Tik Tok and the Tech Titans

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I think the difficult question for Microsoft as it relates to TikTok is, not so much what to do with it, but what not to do with it. There's a lot of potential. Anytime you get that sort of attention, you have that sort of landmass in the attention graph of American consumers, there's a lot of opportunity.

Welcome to the Barron's Streetwise Podcast. I'm Jack Howe. The voice you just heard, that's Scott Galloway. He's a marketing professor at NYU and an author known for jarring predictions on America's big tech companies. In a moment, we'll hear from him and from Wedbush Securities analyst Daniel Ives about a wildly popular video platform called TikTok. We'll also talk about which of the US tech giants could be first in line for an antitrust crackdown, what form it would take, and what it might mean for the US stock market. Listening in as always is our audio producer Meta. Hi Meta.

Hey Jack.

Metta, do you use TikTok? Why or why not?

I do not use TikTok. I don't want more social media in my life, and I don't think it's for me.

That sounds like a sensible approach to me. I think I've gone the other direction. I might accidentally have become a TikTok user, and I know that might sound strange for a guy who has never tried Facebook or Instagram and who's not exactly an influencer on Twitter. I don't post TikTok videos, but I do watch them. Sometimes I watch a lot of them in a row, and it's definitely my daughter's fault. She asked me if she could get TikTok for her iPad, and I said no because it's owned by a parent company in China called ByteDance. And in China, I said, the government controls the companies. I told her that if China's government gets our personal data and pictures of our faces, it might use them in ways we don't like. And I realized while I was saying that, that I was basically describing the business model of Facebook, but my daughter let it go. I decided to learn more about TikTok before she asked me again, so I downloaded it to my phone. The first thing to know is that when you open the app, the videos start playing automatically. You don't have to choose anything. If you like a video, you can touch the heart icon, then you swipe up for the next one. The videos are submitted by other users, and they're often around 15 or 30 seconds long. So it's not much of a commitment to watch another one. There's an algorithm that guesses which videos I'll like. It seems pretty accurate. Apparently, based on my history of likes, I like when a woman asks one of her huskies if it wants to go to the park.

"You do want to go to the park." And then it starts howling.

And then her other husky joins in. I've liked multiple videos from a woman with curly red hair who sings Scottish songs and always starts out by saying, Hello, my wee darlings.

Hello, my wee darlings.

You requested I sing it, and this is a dancey one, so get your dancing shoes on right now. Then there's Daddysaur. He seems like a normal dad, but whenever one of his daughters says the word Daddysaur, he feels compelled to turn into a T-Rex and attack nearby objects, which are usually something messy like a birthday cake or jug of milk or a full garbage bag. While his wife yells. If I tried something like that, my wife would turn me into a divorciasaur, but she laughs when Daddasaur does it. A lot of TikTok videos are short dance routines or dance instructions. I've tried some of the moves and I look like someone drowning on dry land, but I keep watching. TikTok has more than a billion users in total, and it's growing much faster than social media incumbents like Facebook, Twitter, even Instagram. Earlier this year, it generated the most downloads ever for any app in a quarter. So it got people's attention recently when President Trump threatened to ban TikTok in the U.S.

We're looking at TikTok. We may be banning TikTok. We may be doing some other things. There are a couple of options.

He later said he'll give the company until September 15th to sell its U.S. operations or face a shutdown. And he indicated that he was okay with Microsoft being the buyer. Microsoft confirmed that it's in talks. To learn more about what a TikTok purchase would mean for Microsoft, I reached out to Daniel Ives, who covers the tech giants for Wedbush Securities.

Oh, hey Dan, how are you? Good.

How's everything?

Good.

