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Business deals

Oracle and TikTok: Does a partnership make sense?

Trump says deal is 'very close' and that he is a Larry Ellison fan

TikTok and Oracle are looking to join hands in what some see as an unlikely pairing. (Source photos by Reuters) 

PALO ALTO, U.S. -- Oracle and Bytedance are petitioning Washington to allow the American software giant to serve as TikTok's "trusted technology partner" in the U.S., an arrangement aimed at defusing President Donald Trump's threat to ban the popular video-sharing app.

The two companies confirmed on Monday that they have submitted a proposal to the U.S. government, but they have yet to clarify the exact nature of their potential partnership. Trump told reporters Tuesday that he had "heard they are very close to a deal," and that he would look into the proposed agreement.

As officials scrutinize their bid, experts and industry watchers question the rationale behind the move -- and the likelihood that a partnership will materialize given the geopolitical headwinds.

Why is Oracle interested in TikTok?

Oracle, a Redwood Shores, California-based company, is a dominant player in the enterprise IT infrastructure sector. The 43-year-old company is best known for its database software and technology, and for creating one of the world's most widely used computer languages: Java.

Oracle does not currently have any consumer-facing business, which made its interest in TikTok a head-scratcher for many industry watchers. However, the enterprise software giant is trying to diversify its revenue stream and expand into the cloud business, which is projected to become a trillion-dollar market within this decade.

"Oracle is not a household name, and they're trying to build the enterprise cloud computing business out, but they don't have the same scale as [Amazon], Microsoft, or Google yet," said Nick McQuire, vice president of enterprise research at market intelligence firm CCS Insight.

With the cloud business already dominated by players like Amazon Web Services -- which is the current cloud service provider for TikTok's operations in the U.S. -- it is difficult for late-comers like Oracle to break into the market, McQuire said.

"Google Cloud, for example, has been trying to fight Amazon and Microsoft dominance for years in this arena and have struggled. But Oracle is even coming from further behind there," he added.

As the technology partner of TikTok, Oracle is expected to become the popular video app's sole cloud infrastructure provider and host data from its 100 million monthly active users in the U.S.

"Oracle really needs to get some big reference customers as a proof of concept for their Oracle Cloud infrastructure in order to have a chance of really getting into this [cloud] market in a meaningful way," said Sarah Hindlian-Bowler, senior software analyst at Macquarie. "TikTok will be a flagship kind of example of a customer that they can showcase."

Earlier this year, Oracle signed a deal with video-conferencing provider Zoom, the first big-name customer for Oracle Cloud. This partnership has significantly increased the company's presence in the cloud market, and adding another high-profile client like TikTok would give Oracle a further boost.

"While the execution of an Oracle/TikTok deal is still yet to be seen, we note that similar synergies would continue to evidence Oracle's position as a top cloud player, something that management seems to be more much more interested recently," Mark Moerdler, senior research analyst at Bernstein Research, said in a note to clients on Monday.

Industry experts noted that a partnership with TikTok might also benefit Oracle's digital advertising business, as the company could potentially monetize the social media app's trove of user data.

Oracle shares rose more than 4% in Monday's trading on the TikTok news.

Why did ByteDance choose Oracle over Microsoft?

Microsoft, another bidder for ByteDance's crown jewel app, said on Sunday that its proposal had been rejected by the Chinese tech giant but did not go into the reason for the rejection. The sticking point, however, is believed to have been whether TikTok's algorithm -- the key to the app's success -- would be included in the deal.

"We believe the heart of the problem [between Microsoft and TikTok] and probably one reason Oracle won and not Microsoft is the issue of Intellectual Property and source code," said Moerdler at Bernstein.

China recently announced the addition of several artificial intelligence technologies, including "personalized content recommendations based on data analysis," to its list of restricted exports. Such restrictions are potentially a major roadblock for ByteDance to sell its U.S. operations.

"Microsoft was only looking at this from an acquisition perspective. It was not going to do a deal without the algorithm," said Dan Ives, managing director at Wedbush Securities.

It is unclear whether Oracle will have access to TikTok's core algorithm as the app's "technology partner."

Meanwhile, the close relationships between Oracle's key executives and the Trump administration might also have given the enterprise giant a leg up in the deal.

"I think politics plays in at least 50%, if not more, into the decision," said Hindlian-Bowler at Macquarie.

Oracle CEO Safra Catz served on President Trump's transition team in 2016, while Larry Ellison, Oracle's co-founder and executive chairman, has expressed his support for the president, even hosting a fundraising event for Trump earlier this year.

"Larry Ellison and Safra Catz are two of the biggest if not the only Trump supporters in Silicon Valley, which enables them to be better-positioned than others in the valley when dealing with the current White House," Hindlian-Bowler said.

Trump has previously voiced his support of Oracle taking over TikTok's U.S. operations, and has called Oracle "a great company."

On Tuesday, he told reporters that he was a fan of Ellison.

"Ellison and Oracle have strong tentacles in the Beltway that definitely put them in a strong position [for the deal]," Ives said, adding, however, that "if we take politics out from the equation, Microsoft would make more sense than Oracle."

Will there be a deal?

U.S. Treasury Secretary Steven Mnuchin said on Monday that his department will make a recommendation to Trump after the proposed deal is reviewed by the Committee on Foreign Investment in the U.S., or CFIUS. Under the Oracle/TikTok proposal, a new entity called TikTok Global will be set up as a U.S.-headquartered company with 20,000 new jobs, according to Mnuchin.

Experts say the job creation pledge is important in winning Trump's support for the deal, as bringing more jobs to the U.S. is a key election issue for the president. However, whether the administration will approve the proposal remains to be seen, as Trump will be evaluating whether agreeing to the deal would make him look like he is caving in or being too generous toward China, according to Macquarie's Hindlian-Bowler.

U.S. lawmakers have raised concerns over the Chinese government's potential ability to access TikTok's data on American users and risks around the app being used for misinformation campaigns by Beijing.

Having Oracle hold all of TikTok's U.S. consumer data would check the box on a number of concerns as the enterprise giant would essentially control the inflow and outflow of data, according to Ives at Wedbush.

However, without controlling the algorithm, there will be questions over whether Oracle will be able to keep false or misleading information off the TikTok platform.

Asked whether TikTok's algorithm will have to be held by an American company on American soil to allay U.S. concerns over national security, Mnuchin said: "I will just say from our standpoint, we'll need to make sure that the code ... is, one, secure, Americans' data is secure, that the phones are secure, and we'll be looking to have discussions with Oracle over the next few days with our technical teams."

"A deal where Oracle takes over hosting without source code and significant operational changes would not address any of the legitimate concerns about TikTok," former Facebook security chief Alex Stamos said on Twitter, "and the White House accepting such a deal would demonstrate that this exercise was pure grift."

Opposition to the deal is already emerging in Washington.

Republican Sen. Josh Hawley sent out a letter on Monday urging CFIUS to reject the Oracle/TikTok proposal. In the letter, Hawley said the proposed partnership would not address the threat of the Chinese government accessing U.S.-based user data or censoring content on TikTok.

In a statement to the Nikkei Asian Review, TikTok said it believes the proposal it submitted "would resolve the Administration's security concerns."

If the partnership is approved, it will have a far-reached influence on Chinese companies and the global tech landscape, industry watchers said.

"If Oracle figures out a way to work with TikTok, the deal will serve as a blueprint for other companies looking to expand into the U.S.," said McQuire at CCS Insight. "Obviously, it's a very difficult geopolitical environment at the moment, but over time the deal will benefit other Chinese tech companies."

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