Microsoft shares jumped by almost 6% earlier this week when it confirmed it would push ahead with talks to buy the US, Canada, Australia and New Zealand operations of Chinese-owned social media app TikTok. The majority of investors obviously believe the planned acquisition would be a good thing for the US software giant.

The US administration insists the Chinese app is a security threat, accusing its owner ByteDance of sharing sensitive user data with the government in Beijing. US President Donald Trump originally planned to ban the app, but then conceded that it would be even better for it to be taken over by a US company, acknowledging that TikTok was hot and "a great asset."

Knowing that Trump has never ceased to be a businessman, it came as no surprise that he as a perceived broker of any takeover deal with TikTok would want it to also turn into a windfall for the US Treasury.

TikTok allows users to create short videos and add some basic effects and music. It has become tremendously popular, particularly among teenagers and young adults.

Not a first for Microsoft

So let's just assume for a moment that Microsoft gets its way and a deal is struck by mid-September as planned. What could TikTok do for the company, which has largely been focusing on tailor-made software solutions for enterprises and cloud computing under CEO Satya Nadella?

The answer is obvious. It could just try and build on the huge success that TikTok has had among teenagers around the world and with it boost its ad revenues to a certain extent. Let's not forget that Microsoft is no stranger to experiments in the social media sector.

Back in 2016, it acquired job-search network LinkedIn. At the time, it was considered to be Nadella's riskiest financial operation, and Microsoft's shares actually dropped by 3% when the deal was announced.

To the surprise of many analysts, though, LinkedIn has done fairly well, not least because Microsoft has been able to avoid any big antitrust and data privacy run-ins with US regulators over the social media network.

Sure, there's been a drop in revenues recently caused by the coronavirus pandemic, but LinkedIn ad revenues were among the company's fastest-growing in the 2017-2019 period. Data from Reuters reveal that LinkedIn logged $14.3 billion (€12.1 billion) in revenues overall through ads and subscriptions.

TikTok a bigger risk?

While investors are upbeat about a potential Microsoft/TikTok deal, analysts are skeptical again, saying that it would be an even bigger gamble for the US company than it was with LinkedIn. Why's that?

Well, there may be a least two reasons why the US company should be cautious about it. Firstly, TikTok has predominantly set its sight on very young people, meaning whoever owns the app deals with a less affluent target group than the one you encounter at LinkedIn. Advertisers usually pay more to get the attention of more affluent people, it's as simple as that.

Secondly, a proper handling of TikTok in the future may entail heavy costs for content moderation to curb the spread of misinformation and political bias.

What could be in it for Microsoft?

On the other hand, TikTok isn't used by teenagers exclusively. Tech consultancy Vorhaus Advisors points out that about 11% of US adults use the app at least once a week (versus 49% for YouTube and 62% for Facebook).

The app has been downloaded 226 million times in the four nations where Microsoft intends to take over operations, figures from app tracker Sensor Tower show. All in all, TikTok has enormous potential if valued on its superfast user growth.

No matter what, Microsoft seems well-positioned to take this financial risk. It's currently the world's second-largest tech firm by market capitalization after Apple at $1.55 trillion and has fared well during the pandemic.

Should Facebook be alarmed?

Yes, it is already alarmed over TikTok, seeing it as a very strong rival. An indication that Facebook has been taking TikTok seriously is that it has already aimed to incorporate similar functions in its own products.

Take Instagram which is part of Facebook. The app is being fitted with a service called "Reels," which is widely seen as a TikTok copy and which is being tested in Germany and other markets already.

Making part of TikTok's operations a Microsoft asset would aggravate the situation further for Mark Zuckerberg, seeing another financially strong social media player rising in his own country.

China not amused

Chinese state-owned media said Tuesday the state would retaliate against Washington's pressure on TikTok owner ByteDance. "China will not accept the United States' 'theft' of a Chinese technology company," the reports said.

While Beijing would be cautious in imposing equivalent restrictions on US companies in China, the nation has plenty of ways to respond, it added.