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In Bid for TikTok, Microsoft Flexes Its Power in Washington

SEATTLE — Microsoft’s quiet pursuit to buy TikTok suddenly appeared dead a month ago, when President Trump said he wanted to ban the popular social media app for national security reasons. So Brad Smith, the tech giant’s president, went to work.

He called two dozen lawmakers, telling them that TikTok would be safe in Microsoft’s hands. Within 48 hours, he had what he needed.

Mr. Trump saw a tweet by Senator Lindsey Graham, a close ally of the president and one of the people Mr. Smith talked to, calling a Microsoft deal “win-win.” Soon, Satya Nadella, Microsoft’s chief executive, was on the phone with Mr. Trump, and got his blessing to proceed with acquisition talks.

It was another win for Microsoft’s quietly effective Washington influence operation.

The software giant was once a cautionary tale of an arrogant tech company caught off-guard by government scrutiny. But under the leadership of Mr. Nadella and Mr. Smith, it has built one of the most potent forces in the nation’s capital, one that could give it an advantage over the several potential bidders for TikTok if the company continues to pursue a deal.

It secured a coveted Pentagon contract widely expected to be awarded to Amazon. It has largely avoided antitrust scrutiny by Congress and federal regulators even though it is valued at more than $1.7 trillion, more than Google and Facebook, which are under investigation. And while it has disagreed publicly with the Trump administration on several issues, like immigration, it is one of the few big tech companies Mr. Trump and other politicians do not regularly denigrate.

The company does so despite spending less on lobbying than many of its peers. Last year, Microsoft spent $10.3 million on federal lobbying, several million less than Amazon, Facebook or Google, according to the Center for Responsive Politics. It currently has 100 in-house and outside federal lobbyists registered to work on its behalf.

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Credit…Kevin Lamarque/Reuters

People who have worked with Microsoft and those on the receiving end of its lobbying say it is particularly adept at employing a focused, long-game approach, building relationships with lawmakers and other Washington insiders over noncontroversial issues, like when Melania Trump visited Microsoft’s headquarters to discuss her Be Best campaign against online bullying. Its relationship with Mr. Graham extends back many years, with Microsoft supporting his push to ban forced arbitration in sexual harassment claims, and Mr. Graham backing a law granting law enforcement access to data that Microsoft had championed.

It also relies on a staff of policy experts rather than well-known public figures, contrasting with the approach taken by some of its peers. Amazon’s top policy executive is Jay Carney, a former White House press secretary, and Susan Molinari, a Republican former congresswoman from New York, ran Google’s federal lobbying for years.

“They learned their lesson,” said Jeff Hauser, the director of the Revolving Door Project, a progressive group that tracks tech’s influence. “I think they now see themselves as best served by having a permanent, discreet presence in the halls of power.”

Bill Gates, Microsoft’s co-founder, proudly eschewed Washington even as his company grew into a giant and he became the world’s richest man. The company didn’t hire an in-house lobbyist until 1995, 20 years after its founding, when it faced an antitrust inquiry from the Justice Department. The lobbyist, Jack Krumholtz, was a one-man shop, often making calls on his car phone between meetings, giving him the name “Jack in the Jeep.”

The lobbying effort grew quickly, but it did not hold the pressures at bay. Microsoft was sued by the government and pummeled in public. In 2002, a federal judge approved a five-year consent decree with the Justice Department that was extended twice.

By 2009, with its antitrust fights behind it and President Barack Obama taking office, Microsoft revamped its approach. It enlisted Fred Humphries, who had worked for Richard Gephardt, the former House majority leader, to run its Washington operations.

He pushed to open a big policy office on K Street, more than doubling the space for the same number of employees. One night it might host a fund-raiser for Senator Ted Cruz; on another, a panel for a tech industry association.

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Credit…Stephen Crowley/The New York Times

But Microsoft’s polite veneer was at times overshadowed by fights it picked with competitors, as with its aggressive campaign against Google led by the Democratic pollster Mark Penn. It dumped opposition research with journalists and lawmakers and ran alarmist ads on TV saying consumers were “Scroogled” by the search company.

Publicly, Microsoft looked petty. It also got few results. In 2013, regulators decided not to bring antitrust charges against Google after a high-profile investigation.

In 2014, Mr. Nadella took over the reins as Microsoft’s chief executive. The son of an idealist civil servant in India’s first generation after colonial rule, Mr. Nadella did not see government as something to be gamed and insisted on a more “principled” approach, Mr. Smith said.

