Microsoft has been in negotiations with TikTok for several weeks and is looking to acquire the social media application for as much as $50 billion. If the acquisition should go ahead despite the complications associated with such a deal, it will likely be one of the largest tech acquisitions to date and carry significant implications for Microsoft’s positioning against its Big Tech competitors. Until TikTok, Microsoft when compared to Google and Facebook did not have an avenue to leverage or tap into the internet’s social media revolution. However, the question remains, despite four decades of exemplary performance as an enterprise service provider, how will Microsoft integrate TikTok into its ecosystem to either augment its existing proposition or create new avenues for value creation?
Assuming the negotiations result in a deal, two potential trajectories emerge for Microsoft in taking TikTok forward. TikTok can be appended to the enterprise and consumer product line Microsoft presently carries, largely acting as an independent entity like Xbox or it can be spun out as a product hub of its own. The decision will hinge on Microsoft’s plans for its future in the consumer sector. With one of the fastest growing consumer reach platforms in the world in its arsenal, Microsoft could springboard off the TikTok deal to become one of the decades unlikeliest Facebook competitors.
Can TikTok help Microsoft replicate its enterprise success in consumer products?
Over four decades now Microsoft has been synonymous with enterprise success. Their suite of enterprise products across software, cloud and infrastructure have formed a formidable ecosystem which the company has leveraged to create loyalty amongst its enterprise user base. The Microsoft model of utilising its software touchpoints with companies to onboard other services like cloud and infrastructure products has allowed it to successfully operate without much innovation over the last few years. In its enterprise suite of products the interdependencies are clear and the feedback loop from one to the other forms a convincing argument for why enterprise customers should continue to onboard more and more Microsoft products as they themselves scale and change. Microsoft heavily leans into this advantage, the most recent example being its introduction of Teams. Teams saw very quick adoption amid the pandemic particularly provided its ability to complement other Microsoft enterprise products.
Despite the pervasive reach of the Windows OS into consumer lives, Microsoft has not as successfully created interdependencies across its consumer products. While it offers Microsoft 365 for consumers, this hasn’t been able to strengthen consumer ties to the ecosystem as effectively as the company was able to in the enterprise sector. Its consumer focused products have not seen similar interdependent success, as it struggles to leverage its consumer relationship to further its ambitions concerning cloud (One Drive), the gaming ecosystem (Xbox) or its search engine (Bing). With the acquisition of TikTok, the question is, will social media provide the means to create an interdependent ecosystem that will flush value across Microsoft’s consumer products?
TikTok is bringing with it what most would describe as social capital, user-generated content and access to a new and younger consumer base. These seem like very valuable assets for Microsoft to absorb and flush its ecosystem with stronger consumer touchpoints. It’s important to note that, in this deal, the most important asset Microsoft is acquiring is the consumer base. TikTok users’ unique characteristics of consumption on the platform revolve around a high turnover rate of content and rapid cycles of endorphin release. Even though a user spends hours on the application, they cycle through the content bank every 1 – 60 seconds placing their rate of consumption at incredibly high levels.
A consumer base engaged in this mode of discretionary high rate of consumption is at odds with the characteristics of the consumers that utilise Microsoft’s other consumer products.
While it might appear as though the Xbox ecosystem and its users are best aligned with TikTok’s platform, the consumption rate that the physical product of Xbox and the consumption of games represents is still at odds with the TikTok form of consumption. For example, the Xbox ecosystem would have been able to create interdependencies with the likes of a consumer base represented by YouTube users, where both brands share mutual points of value creation – game streaming and consumption of videos. Given how different TikTok is to anything Microsoft has ever owned, translating engagement and loyalty from the platform to the broader Microsoft ecosystem is not as straightforward as integrating it into a sales funnel alongside Microsoft’s other consumer products.
Microsoft’s path forward with TikTok
Ultimately TikTok represents an aberration to the Microsoft consumer ecosystem, something the Microsoft team has no experience with to date. The acquisition is focused on ensuring that the value available in its consumer base isn’t dispersed to competing platforms upon being banned in the US – a powerful tool, if it is retained in it’s existing form and with its existing user base growth. Tiktok in and of itself is a valuable model and a lucrative platform that is already on its way to profitability. Microsoft’s best play here is to allow TikTok to run as a parallel platform and build out its social capital potential. However, with the acquisition of a consumer social media platform, Microsoft will need to be ready for the societal and regulatory burden of managing misinformation, content moderation and the perceived negative implications of social media overuse.
Ecosystems as large as Microsoft and GAFA will see the future as a digitally interconnected world where the lines will increasingly start to blur between models servicing consumers and models servicing enterprises. In many ways even now ecosystems that service both already have tenuous links that feed into each other but not explicitly taken advantage of – for e.g. Amazon’s e-commerce data moat feeds into its AI/ML capabilities.
