Bets for post-pandemic times
And also: The big regulatory battle: content moderation, competition, ethics. Investors looking forward to cover the connectivity gap, and concerned about crypto currencies' volatility
Post-pandemic bets
Private Equity funds have diverging views on the immediate future: will we turn back to pre-pandemic habits or will we keep our new “digital-first” ways of life (and work)? Funds like Apollo are investing billions of dollars in the travel industry (e.g. Expedia, Aeromexico, Hertz), hoping that the (expected) end of the pandemic will bring a fast recovery to this (heavily impacted) industry. Meanwhile, Carlyle is betting on the sustainability of lifestyle changes inspired by the pandemic (e.g. digital healthcare, e-commerce). Blackstone is a mix, because they’re hoping there will be a fast recovery of some of their live entertainment assets (including Bellagio in Las Vegas) and, at the same time, investing in physical assets that are expected to become key for some of the emerging digital habits (e.g. last-mile warehouses for fast deliveries) (FT)
Some digital habits will be sustainable, e.g. home deliveries:
Fast deliveries emerge as the future of e-commerce. DoorDash and Uber Eats see this as a survival kit: We’ve already been commenting this here. “Next-hour commerce” is one of the dominant trends in digital business at the moment. Companies like DoorDash and Uber Eats see this as a big opportunity to boost profitability, given the scope economies they can get by leveraging their own “logistics assets”. And it seems to be happening: non-restaurant orders grew +40% for DoorDash and +70% for Uber Eats in 1Q21. They claim they could even beat the almighty Amazon at this (by offering “next-hour” vs. “next-day” deliveries) (WSJ)
Investors are excited with the concept. Look at Getir: It is not only DoorDash and Uber Eats. There is a plethora of emerging startups looking to lead the new space. And investors are so excited with the opportunity that they’re pouring money on some of them. An obvious example this week is Getir, a Turkish app that pioneered the concept and is now expanding globally. They just closed a funding round at a $7.5bn valuation (higher than Deliveroo or Marks & Spencer). But there are many others, like Berlin-based Flink, Gorillas (also in Europe) or Gopuff (in the US). Ambitions are high: Getir’s CEO describes their business as “the iPhone”, as opposed to Amazon’s or Ocado’s scheduled deliveries, which would be “the Blackberry” (FT)
The challenging economics of deliveries might require a “logistics revolution”. What seems clear is that to deliver on the “next-hour” promise, these companies will have to innovate in last-mile logistics. Food delivery has been seen as a “crummy business”, with challenging economics, very dependent on achieving scale at a local level. Of course, DoorDash and Uber see the world a bit differently, because they think they can actually dilute some of their own costs, incurred to provide their core urban mobility services, by adding other services (like deliveries) on top. However, this is easier said than done, and there are some practical issues to make it possible (WSJ)
Something similar is happening in China, as shown by Meituan’s results this week. As with many other digital things, China is not an exception. This week the Chinese internet giant Meituan presented its quarterly results, and grocery deliveries were an important part of the overall narrative, as the company discussed how they’re investing heavily in food delivery infrastructure, to enable the business in less-developed regions of the country. Investors were happy with this, and the company’s shares jumped +11% after the announcements. Of course, the impressive numbers for Meituan’s other businesses might also have helped with that… (WSJ)
All commerce is becoming e-commerce. Facebook is working to enable this: Meanwhile, in the realm of “general” e-commerce, Facebook seems to agree with investors on the sustainability of the massive shift to digital retail that has happened during the pandemic. Furthermore, they believe that all retail companies have to accelerate their shift to digital… or die. So they see this as a big opportunity for them, as enablers. At the annual F8 event for developers, which happened this week in a virtual format, Facebook presented many innovations using WhatsApp or Instagram, aiming to facilitate retailers the digital interaction with their customers (Bloomberg)
Digital identity is also seen as a key element for the future. The EU just made a move to control this: The EU presented its “official” digital wallet on Wednesday. This is apparently very similar to Apple’s own iOS wallet, with the ability to store payment instruments and official documents, and with options for users to identify themselves through fingerprints or retina scanning. The EU views it as a much needed tool for post-pandemic life, so they seem also inclined to believe that the future will be different, and some of the changes we’ve seen are irreversible (FT)
