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5 questions about Microsoft’s plans for TikTok

If ByteDance is forced to sell TikTok to another company, there are places worse than Microsoft where a media platform could wind up (like Verizon). That being said, the maker of Microsoft Office is not an obvious candidate to acquire a social video app popular with high schoolers.

Microsoft’s unexpected emergence as TikTok’s potential next parent company has raised eyebrows since news broke on July 31 that Microsoft was exploring an acquisition of TikTok from ByteDance, which is being compelled by the Trump administration to sell the app to an American company or give up TikTok’s ability to operate in the U.S. Microsoft has confirmed the acquisition talks and given itself until Sept. 15 to complete a deal. But the company has not explained why it is interested in buying TikTok or what it would do with the platform. 

With more questions than answers at the moment, here is an attempt to answer some of the main questions surrounding Microsoft’s potential acquisition of TikTok, including how TikTok could help Microsoft become a bigger player in the future of TV.

Why would Microsoft want to acquire TikTok?

This is the biggest question at the moment. Microsoft still owns Bing’s search engine, Xbox’s gaming console and even MSN’s online portal, but it has become more of a business-facing tech company than a consumer proposition. That is why Microsoft’s acquisition of LinkedIn made a lot of sense, and why its potential pick-up of TikTok is so confounding. Microsoft’s interest is made clearer if you assume it signals the company’s desire to reinvigorate its consumer-facing business.

“Microsoft has historically always wanted something to be able to compete against Google, recently against Facebook and YouTube too, which is part of Google obviously. So this is kind of their potential way of getting in on that competitive set in a more meaningful way,” said Collin Colburn, senior analyst at Forrester.

How much might TikTok be dinged by the acquisition?

Microsoft is only exploring the purchase of TikTok’s operations in the U.S., Canada, Australia and New Zealand. While TikTok claims to have more than 100 million users in the U.S., the carving up of TikTok’s global service could seriously cap its growth and potential to attract ad dollars from advertisers looking to reach a global audience. “Every other social media app operates on a global audience. Young people today are so globally minded that it feels really strange to suddenly turn TikTok into an entity that’s only available in certain countries,” said Debra Aho Williamson, principal analyst at eMarketer.

There’s also the potential that TikTok could lose its standing among creators, such as Charli D’Amelio, Addison Rae and Zach King, that have helped the app become so popular among teenagers and twentysomethings. The talk of banning TikTok has already led some creators to redirect their audiences to their accounts on other platforms, like Instagram and YouTube, and spurred some brands to create contingency plans for influencer marketing deals earmarked for TikTok. Meanwhile, Instagram is rolling out its TikTok competitor, Instagram Reels, this month, and Snapchat is similarly planning to add a feature later this year for people to add music to their posts.

Additionally, Microsoft, with the exception of Xbox, doesn’t have a great track record with consumer-oriented media platforms. In June, the company announced it was shutting down its gaming-centric livestreaming platform Mixer less than a year after poaching top Twitch streamers such as Tyler “Ninja” Blevins to prop up the platform.

How willing will Microsoft be to continue to invest in TikTok?

Microsoft will likely have to spend tens of billions of dollars to acquire TikTok in the first place. But that’s just the cost of entry. ByteDance has been pouring billions of dollars into TikTok annually. In 2018, ByteDance spent nearly $1 billion solely on advertising to attract users, according to The Wall Street Journal, and the figure increased fourfold in 2019, according to MediaRadar. In addition to its advertising costs, TikTok has pledged to spend more than $1 billion over the next three years to pay creators for posting content to its platform, and that’s only for creators in the U.S. TikTok has said it will spend more than double the amount globally.

As of June 30, Microsoft had $13.6 billion in cash and cash equivalents on its balance sheet, and its total assets amounted to $301.3 billion. So the company wouldn’t necessarily need to go digging under couch cushions to finance TikTok’s growth. But Microsoft is also a big company with many other investment segments, meaning that TikTok will have to fight for its share. The continued growth of TikTok’s user base and advertising business could help the platform lay claim to a larger slice, but that’s assuming TikTok’s growth is not contingent on first having that investment in order to buy ads and acquire (or reacquire) users.

Is Microsoft planning a renewed advertising push?

Microsoft’s advertising business is not what it once was. Before the duopoly of Google and Facebook, Microsoft was one of the major players in the digital advertising industry. As the owner of one of the major portals in MSN, the company played a big role in the online display advertising market. And as the owner of Bing, it played an even bigger role in the search marketing world. But Microsoft’s position in the digital advertising ecosystem has diminished over the years. In June 2015, it effectively exited the display advertising business, handing over direct sales to AOL.

However, Microsoft is still in the advertising game. It still has Bing, though Microsoft is only expected to receive 6% of U.S. search ad dollars this year compared to 71% going to Google, according to eMarketer. Microsoft also has LinkedIn’s advertising business, and the company sells ads that run on its Xbox gaming consoles. Conceivably, Microsoft could attempt to sell ads across Bing, LinkedIn, Xbox and TikTok — as Facebook and Google do across their various properties — but it’s hard to imagine how much audience overlap there would be. 

Nonetheless, Microsoft’s experience catering to direct-response advertisers on Bing and LinkedIn could be applied to help TikTok develop its ad platform for advertisers who want proof their campaigns performed. For example, TikTok only offers a one-day attribution window for campaigns whereas platforms like Facebook and Snapchat allow advertisers to track ads against conversions, such as site visits, for 28 days after an ad ran, said a social ad buyer. “I don’t think they’re ready for primetime,” this person said.

