Why Microsoft’s Potential TikTok Acquisition Probably Isn’t About Advertising

Microsoft TikTok

 

Microsoft hasn’t had a rosy history in advertising.

The tech giant’s ad business dates back to its failed aQuantive acquisition in 2007, which it wrote down by $6.2 billion in 2012 after failing to monetize display advertising. Microsoft then outsourced its display business to AOL in 2015. Today, Microsoft holds roughly 1.4% of the display ads market, per eMarketer, and has the second-largest search engine (by a distance) with Bing.

Microsoft’s track record with ads and CEO Satya Nadella’s focus on SaaS products makes its proposed acquisition of the viral social media app TikTok a head scratcher on its surface.

But the strategy is likely more about gaining exposure to and data on younger audiences while expanding its consumer-facing business than it is about getting back into advertising in a big way.

“This is a way for Microsoft to potentially hedge their bets that they’re not going to be a B2B only company,” said Collin Colburn, senior analyst at Forrester.

Reaching the youngs

Microsoft is first and foremost an enterprise software company focused on cloud computing and business products such as Outlook, Word and Excel. But its creation of the gaming console Xbox in 2001 and acquisition of the game Minecraft in 2014 show it has occasionally tried to grow a consumer business and reach younger audiences.

“It’s important strategically to have more of a presence with younger people,” said Ben Hovaness, managing director of marketplace intelligence at Omnicom Media Group.

While TikTok’s proposed $30 billion price tag is nothing to scoff at, the app’s valuation has recently decreased due to President Trump’s threat to ban it in the United States. That gives Microsoft a way to scoop up a viral product loved by young people at a slightly cheaper price, said R. Ray Wang, principal analyst and founder of Constellation Research.

“This is a consumer foray, and they’re getting in for pretty cheap,” he said.

Microsoft could leverage TikTok’s audience insights to further build out its gaming business and stake out a larger presence in the living room through Xbox. Despite shutting down the game-focused streaming platform Mixer in June, Microsoft may still see gaming and streaming as strategic growth areas; Mixer just wasn’t successful enough to get it there.

“I see this as another way to get a media property that’s targeting the same cohort as Xbox and Minecraft,” Hovaness said.

Beyond synergies between its units, Microsoft’s R&D team uses a lot of internal data to inform product research, Colburn said. And they’re missing out on a major and strategically important cohort right now.

Microsoft also wants to compete with tech giants such as Google and Amazon, which have presences across search, advertising, membership, commerce and subscriptions. Microsoft is already the No. 2 cloud provider and a successful enterprise company, and consumer-facing products are its fresh opportunity.

“You have to get to B2B2C,” Wang said. “That’s what everyone is going after.”

Probably not the next walled garden

A TikTok acquisition would put Microsoft in a position to offer cross-channel supply across search, social and B2B media. But while Microsoft could have all the makings of a walled garden, a closed advertising ecosystem probably isn’t its main goal.

When Microsoft acquired LinkedIn in 2016, it had every opportunity to integrate its B2B data set with Bing search data. But LinkedIn remains largely siloed from the rest of the company to this day.

“It seems logical to think that if Microsoft’s ambition was to build an ad empire, that would’ve been the catalyzing event,” Hovaness said. “Instead, they basically just left the platform alone.”

Microsoft has never treated its search business as primarily an advertising play either, but rather a vehicle to drive advancements in AI and machine learning, said Brian Wieser, head of global intelligence at GroupM.

“Ad monetization isn’t the only use case for search,” he said. “The reasons they have Bing are not for advertising.”

While advertisers would welcome another large-scale competitor to Google and Facebook, Microsoft has to tread carefully when it comes to meddling with TikTok’s user experience. If Microsoft were to require TikTok users to sign in through a Microsoft ID, for example, that could create friction that turns off the app’s younger users.

“There could be an ID graph play,” Hovaness said. “I just don’t think that’s the strategic imperative for the acquisition.”

Microsoft’s messy M&A track record

Microsoft hasn’t had the best history with M&A, and its biggest challenge will be to not screw up TikTok’s magic.

Aside from aQuantive, Microsoft hasn’t done much to integrate Skype, Yammer, LinkedIn and GitHub with the rest of its business, Constellation Research’s Wang said. LinkedIn in particular had potential to become an HR software platform and get into transactions through employment verification. Instead, Microsoft stuck with a focus on media sales.

“They haven’t had the best track record for M&A,” Wang said. “[LinkedIn] could be in financial services and commerce, but they’ve chosen to stay focused on recruiting and advertising.”

Microsoft also doesn’t have much experience with social media, and will need to be careful not to disrupt TikTok’s user experience.

“On social media, you have to thread that needle perfectly between interruptive, unwanted advertising and the experience, content and connections,” Colburn said.

Despite its failures in advertising and M&A, Microsoft’s strong track record in cloud computing and the infrastructure needed to run a service like TikTok makes it a strong acquirer for the app.

“If you think about what makes some of these services run, it’s right in Microsoft’s wheelhouse,” Hovaness said.