With all the talk about banning TikTok in the United States, Tom dives in to explain who actually owns and controls its parent company, ByteDance, and why there’s so much discourse about security.
Featuring Tom Merritt.
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Episode transcript:
There’s a lot of concern about TikTok these days. It’s banned in India. And many members of the US government would like to ban it there as well or at least force a sale. They assert that it is a threat to national security. Is it? That depends a lot on how you see its parent company ByteDance.
Let’s help you know a little more about ByteDance
Bytedance grew out of real estate search engine called 99fang that was started in 2009 by Zhang Yiming and Jiang Rubo. Those two and some 99fang employees started work in 2012 on an app that would use big data algorithms to classify news stories according to user preference. They founded ByteDance to make that app which later become Toutiao.
It is in fact ByteDance’s core product. You may have run into its video hosting service which is similar to YouTube in that users can upload their own video. Or sometimes, like YouTube, videos owned by somebody else. Like TV shows.
ByteDance has also operated many other news apps mostly in India and Southeast Asia.
Among its many efforts at apps was one called A.me, launched in China in September 2016 and later changed to be called Douyin. Within a year it had more than 100 million users in China.
As Chinese companies often do, ByteDance decided to market Doyin under a different name globally. It launched TikTok in September 2017 in India. In November of that year it acquired startup musical.ly which was also growing fast and in addition to its Shanghai office had a headquarters in Santa Monica. Doyin was only available in China and TikTok only in India but musical.ly was available worldwide. ByteDance decided to merge it into TikTok on August 2, 2018. After the merger, Douyin operated in China and TikTok operated everywhere else.
ByteDance has gone to great lengths to offshore itself as much as possible while still being able to operate in China. ByteDance itself is registered as a Cayman Islands company with a principle business address in China. TikTok Limited is a wholly owned subsidiary also a Cayman Islands company, which itself operates several LLCs which are registered in Singapore, the US, Australia and the United Kingdom.
So is it a Chinese company? Depends who’s asking and what you mean. It’s not a lie to say no, it’s a Cayman Islands company. It’s not a lie when you’re talking about the US version of TikTok, to say no, it’s a Delaware LLC. But in the end a lot of people who work on TikTok, work for ByteDance which has offices in Beijing.
So if you’re asking whether ByteDance or TikTok is a Chinese company, you’re asking the wrong question. The question is how much of what TikTok does happen in China?
For Douyin, all of it. For the other regional variants of TikTok, some. The main algorithm appears to be developed by ByteDance employees in Beijing. So it’s not impossible that someone in the Chinese Government could ask someone at ByteDance to give them some information or make certain tweaks in the algorithm. The way things work these days in China, it wouldn’t even have to be an order. An insinuation that people in power would be pleased if certain things happen would be enough.
So let’s look at each of those scenarios, both data access and algorithm tweaks.
There is no evidence of either happening. But let’s start with data access.
For the US in particular, US user data is stored on Oracle servers in Texas, as part of something called “Project Texas.” The data is handled by an independent company called USDS, which has member of the US Committee on Foreign Investment on its board. USDS acts as a contractor to The Delaware LLC, TikTok LLC in the US. Im practice ByteDance employees in Beijing have reportedly been copied on coding projects that included US user data. Those instances have all been incidental. An engineer needs help on something. Or a moderator needs help on something. So they share a screen or file that they technically shouldn’t. This wouldn’t necessarily deliver useful info into the hands of a ByteDance employee and therefore makes it less likely that this path is how the Chinese government would get data on people.
It would be easy for Oracle or CFIUS to catch any more widespread accessing or searching of US user data and there have been no reports of that. So we’re left with the possibility that maybe some of the US user data might have made its way into the hands of people in China. But it would be much less useful data than anyone in the world could buy from a data broker on the open market.
So an objective evaluation would seem to say that the exposure of US TikTok user data to Chinese authorities is not very high, and in fact more guarded from access by Chinese authorities than data stored with other internet companies.
Next would be the algorithm. Again in the US the algorithm is implemented by USDS and audited by Oracle. That said, it’s a complicated algorithm and it takes a long time to audit. It’s quite possible to miss certain effects of changes. Especially because even the engineers in Beijing creating the algorithm don’t always know exactly how it will act.
One suspicion is that China would order the algorithm to push out recommendations of divisive topics in order to foment unrest in the US. To do that engineers in Beijing would have to make tweaks and hope they are not noticed by engineers in Texas. An achievable goal if not done too often. However it would not be certain to succeed, since it could either be caught and altered by USDS employees, or just not work.
From the other side, the difference between China manipulating the algorithm, and humans just causing the algorithm to do what it does best is indistinguishable. Algorithms at YouTube, Facebook and elsewhere are known to push some people into extreme or divisive content. So the fact that the algorithm did that would not itself be evidence of anything.
