In Part I of our 3-part series, we outlined certain aspects of how Oracle has been strategic in its political dealings over the last few years up to its involvement in the free-for-all that followed the Trump Administration’s unprecedented—and very confusing—TikTok ban. In doing so, we traced Oracle’s path from unpopular-but-low-profile-software-vendor to its belated attempt to compete in the cloud space through licensee coercion to its public attacks on its adversaries and its accompanying support of right-wing tech coalitions.
In Part II, we set the stage with regards to Oracle’s involvement in the TikTok saga by first discussing the details surrounding Oracle’s association with the current administration. Here, in Part III, we delve into the possible reasons why Oracle is pursuing a teen-focused social media app with data security problems and, lastly, what this might mean for the hapless Oracle software licensee.
1. The White House Sets its Sights on TikTok.
After Trump’s campaign anticipated massive crowds for his June 20, 2020, rally in Tulsa, the turnout was ultimately much lower than projected. As reported the next day by The New York Times, “Hundreds of teenage TikTok users and K-pop fans say they’re at least partially responsible.”
According to a spokesman for the Tulsa Fire Department on Sunday, the fire marshal counted 6,200 scanned tickets of attendees. (That number would not include staff, media or those in box suites.)
TikTok users and fans of Korean pop music groups claimed to have registered potentially hundreds of thousands of tickets for Mr. Trump’s campaign rally as a prank. After the Trump campaign’s official account @TeamTrump posted a tweet asking supporters to register for free tickets using their phones on June 11, K-pop fan accounts began sharing the information with followers, encouraging them to register for the rally — and then not show.
Scarcely six weeks later, on August 6, 2020, Trump issued an Executive Order against TikTok, stating that “the spread in the United States of mobile applications developed and owned by companies in the People’s Republic of China (China) continues to threaten the national security, foreign policy, and economy of the United States” and that their “data collection threatens to allow the Chinese Communist Party access to Americans’ personal and proprietary information.”
As NPR reported on the same day:
A federal class-action lawsuit involving dozens of American families claims an independent security review of TikTok revealed that the app is siphoning data, including the facial profiles of American children, and sending it to Chinese servers, though the suit does not provide evidence any information has ever been transferred to the Chinese Communist Party.
The possibility that it could hand over data to Chinese authorities has officials on edge, as the White House wages an intensifying trade war against China.
As reported by Forbes the next day, TikTok “said it is ‘shocked’ over President Donald Trump’s executive order”, warning it could go to court. Techcrunch.com also stated that, according to TikTok, the “order was ‘issued without any due process’ and would risk ‘undermining global businesses’ trust in the United States’ commitment to the rule of law.’” Forbes continued:
The Trump Administration has in recent days threatened to ban the app in the U.S., unless a U.S. company, likely Microsoft, can strike a deal to purchase the app by September 15, while TikTok is adamant that it is “not going anywhere.”
According to some sources, the White House has provided zero evidence of any Chinese security breaches regarding TikTok and ByteDance. If fact, the exact opposite appears to be true. The New York Times recently obtained a CIA assessment which “found no evidence that the app had been used by Chinese spy agencies to intercept data.”
Russel Brandom at theverge.com goes on to say:
No president has ever labeled the existence of a program on American devices as a national emergency or invoked emergency powers against a piece of software. And while the Oracle arrangement seems to offer TikTok an out, the chaos surrounding the entire project makes it far from a sure thing. These are unprecedented measures, and there’s been no explanation for why TikTok specifically is alarming enough to justify them.
Aside from the (possibly) misaligned security concerns, there is plenty of speculation regarding other factors at play that could be motivating Trump. One can’t help but question whether his embarassing Tulsa rally might have had something to do with it:
What if this does have everything to do with Trump’s rally in Tulsa, Oklahoma, in June? The event was supposed to mark a return to the campaign assemblies that the president covets, a comeback show of force with nearly 20,000 people in attendance after months of Covid 19 lockdown. And it was totally ruined for him by TikTokers and other young people online who coordinated a campaign to register for tickets to the event and never show up. So, what if the ban on TikTok is retaliation for that?
