Bitcoins everywhere
And also: more signs of a "digital-first" way of life; Microsoft building the AI fabric for e-Health, and other infrastructure news; antitrust wars in the US and China, and other tech regulation news
Bitcoins for everyone
And more signs of life becoming “digital by default”
Coinbase: retail investors get exposure to Bitcoin
The Coinbase IPO is one more step ahead for Bitcoin towards the mass market: It started with a sky high valuation of close to $100bn, justified by very healthy profits for a startup (approx. $800m expected for 1Q21, more than 2x vs. 1Q20). The company is a Bitcoin exchange with 56m verified users, that gets money through fees charged for every transaction. Beyond the business model, everyone sees this as one more step towards the normalization of Bitcoin, as a “mass market resource”. And there have even been comparisons to what Netscape did for the web, 26 years ago. Some also point to the IPO as something that could be perceived as an implicit acceptance by financial regulators of Coinbase’s business as something based on “solid ground” (Bloomberg)(FT)
The result of the IPO reduced the euphoria, but positive sentiment remains: Finally, the IPO was not so successful as some people expected, and the valuation fell to approx. $65bn. Investors are concerned by risks of a more aggressive regulation, now that the company is in the public space, and under the radar. Also, the intrinsic volatility of Bitcoin creates a feeling of risk on what is just a space for trading cryptocurrencies. And finally figures like the current Fed chair are sending negative messages about the future of Bitcoin. But the overall sentiment remains positive, with Coinbase seen as a pioneer in this activity, compared with other “category leaders” like Tesla, Zoom or Snowflake, and with the stock positioned as a way for the masses to expose to the crypto boom (FT)(Bloomberg)
Recent corporate finance activity with Bitcoin is also a driver for optimism: This week we had one more example, with MicroStrategy, a provider of business analytics software, announcing they will start to pay four of its directors in Bitcoin. The company had already committed to invest part of their cash assets into Bitcoins (Bloomberg)
Grocery deliveries start to target “convenience shopping”
There is a boom of ultrafast grocery delivery services: The Financial Times discussed this week the proliferation of startups looking to capture the next growth wave in grocery deliveries. These companies assume that the “large weekly shopping” that used to happen at malls or big supermarkets is already on the way to be replaced by the existing digital apps, like Ocado in the UK, or Amazon Prime in other countries. But, like weekly visits to the mall, the dominant online supermarkets require some planning in advance. So what this new wave of companies perceive as an opportunity is the remaining space of “immediate needs” currently covered by local convenience stores, where people go last-minute, to do unplanned purchases. This is a quite a significant trend these days in Europe, driven (as many other digital things) by the lockdowns. The European market for this segment is large ($2tn according to some estimates) and lots of startups are appearing, including Getir (originally from Turkey), Gorillas (from Germany), GoPuff or Jiffy, which promise to deliver stuff (“from detergent to dog food, crisps to condoms”) in less than 10min. Interestingly, to do this, the new startups are diverging from the initial (and intuitively more appropriate) “asset light” model that relies on “gig-workers” shopping at existing supermarkets, which e.g. Instacart is still using in the US. The new trend seems to be the creation of “dark supermarkets” or local “micro-fulfillment centers” where the layout is optimized to maximize speed. All this seems promising, but as some voices are already warning, there might be too many companies targeting the same space, including some of the existing delivery apps (like Deliveroo in the UK or Glovo in Spain), so some of them could get “a brutal education” (FT)
Meanwhile, “taxi-apps” keep moving to become “super-apps”, including deliveries: This week we learned about another “record-breaking” SPAC merger, even if the momentum for these things seems to be slowing down. The Singapore ride-hailing app Grab has announced a merger deal with Altimeter, a Silicon Valley-based SPAC, which is valuing the company at $40bn (not bad). Under pressure from consumer trends in the pandemic, Grab has been expanding its business model to include (fast growing) food deliveries, and also digital payments, apparently looking to become the “Tencent of South East Asia” (or something like that). There is a massive interest from investors in South East Asia, as one of the fastest growing regions for digital services globally, with large markets like Indonesia as a huge opportunity. A recent report by Bain in collaboration with Google and Temasek, forecasts that online spending in the region will triple from now to 2025, to reach $300bn (WSJ)(WSJ2)