Soon, the company’s Washington office got word that it was time to make nice. Scroogled was done. Mr. Penn left the company a year later.

Instead, the company methodically identified policies to pursue and then slowly ground through the interconnected power of lobbyists, regulators and lawmakers to make them happen. In 2015, Mr. Smith, then the general counsel, was also named Microsoft’s president, bolstering his role as the company’s chief statesman.

In 2017, Microsoft chose to push expanding broadband access in rural areas as a signature issue. The feel-good policy has business implications, since better connectivity means more cloud computing. It came with another key benefit: It had bipartisan appeal.

“One of the great things about the broadband issue is we do get to work with everybody,” Mr. Smith said.

Microsoft proposed using wireless frequencies that exist in the “white space” on unused broadcast channels. Television stations balked, saying the change would force broadcasters off the air.

Microsoft was undaunted. While initially adversarial, in early 2018 its lobbyists met with TV stations’ representatives at the National Association of Broadcasters’ Dupont Circle headquarters, hoping to find some common ground. Mr. Smith took the company’s argument to regulators. In December 2018, he visited multiple members of the Federal Communications Commission.

Many executives arrive for their meetings at the agency at the last possible minute, hoping to avoid attention. Mr. Smith instead showed up early and spent time in a waiting area schmoozing agency staff, according to two people who remembered the visit. They spoke on the condition of anonymity because they were not authorized to speak publicly about the visit.

Microsoft and the broadcasters reached an accord on several key points in 2019, and the F.C.C. has sought comment on some of Microsoft’s proposals, making it possible they could turn them into reality in the coming months.

“Over all, in the end, I think we got to a productive process,” said Patrick McFadden, deputy general counsel at the National Association of Broadcasters.

Despite its more subdued approach, the company still sometimes attacks competitors. Early in the race for a $10 billion Pentagon cloud computing contract, Microsoft joined a coalition including Oracle to oppose a technological approach widely seen as favoring Amazon. Microsoft later dropped out of the Oracle alliance, but the influence campaign helped slow the contracting process, a delay that gave Microsoft more time to improve its technology. Microsoft eventually won the contract, though the work is paused as part of Amazon’s lawsuit challenging the award.

“I’m not here to say that we’re candidates for some kind of sainthood,” Mr. Smith said. “We will stand up and take on battles.”

In July, Mr. Smith met with members of the House antitrust committee ahead of testimony from the chief executives of Amazon, Google, Facebook and Apple. Mr. Smith said he had spent most of his time telling them about Microsoft’s own experience facing antitrust scrutiny two decades earlier. But he concedes he spent “probably 10 percent of my time” with the committee saying the problems Microsoft had in the ’90s most closely resemble the way app stores today control how developers can reach customers, putting Apple in particular in its cross hairs.

In mid-August, Mr. Smith got tested for Covid-19 before flying by private jet to Washington for meetings at the White House and on Capitol Hill, trying to explain how Microsoft could address the security concerns related to TikTok’s data collection.

If the company’s bid is successful, Microsoft will face issues, like misinformation, that it has long avoided thanks to its focus on enterprise rather than consumer products.

“I think it will require the right kind of ambition,” Mr. Smith said. “But also an appreciation that if these problems were easy to solve, others already would have done so.”

Karen Weise reported from Seattle, and David McCabe from Washington.

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How TikTok’s Talks With Microsoft Turned Into a Soap Opera

SAN FRANCISCO — When Microsoft began talking this summer with the popular video app TikTok and its Chinese parent company, ByteDance, no one had any intentions of pursuing a blockbuster deal.

With tensions swirling between the United States and China, along with the complexities of running a social media company, any large acquisition appeared too treacherous to navigate. So Microsoft discussed taking a small stake in TikTok and becoming one of the app’s minority investors, said four people briefed on the conversations.

Even a small deal would be a win-win, the thinking went.

For Microsoft, a minority investment would potentially bring TikTok over to using its Azure cloud computing service, immediately making the app one of Microsoft’s biggest cloud clients, said the people, who declined to be identified because the details are confidential. (TikTok has been using Google’s cloud computing services to power its videos.)

For ByteDance and TikTok, a deal with Microsoft could help propel the valuation of the app’s business outside China to as high as $80 billion, the people said. It would also provide TikTok with the endorsement of a blue-chip American company to mollify the Trump administration, which had called TikTok’s Chinese ties a national security threat.