Of course, this wouldn’t be the first time Trump made redress of personal affronts a part of his administration’s business. After referring to a not-so-small list of companies that have irked the president and been on the receiving end of his ire, it is easy for some commentators to speculate that the Tulsa Rally brought TikTok to his attention and inspired the rush to ban:
He had no known interaction with, nor opinion on, the dancing and prank app known as TikTok until that development. He is a narcissist who felt slighted by the BTS Army and Blackpink’s Blink fandom and decided to use the most powerful nation on earth’s significant economic influence to strike back at these… teenagers. Because they don’t think he’s cool.
2. The White House Becomes Determined to Award the Sale of TikTok to Oracle (and Wal-Mart).
Even though Trump initially insisted on a ban of TikTok, that edict quickly changed when his administration offered parent company ByteDance the option of looking for a bidder:
Microsoft emerged as the early, eager frontrunner with a multi-billion-dollar proposal to acquire a stake in TikTok’s US assets. But Microsoft’s bid fell apart at the eleventh hour and Oracle, which is run by a high-profile Trump supporter, emerged last weekend as the dark-horse bidder. What’s resulted appears to be a far cry from what the Trump administration initially said it wanted, and although the terms haven’t been finalized or announced it appears a new global US-based TikTok entity will be created, with US investors (including Oracle) replacing ByteDance as its majority shareholder.
Bloomberg.com further reported:
There are very few leaders of Fortune 1000 companies who back Trump and the president is “giving a cloud contract and investment opportunity” to a firm “whose CEO is openly supporting him,” said Scott Galloway, a professor of marketing at New York University. “The only way I would describe the proposed agreement is strange and a giant step backward for the government’s approach to capitalism.”
And then there is the question surrounding how an urgent ban that for all intents and purposes was based on security concerns could end in a deal that outright ignores these concerns. As reported by The New York Times:
After insisting that TikTok’s U.S. operations be sold over national security concerns, the Trump administration now appears to be amenable to a watered-down deal where Oracle would become the video app’s technology partner. Readers, we’re baffled — and have several questions.
How would it work? TikTok’s parent company, ByteDance, would apparently maintain control of the app’s algorithms and underlying computer code. Microsoft, whose takeover bid was rejected, said that it would have taken over the algorithm and let the U.S. government review any code changes, an approach favored by the Pentagon and the National Security Agency.
Ultimately, the current deal appears to be that Oracle would attain a 12.5% stake in TikTok Global while Walmart would buy 7.5%. Oracle’s stake “furthers the software maker’s years-long plan to become a cloud computing heavyweight.” Of note is the fact that Oracle along with Walmart and Simon Property Group, “three of Amazon’s biggest rivals across industries such as retail and cloud computing” are secret funders behind the Free and Fair Market Initiative, “which has blasted Amazon’s business practices…since launching last year.”
And, finally, we circle back around to Oracle’s relationship with Trump, as reported by Shirin Ghaffary at vox.com:
The cozy relationship between Oracle’s leadership and Trump is raising questions about whether or not that has played a role in the new plan for TikTok’s future in the US.
“I think with Oracle and the relationship they have with the administration, one wonders, ‘Now, what kind of a level playing field was this?’” said Chesney. But that’s all speculative, Chesney said, since the terms of the deal are still unknown. It’s also entirely possible that Oracle simply made a higher offer than Microsoft, or laid out better terms.
And then there is this from Dominic Patten at deadline.com:
The incumbent said last weekend that the companies involved in the TikTok deal had agreed to contribute $5 billion to an education foundation to “educate people as to real history of our country” and “not the fake history.” Previously, the posturing Trump said in a speech that he was creating a commission to promote “patriotic” education – a move that many took, as with his attack on the dance moves filled TikTok, to be pure campaign politics in motion for the struggling POTUS.
As far as the deal will be concerned, the next few weeks are crucial. As reported by The National Law Review on October 6, 2020:
TikTok’s deadline to file a motion for preliminary injunction regarding the remaining four prohibitions is Oct. 14. The government has until Oct. 23 to respond, with TikTok’s reply due Oct. 30. Judge Nichols scheduled a preliminary injunction hearing for Nov. 4, just eight days away from the Nov. 12 prohibition deadline set by the administration.
