Two weeks ago, four CEOs of the largest companies on the planet were summoned in front of Congress (via video teleconference) to testify as part of an ongoing antitrust investigation.

Two founders, Jeff Bezos and Mark Zuckerberg, defended the firms they’ve stewarded from cradle to powerhouse.

Sundar Pichai fought off the most pointed questions about Google’s dominance as an ad platform that has monopolistic control of internet search.

Tim Cook received, by far, the fewest questions. It didn’t really seem like the elected representatives were prepared to tease apart the nuances of power Apple exerts through their App Store on developers and other tech companies.

Rightfully, our legislators and the American public are concerned about how powerful all four companies have become and the negative impact on our collective economic outcomes caused by so few companies accounting for so much of the economy.

Together, the four companies have a market capitalization of over $5.2 trillion. That surpasses the national GDP of every country outside of the US and China.

However, one enormous US company was conspicuously absent from the antitrust hearings.

Microsoft.

Like Amazon, Microsoft is based in Seattle, WA, and has a market capitalization around $1.6 trillion.

They’re the leader in the personal computer market with 88% market share.

They own Xbox, which holds the second spot in the gaming console market.

They have fought their way the 2nd in public cloud infrastructure, trailing Amazon and ahead of Google, Alibaba, and IBM.

They just landed a $10 billion deal with the Pentagon that will set the stage for more work with US government agencies.

They’re #1 in Saas (software-as-a-service) thanks to their suite of collaboration tools.

Since Satya Nadella took over, Microsoft has grown by more than 3.5x by deprioritizing their PC business and focusing heavily on the cloud.

So… why are they the front-runner to acquire a consumer app where people share videos?

TikTok

TikTok is the fastest growing app in the world and one of the only potential challengers to Facebook’s dominance of social networking and gaming.

Unlike legacy competitors for digital attention like YouTube, Instagram, and Snapchat, TikTok fully embraces the assumptions of a mobile smartphone world by making video creation exceptionally easy and making consumption a full-screen experience from the moment you open the app.

The only institutions capable of slowing the app down are national governments.

India banned TikTok, along with 59 other China-based apps, at the end of June.

The Trump White House has followed suit. The President signed an executive order that gives ByteDance (the Chinese company that owns TikTok) 45 days to sell the video-sharing app before it's banned.

Microsoft as an Opportunistic Buyer

ByteDance’s crown jewel has been stomped on. They’re now backed into a corner with the option to either sell at a below-market price or risk getting nothing for the sizable investment they’ve made in technology and marketing.

The estimated range for a transaction is large since we’ve never seen anything like this in recent history. I’ve seen as low as $10 billion and as high as $30 billion.

But who can buy it?

A purchaser would need:

Enough capital to close a deal. This limits us to about 2/3rds of the Fortune 500
Tech talent to rebuild the backend of the app to abate the security concerns that have prompted the executive order. Cut about 75% off of our existing list (maybe more).
A business case for making the deal within the context of the business.

The list gets exceptionally short, exceptionally quickly.

Microsoft’s biz dev team, led by Nadella, have to survey the landscape and think that a TikTok deal offers the opportunity to get an enormously valuable asset for cheap.

A forced firesale, paired with an extremely limited pool of buyers, means the deck is stacked in their favor.

TikTok’s Business Case for Microsoft

Where precisely would TIkTok move the needle? Some superficial analysts have suggested that TikTok would up Microsoft’s “cool factor”, giving a stodgy B2B company some consumer love.

While maybe true, Satya has not created enormous shareholder value by chasing cool. He’s more focused on chasing revenue in growing markets.

Cloud

TikTok just signed a multi-year agreement to host the app on Google cloud services. If the acquisition were to go through, that agreement would likely be unwound.

That means TikTok eventually ends up on the Microsoft Azure platform. This wouldn’t drastically alter the cloud business’ revenue. However, it would be one of the largest consumer-facing apps to operate on Azure.

Proving the use case and performance of supporting TikTok would add another arrow to the quiver for Microsoft’s sales reps as they compete against Google and Amazon. All three companies see significant yearly growth in a market square in the middle of a secular explosion.

Even a 10% increase in growth means billions to the bottom line.

Tech, Algorithms, and Artificial Intelligence

TikTok’s algorithm is more effective at understanding consumer preferences than almost any other technology on the planet.

In short order, the feed will learn a user’s preferences based on how much of a video they view and whether or not they engage with or share it.

They also use machine learning to infer what each short video is about and sort them by topic and other key identifiers. If you watch a few videos with dogs in them to completion, you’ll inevitably see more.

A study found that kids aged 4-15 spent 80 minutes a day on TikTok, just shy of the 85 minute average of YouTube. Users consistently report getting sucked into a rabbit hole of content, only emerging an hour later.

I don’t know if anyone has ever said that about LinkedIn, Microsoft’s only current social media platform.

If Microsoft can institutionalize some of the lessons about content optimization, mobile-centric product design, the effects on some of its other subsidiaries like LinkedIn and GitHub could be enormous.

A more engaging experience across their wide range of platforms would drive increased user (and revenue) retention.

Ad Sales

Facebook’s acquisition of Instagram should serve as a basic framework for the expansion of an ad platform that engages Microsoft’s existing enterprise clients.

The self-service Linkedin ad manager nearly matches Facebook’s self-service functionality. However, Linkedin’s capacity for hyper-targeting executives for Account-Based Marketing leads to much higher CPMs.

Adding the TikTok marketplace into its ad platform would warrant a significant investment in the platform’s capabilities but also offers significantly more upside. The potential for consumer marketing to the most valuable demos on the planet represents the majority of TikTok’s current enterprise value.

With a B2B and B2C marketplace for ads, Microsoft would have the potential to compete with Google, Facebook, and Amazon at the highest echelons of the digital ad market.

Microsoft Antitrust Concerns

Microsoft’s dominance in personal computing will become less relevant over the next decade as the proliferation of wearables, internet-connected devices, and smartphones degrade the category’s relevance. But, they’re exposed to regulatory risk in other areas.

Slack recently filed a complaint against Microsoft to the European Commission for anticompetitive business practices.

They’re under scrutiny for ‘tying’ Microsoft Teams into their existing Office 365 offering for free, which potentially falls under antitrust law regarding the promotion of inferior products using market power.

Their dominance in B2B software means they have to be conservative about acquisitions that would draw attention their way.

This move seems to put them back in the crosshairs of regulators, 20 years after Bill Gates and Steve Balmer led the firm through antitrust investigation over the …. *fill in*

Here in 2020, Nadella must be thinking that the opportunity to raise Microsoft’s ceiling in cloud, consumer technology, and digital advertising outweighs the risk.

We’ll find out if he’s right.

Should Microsoft Acquire TikTok?