TikTok's new US plan: The joint venture is only responsible for data and content security

Author: Zhu Xinwei, Guanchazhe.com

In the early morning of September 26th, Beijing time, US President Trump issued an executive order announcing a new version of TikTok's US operating plan, which complies with relevant US legal requirements and will ensure TikTok's continued operations in the US. A joint venture will be responsible for TikTok's US data and content security. US Vice President J.D. Vance stated that the joint venture is valued at $14 billion.

It is understood that this joint venture refers to the "TikTok US Data Security Joint Venture" (TikTok USDS Joint Venture), not TikTok's entire US business. Previous reports have valued TikTok's US operations at nearly $40 billion.

The new operating plan has been repeatedly reported in US media, but it has focused on details and failed to present the full picture. Guanchazhe.com has combined President Trump's order, reports from Chinese and foreign media, and information obtained from authoritative sources by Shen Yi, a professor in the Department of International Politics at Fudan University, to exclusively present the complete new TikTok US operating plan in the form of images. ByteDance controls the algorithm, and the joint venture is responsible for data security. TikTok's upcoming US operations plan involves two entities. The figure on the left shows ByteDance TikTok US (BD TikTok US), the principal operating company in the new plan. Its business scope includes commercial and related operational activities (e-commerce, brand advertising, etc.), global connectivity, and product and engineering technical support. ByteDance owns 100% of TikTok. On the right side of the image is the other entity in the dual entity, the "TikTok USDS Joint Venture." This entity will receive US data security, content assurance, software assurance (such as app listing approval), and related domestic operations to comply with US legal requirements. This entity is the joint venture valued at $14 billion mentioned by Trump when he issued the executive order. According to the plan, ByteDance will hold a 19.9% ​​stake in the joint venture to comply with US law; ByteDance's existing global shareholders will collectively hold a 30.1% stake; and new investors will collectively hold a 50% stake. ByteDance will remain the company's largest single shareholder. The board of directors will have seven seats: one for ByteDance, two for ByteDance's existing global shareholders, three for new investors, and one independent director appointed by the board. Regarding algorithms, ByteDance will continue to own the intellectual property rights for TikTok's algorithms and will license the relevant intellectual property to the "TikTok US Data Security Joint Venture," receiving licensing fees from the latter. ByteDance TikTok US and the new joint venture have established a revenue-sharing mechanism. How the new operating model will distribute profits in the future is also attracting widespread attention. We can use the operational performance of other tech companies to infer the profit distribution structure among the various parties under TikTok's new plan. According to Fudan University Professor Shen Yi, ByteDance will continue to engage in commercial and other related operational activities (such as e-commerce, brand advertising, and cross-border commerce) through TikTok's US subsidiary, ByteDance TikTok US. These businesses are the primary revenue sources for Douyin and TikTok. The data security and content security operations of the US joint venture are both cost-intensive businesses. Data security requires significant expenditures, including those for building their own data centers and cloud services. For internet companies with hundreds of millions of users, these operating costs are extremely high. Meanwhile, content security requires employing a large number of reviewers. According to a 2019 report by The Information, a significant proportion of ByteDance's employees are engaged in content review. Whether the new joint venture is built in-house or outsourced, it will be a significant expense. Guancha.com has learned that since data security and content assurance businesses are non-profit, a commercially reasonable revenue sharing arrangement will be established between the two entities to ensure the joint venture's operations. From "Cloud Guizhou" to "Cloud Texas," this latest initiative mirrors Apple's "Cloud Guizhou" operations in China. Because TikTok's data security provider, Oracle, is headquartered in Texas, it has been nicknamed "Cloud Texas." At a press conference following the Madrid talks, a representative from the Cyberspace Administration of China stated that China and the United States "have reached a basic consensus on resolving the TikTok issue through methods such as outsourcing operations for TikTok's US user data and content security business, and licensing the use of intellectual property such as algorithms." This clearly stated that the joint venture's US user data and content security business for TikTok is based on an outsourcing model. Wang Xiaohong, a researcher at the China Center for International Economic Exchanges, stated that this business model is common in the global technology, entertainment, and other industries. For example, to meet Chinese legal and compliance requirements, Apple has entrusted Cloud Guizhou to operate its iCloud services in China since 2018. Microsoft has entrusted 21Vianet to operate and sell Microsoft cloud services, including Azure, in China since 2012. Blizzard Studios has successively entrusted The9 and NetEase to operate the game "World of Warcraft" in China. Disney has entrusted Shanghai International Theme Parks and Resorts Management Co., Ltd. to manage and operate the Shanghai Disney Resort. Apple doesn't even have a stake in Yunshang Guizhou's operating entity, Yunshang Aipo (Guizhou) Technology Co., Ltd., which is a 100% Chinese state-owned enterprise. In contrast, TikTok still holds a significant position in the new joint venture. The "entrusted operation" model is essentially a limited restriction imposed by local governments on the development of foreign multinational corporations in their respective regions for security and compliance reasons. In the past, foreign companies were more likely to adopt the "entrusted operation" model when entering the Chinese market. Take the automotive industry as an example. Thirty years ago, facing powerful foreign automakers, China adopted a protective policy, requiring foreign automakers to form joint ventures with Chinese companies to enter the Chinese market. However, as domestic Chinese automakers grew stronger, this policy restriction was eventually lifted, and other countries even began to implement protectionist measures against the Chinese auto industry. For example, when BYD entered India, it established a local joint venture, Olectra Greentech, which adopted a "entrusted operation" model.

Now, with the growth of China's economy and Chinese technology companies, it is now the turn of other countries to impose restrictions on Chinese companies and require them to adopt a "commissioned operation" model.