3. By Way of TikTok, Oracle Has Now Massively Increased Its Standing in the Cloud Wars.
And so, as we foreshadowed in Part 1, it all comes back to the cloud. In a Bloomberg.com article entitled “Oracle Boosts Cloud Ambitions With Help From TikTok and Trump”, by Nico Grant states, “In 2019, Oracle’s share of the cloud infrastructure market was so small that Gartner lumped it into an ‘Others’ category of niche players.” Grant added:
The administration’s assent gives the Redwood City, California-based company a desperately needed win. Oracle, the world’s second-largest software maker after Microsoft, has struggled to find its footing in the fiercely competitive public-cloud market.
Ram Sagar with Analyticsindiamag.com described the race for TikTok ownership itself as ‘a cloud war’:
The whole deal has turned out to be a new turf for the American cloud providers to take another shot at dominance. AWS is the undisputed cloud leader. Azure had already bagged a $10 billion contract from the Pentagon. Oracle, a relatively obscure name in the cloud markets might finally get to enter the trillion-dollar club.
Sagar points out that the TikTok deal comes hot on the heels of Oracle picking up at least some of Zoom’s pandemic-inspired cloud traffic. He continues by noting that, if the TikTok deal goes through, Oracle may finally enter the arena of the “vast customer base” that was previously “ruled by the likes of AWS, Azure and Google Cloud.” Similarly, Marty Puranik of Atlantic.net noted that the Zoom deal was “a marquee win for Oracle, which has the 4th place cloud behind Google, Microsoft and Amazon,” while noting that Oracle “probably had to be aggressive in giving discounts to win this.”
Still, many commentators typically still place Oracle as a distant fourth (and even query how much this will move the needle). Nonetheless, in typical fashion, Ellison himself is all but declaring victory in the cloud wars:
We love that Zoom’s usage of Oracle Cloud Infrastructure services delivered triple-digit revenue growth in sequential quarters, from Q4 last year to Q1 this year. OCI cloud data centers are opening all over the world at a record pace. We now have 26 OCI regions live around the world, edging out Amazon AWS, which currently has 24 regions. And we’ll be adding at least another 10 regions in the next 9 months. We’re not slowing down.
4. What Does It All Mean for the Oracle Licensee?
In all likelihood? More of the same.
As we have previously written about, for years Oracle has been leveraging aggressive audits and harsh licensing tactics in order to move its current license base in the hopes of obtaining at least a respectable standing in the cloud wars. However, due to a securities class action that contains devastating whistle-blower allegations, it has been our experience (and the experience of many of our colleagues) that Oracle has chilled the practice of offering unwanted cloud services in order to resolve contentious audits. With Oracle’s motion to dismiss pending, the status of that matter remains uncertain. However, we attended the hearing in September and are far from sanguine about the prospects of that matter proceeding without appellate court assistance.
Naturally, Oracle was never going to limits its cloud aspirations to a single approach. Acquisitions and deals have been fueling Oracle’s aspirations for decades. And, while some observers insist that, best case scenario, Oracle will still trail the big three with a market share of 2% compared to Google at 9%, Microsoft 18% and AWS 33%, we believe this misses the importance of scaling in the cloud wars. Once a cloud provider reaches a certain threshold, the so-called “virtuous cycle” (a.k.a. economies of scale) kicks in and allows a provider to generate profit while growing its client base. The cloud is particularly susceptible to this cycle, as larger size drives prices down and allows further investment into infrastructure and amenities. The TikTok deal could provide Oracle with precisely these scaling opportunities, incentivizing it to further continue its drive to move licensees to the cloud.
And some commentators continue to believe that capturing its current licensee base is an essential piece of Oracle’s play for cloud dominance:
To succeed, [Oracle] will need to support more than just two social networks, as large as they are. The company will also need to get some of its big legacy clients to bring their workloads to the cloud, which has so far proven to be a tough task.
Having little doubt that Oracle feels the same, we anticipate that the TikTok ordeal, should it go through, will only invigorate Oracle. And, if the securities litigation currently pending is dismissed at the pleading stage, Oracle will likely be further energized and inclined to return to its much-maligned tactics of using aggressive audits as a sales vehicle for its cloud services.
As with the pandemic and its impact on licensing and auditing, uncertainty continues to reign and, accordingly, we continue to give the same advice. “Buckle up. It is going to be a bumpy ride.”
Published on 10/16/2020