Oracle : TikTok Deal Faces Questions Over Security, Ownership

By John D. McKinnon, Alex Leary and Kate Davidson

WASHINGTON -- An emerging deal to make China's popular TikTok app a U.S.-based business could reshape both the U.S. social-media landscape and the global internet, but continued to spark political debate over security concerns and ownership of the new company.

President Trump agreed in concept to a deal under which Chinese-owned video-sharing app TikTok will partner with Oracle Corp. and Walmart Inc. to become a U.S.-based company. The Commerce Department said it would delay for one week a ban on U.S. downloads and updates for the TikTok app that was set to take effect at 11:59 p.m. Sunday while the new deal for TikTok is finalized.

As part of the deal, Oracle said it would host the data for the new U.S.-based company, to be called TikTok Global, to eliminate the potential of it falling into the hands of the Chinese government -- a plan that didn't fully satisfy China hawks including Sen. Marco Rubio (R., Fla.).

"No matter where the actual data is housed, there can be something in that code that sends it the other way," Mr. Rubio said Sunday on Fox News. "I think we have to be very careful in looking at that provision, because if there's any opportunity whatsoever for China to continue to collect personal data on Americans, then we can't be supportive of that deal."

Other questions swirled around the ownership. Mr. Trump had called for the creation of a U.S. company to take control of TikTok, but the deal as described by backers wasn't the full-scale acquisition that was originally envisioned.

As initially described by people familiar with the deal, China's ByteDance Ltd. would retain roughly 80% ownership of the company. But because ByteDance is about 40% owned by U.S. investors, the new company with equity stakes for Oracle and Walmart can be described as having majority American ownership, they said.

One of the people elaborated further Sunday, saying ByteDance wouldn't technically be an owner of the new TikTok Global entity. Instead, shares in the new entity would be distributed proportionally to ByteDance's current owners, which include both Chinese and American investors.

With the addition of Oracle and Walmart taking a combined 20% equity stake, TikTok Global would be 53% owned by U.S. companies or investors, this person said.

Following an anticipated initial public offering the Chinese stake in TikTok could fall to around 31%, this person said, depending on exact details of the size of the IPO.

This person said a $5 billion fund for education of young Americans would be funded through the IPO. That fund would serve to satisfy Mr. Trump's demand that the government receive some money from the deal creating the new U.S.-based entity.

Eswar Prasad, an economics professor at Cornell University and the former head of the International Monetary Fund's China division, said the deal is "deftly structured to thread the eye of the needle, satisfying U.S. concerns about data privacy and national security while staying consistent with Chinese government requirements by leaving majority control in the hands of TikTok's Chinese owners."

"The TikTok deal allows Trump to claim victory and portray it as a validation of his tough, take-no-prisoners approach in dealing with China, even if the final deal represents a compromise relative to the administration's initial set of demands," Mr. Prasad said.

Other observers said the deal favored political optics.

"It's bad policy," said Derek Scissors, a resident scholar at the American Enterprise Institute. "They turned a mandate to secure personal data into a political event." He said the negotiations drifted into issues such as job creation that have nothing to do with U.S. national security or consumer protection, "and open the door for American firms to be shaken down by China and others, even though our original inquiry was entirely legitimate."

Speaking Sunday on Fox News, Secretary of State Mike Pompeo said the ownership arrangement satisfies the president's demand that data not be accessible to the Chinese government.

"Whether there's still some Chinese ownership where they still collect a royalty check from the benefits of the business, there will be an American headquarters; it will be controlled by Americans," Mr. Pompeo said. "And the data, most importantly, the data, the very reason we have gone after TikTok, that data will be in a place that we have confidence that no American will have the risk that their data will end up in the hands of the Chinese Communist Party."

TikTok has quickly become a social media force, a point that TikTok's lobbyists in Washington made to the Trump campaign, a senior campaign official said. TikTok has about 100 million monthly users in the U.S., up from about 11 million in early 2018. While it is mostly popular with teens, many are of voting age and live in key battleground states such as Florida, lobbyists told the campaign in warning against a ban.

The tactic was similar to that employed by opponents of Mr. Trump's proposed crackdown on flavored e-cigarettes. Vaping advocates shared with the campaign and White House polling data commissioned by the Vapor Technology Association, that shows flavored e-cigarettes are popular with adult consumers in key election states, including Florida, Arizona and Michigan, and a ban was almost universally opposed. The Trump administration eventually released a scaled back policy.

Mr. Trump is facing severe economic pressure heading into the election and could tout job creation -- even if details about 25,000 possible jobs under the deal remain unclear -- as evidence he is working toward the recovery.

The Chinese government hasn't commented on the latest iteration of the deal or Mr. Trump's endorsement of it. China's Ministry of Foreign Affairs and Ministry of Commerce didn't immediately respond to requests for comment.

ByteDance has been in communication with China's internet regulator and the Ministry of Commerce on the potential sale however, according to people familiar with the discussions.

Still, the forced sale of a piece of one of the world's hottest internet properties -- China's first true global social-media sensation -- angered many in China, including Fang Xingdong, a former internet entrepreneur and founder of Beijing-based think tank China Labs, who described it in an interview Sunday as "daylight robbery."

One of the people familiar with the matter said the main outstanding issues for the U.S. concerned data-security details and didn't appear substantial. Assuming those issues are resolved, creation of the new TikTok Global entity will proceed over the next few weeks.

Oracle said it would have a 12.5% stake in the new entity called TikTok Global, and would provide secure cloud service for data on the popular app.

Walmart said it had agreed to purchase 7.5% of TikTok Global as well as entering into commercial agreements to provide e-commerce, fulfillment, payments and other services to the new company.

Walmart said its chief executive, Doug McMillon, would serve as one of five board members of the newly created company.

In all, four of TikTok Global's five board members will be Americans, according to Walmart and Oracle, which didn't immediately name the other members.

A TikTok spokeswoman said the company was "delighted that the individuals who've turned their creativity on TikTok into thriving careers, the small businesses using TikTok to reach customers during the pandemic, and the families who've found joy and connection through our platform will be able to use TikTok for many years to come."

--Georgia Wells and Liza Lin contributed to this article.

Write to John D. McKinnon at [e-mail], Alex Leary at [e-mail] and Kate Davidson at [e-mail]