Inside TikTok’s Fight To Avoid A US Ban

(Bloomberg Businessweek) -- On Feb. 1, TikTok’s top lobbyists thought the meeting on Capitol Hill was going well. Their slide presentation, which was meant to show how hard TikTok worked to prevent data generated in the US from ending up in China, was capturing the attention of their congressional antagonists— Mike Gallagher, a Wisconsin Republican, and Raja Krishnamoorthi, an Illinois Democrat..This was the bipartisan duo leading a new House committee focused on China. They’d already sponsored a bill seeking to ban the app on the suspicion, commonly held in national security circles, that the Chinese Communist Party could use TikTok to track and manipulate Americans because it’s owned by a company based in Beijing, called ByteDance Ltd..Krishnamoorthi asked a question TikTok was expecting: What about the law in China that forces companies based there to comply with any government data requests?.Michael Beckerman, TikTok’s well-coiffed head of US public policy, reassured Krishnamoorthi that users have nothing to worry about, according to two of the meeting’s attendees. TikTok is taking extreme measures to isolate its US operations. Beckerman said the company is housing data with an American partner, Oracle Corp., and has agreed to accept oversight from a US government-appointed board, in a $1.5 billion plan called Project Texas—all explained in slides on the iPad that the lawmakers were holding and that congressional staffers were straining to see..The representatives were familiar with the plan. But they were also familiar with the loyalty China demands from its domestic companies. Gallagher asked: If China were to order TikTok to remove content about the government’s oppression of the Uyghur minority in Western China, what would TikTok do? Beckerman promised the content wouldn’t be censored, but he appeared flustered..So it goes for TikTok in Washington, where bashing the company seems to be a major thing Republicans and Democrats actually enjoy doing together. It’s an area where the Biden administration can find rare bipartisan agreement. Congress is giving the president plenty of options, with four bills including Gallagher’s looking to limit TikTok’s power..On March 7, the White House threw its support behind one Senate bill, introduced by Virginia Democrat Mark Warner and South Dakota Republican John Thune, that could give the president the ability to evaluate the national security risk of foreign-owned technology and limit its US operations if necessary. “Act quickly to send it to the president’s desk,” the White House urged. Three days later, a former TikTok employee told Congress he thinks Project Texas is deeply flawed and that US user data will still be at risk even after the promised protections are implemented. “Anyone who left the company in February of 2022 would have no knowledge of the current status of Project Texas,” a TikTok spokeswoman says..TikTok’s leadership is now considering more drastic measures to keep operating in the US, including separating from its parent, according to people familiar with the matter. A divestiture or stake sale would require China’s approval, and it’s not clear there would be a buyer. But TikTok’s leaders think the alternative—a full ban—would be a bigger risk to ByteDance’s financial success, one of the people says..Breaking off from ByteDance, which TikTok hasn’t told Congress it’s considering, would be a last resort. (In the end, ByteDance may not have a choice: The Biden administration recently warned the company to spin off TikTok or face a ban, according to people familiar with the matter.) “Neither a ban of TikTok nor a divestiture of TikTok from ByteDance does anything to address national security concerns about data transfers,” TikTok said in a statement, touting the benefits of Project Texas. TikTok’s policy staffers and its chief executive officer, Shou Chew, have been frustrated for months that its biggest opponents in Congress seem unmoved by the expensive, expansive steps the company is taking to safeguard user data. The app, beloved especially by American teens and tweens, is caught in a geopolitical maelstrom it’s struggled to navigate..On the day of the meeting with Gallagher and Krishnamoorthi, the news was not in TikTok’s favor. US military officials were debating whether to shoot down a Chinese spy balloon that came to the public’s attention when it passed too close to a US Air Force base in Montana. Panic over the balloon translated easily into panic over the popular video app. “A big Chinese balloon in the sky and millions of Chinese TikTok balloons on our phones,” Utah Republican Senator Mitt Romney tweeted. “Let’s shut them all down.”