I asked why Microsoft is in a position to do this deal. Just near the end of July, the chiefs of Apple, Amazon, Alphabet, and Facebook received a video conference grilling from the House Antitrust Subcommittee. So why not Microsoft? By stock market value, it's the second largest US company behind only Apple. Dan says Microsoft has been focused on the enterprise. He's not talking about that ship from Star Trek. He means software and services for big organizations and not areas that are getting the most regulatory scrutiny like social media or digital advertising. That's because Microsoft tried and failed in those other areas. Its Bing search engine never really took off. I had to Google it recently to see if it's still around. Microsoft tried to buy Yahoo in 2008 for $45 billion, but it failed, which in hindsight was lucky because Verizon bought Yahoo less than 10 years later and the price was less than $5 billion.

It's ironic because here it is, Microsoft that was in the midst of regulatory in the late '90s, early 2000s from antitrust. Now finds itself untethered where every other company in terms of the FAANG world are basically handcuffed as they're up to their eyeballs in regulatory scrutiny. So TikTok essentially fell on the lap of Microsoft.

When Dan mentions regulatory action in the late 1990s, he means a 1998 antitrust case. Microsoft, with its free web browser, was accused of contributing to the collapse of a rival browser called Netscape. A judge ordered Microsoft to break up, but Microsoft appealed and won, and the Justice Department settled without a breakup requirement. Today, Microsoft is thriving in cloud computing, where its main competitor is Amazon. Dan says that with TikTok, Microsoft CEO Satya Nadella has an opportunity to buy a crown jewel in social media potentially on the cheap.

That's a no-brainer acquisition, especially the fact that ByteDance has their back against the wall. They're at the prom, there's one dance partner, it's Microsoft, and if they walk away from Microsoft, then the service gets shut off by Trump in the White House.

I asked what the concern is exactly about China. I was looking to bolster my explanation for the next time it comes up with my daughter.

Well, right now, in the midst of a U.S.-China cold tech war, as we've seen with Huawei, You know, TikTok, based on all that information that they gather of consumers, 100 million US users, and right now the US from a national security perspective is very concerned of that.

I pay nothing to use TikTok and I don't see much on the app by way of advertising. So what would Microsoft get out of the deal? Dan says Microsoft might be able to add advertising and maybe increase the reach of its Xbox gaming business. He also thinks that by diversifying into a more consumer-facing business, Microsoft might end up with a higher valuation.

And that's why I think you see the stock reacting positively as investors are starting to view this as a potential sum-of-the-parts valuation where they could buy an asset for $40, $50 billion and under the Microsoft cocoon could be worth $100 billion first day.

Dan points out that Microsoft sits on cash and short-term investments worth $136 billion, and that it could generate enough excess cash in one year to pay for a potential TikTok purchase. Dan is bullish on Microsoft stock, and he views the TikTok deal as likely.

At this point, we have 75-80% chance the deal happens, and I think that could be conservative.

On July 29th, as I said, the chiefs of Apple, Amazon, Alphabet, and Facebook answered questions by video from the House Antitrust Subcommittee, and there were substantive points raised, but I'm not sure the day left investors fearing a crackdown based on how those 4 stocks rose that day and the day after, and then mostly soared the following day on blowout earnings reports. I thought that there were moments during the hearing that reinforced some negative impressions of Congress rather than big tech. At one point, a 21-term House rep tried to get tough with Facebook CEO Mark Zuckerberg, but he seemed to confuse Facebook with Twitter.

Congressman, well, first, to be clear, I think what you might be referring to happened on Twitter, so it's hard for me to speak to that, but I can talk to our policies about this.

At another point, a 30-second shouting match broke out among House reps. Mr.

Jordan, I have the time.

But this is the ranking.

Our first witness— We're talking about people's liberties here. We got the ranking order.

