertainment - Mentioned as a growing trend in content consumption.
  • IP (Intellectual Property) - Mentioned in relation to content creation and media companies.
  • Quantum computing - Mentioned as a future technology with significant breakthroughs.
  • H200 chips - Mentioned in relation to Nvidia's sales to China.
  • Artemis program - Mentioned as NASA's program for returning to the moon.
  • Nuclear propulsion - Mentioned as a technology for long-duration missions to Mars.
  • Nuclear surface power - Mentioned as a technology with applications on the moon or Mars.
  • Cloud services - Mentioned as a market within the AI landscape.
  • AI infrastructure - Mentioned as a key area of investment and concern for companies.
  • AI applications - Mentioned as a growing area of AI development and demand.
  • Corporate bonds - Mentioned as an investment option in relation to interest rates and debt issuance.
  • Private credit - Mentioned as a source of capital.
  • Private equity - Mentioned in relation to long-term return expectations.
  • AI models - Mentioned as a core component of AI development requiring significant capital.
  • ChatGPT - Mentioned as an AI tool and its adoption in universities.
  • Gemini - Mentioned as Google's AI model.
  • AI washing - Mentioned as a potential misattribution of job cuts to AI.
  • Hyperscalers - Mentioned as companies involved in AI infrastructure spending.
  • Electrical equipment - Mentioned as a sector involved in physical infrastructure spending for AI.
  • Data cleaning - Mentioned as a difficult process for companies preparing for AI.
  • AI ecosystem - Mentioned as a broad area of opportunity and risk.
  • US-China relations - Mentioned as a broader context for technology friction.
  • Chip war - Mentioned as a component of broader tech competition between the US and China.
  • Taiwan sale - Mentioned in relation to arms deals and its connection to the chip industry.
  • Rare earths - Mentioned as a factor in US-China trade discussions.
  • Tariffs - Mentioned as a potential threat from the Trump administration against Chinese goods.
  • National security - Mentioned as a concern related to TikTok and technology control.
  • Telecommunications hardware - Mentioned as an area where China has made significant inroads.
  • Global stage - Mentioned in the context of the US retreating from it.
  • US five-year plan - Mentioned as lacking a coordinated view compared to China's AI focus.
  • Hardware - Mentioned as increasingly important in AI development beyond data.
  • Robotics - Mentioned as an industry impacted by advancements in hardware.
  • Pharmaceuticals - Mentioned as an industry impacted by advancements in hardware.
  • AI (Artificial General Intelligence) - Mentioned as a concern regarding China's potential lead.
  • Super intelligence - Mentioned as a concern regarding China's potential lead.
  • AI infrastructure build out - Mentioned as a concern for investors.
  • Productivity - Mentioned as a key metric to be proven for AI investments.
  • Labor outlook - Mentioned in relation to the impact of AI.
  • AI-enabled productivity - Mentioned as a future benefit of AI.
  • Palo Alto Networks - Mentioned as a technology company enabling AI scalability.
  • MongoDB - Mentioned as a technology company enabling AI scalability.
  • Free cash flow - Mentioned as a metric for evaluating companies, particularly in AI.
  • Capital expenditure (CapEx) - Mentioned in relation to AI infrastructure spending.
  • US economy - Mentioned as having stronger growth prospects compared to other global regions.
  • Corporate earnings growth - Mentioned as stronger in the US.
  • GDP growth - Mentioned as stronger in the US.
  • Consumer spending - Mentioned as a potential beneficiary of stimulus.
  • IRA (Inflation Reduction Act) - Mentioned as an existing stimulus.
  • Tax bill - Mentioned as a potential future stimulus.
  • Fed rate cutting - Mentioned as a factor for the economy in the coming year.
  • Labor market - Mentioned as a watch item for the economy.
  • Fiscal stimulus - Mentioned as a factor for the economy in the coming year.
  • Iheart - Mentioned as a podcast network.
  • Facebook Marketplace - Mentioned as a feature for connecting with friends and finding gifts.
  • Facebook - Mentioned as a platform for staying connected.
  • Optum - Mentioned as a company using technology to simplify healthcare.
  • Bloomberg Audio Studios - Mentioned as a producer of podcasts.
  • Bloomberg Tech - Mentioned as a podcast and show.
  • Bloomberg - Mentioned as a news organization.
  • Pro Football Focus (PFF) - Mentioned as a data source for player grading.
  • New England Patriots - Mentioned as an example team for performance analysis.
  • NFL (National Football League) - Mentioned as the primary subject of sports discussion.
  • Kevin Mayer - Mentioned as a former TikTok CEO and COO of Bytedance.
  • Cohesity - Mentioned as a company related to resilience.
  • Health Discovered - Mentioned as a podcast.
  • MS (Multiple Sclerosis) - Mentioned as a health condition discussed on Health Discovered.
  • America's number one podcast network - Mentioned in relation to iheart.
  • The holidays - Mentioned as a time for connecting and exchanging gifts.
  • Tj maxx - Mentioned as a retailer for holiday shopping.
  • Amazon - Mentioned as a retailer for holiday shopping.
  • Colgate Total Active Prevention System - Mentioned as an oral health product routine.
  • Gingivitis - Mentioned as an oral health problem.
  • Cavities - Mentioned as an oral health problem.
  • Odoo - Mentioned as a business software platform.
  • Multiple myeloma - Mentioned as a life-changing diagnosis.
  • Disney Plus - Mentioned in relation to its development.
  • Coco Melon - Mentioned as an IP derived from YouTube.
  • Moonbug - Mentioned as a company owned by Candle Media.
  • YouTube - Mentioned as a platform for short-form entertainment and content.
  • YouTube Shorts - Mentioned as a feature for short-form video.
  • Hollywood - Mentioned in the context of competition and its need for a healthy ecosystem.
  • Star Wars - Mentioned as an IP owned by Disney.
  • Marvel - Mentioned as an IP owned by Disney.
  • Pixar - Mentioned as an IP owned by Disney.
  • Google Cloud - Mentioned as a competitor in the AI space.
  • Taiwan - Mentioned in relation to arms deals and its connection to the chip industry.
  • Nvidia H200 chips -

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