.Americans, on average, spend 56 minutes a day on TikTok, more than on either Facebook or Instagram, according to market researcher Insider Intelligence. The lawmakers giving dire warnings on Chinese spying say the app also represents a gateway drug for Chinese propaganda—“digital fentanyl,” as Gallagher called it. For users, that’s hard to square with the app’s videos of Noodle the pug and Francis the train guy..Limiting TikTok, however geopolitically alluring, would be domestically unpopular and unprecedented. It’s more the kind of thing that would happen in China, which has blocked Facebook since 2009. Commerce Secretary Gina Raimondo last month told Bloomberg News that banning the app would “literally lose every voter under 35, forever.”.ByteDance gained its foothold in the US by starting with young internet users who weren’t already obsessed with Instagram and Snapchat. In 2017, ByteDance bought Musical.ly, a Chinese app popular among preteens for sharing videos of people lip-syncing to popular songs, and turned it into TikTok. American middle schools and high schools became backdrops for goofy coordinated dances, known as “challenges” on the app; anyone who went viral sharing their challenge gained online clout. But at the time, the app was still pretty minor league..Then the pandemic happened. Schools switched to virtual-only, adults locked down with their children, and nobody had anything noteworthy to post on their Instagram grids. TikTok, which provided lighthearted humor from everyday people, became a salve for America’s collective Covid-19 anxiety and boredom. A popular trend could cause a song to surge to the top of the charts, upending the music industry and giving a viral boost to the fame of stars like Olivia Rodrigo. The effects in fashion and beauty could lead to a run on products, such as Clinique’s Almost Lipstick in Black Honey, or catapult a TV show like Netflix’s to the most-watched list..Central to TikTok’s success is its algorithm, which guesses users’ interests based on what they decide to watch, drawing them to niche, sometimes weirdly specific, content, from home inspectors sharing their worst discoveries to people dancing to customer service line hold music. That charming technology tends to unnerve national security experts. If TikTok can figure out how to entertain individual US users so specifically and successfully, and TikTok is owned by a Chinese company, what could China do with that power?.At the height of the pandemic, Covid was straining relations between China and the US, with factory shutdowns and export controls putting stress on the supply chain for electronics and more. TikTok was the sort of Chinese export that the US couldn’t put on a mandated inspection list. But it was clear that anti-TikTokism was brewing around the world. India abruptly banned TikTok in June 2020 during a dispute with China, citing national security concerns..TikTok, sensing the political fight ahead in its most lucrative market, tried branding itself to be as American as possible. Public relations representatives started telling journalists TikTok was incorporated in the Cayman Islands—therefore not Beijing-based. The company hired a new CEO, Kevin Mayer, the well-known head of Walt Disney Co.’s streaming business, just after he led the wildly successful launch of Disney+. He was tasked with Americanizing the company’s executive ranks and being a friendly face in Washington..TikTok’s best advocates were its own users, who were willing to go to bat for the app without being asked. When President Donald Trump issued an executive order to ban TikTok in August 2020, America’s youth fought back with impassioned videos about how important the app had become in their lives. A collection of TikTok users pranked Trump by registering for one of his rallies, causing him to expect many more attendees than actually showed—which angered him further..After months of negotiations with the White House to avoid a ban, ByteDance settled on a plan to sell TikTok to Oracle, a company that has always had strong ties to the national security establishment. Its chairman, Larry Ellison, has helped fundraise for Trump, making Oracle an ideal shield from Republican China hawks. A court issued an injunction to block Trump’s order. That order was dropped by the Biden administration and replaced with a new one calling for a national security review..By then, Mayer was long gone. He’d lasted only four months, exhausted by the political nature of the role. Ever since, the company has struggled to hire seasoned, public-facing executives willing to thrust themselves in front of anti-China politicians and defend TikTok’s scruples, according to three people familiar with the matter..In May 2021, Chew, a Singaporean and a former executive at the Chinese cellphone manufacturer Xiaomi Inc., took the CEO job. Since then he’s been spending most of his time in the US and Europe, trying to show regulators and TikTok’s advertisers that the app is already, in practice, disconnected from China and embedded in US culture. TikTok employees rarely see Chew in its Singapore offices and joke that nobody knows how tall he is. But Chew was at the Super