TikTok Buyout Could Be 'Disaster' Only For Investors to End Up Paying $100 Billion

A potential buyout of TikTok by an American company seems to be the app's only chance of survival in the US and possibly in Europe.

There are people across different industries who expressed desire to buy the platform such as former Treasury Secretary Steven Mnuchin and Frank McCourt, a real estate billionaire.

However, they might face significant challenges, especially regarding TikTok's core asset: its algorithm.

With the imminent TikTok ban, it would be forced to be sold to a US-owned firm. That's what the House voted in March. Although senators were less convinced of the need for such legislation, the Department of Justice favored the sale option over a ban.

President Biden recently signed off on this bill, giving ByteDance, TikTok's Chinese owner, nine months to sell the app to a US company, with a possible extension to twelve months.

The Importance of TikTok's Algorithm

While TikTok and many of its creators argue that banning the app is unconstitutional, the future of the app remains uncertain. Even if sold, investors risk overpaying without securing the app's most valuable asset: its algorithm.

Unlike other video platforms like YouTube, TikTok's success hinges on its sophisticated recommendation algorithm, according to 9to5Mac. This algorithm curates a personalized video feed based on user interests, driving the app's addictive nature and popularity. Although users can follow specific creators and search for content, the algorithm remains the heart of the user experience.

Despite concerns about the algorithm's impact on mental health and its addictive nature, there is no denying its role in TikTok's success.

Potential Financial Pitfalls

A Wired report indicates that potential investors might pay up to $100 billion for TikTok. Frank McCourt has already started assembling a group of investors, with financial advisors from Guggenheim Securities and legal assistance from Kirkland & Ellis. Similarly, Steven Mnuchin is also putting together a group of investors to bid for TikTok.

However, the Chinese government has blocked the sale of TikTok's algorithm to a US company. This legal restriction means that any buyer would have to acquire TikTok without its recommendation algorithm, which drastically reduces the app's value.

TikTok confirmed that the Chinese government would not permit the sale of its algorithm to foreign buyers due to regulations introduced after former President Trump first targeted TikTok in 2020. These measures restrict the export of technologies such as "personal interactive data algorithms."

The Challenges Ahead

Both McCourt and Mnuchin acknowledge that TikTok is less valuable without its algorithm. McCourt has proposed a new design that moves beyond the current paradigm, but rebuilding the technology behind TikTok's success would be a monumental task.

Competitors like YouTube and Meta have tried to replicate TikTok's product with limited success, highlighting the complexity of the algorithm.

Mnuchin also understands the challenge, stating his intention to "rebuild the technology." However, creating an algorithm that rivals TikTok's current system is a daunting and potentially unachievable goal, considering the years of development and data that have gone into perfecting it.

Buying TikTok without its algorithm essentially leaves investors with a brand name and a basic app. This scenario raises doubts about the financial viability of such a deal. The algorithm is what sets TikTok apart from other social media platforms, and without it, the app's value plummets.

While the forced sale of the video-sharing app to a US company might be necessary for its survival in the US and Europe, the lack of access to its algorithm poses another hurdle in the business.

Potential buyers must weigh the high financial stakes against the uncertain value of an algorithm-less TikTok, making this a risky investment with no guaranteed return. Surely, it will hurt business beyond entertainment for the years to come.