One kept hollering, put your mask on. Put your mask on. Put your mask on. And another one shouted, you want to talk about masks? Why would the Deputy Secretary of the Treasury unmask Michael Flynn's name? That's a subject that had nothing to do with tech or antitrust. I couldn't help but think that 4 chiefs running companies collectively valued at nearly $5 trillion were being held to account by a brawling Congress that might run a $5 trillion budget deficit this year, and not nearly all of that deficit is due to the pandemic. Now, no one is looking for a defender of big tech right now, but let me just point out two things. First, at a time when a lot of things seem broken, these services are working. My family has relied greatly on Amazon and its Whole Foods grocery chain for basics and hard-to-get items. I use Google constantly as a starting point for tracking down information. Apple is basically my IT department. Many years ago I had lots of computer problems. I felt like I was reinstalling my Windows operating system and programs every 6 months. So I asked an IT guy if I should get a Mac, and he said, "Macs are for people who are too dumb to use computers." I bought one the next day. Then I started using Apple for everything. I might be too dumb to use a computer, but I'm smart enough to stick with things that work. I don't use Facebook, but my wife does. She says 90% of what she sees are pointless arguments about politics, but 8% is useful community information. The remaining 2% is a tense standoff between our town's dog owners and a handful of homeowners who want to move one of the dog parks. Anyhow, Facebook has zero political allies because the left suspects it helped swing the 2016 election for Trump and the right suspects it suppresses conservative thought. I've never met someone who confessed to liking Facebook, and yet almost 1.8 billion people use it daily as of the end of June, and 2.7 billion use it at least monthly. Those numbers are up 12% from a year ago. I can't help but think that we treat each other horribly on Facebook, then blame Facebook for how horrible we've become, and go on Facebook to complain about it. The second thing I wanna point out is that the fact that our stock market is soaring amid the economic wreckage is mostly about big tech. Credit Suisse pointed out recently that over the past year, the 5 largest S&P 500 companies, that's Apple, Microsoft, Amazon, Alphabet, and Facebook, had returned 58% versus 1% for the rest of the market. It attributed that to superior earnings. During the second quarter of this year, the Big Five grew earnings by 19% versus a 40% plunge for the rest of the market. And keep in mind that the S&P 500 index is weighted for company size, so those five companies have a lot of sway. Now, I'm not saying that the tech titans don't have too much power, and I'm not saying that a rising stock market makes up for antitrust concerns. I'm saying we should hear on the matter from a more aggressive witness for the prosecution than me. So I called up Scott Galloway. I'll let Scott introduce himself.

NYU professor of marketing and author of the upcoming book Post-Corona: From Crisis to Opportunity, and Jack Howe's favorite academic.

Before Scott was an academic, he was a tech entrepreneur and hedge fund investor. A few years ago, I noticed his lectures on big tech were getting a lot of views on YouTube, and I sat down with him for a Q&A in Barron's Magazine. That was around when he wrote a book called The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google. At the time, Scott compared those companies to body parts. Alphabet's Google search was the brain because that's where we ask things. Facebook is the heart because people have relationships there. Amazon is the stomach for consumption. But Apple, it's the private parts. Let me explain by reading a passage from Scott during the Q&A. He pointed to my Apple Watch. The watch you are wearing isn't a timepiece. It's an attempt to signal to people that if they mate with you, their kids are more likely to survive than if they mate with someone who's wearing a Swatch. The price premium is irrational, but we're willing to pay a lot of money to seem more attractive to other people. So it's kind of the opposite of having ad-supported Pandora or paying with a Discover card, which I think says to potential mates, "You have bad genes." Now, for the record, I have a Discover card, but I don't use it. So I don't know what that means for my genes. And although I still have an Apple Watch, I'm not trying to procreate with anyone, I swear. I'm not even the one who brought private parts into this. Technically, that was Scott. Anyhow, he's always saying stuff like that and I find his perspective interesting. So when I talked to him this time around, I started by asking about TikTok. Why is it such a big deal?

Well, there's just really one stat that sort of distills the power of TikTok and that is supposedly people are spending more time on TikTok than on Instagram. And Instagram, a lot of people would argue, is the most successful social platform of the last decade. So you have what is for the first time in a decade a platform that feels like as if it could rival Instagram, which is the growth engine of Facebook. So, you know, could we go from a monopoly in social media to a duopoly? So this is a big deal.

Scott says he doesn't use TikTok, that anyone his age shouldn't use it, and I'm pretty close to his age, so oops. I asked why TikTok has been so successful.

You know, it tapped into something in terms of a certain level of joy It's performative like Instagram, but it's more around music and dancing.