Could Microsoft use TikTok to break into the streaming wars?

Stifle your laughs. If Microsoft planned to buy TikTok as a way to compete against Netflix and Disney+, it likely could buy Quibi for less money — and we could all laugh about that. Instead, consider how Microsoft could use TikTok to help Xbox compete against Roku’s and Amazon’s connected TV platforms. Microsoft had previously tried to establish Xbox as a CTV platform with the 2013 launch of the Xbox One that allowed people to watch traditional TV through the gaming console. Things didn’t pan out in Xbox’s favor then, but now could be different. 

With so much programming available across so many streaming services, one of the biggest opportunities in that market is helping viewers find what to watch. This has been one of Apple’s not-so-secret strategies behind the launch of Apple TV+ and roll-out of its Apple TV app across other platforms, including Roku. Now consider TikTok’s famed content-recommendation algorithm that powers its “For You” page and enables a video to go viral even if its creator doesn’t have many followers. Microsoft — which will be releasing a new Xbox console later this year — could follow Apple’s example and retool TikTok’s algorithm to recommend shows and movies from the various streamers distributed on Xbox’s platform. 

People are unlikely to spend hundreds of dollars to buy an Xbox simply for streaming. But take into account that Microsoft sold more than 46 million Xbox One consoles as of the second quarter of 2019, giving it a larger footprint that Roku or Amazon which each claim more than 40 million monthly active users. Assuming a similar number of people will pick up the newest Xbox, an improved streaming recommendation feature on Xbox could lead those owners to opt to stream through Xbox instead of another CTV platform.

Confessional

“We’re having conversations with talent about what they’re comfortable with. We have a show with a prominent talent who’s not willing to fly right now, so we have to figure out how we can drive them to different interviews.”

— Producer on returning to physical production

Stay tuned: College football’s return

How long Major League Baseball’s return will last is a huge question facing TV networks and advertisers. Also up in the air is the return of college football. Conferences including the SEC, Big Ten and Pac-12 said they will play games this fall, but that could change as coronavirus cases increase and players threaten to opt out of the season. “I can’t imagine that college football happens,” said one agency executive.

And college football’s fate may be cleared up by the time you’re reading this. The NCAA’s Board of Governors was slated to meet on Aug. 4 to decide whether college sports can be played this fall. Of course, the situation could change by the time the college football season kicks off or before the bowl games begin at the end of this year and into 2021. If college football were to be canceled or have its season shrunk, it could trigger a ripple effect.

ESPN would take a pretty big hit if the college football season were canceled, according to Bloomberg. Last season more than half of college football viewers watched games on one of ESPN’s properties, and college football broadcasts brought in $793 million in advertising revenue for ESPN parent Disney last year, the publication reported citing figures from Standard Media Index.

Ad buyers are already trying to game out the repercussions. If the likes of the SEC and Big Ten stick to conference-only schedules, “there should still be enough coverage for most networks” to hang on to ad dollars, said a second agency executive. But if no games are played, that would put a lot of money up in the air. That money could be redirected to other sports — assuming the NFL et al. don’t go on hiatus — but there may not be enough inventory for the TV and streaming ad market to hang on to all that money.

“If college football goes away, whatever ratings Auburn-Alabama would have gotten is going to be really hard for a media company to replace those … unless there’s an NFL game,” said the first agency executive.

Numbers don’t lie

60.5 million: Number of subscribers to Disney+, as of Disney’s latest earnings report.

$3.8 billion: How much advertising revenue YouTube generated in the second quarter of 2020.

102,000: Number of new pay-TV subscribers that Charter acquired in the second quarter of 2020.

2.9 million: Average number of people that tuned in to the NBA’s return across traditional TV and streaming on July 30.

10 million: Number of people who have signed up for NBCUniversal’s Peacock streaming service, which offers a free tier.

What we’ve covered

TikTok-Instagram rivalry for creators heats up:

  • The threat of a TikTok ban is pushing some creators and brand deals from TikTok to other platforms, especially Instagram.
  • The battle between TikTok and Instagram for creators will ultimately come down to the platforms’ ability to financially support creators.

Read more about the TikTok-Instagram rivalry here.

Proliferation of FASTs is causing headaches for media companies:

  • As the number of free, ad-supported streaming TV services has increased, media companies are finding it more complicated to distribute 24/7 channels across the services.
  • Pluto TV and Samsung TV Plus are emerging as the most popular streamers but require different distribution methods.

Read more about FASTs here.

TikTok turns up its branded content spending and profile with publishers:

  • TikTok has begun paying publishers, including BuzzFeed, PinkNews and The Dodo, for branded content campaigns.
  • TikTok is also encouraging publishers to spend money on the platform.

Read more about TikTok here.

What we’re reading

YouTubers pivot away from advertising:
The weak ad market has pushed YouTube creators to ease their reliance on advertising revenue, according to Bloomberg. The number of YouTube channels that make money from non-advertising sources increased by 20% between March and April, and there has been a 40% increase in the number of creators no longer generating the majority of their YouTube revenue from advertising.

TV upfront negotiations kick off:
Normally the annual TV upfront advertising market would be winding down around now. Instead it is just getting started, finally. Top TV network groups and agency holding companies have begun their negotiations, according to Variety. Meanwhile, Procter & Gamble has started to go it alone in striking upfront deals, despite having supported the Association of National Advertisers’ call for this year’s upfront negotiations to be delayed until the fall.

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