Uber says they’re having record demand figures: Of course, and consistently with the trends we’ve just mentioned, this includes food-deliveries, with the business having more than doubled in just one year. But the core ride-hailing business looks to be recovering too, and March 2021 was the best month since last year, so Uber may finally be seeing the light at the end of the pandemic. A risk we’ve already commented here are the challenges that Uber is finding to recruit drivers, with competition from fast-delivery apps having massively increased in the last few months (WSJ)
Online education is here to stay
In the US, there are signs that online schools will outlast the pandemic: The NY Times claims that demand for virtual schools has soared in the US, with some groups of students, parents and teachers seeing it as the preferred mode. This sounds pretty consistent with what we’re seeing in other sectors. The “digital-first’ mode can have disadvantages vs. the traditional, “physical-first” approach, but it is possibly the most efficient way to address some gaps and expand (or in some cases maintain) services to the mass market. So in the long term it may happen that whoever wants to have a (potentially better) face to face experience will end up paying a prime for it. For now, we’re seeing that the US government has started to tie public funding to specific plans to start online schools (NYTimes)
Business travel won’t be the same anytime soon
Companies’ appetite to go back to business travel is limited: Christopher Mims from the WSJ tells us this week about a couple of American companies that have discovered the advantages that travel restrictions from the pandemic have had on productivity. Probably all of use have experienced that many activities that we thought were not possible without physical presence, and business trips, are really easy to do through virtual meetings. This could have a significant impact on the levels of business travel after the COVID crisis. The CEO of Delta (a US airline) is projecting that only 70% of the pre-pandemic volume of business trips will be recovered by 2023, and the WSJ had already published an analysis that projected a long-term drop of between 19% and 36% (WSJ)
Digital games are expected to absorb a massive amount of people’s free time
Epic Games just completed a $1bn funding round, at a $29bn valuation: The Fortnite developer has almost doubled its value in just 8 months. Apart from the social features of Fortnite itself, which have turned the video game into a vehicle for social communication for kids, the company also owns the Unreal Engine, a suite of software tools for developing video games and producing digital effects for TV shows, and a very promising platform to build “digital life” experiences. Apart from all this, video games in particular are in a very good shape, with consumer spending on game software having increased +20% in 2020, to reach $175bn, and with lots of Venture Capital cash flowing into video game startups (WSJ)
AppLovin, another video game company, had its IPO this week, also with a $29bn valuation: This looks like a great business for private equity fund KKR, which acquired a controlling stake at a $2bn valuation (15x returns don’t really look like a bad deal). AppLovin owns several successful game franchises and offers marketing software to other developers. In this case, the IPO brought a significant correction, with shares falling -18%, so the resulting value was $23bn. In part, the penalty came due to investor concerns on the ownership structure of the company (which is using two classes of shares to ensure that the founder and KKR remain in control) (FT)(Bloomberg)
Digital-first services could scale in emerging economies, and then disrupt advanced markets
Digitalization is starting in emerging economies: The digital revolution could be the catalyst that emerging economies needed, according to this opinion piece from the FT this week. Emerging nations don’t have to deal with (so many) legacy infrastructures, and this can be an advantage to evolve into digital. E-commerce is seen as a massive opportunity, and local versions of Amazon are growing fast in Russia, Poland, Latin America or South East Asia. On top of that, digital payments have a clear opportunity in markets with lower banking penetration, like Africa (Kenya is a global benchmark for this). All this points to an interesting potential dynamics for the next few years, when emerging countries’ current gaps in basic services like schools, hospitals and banks, could rapidly be addressed with digital-first services, and these could then turn into disruptive forces in more advance markets, with more resistance to change (FT)
Microsoft is spending money to build the AI fabric of e-Health
And other news about building infrastructures for the future