Zoom is increasingly looking like a sustainable business. Remote working also seems to be here to stay, at least through “hybrid office” arrangements. And Zoom, one of the key beneficiaries of remote working, confirmed this week that they are in good shape. They presented their 1Q21 results, beating revenue expectations (3x vs. 1Q20, to $1bn per quarter) and giving an ambitious guidance for the next quarter. Investors are monitoring sales to large customers, which concentrate most of the paid subscriptions, and also the market share vs. Teams, which Microsoft offers as a (free) value-added component to its existing bundles. But for now, Zoom’s position looks solid (Bloomberg)(WSJ)
Other things look more uncertain: This week, expectations were lowered on the “disruption” of the car industry
Electric Vehicles might not be a revolution, after all: Surprisingly, after having been one of the key themes at the start of 2021, and probably the #1 target for “exuberant” SPACs, Electric-Vehicle stocks have massively underperformed those of incumbent car companies (-15% in the last 3 months for 19 EV specialists vs. +11% for the 17 largest non-Chinese incumbents). Analysts attribute this to the value of scale, increasingly significant also in the electric car space, because batteries are becoming a scarce resource and bigger car manufacturers are expected to get better economics for them (WSJ)
Self-driving cars might still be (very) far away: Five years ago some pundits were announcing the almost immediate arrival of self-driving cars that were going to change cities, and the way we move through them, forever. But, as some Artificial Intelligence academics had already forecasted, this has not happened. A sense of realism has now started to expand in the industry, and there are even some researchers who say that “perhaps decades” will have to pass before we see anything like that. Their argument is that fully autonomous vehicles would require something very close to “General AI”, a promise much beyond what deep neural networks can deliver for now. Even those who remain more optimistic are now thinking on initial applications based on controlled or “restricted” scenarios (e.g. airport shuttles on ad-hoc lanes, or long-distance trucks in well defined road routes) (WSJ)
The big regulatory battle: content moderation, competition, ethics
This week Facebook decided to ban Trump’s account for 2 years, and there was a big debate:
Should a private company have this kind of power? As their “oversight board” had suggested a few weeks before, Facebook has revised the previously indefinite suspension of Donald Trump’s account. This was part of an overall review of the company’s content moderation policies, also aligned with what the oversight board had advised. The result was that Trump’s messages on January were classified as one of the most serious potential offenses that the new framework contemplates, and this led the company to extend the ban for at least 2 years. As expected, this increased the previously existing debate on why tech companies should be making these moderation decisions. In Florida, the state has passed a law enabling citizens to sue tech companies for things like these. And elsewhere, many people claim that it should be official institutions, controlled by democratic tools, rather than private companies, who do this (FT)
OK, but what are the implications of more “democratic control”? That sounds good, of course. But all this has a reminiscence of the times when the press was presented as an independent “fourth estate”. In practice, if social media gets to be controlled by political institutions, then it will be immediately invalidated as a “balance” to counter the potential excesses of these same institutions (e.g. Trump’s America…) An extreme example is the case of authoritarian countries, where governments control all the institutions, and are now on the way to take control of social media as well. This week we learned that Nigeria has blocked Twitter from the country’s mobile networks, after the company decided to delete a post by the country’s President, which many had interpreted as an apology of political violence. Then, we also read a discussion at Bloomberg, about the need to limit what authoritarian governments can do with the internet, e.g. by banning exports of surveillance technologies. So, as often happens with these “political” solutions, there are risks that what initially looks like reasonable “control” can degenerate into something worse (FT)(Bloomberg)
Paradoxically, in this case the company is also being accused of trying to please democratic institutions… On top of all that, the paradox here is that Facebook is being criticized precisely because the company’s decisions seem to follow “political threats and directives”. So at the end of the day it is not clear that decisions made by the American political institutions, now controlled by the Democrats, would be much different. So to some extent this all looks like a formal, spurious debate (WSJ)
