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China tech

TikTok's regulatory woes cast a cloud over parent Bytedance

Video platform accused of endangering children and illegal data gathering

TikTok allows users to share 15-second videos and is hugely popular with teens and tweens. (Getty Images)

HONG KONG -- When Chinese social media app TikTok surpassed Facebook and Instagram in number of downloads in January, it seemed further confirmation that an IPO for its parent company ByteDance was only a matter of time.

That was before TikTok -- which allows users to post 15-second videos -- was hit by a string of scandals in recent days that has raised questions over the prospects for a widely speculated ByteDance listing later this year.

On Feb. 27, TikTok was fined $5.7 million by U.S. authorities for illegally gathering personal information from children under the age of 13 without parental consent. While such a penalty may be small for ByteDance, which has been valued at $75 billion in its most recent fund-raising, this is one of the largest ever civil penalties issued by the U.S. Federal Trade Commission.

That same week, a youth in India's southern state of Tamil Nadu was accused of murdering a friend over a video uploaded to TikTok, days after lawmakers in the state called for banning the platform due to concerns over hate speech on its platform.

In the U.K., a recent survey of 40,000 schoolchildren found that one in 20 had been asked to take off their clothes while livestreaming with strangers on various platforms. The National Society for the Prevention of Cruelty to Children, the British charity group which conducted the survey, said TikTok and other livestreaming apps were being used as "a hunting ground" for child abusers in a statement emailed to the Nikkei Asian Review.

In response, TikTok told the Nikkei Asian Review it had "robust measures to protect users against misuse." These included "easy reporting mechanisms" to allow users and law enforcement to report illegal or unacceptable content. Moreover, "parents can simply block it from their child’s phone using device-based parental controls,” the company said.

TikTok has also announced plans to hire a "chief nodal officer" , whose job will be to coordinate with law enforcement agencies in India. 

“At TikTok, maintaining a safe and positive in-app environment is our priority," it said.

Nevertheless monitoring abuse of its platform is one of the challenges TikTok faces as its popularity soars.

TikTok has been downloaded 1 billion times worldwide, according to mobile app tracker Sensor Tower. In January, it added more than 6 million new users in the U.S. alone, overtaking Facebook and Instagram to become the No. 1 downloaded non-game app among American smartphone users, SensorTower data showed. TikTok has also cultivated a huge fan base in India, which accounts for one-quarter of its total installs.

"As TikTok continues to grow, especially at such a rapid pace, it will undoubtedly experience growing pains in regard to its ability to moderate content," said Alex Malafeev, co-founder of Sensor Tower. "TikTok will need to pay particular attention to ensuring it is a safe place for not only users, but advertisers and backers as well."

Tiktok has yet to launch any sponsored content to monetize its overseas popularity. But "we do have plans for that," its global marketing head, Stefan Heinrich, said in a November interview with Digiday.

Advertising experts are divided on whether the recent scandals will hamper attempts to monetize the platform.

"We expect minimal impact on TikTok's business for the time being," said Kia Ling Teoh, an analyst specializing in advertising at global consultancy IHS Markit. "Many brands or advertisers are also the content creators on the platform looking for eyeballs. So as long as the traffic is high, they will find value in the platform."

But Chris Strong, a director at Arkansas-based marketing agency Viral Nation, thinks otherwise.

"This is a huge setback for TikTok for any brands targeting the tween and teen market," Strong said. "The last thing anybody wants is to be tied in with a platform that has bad publicity."

Although TikTok has started to address the concerns by imposing age checks, "kids will lie about their age to get around that," Strong said. "I don't think this is the last time we will hear from the FTC in regards to TikTok."

Privacy protection and a lack of control over inappropriate content are common problems facing social media platforms. Facebook, for instance, has been under investigation for data breaches. But industry observers say the Chinese app operator may find it more difficult than its Western rivals to overcome that problem in a business environment different from its home market.

"Generally speaking, Chinese companies are familiar with what not to do in China. For instance, they won’t allow conversations on politics and pornography," said William Xie, an investment analyst at Hong Kong-based Brightway Asset Management. "But when it comes to racism and child abuse, it really depends on whether the companies’ management is aware of those issues."

TikTok has also faced other challenges encountered by Chinese companies. Earlier this year, Washington D.C.-based think tank the Peterson Institute for International Economics questioned questioned how TikTok would use and store its users' data and described its rising popularity in the U.S. as a security threat.

All of this comes at a time when investors are expecting TikTok's operator to make its debut as a listed company. ByteDance, founded by Chinese software engineer Zhang Yiming seven years ago in Beijing, recently surpassed Uber Technologies to become the most valuable startup in the world, according to CB Insights. The tech company, whose products also include a popular Chinese news aggregator Jinri Toutiao, was reportedly planning an IPO later this year.

But with scandals emerging one after another, Xie warned that in the immediate future ByteDance may have a tough time going public, especially in the U.S., as most tech companies do.

"If the company chose to be listed in the U.S., it would likely face questions from the Securities and Exchange Commission [over children's privacy violations]," Xie said. "Investors are always looking for ways to bring down companies' stock pricing," he added. "The recent backlash against TikTok has offered them the perfect bargaining chip."

The company may even hold off on listing, according to Brock Silvers, a managing director at investment firm Kaiyuan Capital based in Shanghai.

"TikTok's troubles are serious and the results are still fluid," he said "The alleged violation of U.S. law is spurring greater concern in other foreign countries. Until TikTok gains control over the issue, the potential damage to the company's prospects cannot be measured, and any IPO plans are surely on hold."

ByteDance is also facing troubles at home.

In December 2017, ByteDance’s flagship product Toutiao was forced to go offline for 24 hours as Beijing accused the platform of "exerting a bad influence on online opinion." The company responded by hiring in-house censors and cleaning up online content, but despite its efforts, Toutiao’s service was suspended again for weeks last April. 

Chinese officials also shut down "Neihan Duanzi," an online jokes app developed by ByteDance. Before the regulators stepped in, the app had more than 38 million monthly users -- equivalent to the population of Poland -- according to market research firm QuestMobile. 

As well as persistent regulatory pressure, ByteDance has faced an uphill battle in China's tech world. Last year, Hong Kong-listed Tencent Holdings clashed with it over social networking apps, with the two companies suing each other for unfair competition. ByteDance also had a legal battle with Chinese search engine Baidu over copyright violations. In December, a Beijing court ruled in Baidu’s favor. 

With domestic competition heating up, TikTok has apparently been scrambling to maintain its popularity abroad -- a market that Tencent, Baidu and many other Chinese tech giants have yet to crack. Following the FTC's penalty in late February, TikTok said it has taken additional measures to protect younger users by preventing anyone below the age of 13 to share their personal information or uploading videos online. The company has also begun deleting all the videos previously uploaded by users under 13. 

But some remain skeptical.

"Of course they did as they should, said Strong, the U.S.-based advertising expert. But the problem of children lying about their age would remain, he added.

"The update will help put out part of the fire, but it won't completely dump it out. There [will] still be a lot of 13-and-under users posting content," he said.

Nikkei staff writer Rosemary Marandi in Mumbai contributed to the story.

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