However I think an objective evaluation would say that China putting its thumb on the scale of the algorithm is possible, while its effects would not be guaranteed. And the risk here is probably slightly greater than the risk to society from domestic algorithms from US companies.
All of this needs to be considered under the knowledge that if China got caught doing any of the things its government is suspected of doing, it might tank the value of TikTok and therefore ByteDance. That might be a risk China’s government would be willing to take, but what about ByteDance’s investors?
ByteDance is 20% owned by its founders and 20% owned by employees. China’s state-run Internet Investment Fund owns 1% of the Beijing subsidiary. So the government owns a small part of ByteDance but that in itself is not unique to ByteDance. It’s true of many Chinese companies that do not face the kind of scrutiny Bytedance has faced. 60% of ByteDance is owned by global investors. That includes Jeff Yass’ Susquehanna International Group, Kohlberg Kravis Roberts, SoftBank Group, Sequoia Capital, General Atlantic, and Hillhouse Capital Group. Those groups are based in Dublin, New York, Tokyo, Menlo Park, California, New York and Singapore.
Suffice to say the only interest behind Bytedance is mostly American. The exception is Hillhouse Capital, which is Asian, run by a Yale graduate who was born in China.
Let’s take a look at the board of directors to see if we can detect any indication of more Chinese control than we see from the investment side.
The chairman is co-founder Rubo Jiang.
Then there’s Arthur Dantchik from Susquehanna. William E. Ford from General Atlantic. Philippe Laffont from a New York investment management company called Coatue. And finally Neil Shen, a Chinese-born investment manager who now lives in Singapore and runs Susquehanna’s Chinese investment arm.
The Chinese influence on the board appears to be the co-founder and an employee of a western company who no longer lives in China. Not nothing,. But not a smoking gun for Chinese influence on the board.
For comparison, 5 of the 8 board members for rival TenCent were born in China and 4 of them still live there. Of the three- non-Chinese board members, one is from Hong Kong, one from South African and the other Russian.
ByteDance appears to have a heavily western-influenced board of directors and slate of investors.
So let’s recap what have we found.
Technologically it is possible but not easy for the Chinese government to somehow make changes to the algorithm of TikTok. It would be hard to detect from background noise and difficult to predict how effective it might or might not be. It’s less likely that the Chinese government would use its rather inconsistent access to US user data in any useful manner when it has much better options.
And the motivations behind the company appear to be mostly western. While it has obfuscated its ownership with several paper companies, the trail leads back to western, and mostly American investors.
One name I haven’t mentioned in this entire explanation is Shou Zi Chew, the CEO of TikTok LLC. That’s the one that runs the other subsidiary LLCs in multiple regions. Chew is a Singaporean. Born in Singapore, schooled in London, and previously employed by Golden Sachs as well as Russian Yuri Milner’s DST Global.
I haven’t mentioned him because he’s somewhat immaterial to the deduction. He makes a nice face for TikTok in the US because he can credibly say he’s not Chinese. He’s not. But his ultimate boss is Liang Rubo, the CEO and Chairman of the board of ByteDance.
You are more likely to have heard of Zhang Yemin, who cofounded ByteDance and is the more colorful of the two. But Zhang resigned as CEO in May 2021 to focus on long-term strategy. Often code in tech companies for being bored with being a manager and wanting to do fun stuff. Like Larry and Sergei from Google did.
And to my way of thinking, that covers all the angles on ByteDance related to TikTok in the US. So what are we left with?
Concerns about TikTok’s treatment of user data and the effect of its algorithms on public opinion are well founded. However they do not seem to be particularly unique from similar concerns at all other tech companies who operate in the same space, such as Meta and Google. There are some areas where the risk might be less because of the strict oversight of US user data in Texas. There are areas where the concern may be more such as the influence on the algorithm by a non-US government.
But neither of those appear to be in any way extreme concerns or reassurances. It may be that strict rules on how to protect user data or a solid system for users to guard it themselves could solve many of these problems.
Preventing TikTok from operating in the US would certainly solve it for TikTok but likely with little effect on overall public safety. Forcing Bytedance to sell TikTok to a US owner would only change who might influence the algorithm or misuse private data. And would likely not be able to replicate the user experience.
In other words, I hope you know a little more about ByteDance.
CREDITS
Know A Little More is researched, written and hosted by me, Tom Merritt. Editing and production provided by Anthony Lemos and Dog and Pony Show Audio. The public key cryptography players were Sarah Lane as Alice, Shannon Morse as Eve and Andrew Heaton as Bob. It’s issued under a Creative Commons Share Attribution 4.0 International License.