At the end this all looks like a competition issue: An opinion article at the FT this week, before the announcement of the Facebook’s decision, identified the application of free speech principles to the internet, on one side, and the risk of anti-competitive behavior by internet giants, on the other, as two key elements that regulators need to look at when facing Big Tech’s activities. And the two aspects are linked, as we can also see in the Facebook vs. Trump case. All the debate seems to be based on the assumption by many that Facebook is effectively a monopoly, or an oligopoly together with Twitter and a few more. If there is effective competition, removing Trump’s account from one platform doesn’t limit his freedom of speech, as he could then go to an alternative platform, or create one. So probably the right way to look at this is through regulators removing any potential bottlenecks or barriers to competition, if there were any. This article mentions (of course) the accumulation of users’ personal data. Yes, there could be other approaches, beyond regulation, and using technology, e.g. decentralized apps and blockchain, but that’s a different story… (FT)
Competition, rather than market concentration, could also be critical to develop AI in a sustainable way. A parallel, probably more interesting, debate in the business press this week was about the impact of the recent shift of advanced technology research, from academia / public domain to for-profit organizations. In the particular case of AI, some people claim that corporate control on R&D is already increasing the risks that non-responsible / non-ethical use cases of the technology are developed. Some even envision a “privatized version of China” in which a bunch of private companies know all about each citizen. This has been discussed in the context of the British NHS, and other healthcare institutions, having recently signed deals with AI companies to share medical records with them in order to build AI-based healthcare apps. Against the negative views, Demis Hassabis, the leading voice of Google’s DeepMind, says the relation with the parent company has been fruitful, and claims it is compatible with collaborative research with other institutions, that would guarantee maximum transparency. But again, competition can be very helpful to limit the power of specific companies and reduce the risks (FT)
This week we also learned that Europe and UK have started antitrust investigations about Facebook. Regarding competition, and Facebook, there were more news this week. The EU and the UK have, independently by simultaneously, launched antitrust investigations on the company’s use of customer data to dominate core markets like digital advertising. The probes will look at how Facebook uses the data, which the company collects also from some of its direct competitors (FT)
The EU has said they will focus their antitrust efforts on the “Big 5” tech giants: In the case of the EU, this is a first step in the new approach that the region’s regulators have decided to follow regarding the digital economy. This week the Financial Times discussed the opinions of one of the authors of the recently approved legislation about limiting the influence of “gatekeepers” to shape competition in their favor. According to him, the “biggest problems” for competition are the top 5 “Big Tech” companies, i.e. Apple, Microsoft, Amazon, Google and Facebook. Apparently, the thresholds to define a “gatekeeper” have been defined in a way that leads almost exclusively to these five firms (FT)
Meanwhile, in the smartphone world, Google follows Apple and turns privacy into a competitive / differential asset: Finally, as a testimony of the frequent case when regulation is made irrelevant by actual (but initially) unexpected competitive moves by different players, this week we saw how Google is following Apple with respect to privacy protection in the smartphones. Android will further facilitate users to opt-out from third party apps’ tracking of what they do with their smartphones, in a very similar way to what Apple already introduced for iOS. Yes, this can help Google, as owner of the operating system, while also a leading player in digital advertising, and even Facebook, as owners of some the apps where user attention is focused. But it looks like an effective step in the right direction(FT)
Investors: confident on digital connectivity, more cautious on crypto currencies
Money keeps flowing to cover the digital “connectivity gap”