Microsoft announced the acquisition of Nuance, in a big bet on Healthcare AI tech: Microsoft is spending quite a lot of money ($16bn) to buy Nuance, the company that developed Siri’s speech recognition engine and that has been recently pivoting into healthcare services. Nuance is using its speech recognition technology to improve doctors’ ability to analyze patients’ comments during telehealth appointments, by digitizing the conversations and then using AI to analyze them and e.g. link words with specific conditions or treatments. Nuance’s systems are already used in more than 75% US hospitals. Microsoft wants to integrate these technologies with Teams (where many of these appointments are already happening). The investment case for Microsoft is further supported by the opportunity to reinforce its cloud value proposition, with services specifically targeting healthcare organizations, which have been relatively slow in moving to the cloud. Looking at recent moves by Amazon, Google or even Apple, it is easy to see how all these Big Tech companies see health as a key opportunity (Bloomberg)(WSJ)
The first reactions to the deal: makes sense, but it is expensive. Microsoft is paying a +23% premium for Nuance, and analysts see this as a confirmation of a pattern, with the company behaving like some sort of Real Madrid of the digital corporate world, and overpaying for the opportunities, even if they make sense (like in this case). At least the Nuance deal is consistent with Microsoft’s core business, focused on the enterprise segment and the cloud. A potential acquisition of TikTok US, rumored last summer, when Trump was looking for buyers, or of Pinterest, that has also been rumored (and would have costed more than $50bn) would probably have been much worse. What is clear is that there is a significant appetite for acquisitons at Microsoft, which is looking for the engines for the next wave of growth (WSJ)(WSJ2)
A new Chinese Big Tech is on the way
Amid regulatory pressures on Alibaba and Tencent, ByteDance becomes a third Chinese Big Tech platform: ByteDance, the owner of TikTok, Douyin (the Chinese version of TikTok) and Toutiao (the innovative news app that has massively succeeded in China), is preparing its IPO. And an internal memo has been leaked (probably on purpose…) with very optimistic projections about the future, including +42% advertising revenue growth this year, to $40bn, and an ambition to triple the size of the e-commerce business. Douyin is targeting 680m daily active users (+60m vs. March 2021). In summary, if ByteDance delivers on these ambitions, it would have managed to grow in nine years as much as Facebook did in 13 (Bloomberg)
Nvidia wants to build the future computing infrastructure, by leading the semiconductor market
Nvidia challenges Intel but this could put at risk its Arm acquisition: Nvidia had an analyst day last week, in which they presented its plan to build CPU (general purpose) chips. Nvidia dominates the GPU / graphic unit space, which has emerged as a high priority due to how well these chips are adapted to run AI algorithms. But the company wants more, and now they’re on collision course with Intel, that has traditionally dominated the CPU market. Nvidia presented its new Grace CPU, which will go on sale in 2023, and that targets the data center segment, where Intel / x86 still reigns. The risk that many people see here is the potential conflict with the Arm acquisition under way, as Arm has up to now been a provider of “neutral” architectures that Nvidia and companies like Amazon, Google or Apple have used to design their own chips. Now, with the move to datacenters, Nvidia could potentially compete with some of these large Arm customers that are developing their own CPUs. The company has denied any conflict, arguing that they’re targeting only the high end market of advanced AI applications. But it looks just a question of time (FT)(WSJ)
In other semiconductor news:
TSMC confirms investments of $30bn this year, to expand capacity: The company has already spent $8.8bn in 1Q21, and is now raising its guidance for FY21 by +$2bn. All points to a boom in demand that requires even more capacity, because the company also increased its revenue guidance, now targeting +20% year-on-year growth. These look like good news for all the industries now affected by chip shortages, but this actually depends on who we’re talking about. The capacity expansion is expected to be more focused on the advanced chips which give higher margins to TSMC, so lower-tier components for e.g. the car manufacturing industry might have to deal with shortages for some time. Chips for smartphones already represent 45% of TSMAC’s revenues, and 5nm and 7nm designs (the most advanced ones) contribute 14% and 35% respectively (Bloomberg)
Chip shortages are not expected to affect Big Tech companies: Partially because of the priority they have for TSMC and other chip manufacturers, the world’s largest tech companies are not expected to suffer from the current semiconductor shortage, at least in the short term. The health of the Big Tech platforms look great, and according to consensus in 1Q21 they would expect to announce an average revenue growth of +29% yoy (on a combined sales figure of almost $300bn) (WSJ)
