Tick Tock for TikTok

TikTok finally got its day in court. In mid-September, the company’s challenge to the constitutionality of a law passed in April that would force its parent company, ByteDance, to either sell it or get banned got its hearing in the D.C. Circuit Court of Appeals.

The day of the oral arguments was both momentous and anti-climactic. Momentous in that this is the first time both TikTok and the U.S. government have argued their respective position in this unique, precedent-setting case. Anti-climatic in that no matter what the Court of Appeals decides, the case will surely go to the Supreme Court.

Legally, a favorable decision for TikTok rests on whether the court would apply a judicial standard called “strict scrutiny” to the company’s First Amendment defense. TikTok is arguing that its freedom of speech and press, as a publisher and editor of content, and that of its millions of users have both been violated. Congress and the executive branch are arguing that TikTok is a national security threat because of its Chinese ownership, so curbing its speech is totally fine. Since we hold freedom of speech as a sacred right in America, restricting it typically requires the government to show a compelling need to do so, while also demonstrating that the proposed restriction is limited to only meeting that need. In short, any act to curb speech ought to be scrutinized very hard. In legalese, this is called “strict scrutiny.”

If the court applies strict scrutiny, instead of a less stringent version called “intermediate scrutiny,” then TikTok stands a chance. But procedurally, TikTok has both hands tied behind its back when trying to show it warrants that treatment. That is because the intelligence gathered by the U.S. government (allegedly) proving that TikTok is (or could be) under the directives of the Chinese government is classified and redacted. No one aside from the judges, including anyone from TikTok or the general public, can see that evidence on, again, national security grounds. It is a bit like being accused of murder, but you don’t even know who’s dead and aren’t allowed to see the body.

In the end, the TikTok saga, which began as a political issue, can only end politically.

As we head into the final few weeks of the 2024 election, Donald Trump has 11.6 million TikTok followers, Kamala Harris has 5.8 million. More salient is the growing trend that more Americans, especially young adults, are getting their doses of news and information from TikTok. Among all adults, 17 percent regularly get their news from TikTok this year (versus 3 percent four years ago), but among adults under 30 that proportion soars to 39 percent.

For politicians from both the left and right, TikTok is a lemon that has plenty of juice left to squeeze. Whoever is the next president, if she or he decides that the lemon is worth squeezing more, then TikTok may still survive. But if the lemon is deemed dry or not worth the trouble, they will move on with no hesitation.

As for other Chinese tech firms still seeking a foothold in the U.S., navigating the treacherous American political water is now table stakes, not an afterthought. Even though the underlying issues at hand—data collection, algorithmic transparency, privacy, and security—may be technical challenges that can be solved with technology, the TikTok saga, no matter how it ends, has shown that there are no technical solutions to a political problem.

On the surface, TikTok’s legal argument appears to defend First Amendment rights, claiming that a forced divestiture would disconnect millions of Americans from the global community. But is this really about personal liberties and free speech?

Beneath this legal defense lies a more complex reality—one where TikTok and its parent company, ByteDance, find themselves with few allies. Global institutional investors, including Sequoia Capital and General Atlantic, hold 58 percent of ByteDance, yet they have remained largely silent. So have key partners like Oracle. Their hesitation comes from concerns over being seen as disloyal to U.S. interests, especially in the context of escalating U.S.-China tensions.

TikTok has bent over backward to meet U.S. demands, spending $2 billion on “Project Texas” to secure U.S. user data through a partnership with Oracle. Evercore analysts estimate that TikTok’s spending on Oracle cloud infrastructure ranges from $480 million to $800 million—roughly one-tenth of Oracle’s $6.9 billion cloud revenue. Despite this significant financial relationship, Oracle has remained quiet, only addressing TikTok when required in earnings calls per disclosure requirements.

This silence isn’t limited to Oracle. Other major stakeholders, including Silicon Valley’s biggest private equity players who hold significant shares in ByteDance, have also stayed on the sidelines. These investors are unwilling to wade into a politically charged battle, aware of the potential backlash that could come with publicly supporting TikTok.

TikTok has repeatedly yielded, making concessions that few other global tech companies would consider, including offering the U.S. government a “shut-down option” that would allow regulators to halt operations if TikTok violated any part of the proposed agreement. Yet the company continues to face shifting goalposts. It’s a game of chicken, and TikTok is running out of options.

Complicating matters further is TikTok’s need to manage a dual narrative. In China TikTok is not just an app, it’s a testament to the country’s technological prowess, a shining example of a social media company with China DNA thriving on the global stage. It symbolizes innovation and the ability of Chinese technology to compete internationally.

But TikTok faces an increasingly hostile environment in the U.S. dominated by concerns over national security and its ability to influence and mobilize its 170 million users. Balancing these two competing narratives is essential for TikTok’s reputation management. The legal defense TikTok uses in the U.S. may help safeguard its operations there, but it risks damaging its image back home if it’s perceived as conceding too much to U.S. pressure, weakening its status as a symbol of China’s technology capabilities.