Bowl, posting videos from Rihanna’s halftime show to TikTok, alongside other American tech and entertainment executives..Chew seems uninterested in making the kind of open pleas for trust like the ones Mark Zuckerberg would deliver after a Facebook scandal. Nor does he like embarrassing his critics the way Elon Musk does at Twitter Inc. Instead, he’s been asking for private meetings to navigate TikTok’s position. The panel with the most power to determine TikTok’s fate, he reasons, is the Committee on Foreign Investment in the United States. Cfius, as it’s known, is the interagency government committee that determines, for instance, whether Huawei Technologies Co. can sell smartphones in the country (no) and whether Broadcom Inc. can buy Qualcomm (also no)..Chew thought TikTok could negotiate with Cfius by sharing details about the company’s data procedures and rules for employees—and that based on those facts, the government would gain confidence, according to people familiar with his plans. Oracle, which the government was no longer asking to buy TikTok, nevertheless remained its political shield and a big part of its pitch to Cfius. Under the Project Texas proposal, Oracle would house all US user data and audit TikTok’s code. A three-person panel, approved by the government, would oversee these operations, and all employees of TikTok’s new US Data Security entity would face the same extensive background vetting as government contractors do..National security officials conducting the review of Project Texas are not convinced by its promised protections. Officials at the Department of the Treasury had favored giving TikTok’s offer a chance, but Department of Justice officials swayed other members of the committee toward rejecting the plan, according to people familiar with the discussions. FBI Director Christopher Wray recently told Congress that TikTok “screams out with national security concerns.” Plus, Capitol Hill staffers are suspicious of Oracle’s incentives, according to people familiar with the matter. Because of TikTok’s incredible growth, it’s become one of Oracle’s biggest cloud customers. Oracle wouldn’t have much incentive to flag any suspicious activities, which could endanger its lucrative contract, they say. Oracle didn’t respond to a request for comment..While Cfius deliberated in private, Republican senators including Josh Hawley of Missouri and Marco Rubio of Florida latched on to critical news reports to wage a media campaign to ban the app. The usual critiques that follow all popular social media apps—that their content is addictive, that their algorithms negatively affect the mental health of teens, that they gather data in a way users don’t understand—all seem more sinister with China’s involvement..Until late last year, TikTok largely ignored the blustering of lawmakers and officials it thought were spouting lies and who didn’t understand the business, two people familiar with the strategy say. Non-engagement was obviously a mistake. In Washington, politics will shape the narrative surrounding any company that doesn’t seek to write it itself. TikTok hasn’t reported any lobbying expenditures, but its Chinese parent company has. ByteDance’s first lobbying disclosure in Washington was $120,000 in the third quarter of 2019. In the second quarter of 2022, it spent $2.1 million..But lobbying can only solve so much. When magazine published a report saying it was indeed possible for ByteDance employees in China to access US users’ location data, what happened in response was worse: ByteDance employees dug into the IP addresses of the journalists to figure out who their sources were. The incident, which TikTok admitted to in December, “is a scandal that casts doubt on every promise TikTok has made about protecting personal information,” Oregon Senator Ron Wyden, a Democrat, said at the time..TikTok has been trying to remove the mystery around its app, building what it called a Transparency Center in Los Angeles—a building with rooms full of explanatory diagrams and cartoons about its data standards and algorithms to help legislators and journalists understand how it safeguards data and how its algorithms work. As TikTok’s global head of risk response, Suzy Loftus, put it at the unveiling of the center: “We face very significant headwinds in the trust space.”