Why Microsoft and Walmart Want to Sync Up With TikTok

Walmart Inc. (NYSE: WMT, Rated “B”) is working with Microsoft Corp. (Nasdaq: MSFT, Rated “B+”) on a bid to buyout TikTok, the smartphone app famous for silly lip-singing and dance videos created by teens and social media influencers.

The app might seem like a strange fit for a discount retailer and a firm best known for productivity software, but due to the digital transformation, everything has changed. Now, the need for instant connections and new business models is rising.

Walmart wants a new sales channel and Microsoft sees a big client for its cloud business.

Their strategy is likely to work.

TikTok is a deceptively big business. The Chinese-owned app was the fourth most popular download for iPhones in 2019, behind YouTube, Instagram and Snapchat.

That means it beat out Facebook (Nasdaq: FB, Rated “B-”), Facebook Messenger, Gmail and Netflix. (Nasdaq: NFLX, Rated “C+”).

And if you combine downloads for Apple’s (Nasdaq: AAPL, Rated “B”) App Store and Google Play, the Android equivalent, TikTok was the second most popular app in all of mobile. Facebook’s WhatsApp ranked first.

TikTok users were also more engaged with influencers than any other platform, according to research from Influencer Marketing hub.

That’s why managers at Walmart see a huge opportunity.

And this opportunity is already a reality in China. Douyin, TikTok’s Chinese version of the app, is an ecommerce destination that is making huge inroads into the $140 billion Chinese live-streaming marketplace.

Influencers have been able to setup storefronts and hawk actual products to viewers. If this seems vaguely familiar to QVC, that’s because it is, with a strangely digital immediacy shoppers find intoxicating.

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In June, Walmart and Shopify (NYSE: SHOP, Rated “D+”), a Canadian ecommerce platform geared toward small sellers, began working together. The goal was to build a vibrant third-party marketplace at the discount retailer. At the time, analysts speculated that Walmart was building a competitor to Amazon marketplace. That assessment now seems shortsighted.

If Walmart can get TikTok, the company will gain an instant network of the most prolific influencers and the infrastructure to build real ecommerce businesses quickly.

The Microsoft angle is more mundane. The biggest business expense for successful online platforms is infrastructure. For example, Netflix spends billions with Amazon Web Services, Amazon.com, Inc. (Nasdaq: AMZN, Rated “B”)’s cloud computing business. Keeping everything running smoothly is surprisingly expensive. TikTok, in terms of downloads, is more popular, with greater upside potential. Winning that business could be worth billions for Microsoft.

Despite the enormous potential benefits of the acquisition, there is an elephant in the room: politics.

TikTok is owned by ByteDance, a Chinese conglomerate. Managers in China say the businesses operate independently. Data for TikTok’s American members is stored in Singapore and the United States, not China. There is also no direct evidence any personal information has ever been shared with the Chinese government.

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But American lawmakers don’t want to take any chances. That’s why President Trump singed an executive order demanding that the American-facing operations be sold.

If Microsoft can win the bidding war for TikTok, those concerns would be allayed.  According to a Reuters report, all American data would be protected by Microsoft. And ByteDance would agree to divest its entire stake in TikTok’s American, Canadian, Australian and New Zealand operations.

The sticking point could be optics. Both Microsoft and Walmart have considerable Chinese operations. In the current political climate, that might be a liability. Oracle Corp. (NYSE: ORCL, Rated “B”), the other reported bidder, is favored by President Trump, according to a Wall Street Journal report.

On Aug. 24, TikTok filed a lawsuit challenging the President’s executive order.

Clearly, the situation is evolving, but the major objectives should now be obvious …

TikTok is more than a silly smartphone app. It’s a platform with the potential to become a new multibillion ecommerce platform in the West. These opportunities don’t come around frequently. It makes perfect sense why bidders are lining up.

Despite the optics, a Microsoft and Walmart bid should be a winner for shareholders if they pull it off.

Best wishes,

Jon D. Markman