Microsoft’s TikTok acquisition represents a future-proofing strategy rather than an immediately integratable one, in which the world’s largest tech companies will not silo their value capture into enterprise only or consumer only products. Creating interdependencies across the entire product ecosystem is a way to continually innovate and continue compounding on growth. Where Microsoft has done this with its enterprise side to an extent, TikTok and its social capital represent an avenue for true ecosystem innovation – as it matures Microsoft will have more leeway to morph it alongside its own evolution.
Down the Rabbit Hole
1. Ecosystems: broadening the locus of value creation
The pervasive use of the term ‘ecosystem’ to describe business models is a deviation from primary business theory which focuses on supply and value chains to elucidate organizational models. The term ‘ecosystem’ and the stream of research around its related characteristics and modelling is a telling phenomenon of the internet driven transformation of organisations towards greater degrees of connectivity. Kapoor writing for the Journal of Organization Design, explores the usefulness of ecosystem-based theorizing and the tenets that differentiate an ecosystem based perspective from that of value-chains, supply chains, alliances and networks.
“Simply put, an ecosystem encompasses a set of actors that contribute to the focal offer’s user value proposition.
… Value creation in an ecosystem is enabled by the presence of complementarities and interdependencies between actors, whose offers contribute to the focal offer’s user value proposition.
… Interdependencies represent a structural relationship between actors in terms of how their offers are connected for the value to be created.”
Kapoor goes on to point out that the ‘locus’ or what we would understand as the central point of integration in an ecosystem is a wholly separate construct to that of the ‘scope’ of integration. Where the scope is the reach into the ecosystem that can be attained through integration into that ecosystem.
“The locus of integration is an ecosystem-level construct that is based on the flow of inputs and outputs in an ecosystem, and the integrator is an actor that bundles inputs. Hence, the integrator has decision rights over the downstream bundling of different offers that are produced upstream with an ecosystem.”
“In contrast, the scope of integration is a firm-level construct that is based on the production of different offers within an ecosystem. An important strategic choice for a firm in an ecosystem is whether to expand its scope and produce different offers that underlie the focal offer’s value proposition”
Kapoor further posits that characterizing ecosystems in terms of ‘what is connected to what’ within both the supply and demand sides of the ecosystem’s architecture presents three avenues of further inquiry and exploration. These avenues are necessary to both understand and design for maximizing value output from ecosystems.
“In an ecosystem, bottlenecks are component offers in the ecosystem whose performance, cost, or scarcity constrains the focal offer’s value proposition, thereby limiting its demand or growth.
… The technological architecture can also create system-level interactions between the different components such that an improvement in one component can exacerbate or mitigate the constraints imposed by other components.”
“These are the actors who produce complementary products and services that contribute towards the focal offer’s value creation (e.g., apps for smartphone, charging infrastructure for electric cars, physician services for hospitals). The nature of interdependence between firms and their suppliers is distinct from that of firms and their complementors.
The former is characterized by a supply-side sequential interdependence with the firm having the decision rights with respect to the integration of upstream input into the focal offer whereas the latter is characterized by a demand-side pooled interdependence with the downstream actor (or user) having the decision rights with respect to the integration of the complements with the focal offer.”
“Platform-based ecosystems are orchestrated by the owner of the platform, who creates the platform architecture and sets the rules for complementors to participate in the ecosystem. Accordingly, the alignment structure between the platform firm and the complementors is determined by the platform owner. In contrast, the alignment structure between the product firm and complementors is typically mutually determined.”
Source: Ecosystems: broadening the locus of value creation by R.Kapoor for Journal of Organization Design
2. TikTok and the creation consumption balance
“TikTok’s explosive growth as it entered the market followed on the heels of strong positioning as a UGC centric platform made for the consumer and the creator. The primary concerns for a UGC creator on any platform is the ideation of original content and the potential return on effort. Where a user on YouTube may be apprehensive about creating content in such a competitive landscape, TikTok has sanded down the barriers to content creation to almost nil. It does away with the cognitive expense of creating a unique brand, encouraging mimicry as the tether to a larger community and millions of views. TikTok’s focus on mimicry through broader trends and fads, provides creators with the virality that they would otherwise need to build organically from the ground up.”
“While viral mimicry is the prolific form of UGC on TikTok – the real power of TikTok lies in their ability to optimise the utility of hard-won original ideation. Where one original idea on a platform like YouTube yields one video, one original idea on TikTok can yield hundreds of thousands of videos for the platform. This lowers the threshold count for original ideas across the platform as a whole and places TikTok in the powerful position of creating an incredible bank of content at a far lower ideation cost.”
Source: TikTok and the creation consumption balance – 4th Quadrant