Microsoft & TikTok: The Odd Couple (Part 1 of 2)
Microsoft &
TikTok: The Odd Couple (Part 1 of 2)
Ever since Microsoft announced
via a blog post that it was in talks to buy the US operations of TikTok, I have
been attempting to understand the rationale behind this deal. What does
Microsoft, an enterprise-solution oriented tech giant, want with a trending
video sharing app with dancing and lip-syncing teens? In this two-part
analysis, I will first lay down the foundation by looking at the product
offerings of both these companies and their current strategies. With that
background, I will attempt to identify possible strategic benefits to Microsoft
from this acquisition and then finally argue why this deal may not result in
the best fit.
Source: Axios
Microsoft: A
Revitalized Tech Giant
When Satya Nadella took over the
reins of Microsoft from Steve Ballmer in 2014, the company was on the brink of
technological irrelevance at a time when Big Tech was establishing itself as a
key feature of modern capitalism. It had seemed like Microsoft was in danger of
missing out on every major technological trend. The company was unable to take
a sizeable share of the smartphone market from Apple, the cloud sector from
Amazon or search from Google and it had no stake in the social media business.
While the company still remained profitable during this wayward period, the
stock has flat-lined due to the doubts prevailing over the long-term viability
of the company.
Figure 1: The growth in MSFT: The
stock had flat lined before 2014 based perceived poor long-term prospect of the
business but under the tenure of Satya Nadella, the company has shown a strong
comeback with 6-year CAGR of approximately 30%
Source: Yahoo Finance
After nearly six and a half years
under Nadella’s quiet and calm leadership, Microsoft’s turn around has been
astounding. The share price has more than quintupled and the company has a
market cap of approximately $1.75 trillion with a promising short to mid-term
outlook.
Microsoft’s Investment
Strategy
Under Nadella, Microsoft narrowed
the focus of their investment strategy to make fewer but bigger consolidated bets.
Nadella doubled down on future technologies with investment into cloud and AI.
Microsoft launched Intelligent Cloud which includes products such as Server and
Azure and is currently the only meaningful competitor to Amazon Web Services
(AWS). The company also launched an AI division with 5000 computer scientists
and software engineers.
In addition to organically
growing the cloud and AI divisions, Microsoft undertook a series of smart
acquisitions. These include GitHub, Citrus Data, LinkedIn, Lobe and Mojang.
Microsoft’s acquisition strategy thus far has been forward-looking rather than
playing catch up with its rivals as it was attempting to do under the
leadership of Steve Ballmer. (The poorly thought out acquisition of Nokia’s
mobile division is a good example of their old approach.)
This investment strategy has
created a seamless of architecture for Microsoft that covers both the consumer
and enterprise landscape. Consolidating on its traditionally strong consumer business
as well as the pervasiveness of its Office suite of tools, Microsoft now has
the appeal of the business community (LinkedIn) and the developer community
(GitHub). The company has also been able to differentiate itself in the B2B
space from competitors such as Oracle, IBM and SAP with the help of Azure.
Another advantage of Microsoft’s
investment strategy, which is often overlooked, is the source of their revenue.
Unlike other tech giants such as Facebook and Twitter, Microsoft’s revenue is
derived from their products rather than data which means that the consumers are
not the product. This has allowed Microsoft to circumvent all the privacy
issues that have plagued the other technology companies and this in turn has
allowed it build strong consumer trust as well as valuable political goodwill.
When Congress held an anti-trust hearing for Amazon, Apple, Google and
Facebook, Microsoft was a notable absentee. The accrual of this political
goodwill has had a tangible impact on Microsoft’s revenues since it allowed the
company to secure a few major US defense contracts such as JEDI (Joint
Enterprise Defense Contract) and DEOS (Defense Enterprise Office Solutions)
over its major cloud computing rival, Amazon.
This strategy has allowed
Microsoft to fly under radar and operate quietly in the less controversial
enterprise market. Even their social media platform, LinkedIn, is exclusively
focused on professionals who tend avoid sharing their personal opinion on
politics, sex and religion (the usual hotbed of controversial topics). Due to
the inherent incentives built within the platform, there is a general tendency
for self-censorship and moderation by the users resulting in lower
controversies for LinkedIn.
