The proposed divestiture of TikTok’s U.S. operations, initiated under the Trump administration and now progressing under President Biden, is set to leave its Chinese parent company, ByteDance Ltd., with a significant financial interest. Contrary to expectations of a complete separation, indications suggest ByteDance could retain approximately half of the profits generated by the American entity, even after a majority ownership transfer to U.S. investors. This arrangement stems from anticipated licensing fees for the use of TikTok’s proprietary algorithm and a proportional share of profits tied to ByteDance’s residual equity.
Algorithm Licensing and Profit Sharing
Sources close to the matter indicate that ByteDance is expected to receive a licensing fee based on all revenue generated from its algorithm’s deployment within the U.S. operations. This fee, alongside a share of the overall profit proportionate to its remaining equity, suggests a complex financial entanglement. It is projected that ByteDance could secure 50% or more of the U.S. operation’s total profit following the ownership change. While official comments from ByteDance, TikTok, and the White House have been withheld, this profit-sharing model appears to be a key component of the ongoing negotiations.
A Protracted Regulatory Landscape
The structure of this proposed deal represents the latest development in a prolonged regulatory saga. President Joe Biden’s administration enacted legislation mandating ByteDance to relinquish control of TikTok’s U.S. business or face a shutdown. Concurrently, former President Donald Trump has signaled a willingness to extend sale deadlines while negotiating terms that would permit the platform’s continued operation, citing its utility in his political messaging.
Uncertainty in Deal Terms and Valuation
Recent discussions between President Trump and Chinese President Xi Jinping reportedly yielded an agreement on the sale, though Beijing has not formally confirmed this consensus, and specific transaction terms remain undefined. Adding to the ambiguity, Vice President JD Vance recently estimated the sale price at approximately $14 billion, a figure substantially lower than the $35 billion to $40 billion anticipated by industry analysts.
The Algorithm’s Economic Value
This substantial valuation discrepancy may be illuminated by the proposed profit-sharing arrangement. Under the current framework, TikTok’s U.S. entity would be obligated to pay ByteDance substantial licensing fees for the utilization of its algorithm – the core technology underpinning the platform’s addictive user experience. One source suggests ByteDance could receive up to 20% of incremental revenue derived from the algorithm. For instance, if the U.S. operation generates $20 billion in revenue, ByteDance could stand to gain as much as $4 billion through these licensing provisions alone.
Michael Zhang is a seasoned finance journalist with a background in macroeconomic analysis and stock market reporting. He breaks down economic data into easy-to-understand insights that help you navigate today’s financial landscape.