ByteDance prefers TikTok shutdown in US if legal options fail, sources say

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TikTok owner ByteDance would prefer to shut down its loss-making app rather than sell it if the Chinese company exhausts all legal options to fight legislation to ban the platform from app stores in the U.S., four sources said.

The algorithms TikTok relies on for its operations are deemed core to ByteDance's overall operations, which would make a sale of the app with algorithms highly unlikely, said the sources close to the parent.

TikTok accounts for a small share of ByteDance's total revenues and daily active users, so the parent would rather have the app shut down in the U.S. in a worst case scenario than sell it to a potential American buyer, they said.

A shutdown would have limited impact on ByteDance's business while the company would not have to give up its core algorithm, said the sources, who declined to be named as they were not authorised to speak to the media.

ByteDance declined to comment.

It said late on Thursday in a statement posted on Toutiao, a media platform it owns, that it had no plan to sell TikTok, in response to an article by The Information saying ByteDance is exploring scenarios for selling TikTok's U.S. business without the algorithm that recommends videos to TikTok users.

FILE PHOTO: Illustration shows the US flag and TikTok logos
ByteDance would rather have the app shut down in the US in a worst case scenario than sell it to a potential American buyer.

In response to a Reuters request for comment, a TikTok spokesperson referred to ByteDance's statement posted on Toutiao.

TikTok's CEO Shou Zi Chew said on Wednesday the social media company expects to win a legal challenge to block legislation signed into law by President Joe Biden that he said would ban its popular short video app used by 170 million Americans.

The bill, passed overwhelmingly by the U.S. Senate on Tuesday, is driven by widespread worries among U.S. lawmakers that China could access Americans' data or use the app for surveillance.

Biden's signing sets a Jan. 19 deadline for a sale - one day before his term is poised to expire - but he could extend the deadline by three months if he determines privately owned ByteDance is making progress.

ByteDance does not publicly disclose its financial performance or the financial details of any of its units. The company continues to make most of its money in China, mainly from its other apps such as Douyin, the Chinese equivalent of TikTok, separate sources have said.

The U.S. accounted for about 25% of TikTok's overall revenues last year, said a separate source with direct knowledge.

Reuters interviewed more than half a dozen investment bankers who said it was tough to value how much TikTok is worth compared with like-for-like competitors Meta Platforms' Facebook and Snap, as TikTok's financials are not widely available nor easy to access.

ByteDance's 2023 revenues rose to nearly $120 billion in 2023 from $80 billion in 2022, said two of the four sources. TikTok's daily active users in the U.S. also make up just about 5% of ByteDance's DAUs worldwide, said one of the sources.

Algorithms not for sale

TikTok shares the same core algorithms with ByteDance domestic apps like short video platform Douyin, three of the sources said. Its algorithms are considered better than ByteDance rivals such as Tencent and Xiaohongshu, said one of them.

It would be impossible to divest TikTok with its algorithms as their intellectual property licence is registered under ByteDance in China and thus difficult to disentangle from the parent company, said the sources.

Moreover, separating the algorithms from TikTok's U.S. assets would be an extremely complicated procedure and ByteDance is unlikely to consider that option, the sources added.

ByteDance also would not agree to sell one of its most valuable assets – its "secret source" - to rivals, said the four sources, referring to the TikTok algorithm.

In 2020, the Trump administration sought to ban TikTok and Chinese-owned WeChat but was blocked by the courts. The short-form video app has since faced partial and attempted bans in the U.S. and other countries.

China indicated it would be likely to reject a forced divestment of the TikTok app during a U.S. congressional hearing in March last year.

"China will firmly oppose it (the forced sale of TikTok)," said a spokeswoman for the Ministry of Commerce at a news conference in Beijing in late March 2023.

"The sale or divestiture of TikTok involves technology export and must go through administrative licensing procedures in accordance with Chinese laws and regulations."

China in 2020 unveiled the Export Control Law and the final text extended the definition of "controlled items" from prior drafts. According to state media, the amendment ensures that the exports of algorithms, source codes and similar data are subject to an approval process.

Excluding algorithms, TikTok's main assets include user data and product operations and management, said two of the people.

Former U.S. Treasury Secretary Steven Mnuchin has expressed interest in putting together an investor group to try to buy TikTok. ByteDance may struggle to attract any buyers for TikTok's U.S. assets excluding algorithms, the sources said.

ByteDance, backed by Sequoia Capital, Susquehanna International Group, KKR & Co and General Atlantic among others, was valued at $268 billion in December when it offered to buy back around $5 billion worth of shares from investors, Reuters reported at the time.

TikTok Ban: ByteDance Denies Report That It’s Considering Selling App

ByteDance said a report that it’s mulling the sale of a majority stake in TikTok’s American business — after the U.S. adopted a law forcing it to divest its ownership position or face a ban of the app — is “untrue.”

The Chinese internet giant was responding to a report Thursday by tech-news site The Information, citing anonymous sources, that ByteDance “is internally exploring scenarios for selling a majority stake in TikTok’s U.S. business, preferably to companies outside the tech industry, and without the algorithm that recommends videos to TikTok users.” ByteDance posted its denial of the report on the ByteDance-owned Toutiao news platform in China, as first reported by the Wall Street Journal.

 

TikTok says it plans to file a lawsuit challenging the new U.S. law on First Amendment grounds. If that fails, the app could become outlawed in the U.S. as early as January 2025.

Under the new law, which was fast-tracked through Congress, unless ByteDance sells its stake in TikTok by April 2025 at the latest to owners based in a country that the U.S. does not consider a “foreign adversary,” the popular video app will be illegal to distribute in the U.S. The legislation was signed into law by President Biden on April 24 as part of a package of emergency foreign aid.

If ByteDance were to entertain the idea of selling off TikTok, it would be a very expensive transaction. In the U.S. alone, the app generated $16 billion in revenue in 2023, valuing the business at up to $150 billion, per a Financial Times report.

At a contentious House committee hearing last year, TikTok CEO Shou Zi Chew asserted that forcing ByteDance to divest its ownership stake in the app would not change how TikTok operates. “A change in ownership would not impose any new restrictions on data flows or access,” he said. “All global companies face common challenges that need to be addressed through safeguards and transparency.”

U.S. lawmakers have voiced strong concerns that TikTok represents a national security threat, suggesting ByteDance is under the thumb of the Chinese Communist Party and could “weaponize” TikTok to spy on Americans. TikTok has repeatedly claimed the Chinese government has never made demands to access the app’s user data. In addition, it says 60% of ByteDance’s ownership is represented by “global institutional investors” including Blackrock, General Atlantic and Susquehanna International Group. Another 20% is owned by ByteDance’s founders and the remaining 20% is owned by its employees (including more than 7,000 Americans), according to TikTok.

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