Now, I've said in the past that Instagram is for weaponizing beauty or wealth, and Twitter is where the rest of us do the best we can with snark. Facebook, as near as I can tell, is where your uncle fights with your coworker over politics. Scott agrees that Instagram consists of, as he puts it, basically communicating to other people how much better your life is than theirs.

To distill it into very loose terms, I think when you come off of TikTok, you feel maybe good and maybe even just a little better about yourself. And I'm not sure if that's true when you come off of Instagram.

Scott also says that the look and feel of TikTok is compelling.

The way they've structured kind of this bottomless feed, it's just very tempting and easy to kind of go down this rabbit hole and pull your head up 2 hours later and you're still on TikTok.

Scott agrees that any Chinese company is effectively, as he puts it, a loosely affiliated wing of the Chinese government. He says that China is a U.S. competitor at a minimum and more likely an adversary, and that TikTok's data could be used as a weapon. He says China isn't in a position to complain about that view because of how it treated Facebook and Google.

It's very difficult for China to raise any alarm because effectively they proposed the same concerns when they let Facebook and Google into China just long enough to steal the IP and then kick them out for quote unquote security reasons.

I asked about a potential Microsoft deal and Scott agrees that, as he puts it, the moons have lined up above Seattle, which is near Microsoft's headquarters. Scott points to Facebook's enormous rise in valuation since it bought Instagram back in 2012. He says Microsoft could put a lot of capital into TikTok and maybe roll its performance up with LinkedIn and claim that it's one of the biggest players in social media.

TikTok and all of these companies could eventually one day be not only very valuable media companies in terms of their advertising revenue they garner, but also maybe give them entrée into some sort of streaming video platform such that they could compete with Apple TV+ or Netflix. So I think the difficult question for Microsoft as it relates to TikTok is not so much what to do with it, but what not to do with it.

That's an interesting point. When my kids get time on their iPads, I try to talk them into the kids section of Disney+ or Netflix or HBO Max because I like that it's a curated experience where someone's in charge of appropriateness. They'd much rather play an online video game called Roblox, or if I let them, which I don't, watch YouTube or TikTok. For me, I wonder if I've been watching less TV because if I want to casually turn something on for a few minutes before bed, the success ratio just seems higher if I scroll through a few TikTok videos than if I take time to get into a new show or movie. And I know I should read classic literature instead of looking at any of this stuff. I'm not a perfect person. I mean, I have a Discover card and bad genes. Anyhow, whether or not Hollywood views TikTok as a threat, Facebook seems to. This past week, it launched a service on Instagram called Reels, which lets people make videos, set them to music, add filters, and easily share them just like TikTok. Scott says Microsoft buying TikTok isn't a perfect solution from an antitrust perspective.

It's difficult to understand which is worse, and that is, okay, if you ban them from the U.S., then that just protects monopolies. That protects U.S. big tech. But letting Microsoft buy them only accretes more power to big tech. So it's sort of this Sophie's choice for antitrust.

Scott's impression of the recent antitrust hearing was different from mine. He felt it sent a powerful message.

The witnesses weren't really there to provide additional information. They were essentially props for the committee to demonstrate or to articulate a series of opinions that they have formed after what has been an exceptionally in-depth investigation. And while I've said this before and I've always get my heart broken, it felt to me like the beginning and the end of big tech as we know it. I think this validated a lot of the public's and a lot of lawmakers' viewpoint that these companies have just grown too powerful.

But, I said, shares of these companies went up during and after the hearing. Yes, Scott said, but lately other stocks aren't participating, and that's a bad sign.

I think the market is starting to figure out that when 4 companies can increase their market cap by a quarter of a trillion dollars in one day, that in a low-growth economy, it's become a zero-sum game, and what's good for those firms when it's that good is likely bad for everybody else, and now you're starting to see the rest of the market decline the same way when Amazon announces an incredible quarter, retail stocks don't trade up in sympathy, they go down because the assumption is they're taking share from everybody else.