This precarious balance between protecting market access while maintaining its status as a national success story complicates TikTok’s long-term strategy on both fronts. TikTok’s future in the U.S. remains perilous. It’s becoming clear that the battle may not be won in the courtroom—it’s a political and reputation game, and TikTok is running out of moves.

Everyone has an opinion on the U.S. law aspects of the TikTok affair, but there are other important aspects that are not well understood.

First of all, what exactly is “TikTok”? What is the corporate structure behind the app? The short answer is that the app is ultimately owned by a Cayman Islands (not Chinese) company, ByteDance Ltd. (“ByteDance Cayman”). ByteDance Cayman owns a chain of companies extending into the U.S. (where it operates TikTok) and another chain extending into China (where it operates the Douyin app), but these chains are separate and have no interlocking ownership. In the U.S., the chain of ownership is from ByteDance Cayman to TikTok Ltd. (also a Cayman Islands company) to TikTok LLC (a Delaware entity headquartered in Culver City, California) to TikTok Inc. (a California corporation headquartered in Culver City). Shou Zi Chew, often described in the media as the CEO of “TikTok,” is the CEO of the bottom-most entity here, TikTok Inc.

On the China side, ByteDance Cayman, through a chain of wholly-owned subsidiaries, owns Douyin Co., Ltd. (“Douyin China”), a company incorporated in China. Because foreign companies such as ByteDance Cayman may not directly or indirectly own media such as Douyin, the app is formally owned and operated by Beijing Douyin Information Service Co., Ltd. (“Beijing Douyin”), a Chinese company owned by Chinese nationals. Beijing Douyin is tied to Douyin China via a variable interest entity structure, which mimics the incidents of ownership through a web of contracts.

And who owns ByteDance Cayman, the common owner of both chains? That’s not public. According to Chew, 60 percent is owned by global institutional investors, 20 percent is owned by the founder, Zhang Yiming, and 20 percent is owned by employees around the world.

Once we understand the corporate structure, it is hard to understand the legal grounds on which China could forbid the sale of TikTok. The “sale of TikTok” might mean the sale of the app by TikTok Inc. (a California company), or it might mean the sale of stock in any of the companies in the U.S.-side chain by the company above it in the chain. ByteDance Cayman is at the top of that chain; neither it nor any of the other companies are Chinese companies under the jurisdiction of China. To say that China won’t allow the sale of TikTok is to say that China won’t permit a company from foreign country A to sell its interest in a company in foreign country B. It’s like China telling Apple that it can’t sell its Mexican subsidiary.

Of course, because ByteDance Cayman does a lot of business in China via its interest in the Douyin app, China can put a lot of pressure on it. It’s the same for Apple, which does a lot of business in China. But that doesn’t mean there is a legal basis for the action.

On the First Amendment issue, it seems that ByteDance is trying to have it both ways. In its brief arguing the unconstitutionality of the Protecting Americans From Foreign Adversary Controlled Applications Act (PAFFACA), ByteDance asserted that the PAFFACA infringes upon the speech not just of users but of ByteDance itself:

TikTok Inc.’s choice of material to recommend or forbid constitutes the exercise of editorial control and judgment that is protected by the First Amendment. [Internal quotations, citations, and brackets omitted.]

It is well settled that editorial control and judgment constitute protected speech under the First Amendment. And it’s not an inherently dumb argument to say that the algorithm constitutes a form of protected editorial speech, although it merits less protection than speech singled out on the basis of its content—the core of what the First Amendment protects. But look what happened when TikTok, Inc. and a parent corporation were sued for contributing to the death of a child through TikTok’s promotion of the “Blackout Challenge.” Here’s what they argued in their motion to dismiss:

App recommendations are not content in and of themselves but are tools meant to facilitate the communication and content of others. And algorithms reflect TikTok’s choice to automate its editorial decision-making—and are themselves protected publisher functions. By recommending content to users, including through algorithms, online platforms are acting as a publisher of others’ content. [Internal quotations, citations, and brackets omitted.]

What does all that mean? Essentially, “Hey, it’s not our speech!”—the opposite of what they are arguing in the PAFFACA case.

I’m not sure if TikTok will succeed in defending itself on First Amendment grounds, but I believe this argument represents its strongest legal case. Various disparate groups—often not typically aligned—seem willing to support TikTok in this battle. However, what seems more certain is that China will strongly oppose any forced divestiture of TikTok, as it sets a dangerous precedent for global business relations.

This situation is different from the forced divestiture of Grindr, a gay dating app. The gaming firm Beijing Kunlun Tech bought 60 percent of Grindr from its American owners in 2016, but was forced by the Committee on Foreign Investment in the United States (CFIUS) to sell its stake in 2020 because of U.S. national security concerns about potential misuse of user data. While TikTok did acquire Musical.ly, a Shanghai-based social media platform, the TikTok app was essentially rebuilt from scratch, modeled after its Chinese counterpart Douyin, making the circumstances quite distinct.

Additionally, I don’t think a potential TikTok ban will significantly influence the upcoming election. Any ban wouldn’t likely take effect until January at the earliest, and the country has more urgent issues to focus on, including the resolution of the election itself.