Why does Microsoft want Tiktok?

For years now, some venture capitalists in silicon valley have considered the social media space a no go area. They believe that the days of being able to invest in social media startups like Facebook and watch those investments climb into the stratosphere have passed.

Then came TikTok.

The little app owned by Chinese Company ByteDance took the world by storm. In December 2018 the app had only been downloaded 6 million times. Barely two years later, the TikTok app has been downloaded over 2 billion times with over 800 million active users. The meteoric growth did not come without its drawbacks. TikTok’s growth and Chinese connection have made it a proxy in the U.S. and China’s budding economic cold war.  Now TikTok finds itself in a precarious situation. To continue to thrive in the world’s largest economy, it must make a clean break from its Chinese roots and it must make this break by September 15th, 2020.

Enter Microsoft (NASDAQ: MSFT).  The boring member of big tech.

It is most known for its business-facing products such as Office 365 and Microsoft Azure. Even its most popular consumer-facing product also happens to be the most boring social media platform, LinkedIn. The company has a litany of big consumer product failures such as the Nokia Lumia, its smartphone; Microsoft Zune, a failed music streaming service; Bing, the search engine nobody rates and Skype, Zoom before Zoom was Zoom.

To be fair to Microsoft, it has done a great job with the Xbox but the larger point here is that Microsoft is not known for its ability to deliver quality products directly to consumers. This is why Microsoft’s announcement that it was interested in acquiring TikTok was at first puzzling.

A few years ago, Microsoft was in a really bad place. The stock was flat and it was losing relevance thanks to the rise of smartphones. However, since Satya Nadella took over, there have been moves to strengthen the business including the acquisition of LinkedIn. Investors have rewarded the company as its stock price has gone from $37 in 2014 to $212 today.

The potential acquisition of TikTok seems to be one more move by Nadella. On the merits of it, Microsoft will be acquiring the social media of choice for the next generation and the biggest threat to the Future of Facebook, Instagram. Tiktok gives Microsoft a very monetizable segment of users and that can bring in billions of dollars of digital advertising if growth continues. The 13-24-year-old segment represents 69% of Tiktok’s user base, compared to around 51% of Instagram’s base. Also, the average Facebook user is 45 years old. In addition, according to financial services firm, Cowen, the average time on TikTok has risen from 37 minutes to 41 minutes. On Instagram, the average time has stagnated at 33 minutes per day per user.

So why does Microsoft want to acquire TikTok?

The answer is that Microsoft wants to own the future’s biggest piece of advertising real estate. Right now that is the platform where 800 million people have chosen to spend 41 minutes each day.

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