Okay, so if there's regulatory action, which companies will get hit first? Scott says Facebook and Alphabet.

Well, the most disliked and easiest target is Facebook because the CEO is perceived correctly as an oligarch who is basically corrupt. So I think the least likable is Facebook, and likability or lack thereof plays a huge role in politics and antitrust action, even when it shouldn't. Realistically, what it looks like in terms of signals out of the government, it looks like Google is probably gonna get the first antitrust lawsuit filed against it sometime in the fall.

When I asked about tech companies getting hit, Scott said that way of thinking about it isn't ideal.

Right now, consumers are faced with this, what I call this empty question or this false narrative of, are these companies bad and should we punish them with antitrust? And that's the wrong way to think about it. These companies have accomplished incredible things. They've aggregated incredible power, and whether you think they've done that legally or illegally, they have gotten to a point where the entire economy would benefit from the oxygenation of breaking these companies up.

Scott points out that some past breakups resulted in higher aggregate market values 5 to 10 years later.

If Facebook can acquire Instagram and WhatsApp, it can divest them. And I believe if you spun YouTube from Google in the first corporate strategy meeting that YouTube has as an independent company, they decide to go into text-based search, and Google decides to start their own video search company, and overnight we have two competitors, or four competitors, as opposed to two divisions cooperating and coordinating.

How might that help consumers? Scott has an example.

If you're Facebook or Google, and P&G says, you know, it kind of bothers me that there's a lot of evidence that when young women or girls spend time on Instagram, they're more prone to self-harm and self-cutting, or 'Hey Google, it bothers me that there appears to be a lot of evidence that young men are being radicalized on YouTube.' You know, what motivation or incentive do they have to do anything but put a very earnest person in front of them and nod their head and take notes and say, 'We need to do better,' when the person on the other end doesn't have any choice?

One last point. Scott says it's a mistake to think of these services as free. He says if parents are worried about their kids on these platforms, the cost of parenting rises. And that if citizens are worried about elections or foreign governments weaponizing data, the cost to society is going up.

If you really start to think more broadly by what we mean by prices, our prices have skyrocketed at the hands of the density and consolidation of power across fewer and fewer firms.

Meta, it's listener question time. Who do we have?

We have a question from Dom. He's from the UK. Hi, Jack and Meta. Dom here from Cambridge, United Kingdom. So Dom mentions an earlier episode where you told a listener to stick with his S&P 500 fund rather than shift more money overseas. Why isn't it the case that you recommend tracking a world index? Is this because the questions were coming from US-based investors, or do you expect the US market to outperform the global market? Would your advice be that investors internationally also favor the U.S. market? Many thanks for your time.

Thank you, Dom, and thanks to all of our listeners in the UK. Yes, especially you, Your Royal Highness. Now, there's something in investing called home country bias, and I'm as guilty of it as anyone. I don't think a little home country bias is such a bad thing if you live in a country with a stable financial system and a robust menu of investable assets. After all, most of us also have a high home country weighting when it comes to our future obligations, like spending for retirement. And more than 40% of revenue for S&P 500 companies comes from outside the U.S., so it's not entirely a U.S. investment. But you make an excellent point, Dom. For many investors, especially those outside the U.S. whose future obligations are denominated in other currencies, a world stock index might be more appropriate. Thank you, Dom, for sending in your question. And everyone, please keep the questions coming. Just tape on your phone, use the voice memo app, and send in an email to jack.hough, that's H-O-U-G-H, at barons.com. If you send us a TikTok video where you're dancing while asking your question, Meta promises to give it priority review. Thank you for listening. Meta Lutzov is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you listen on Apple, write us a review. If you want to find out about new stories, new podcast episodes, you can follow me on Twitter. That's @jackhowe, H-O-U-G-H. See you next week. Model portfolios are no longer one size fits all. In fact, 85% of investors want financial advisors to deliver models customized to their individual goals investment preferences, and tax circumstances. Discover some of the top themes driving the shift in Seizing the Next Model Moment by BlackRock.