The German government will subsidize connections to Elon Musk’s Starlink: The German government is trying to improve the quality of connectivity across the country. This is quite a challenge, given the dispersion of the population, and the lack of a previous duct infrastructure that could be leveraged for deployments (unlike what happened in Spain). All this is making the effort very expensive, and even more in some areas of the country. So any innovative solution is welcome. This week we had more news about this, with the announcement that the government will subsidize the connection expenses to the satellite-based internet access network that Elon Musk is buying through Starlink, one of his companies. The plan is to cover the approx. €500 of setup costs that users need to pay upfront. Germany is one of the first markets where Starlink is starting to provide its service, so let’s see how it goes (WSJ)
In the UK, a race to deploy fiber has started: Fiber deployments in the UK may start to accelerate, at least according to what we heard this week. First, the newly merged Virgin Media O2 made a public commitment to attack BT, both commercially (through convergent bundles) and with a competitive fiber access network. The company is apparently looking for external investors to co-fund a deployment that could add up to 8m homes across the country, and has decided to directly compete with BT also as a wholesale access provider (probably a wise move, given the need of economies of scale for the project to be profitable). At almost the same time, LetterOne, a fund controlled by a Russian billionaire, also announced a plan to invest £1bn to build a regional British broadband network to compete with BT for “post-Covid home workers”, through Upp, a new company they have created. Finally, BT has recently announced they were expanding their plans to cover up to 25m homes with fiber-to-the-home by 2025. For some analysts, significant market consolidation needs to happen before that (FT)(FT2)(FT3)
Several companies are working to improve digital infrastructures in Africa: Internet traffic is growing faster in Africa than almost anywhere else in the world, but the continent is still largely dependent on infrastructure hosted elsewhere, with France (Marseille) playing a very significant role, e.g. including Netflix servers used by African customers, connected through subsea cables. As a clear indicator of the situation, Africa only has 1% of the world data center capacity. Of course, this is a limit for user experience and further growth, so many investors are seeing the rationale to fund the deployment of local infrastructures in the region. Several facilities are now being built, by companies including Teraco, the leading local data center operator, and Actis, a private equity fund that has a $250m budget to build data centers (FT)
Crypto currencies’ uncertainties have not decreased
China is determined to control Bitcoin, and this is increasing global uncertainty on crypto: The blow to crypto currencies’ expectations last month, when the Chinese authorities publicly expressed their hostility to the use of Bitcoin for economic transactions in China, has now been amplified, as investors are seeing how the country’s war on crypto is expanding. The latest developments are related to Bitcoin mining, an activity that Chinese companies like Bitmain have been leading, often building ad hoc computing facilities close to energy sources. The government is pushing against these activities, that they see as a potential obstacle for the country’s delivering on its climate and coal usage reduction goals. Interestingly, as the article says, Bitcoin, that used to be seen as a way to decouple currency from political authorities, is being significantly disrupted by the quintessential political authority (the Chinese Communist Party) (WSJ)
The crypto civil war: Will Bitcoin be dethroned? Another challenge for Bitcoin is coming through competition from other cryptocurrencies, like Ether, the token associated to the Ethereum blockchain technology. Ether is still much smaller than Bitcoin (which has a market value more than 2x bigger) but the gap is narrowing. Bitcoin has suffered much more impact from the recent bearish crypto market, as it is more dependent on the “proof of work” algorithm, which is every consuming and (through mining) very dependent on China. Meanwhile, Ethereum is a more flexible blockchain, that could accommodate alternatives to mining, e.g. through “proof of stake”. It is still an open race, and Bitcoin is a much stronger brand, so let’s see what happens (Bloomberg)
Volatility remains a key issue. Ideas proliferate to make crypto more stable: Volatility, tougher with mining and energy consumption, is one of the key arguments that have recently been used against crypto currencies. One of the ways to address this problem is through “stable coins”, tokens linked to actual, “physical world” assets, a mechanism that reduces volatility, because the value of the underlying asset limits fluctuations in the price of the digital token. However, there are also challenges. Stable coins, like other crypto currencies, can be used for illicit activities, so governments tend to mistrust them. In addition to that, Central Banks planning to issue their own digital currencies may oppose proposals to have tokens linked to fiat money (FT)