Yet what started as discussions about a small investment morphed into a big, messy, political soap opera. Pushed by President Trump, who has ordered TikTok’s U.S. operations to be sold or to cease operating, ByteDance is now discussing selling parts of TikTok’s global operations to several potential bidders. And with so many groups jumping into the talks to get a piece of any deal, all are trying to drive their own interests and agendas.

Apart from Microsoft, the bidders include Oracle, the enterprise software company, the people with knowledge of the talks said. Bankers and investors, some authorized and some simply trying to gin up a deal, have also called Netflix and Twitter about buying TikTok, they said, though it is unclear if those companies have a genuine interest in an acquisition. Microsoft, with the deepest resources and a market value of more than $1.6 trillion, still appears the furthest along for now, the people said.

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Credit…Shannon Stapleton/Reuters

The sale scenarios on the table are head-spinning, the people said, because all of the parties — ByteDance, TikTok, their investors, and the bidders — want to get the most out of any deal. The talks have covered everything from selling just TikTok’s North American operations all the way to every part of TikTok, minus ByteDance’s Chinese-only video app Douyin, they said.

A deal price is unclear, though numbers have ranged from $20 billion to $50 billion depending on what parts of TikTok will be sold, the people said. The talks are fluid and no deal may ultimately be reached.

Even if one does take place, a TikTok sale — which has become a referendum on the U.S.-China relationship — may still be disrupted if Beijing or Mr. Trump weigh in. Mr. Trump has been highly involved, including talking to Microsoft’s chief executive, Satya Nadella, and saying that Oracle could handle buying TikTok. In an Aug. 6 executive order, he imposed a deadline for TikTok’s U.S. operations to be sold by Sept. 15.

On Monday, TikTok sued the U.S. government, arguing that the executive order had deprived it of due process. The suit could give TikTok more time to operate in the United States if the courts order it, a stalling tactic that may help the app wait it out past the Nov. 3 election.

Steven Davidoff Solomon, a law professor at the University of California in Berkeley, who contributes to The New York Times, said the United States’ forcing such a huge company to sell itself was “really unprecedented.” He added, “This is a forced sale, and ByteDance is trying to keep it from being as much of a fire sale as possible.”

This account of TikTok’s deal discussions was based on interviews with more than a dozen people who were involved in or were briefed on the situation. They spoke on condition of anonymity because they were not authorized to speak publicly.

Representatives from TikTok and ByteDance, Microsoft, Netflix, Twitter, Oracle and the White House declined to comment.

A spokesman for China’s Foreign Ministry, Wang Wenbin, called Mr. Trump’s executive order a “naked act of bullying,” and added that the U.S. government would eventually “reap what it sows.”

TikTok, which ByteDance created partly out of a $1 billion purchase of the lip-syncing app Musical.ly in 2017, has become a phenomenon in the United States and elsewhere. More than 100 million Americans regularly use the app, the company has said, especially teenagers and twentysomethings.

Last year, as tensions between the United States and China grew worse, the Trump administration began scrutinizing TikTok and ByteDance. In November, the Committee on Foreign Investment in the United States, a powerful panel known as Cfius that reviews foreign acquisitions, opened an inquiry into ByteDance’s deal to buy Musical.ly after lawmakers voiced concerns that TikTok was giving data on its American users to Beijing.

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Credit…Jeenah Moon for The New York Times

TikTok has denied that it helps Beijing. To reduce the U.S. pressure, Zhang Yiming, ByteDance’s chief executive, began consulting with a small group of investors in his internet company, including Sequoia Capital and General Atlantic. ByteDance, which is privately held, has been valued at about $100 billion.

Doug Leone, one of Sequoia’s partners, and Bill Ford, chief executive of General Atlantic, became Mr. Zhang’s bridge to the White House, the people with knowledge of the talks said. In their conversations, the Trump administration had specific stipulations: First, it wanted TikTok to overhaul its governance and shareholder structure to reduce ByteDance’s ownership of the app. Second, it wanted guarantees that TikTok’s American user data be stored on U.S. servers.

The firms needed a major U.S. tech partner to get the deal done, the people close to the talks said. Mr. Zhang and the investors figured that Facebook, Google and Amazon were under too much antitrust scrutiny. But Microsoft, with its cash hoard of $137 billion, cloud expertise and strong government relationships, could work.

Mr. Zhang, a former Microsoft engineer, reached out to Microsoft executives to gauge their interest, said one person with knowledge of the talks. Sequoia and General Atlantic declined to comment.