Biden is committing money to solve the semiconductor shortage: The President this week read a letter from 23 senators and 42 House representatives backing his proposal to spend $50bn in semiconductor manufacturing and research. Tech industry CEOs are (obviously) also supporting the initiative. TSMC will be one of the beneficiaries, in exchange for their commitment to build a plant in Arizona this year (Bloomberg)
High speed trading is an opportunity for specialized chips: Rebellions, a South Korean startup, is planning to build a microchip that will speed up transactions driven by automatic trading systems by a few microseconds. This is achieved by the ability to accelerate the execution of AI algorithms, so this could eventually have other applications too. TSMC (who else?) will manufacture the chip(Bloomberg)
Antitrust pressure grows in the US and China
And other stories about the Techlash and the Second Cold War
Amazon, under pressure for linking business lines in negotiations with partners: The WSJ published this long report about how Amazon aggressively negotiates with partners, using the company’s strong position across several different markets, including e-commerce, advertising, streaming content and cloud computing, to get better deals. An example is the case of Ecobee, a smart-thermostat that works with Alexa, that was asked to share data from the device with Amazon, including information about the temperature of a user’s home, whether the doors are locked and when the user last opened the garage doors. In the negotiation, Amazon apparently mentioned that denying access to these data could affect Ecobee’s ability to sell the device through Amazon’s site. Amazon has already been accused of having “monopoly power” by the House Antitrust Subcommittee, and regulatory pressure for this could increase in the coming months (WSJ)
Meanwhile, new revelations have been published on Google’s practices in digital advertising: During years, Google has apparently been operating a secret program that exploited Google’s strong position at both sides of the digital advertising value chain. Google is both an operator of a leading ad exchange and a representative of buyers (advertisers) and sellers (content companies) in the exchange. As a consequence, the company has access to data from the exchange, and also from publishers’ ad servers, which can be used to offer advertisers guidance on how to bid, a key advantage vs competitors. All this has been included in a Texas antitrust lawsuit against the company. Google claims that the lawsuit “misrepresents many aspects of their adtech business”. Let’s see what happens, but it looks like if pressure could increase in the coming months (WSJ)
In China, investors think that the antitrust storm has ended for Alibaba: After the $2.8bn fine, equivalent to 4% of the company’s domestic revenues, the company’s shares have risen sharply, adding approx. $40bn to Alibaba’s market cap. The first interpretation is that it could have been worse, because the Chinese law sets a maximum penalty of 10% of the revenues. Also, this is seen as a the end of the process for Alibaba. However, as the WSJ points out, the regulatory environment has become more dangerous for Chinese Big Tech companies, and Alibaba (and its investors) should probably see this as “the end of the beginning”, rather than the end (FT)(WSJ)
Meanwhile, Ant Group tries to avoid further regulatory actions: Ant Group, the other big venture led by Jack Ma in China, is trying to address all the demands from regulators and become a “good Chinese citizen” to avoid further actions. This week the company declared its intentions to apply to become a financial holding company, and be submitted to the standard Chinese financial regulations, including the supervision by China’s Central Bank. This is part of the “comprehensive, viable rectification plan” that the company is discussing with regulators. All this has already translated into a loss of value for the company, that has passed from preparing an IPO at an implicit valuation of more than $300bn, to a current estimated value of about $230bn. Maybe not so bad, if it can be maintained at this level (WSJ)(FT)
All Chinese Big Tech companies are accepting the regulator’s rules, but the end game is still unclear : More than 30 of China’s largest tech firms have made public commitments to comply with the country’s antitrust regulations. The group includes ByteDance, JD.com, and Pinduoduo, apart from the “usual suspects” Alibaba and Tencent. So peace may be on the way, in the short term. But again, this looks to be freedom under surveillance, and there is a latent threat that may affect future growth (WSJ)
Other news in tech regulation
Bezos is worried by the working conditions of his employees: We already discussed last week. The battle with unions at Amazon’s plant in Bessemer, Alabama, has been solved favorably for the company, with more votes against unionization. However, everyone sees this, and all the debates that surrounded the process, as the beginning of a longer fight. Bloomberg recommended this week that Amazon addressed some of the concerns that had been raised, e.g. in relation with black workers. And then, also this week, came Jeff Bezos’ annual letter to shareholders, which this year has put employees right at the front. Bezos textually says that they need “a better vision for how (they) create value to employees” (FT)(Bloomberg)(WSJ)
