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What is Microsoft getting itself into?

Microsoft is exposing itself to a whole new world of regulatory and national security scrutiny if it buys TikTok.

The TikTok app

One issue Microsoft will face if it moves forward: figuring out how to retrieve all U.S. user data and transfer it to U.S.-based servers.

Photo: Kon Karampelas/Unsplash

It's easy to see what Microsoft stands to gain from acquiring TikTok. Microsoft, which has successfully invested enormous resources into its business technology products, could probably purchase TikTok at a real discount, catapulting itself overnight into the big leagues of social networks.

But Microsoft is also exposing itself to a whole new world of regulatory and national security scrutiny as it tries to buy the Chinese-owned app that has attracted a drawn-out national security investigation, fiery congressional hearings and countless letters and inquiries from Capitol Hill, just as antitrust scrutiny ramps up in the U.S.

Here are just some of the issues Microsoft will face if it moves forward.

Microsoft's ties to China

As soon as reports of Microsoft's interest in TikTok began trickling out, White House advisers — most prominently trade adviser Peter Navarro — began questioning whether Microsoft is the best American company to pluck off TikTok's U.S. business.

In an interview with CNN, Navarro claimed there is "suspicious stuff" between Microsoft and China. Trump himself has left the door open as to whether it will be Microsoft or another U.S. company that ultimately buys TikTok.

Microsoft does have a significant presence in China, and many of China's computers run on Microsoft Windows. Microsoft's products aren't banned in mainland China — unlike Facebook, Twitter and YouTube — and it maintains a large R&D presence there.

But Klon Kitchen, the head of the Heritage Foundation's center for technology policy, said the TikTok acquisition is "wholly separate from all of that." Kitchen, who spent more than 15 years working in U.S. intelligence, said, "Microsoft's presence in China doesn't give me specific concerns about TikTok." Microsoft is one of the largest partners to the U.S. government.

Kaiser Kuo, host of the weekly China affairs podcast Sinica Podcast, said Navarro's targeted criticism of Microsoft "lays bare the real motives behind what Navarro wants to do here: It's not about protecting American national security, it's about hobbling China."

How Microsoft will disentangle TikTok from ByteDance

Over the next 45 days, Microsoft will have to draw up a comprehensive plan for ensuring it cuts off all ties between Bytedance, TikTok's Chinese parent company, and the app itself. TikTok has said multiple times that it stores U.S. user data in the United States, with a backup in Singapore. But its systems are still intimately connected to ByteDance, and some parts of the app development continue to happen in China. So Microsoft will be tasked with figuring out how to retrieve all U.S. user data and transfer it to U.S.-based servers, a task that will very likely take enormous resources, time and brainpower.

In many ways, the task of dissecting TikTok from ByteDance mirrors the ongoing struggle around how to cut off Chinese telecom giants Huawei and ZTE from U.S. 5G networks, said Nathan Leamer, a former FCC policy official. It's much more complicated to pull Chinese companies out of U.S. telecommunications infrastructure, of course, but Leamer said the TikTok dilemma is the "platform version of that conversation."

Government officials and lawmakers on Capitol Hill will be watching closely to see if Microsoft's promises satisfy their concerns. A spokesperson for the House Energy and Commerce Committee told Protocol, "The committee has raised concerns about TikTok, their data practices, and their alleged ties to the CCP."

"We will continue to conduct oversight and look forward to taking an in-depth look at any formal announcement about the future of TikTok," the spokesperson said.

Antitrust scrutiny

A deal of this size will need approval from the relevant government regulators — namely, the Federal Trade Commission and Department of Justice. Antitrust experts told Protocol that the acquisition doesn't raise any immediate red flags. It doesn't appear to be a vertical merger, considering Microsoft does not compete directly with TikTok beyond LinkedIn, a dissimilar network with a very different target audience. And it's not really a horizontal merger, considering Microsoft doesn't have, say, a smartphone operating system.

"I guess you'd view this as a conglomerate merger," said John Newman, an associate professor of law at the University of Miami and former DOJ antitrust lawyer. And it's almost unheard of for the government to challenge conglomerate mergers, Newman said.

It's possible that an internal review could raise fresh antitrust concerns, Newman said — for instance, if documents reveal that Microsoft is hoping to move deeper into the smartphone business.

But even then, the agencies now find themselves in an odd position: The White House has essentially sanctioned the acquisition, making it harder for the FTC and DOJ to say no.

U.S.-China tensions

The entire process around Microsoft's potential acquisition of TikTok has been unusual; for instance, it's extremely rare for the White House to be actively negotiating over a private acquisition, and even rarer for the company to admit it publicly.

More than anything, Microsoft is diving headfirst into a nasty geopolitical conflict that is only set to intensify in the coming months and years: the U.S.-China "tech cold war," in Microsoft President Brad Smith's own words.

Kuo said he sees this as only the latest chapter in the U.S.' escalating war against China, which has recently seen the U.S. shut down its Peace Corps involvement in China, cancel Fulbright scholarships to China and Hong Kong, take drastic measures against Huawei and threaten Chinese students in the U.S. with deportation.

"It's been a true full-court press," Kuo said, "and anyone who imagines that you can look at TikTok in isolation from that, that's just insane."

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