By July, Microsoft joined the talks. At the time, the discussions centered on Microsoft making a minority investment in TikTok, the people said. Between the U.S.-China tensions and the pressures of operating a social media company, Microsoft executives were hesitant about a big deal, said people briefed on the conversations. ByteDance and Mr. Zhang also wanted to retain some ownership of TikTok, they said.

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Credit…Doug Mills/The New York Times

Yet as the talks progressed, Microsoft grew warmer on a potentially larger deal with TikTok. While Microsoft has lots of data about industries like gaming and workplace software, it has little information about people’s social media behavior. TikTok’s user interaction information could strengthen Microsoft’s data science operation, the people briefed on the talks said.

TikTok could also be linked to Microsoft’s $7 billion advertising business. Together, that could make a meaningful difference to Microsoft’s growth, they said.

ByteDance and Microsoft came to see an acquisition of TikTok’s U.S. operations as a cleaner option, they added. Microsoft could allow TikTok to operate as a stand-alone unit, similar to how it had treated past large acquisitions, such as its $2.5 billion acquisition of the company behind the video game Minecraft in 2014 and its $26 billion purchase of professional networking site LinkedIn in 2016.

All the while, Trump administration officials were keeping an eye on the situation. Last month, Treasury Secretary Steven Mnuchin, who is chairman of Cfius and holds the final word on the panel’s recommendations of ByteDance’s purchase of Musical.ly, spoke with TikTok and Microsoft about how TikTok’s data should be on U.S. servers, three of the people said.

On July 31, Mr. Mnuchin presented the Cfius analysis of the ByteDance-Musical.ly deal to Mr. Trump, two people said. The recommendation: that ByteDance be ordered to sell TikTok to an American owner, with Microsoft acquiring most of TikTok’s business and the stakes held by ByteDance’s Chinese shareholders winnowed to a minority investment.

A spokesman for the Treasury and Mr. Mnuchin declined to comment.

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Credit…Ian C. Bates for The New York Times

But aboard Air Force One later that day, President Trump said he planned to ban TikTok entirely. Several of Mr. Trump’s advisers were furious at the derailment of their recommendation, saying that China hawks like Peter Navarro, the White House director of trade and manufacturing policy, had exerted too much influence, according to White House officials and others close to the president.

In a statement, Mr. Navarro said, “Nobody exerts ‘influence’ over President Donald J. Trump. He listens carefully to a wide range of often sharply competing views and then he makes the best and most informed decision. That’s why he is such a great president.”

The next 72 hours were chaotic. News leaked that Microsoft was in talks to acquire TikTok. Private equity firms and bankers circled. That briefly included Stephen A. Schwarzman, chief executive of the Blackstone Group, said people familiar with the talks. Blackstone declined to comment.

That weekend, Mr. Trump called Mr. Nadella about TikTok. Mr. Trump said ByteDance had 45 days to complete a sale of TikTok’s business in the United States. He added that any deal should help the U.S. government in some way, perhaps in the form of job creation or other economic benefits, or some kind of offering to the Treasury Department.

Privately, officials at Microsoft and TikTok were shocked. The 45-day window put TikTok at a disadvantage in negotiating the best deal. Mr. Trump also seemed to be arguing for “tipping the waiter,” essentially offering a percentage of the deal to the Treasury, the people said.

On Aug. 2, Microsoft issued a statement about its pursuit of TikTok and said it would provide “proper economic benefits to the United States, including the United States Treasury.” It did not elaborate on what that meant.

A few days later, Mr. Trump signed his executive order to block TikTok if it was not sold by mid-September. A week later, he issued another executive order giving ByteDance 90 days to close such a deal.

Since then, other potential suitors have emerged, including Oracle. ByteDance, backed into a corner by the White House, wants the best price for TikTok — and not only from one bidder in Microsoft. And sensing ByteDance’s weakness, more potential acquirers are kicking the tires on the hot, fast-growing app. All of that may turn off Microsoft from a purchase.

Even as deal discussions have continued, TikTok sued the U.S. government on Monday over Mr. Trump’s executive order.

“We far prefer constructive dialogue over litigation,” the company said in a statement. But given the executive order, it said, “we simply have no choice.”

Mike Isaac reported from San Francisco, and Andrew Ross Sorkin from New York. Reporting was contributed by Ana Swanson, Maggie Haberman, Michael J. de la Merced, Raymond Zhong and Alan Rappeport.