– August 13, 2020
pick pocket

Last week, like a scene out of the movie The Godfather, President Trump made an “offer they can’t refuse” to the Chinese shareholders of TikTok, a fast-growing social media app company that has an estimated 100 million users in the U.S. Trump gave the shareholders 45 days to make a choice: they can either shut down their U.S. operations or sell themselves at a distressed sale price to an American company.

Already, TikTok’s business in the U.S. is in the process of dying as a result of Trump’s threat. Many of TikTok’s American users are already switching to alternate online platforms, such as newcomer Byte and Facebook’s Instagram. Undoubtedly, these subscriber defections have only further depressed TikTok’s sale price, making it even more of a bargain to the U.S. company that gets to buy it.

Ironically, one of the leading contenders to buy TikTok is the American software company Microsoft, which stepped up immediately after Trump’s threat and indicatied its willingness to buy the company.

Microsoft’s move is ironic because Microsoft faced its own epic shakedown at the hands of the U.S. government more than 25 years ago, when it was the subject of a federal antitrust lawsuit that was instigated by many of its disgruntled competitors, including Netscape, Sun Microsystems, and Oracle.

Ultimately, as a result of the antitrust actions, Microsoft had to pay out billions in fines and settlements, not just from its competitors’ antitrust complaints and prosecution by the U.S. Department of Justice, but also from follow-on antitrust actions by European authorities.

Arguably more damaging to Microsoft than just the loss of billions of dollars is that the company had to pull back from aggressively carrying out its business plan. It had to remove features from its operating system software, such as a web browser and virus protection, and facilitate competitors’ connections of their web browser and virus protection software to Microsoft’s Windows operating system. 

As a result of having to deal with the antitrust legal assault, Microsoft also became distracted from successfully pursuing its plans in other areas. Bill Gates, for example, recently cited the distraction of the antitrust lawsuit as the reason why Microsoft failed in its effort to successfully deploy a version of its Windows operating system on mobile devices.

Many of Microsoft’s competitors initially benefited from the court-ordered hamstringing of its operation and specific mandate to include their products as part of Windows. Now it is ironic that Microsoft, itself a victim of governmental coercion, is pursuing an opportunity to profit from Trump’s coercive threat against TikTok.

Beyond the irony, a more profound issue that the TikTok episode reveals is the new audacity with which our government is willing to interfere with the workings of markets. President Trump had initially threatened to shut down TikTok immediately (!), which he then “generously” extended to a 45-day timeframe. Such dramatic unilateral executive action is much more authoritarian than the shakedown of Microsoft in the 1990s by the Department of Justice, which did, after all, require numerous investigations and court hearings over a number of years before Microsoft faced its own “offer it couldn’t refuse.”

If TikTok really were a security threat, it should be proven in a courtroom. It is contrary to the rule of law that a simple declaration by a president is sufficient to destroy or meaningfully impair the value of a business enterprise. The president is arrogating to himself a level of executive power that would be questionable even in wartime, the power to simply shut down a company or compel its forced sale based solely on his personal authority and without a court hearing.

Many Americans may look away from this dispute without interest (unless they are one of the millions of American TikTok app users) because TikTok is just a “Chinese company.” But to say such conflates the Chinese government with the millions of genuine entrepreneurs who helped build the Chinese economy, including the companies making the billions of dollars of Chinese products that nearly every American consumes.

The impending takedown of TikTok sets a dangerous precedent. It marks a serious diminution of the rule of law and a major step-up in the authoritarian use of power by our executive branch. This new power will be used by whoever wins the election, whether he is Trump or Biden, and then one can only imagine how such arbitrary powers will be ramped up even further by those presidents who follow them.

Back in the 1990s, Microsoft felt the wrath for not “kissing the ring” of Caesar by paying off politicians in the form of lobbying money and campaign contributions. At the time, observers pointed out that the company’s failure to woo Washington with millions of dollars in campaign contributions and lobbying money set the company up for the type of takedown it endured in the mid-1990s. 

Expressing this viewpoint, one of Microsoft’s political nemeses at the time was Utah Senator Orrin Hatch, who aggressively sponsored the government’s antitrust investigation. In a 2000 speech, he said, “I have given [Microsoft] advice, and they don’t pay any attention to it.” What was that advice? “If you want to get involved in business, you should get involved in politics.” In other words, Microsoft had to pay up if it wanted to avoid Washington’s wrath.

Pay up, Microsoft eventually did. After the antitrust complaint was filed by Microsoft’s competitors in 1996 and then picked up by the Department of Justice in 1998, Microsoft went from spending essentially zero ($16,000) on lobbying in 1995 to $3.7 million by 1998, and regularly over $10 million per year today. Bill Gates, who had initially said in 1995, “I’m sorry that we have to have a Washington presence. We thrived during our first 16 years without any of this,” later oversaw the build-up of one of the largest lobbying organizations in Washington.

If TikTok survives its close encounter with our president, watch it ramp up its lobbying activity just as Microsoft did. But every other large American corporation is also paying attention to this saga. Watch all of corporate America ramp up their lobbying activity further as they, too, seek to avoid the unpredictable wrath of the Godfather.

Looking ahead to a more authoritarian future, will old-fashioned lobbying be enough to secure a measure of business freedom any more? What new steps will businesses need to take in the future to protect themselves from presidents who, instead of the Art of the Deal, prefer the Art of the Shakedown?

Raymond C. Niles

Raymond C. Niles is a Senior Fellow of the American Institute for Economic Research. He holds a PhD in Economics from George Mason University and an MBA in Finance & Economics from the Leonard N. Stern School of Business at New York University. Prior to embarking on his academic career, Niles worked for more than 15 years on Wall Street as a senior equity research analyst at Citigroup, Schroders, and Goldman Sachs, and as managing partner of a hedge fund investing in energy securities. Niles has published a book chapter and numerous articles in scholarly and popular publications.

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