In addition to acquiring the
companies, Microsoft has also allowed these companies to operate semi
autonomously without aggressively attempting to integrate these products into
their product portfolios. The creators of Minecraft, Mojang as well as LinkedIn
have been allowed to operate as separate entities without any heavy-handed
management from the parent company. It appears that Microsoft has learned its
lesson on the pitfalls of aggressive assimilation from poor performance of
Skype and Windows Phone.
Figure 2: The major acquisitions of
Microsoft. The red boxes represent the acquisitions under the reign of Satya
Nadella.
Source: Statista
TikTok: The Latest Social
Media Darling
TikTok is a social media platform
based on short-form video content, which is owned by ByteDance, a Chinese
internet company founded in 2012. ByteDance has various other apps such as
Helo, Vigo Video, BaBe and Douyin (the Chinese version of TikTok).
The app was launched worldwide in
2017 for iOS and Android but its popularity skyrocketed after it merged with
Musical.ly in mid-2018.
Figure 3: The rapid growth of TikTok
following the merger with Musical.ly in August 2018.
Source: Gartner Research
A Content Focused App
TikTok differs from other social
media apps because it is geared for content creation and discovery rather than
communication. If you scroll through TikTok, you will not find the carefully
curated, picture-perfectness of Instagram or the political rants on Twitter or
the daily vlogs found on YouTube. Users are not sharing their lives; they are
creating entertainment and their success depends on their content. In this way
TikTok has truly democratized virality and allows people to experience their
‘15 seconds of fame’ rather than the traditional 15 minutes. As a result, the
content creators feel that they have a genuine opportunity to go viral with
just the right video and capitalize on the momentum and become influencers.
The app is also structured in a
way to promote virality and encourage content discovery. The backbone of TikTok
is viral chain challenges where users take a pre-established concept and imitate
it with a twist. This spawns’ endless iterations of a concept allowing the
trend to last for weeks and months.
Users can discover these trends or find new videos through the ‘For You
Page’ (FYP). This is the page where users spend most of their time on and the
algorithm that drives the page is kept a secret but the consensus is that it is
impressively perceptive of the tastes of the user is very successful in
creating highly addictive feeds.
A Highly Unique and Valuable
User Base
In October of 2019, a pitch deck that
was circulated among advertisers by TikTok was leaked. The deck provides a rare
glimpse into details of the app and helps to explain why it is considered to be
highly valuable. While the pitch deck presents data for 2019 and is a little outdated
at the time of this writing, it nevertheless provides a deep insight into the
demographics of company.
Figure 4: Gen Z skewed user base.
Source: Ad Age
Figure 5: The largest age bracket is
18-24 with 42%.
Source: Ad Age
The app is Gen Z focused with
approximately 70% of users falling within the 16-24 age bracket. Gen Z is one
of the most diverse generations with high levels of education, digital nativism
and strong social and cultural awareness and need to voice their opinions and
thoughts. The app provides a unique look at this generation and the data and
insights gleaned from these users is highly valuable and it could help companies
hone their product development and marketing and messaging to become and stay
culturally relevant.
Figure 6: A highly engaged user
base.
Source: Ad Age
In addition to the skew towards
younger users, TikTok has a highly engaged community. The stats above provide a
deeper look at the usage statistics in the US. One reason for this high
engagement level is due to the emphasis on content discovery mentioned earlier.
This high engagement level is attractive for advertisers looking to reach their
target audience effectively. Moreover, the propensity to go viral providers
advertisers an opportunity to reach a wider reach with their average spend.
This makes advertising on the platform attractive when compared with
alternative platforms like Instagram where an influencer’s reach is limited by
their followers.
A Nascent Advertising Business:
Based on the pitch deck, it
appears that TikTok is focusing on capitalizing on its strong user base and are
planning on improving the monetization of app through advertising. TikTok is
offering 5 main ad formats for brands to utilize.
Figure 7: 5 Ad formats for brands to
utilize
Source: Ad Age
The deck also offers a glimpse
their pricing model.
Figure 8: Pricing options for ads on
TikTok
Source: Ad Age
On the whole, it appears that
TikTok has managed to create a unique, vibrant and valuable community and they
now have a solid plan to capitalize on this and improve the monetization and
thereby the financial viability of the application.
With the stage set with both
these companies, we can now look into the proposed acquisition in more detail.
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