.The first federal anti-TikTok legislation to pass banned the app on US government devices. The European Union, Belgium and Canada have done the same. Some state lawmakers have taken similar steps; TikTok is blocked or banned on government employee devices in 25 states. In some states, that includes public school employees and college Wi-Fi networks..At the University of Texas at Austin in January, it didn’t take long for TikTok users on campus to figure out a workaround. Grace Featherston, a theater education major, says students simply switched to using cellular data or a different Wi-Fi signal. The ban did, however, make her mad. Featherston, with 26,000 followers, posts about musical theater. She compared the prospect of a ban to the government taking away abortion rights in the state..If the app ultimately gets blocked in the US, it’d be akin to ripping out “an artifact of youth culture,” says Ioana Literat, associate professor of communication, media and learning technologies design at Columbia University. “Knowing how bold and fearless they are about speaking up when it comes to something that they perceive as an injustice—which they would definitely perceive this as an injustice—I would expect a very strong reaction.”.TikTokers may be a particularly dangerous voter group to scorn. Voters under 30 were the only age group in the 2022 US midterm election in which the majority favored Democrats, by an impressive 28-point margin, according to Tufts University. The Democratic National Committee knows that—it has a TikTok account with more than 320,000 followers. Biden hosted TikTok influencers at the White House ahead of last year’s midterm election. Democratic strategists say TikTok is useful not only to turn out young voters who skew blue, but also to mobilize them to donate to and volunteer for campaigns..Most Republicans brush off such concerns, at least in public. Representative Tim Burchett, a Tennessee Republican on the House Committee on Foreign Affairs, says he “could care less” about the political blowback from banning TikTok. But speaking in private, some staffers working on the issue acknowledge that it might be too late to ban an app that’s become this popular, according to a senior Republican aide who declined to be named sharing private discussions..That’s one reason the divestiture solution has become so enticing for both parties. But if it happened, the Chinese government would have to review and sign off on it, because TikTok’s technology is covered by that country’s export controls. In August 2020, China’s tech regulators updated a list of products that require approval before they’re sold abroad to include the algorithms that ByteDance uses in TikTok. If China’s regulators have any incentive to say yes to a sale, it’s because doing so would help Beijing seem pro-industry after three years of subjecting China’s private sector to strict Covid curbs and regulatory crackdowns, says Xiaomeng Lu, director of geo-technology at Eurasia Group..Selling, banning or breaking off TikTok could take months or years. (A sale would be more likely than an initial public offering, which is just not financially necessary at TikTok and would likely keep ByteDance as a major investor, according to people familiar with the matter.) For both Cfius and TikTok critics in Congress, it’s not clear how much of the company ByteDance would have to sell to no longer be considered in control. TikTok would prefer to stick with its Project Texas plan than endure a drawn-out divestiture process. The political tension with China has led Chew to joke that the spy balloons were sent for him, according to people familiar with the matter..In the meantime, Chew seems to have shifted to a more public communication strategy out of pure urgency, according to people familiar with the matter. He’s been called to testify in Congress on March 23 on the company’s data privacy and security practices, its relationship with the Chinese Communist Party and the app’s impact on kids. Ahead of his arrival, TikTok has flooded Washington with ads touting the company’s trust and safety policies..Chew has been meeting with bankers in New York and Miami, just in case he ends up navigating a major transaction. Meanwhile, his team has been preparing him for contentious questioning on the Hill, according to people familiar with the matter. He’s been advised to steel himself and stay level, even if faced with inflammatory or false accusations, these people say. Don’t be combative, but don’t be overly defensive. Let the facts do the talking..If that approach for the testimony doesn’t work, though, TikTok may go on the offensive to fight for its survival, by equating limits on the app’s existence with censorship, or even anti-Asian racism, and taking its fight out of Washington and to the public, two people familiar say. On March 14 at TikTok, the company’s senior leaders discussed the upcoming hearing with staff. One person close to TikTok equates it to the congressional grillings of American tech leaders like Zuckerberg. “It’s a rite of passage for a company in our industry,” the person says, declining to be named discussing internal matters. “It’s our turn.” —.More stories like this are available on bloomberg.com.©2023 Bloomberg L.P.

Inside TikTok’s Fight To Avoid A US Ban

Ahead of next week’s showdown in DC over ongoing national security concerns, the Chinese-owned social media app is considering all its options—from going along with a forced sale to taking the offensive.

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