The European Union starts to act against “high risk” AI applications: Companies developing them could receive fines of up to 4% of their global revenue. The planned new rules include: (1) a full ban of systems the can be used to manipulate human behavior; (2) explicit authorizations will be required for face recognition systems; (3) specific inspections will be required for any application considered of “high risk”, including all that could endanger people’s safety, lives or fundamental rights; (4) some companies will be allowed to undertake self-assessments, while others will have to be evaluated by third parties; (5) the same rules will apply to local European companies and to foreign ones (Bloomberg)
Regulatory concerns are growing for cryptocurrencies: As a logical effect of their expansion to the mass market, regulators are increasingly interested in setting rules on how to operate with cryptocurrencies. The World Economic Forum’s blockchain expert said this week that financial regulators are “poised to intensify their efforts to regulate the sector” (Bloomberg)
People in Europe are worried about the privacy risks of a potential “Digital Euro”: in the future: A study from the European Central Bank shows that more than 40% of the 8,200 companies surveyed consider that keeping money transaction private is their highest priority with respect to a potential future ‘Digital Euro”. Interesting, as the ability to monitor transactions is precisely one of the incentives for governments to look at these technologies (FT)
A bipartisan effort is under way in the US to protect children vs. Big Tech: Both parties want to pass laws to limit social media companies’ ability to target product to under-16s, and in particular their capacity to capture, store and analyze these users’ private data. The companies argue that the apps developed for these segments offer extra protections, but critics suggest that they’re actually driven by profits (FT)
Pakistan shows (again) the risks of leaving content moderation in the hands of governments: Pakistan this week decided to block social media sites, as the government prepared to act against islamist activists that had been protesting against the results of the trial against the terrorists that killed the Charlie Hebdo journalists in 2015. Yes, this may be a good cause, but it still shows how governments are taking advantage of the opportunity to neutralize the potential “liberating” effect that social networks and the internet were expected to bring (FT)
Stories from the Second Cold War
(Local) manufacturing matters again: Governments globally are worried by the disruptions that both the geopolitical situation and the virus have created for the supply chains of almost everything. A series of (unfortunate) events have revealed the fragility of the international framework on which most advanced economies were relying . So now manufacturing has become a priority for everyone. Local manufacturing shifted to global for pure economic reasons, linked to workforce arbitrage, but the he good news are that new technologies, which improve efficiency through automation, can reduce the costs of local production, so as to enable the new transition with relatively few stress on consumer prices. A new study published by the McKinsey Global Institute this week analyzes the trend and shows how 16 out 30 manufacturing sectors analyzed in the US stand out for their strategic value (FT)
TSMC increasingly forced to choose between the US and China: The Taiwanese leader of chip manufacturing is facing a dilemma as a key supplier of both the Americans and the Chinese. The US authorities have already accused the company to supply chips to a Chinese supercomputing firm (Phytium) that is supposed to provide systems to the Chinese military, and in particular to support some efforts on strategic weapons, such as hypersonic missiles. An “easy” solution would be for TSMC to fully focus on the US market, which already represents 60% of its revenues (vs. 20% from China), but the Chinese market is growing much faster. Also, a cancellation of supplies to China could create a risk of backlash against other Taiwanese firms that are much more dependent on China (FT)
After banning Huawei, the UK asks telecom operators to use alternative network suppliers: The UK “vendor diversity task force” is preparing a report, sponsored by the government, which will make recommendations about the country’s 5G strategy. The FT revealed this week that among these there is the idea that “smaller” network vendors should provide 25% of the 5G equipment deployed by local operators. This would be at the expense of the “natural” winners of the Huawei ban, Ericsson and Nokia, and could benefit alternative technologies, like Open RAN (FT)