Rebuilding trust
And: The Second Cold War / Investors prefer the Cloud to Telecoms / Is the Cloud growth slowing down? / Other news from Big Tech
We need a “trust infrastructure” for digital networks
With the recent shift to e-commerce, the question of trust in digital networks is re-appearing. It happened again this week in the tech / business press. As platforms make possible the interaction between massive numbers of customers and massive numbers of suppliers, the need of mechanisms to “discover” what’s right or appropriate (for both sides) becomes evident. And there are two basic ways this is being addressed: (1) personalization / recommendation engines, powered by data analytics, and (2) social evaluations / recommendations, which help both sides of the platform trust the agents at the other side. This analysis at the FT looks at these “trust enabling” mechanisms and concludes that they work better if they are combined with some traditional or “institutional” control in the loop (FT)
New businesses are being created to fill (some of) the gaps: A completely different way to generate trust, e.g. in e-commerce sellers o in their products, is for customers to delay the actual payment until after they’ve actually tested the products. Klarna, a Swedish “Fintech” startup, is offering exactly this, taking factoring to the consumer segment, and they seem to be doing OK, with the tech-centric Private Equity fund SilverLake (hyperactive these days) having just invested $500m at a $10bn valuation (not bad at all…) (WSJ)
There is also a need to trust the infrastructure that makes transactions possible: Still in Sweden, policymakers are worried for the sudden “death of cash” that the pandemic has brought. Like almost all digital infrastructures, there is a feeling of increased fragility in the new context, because smartphone payments may be great, yes, but they are also more vulnerable to things like the need of active connectivity. The learning of all this: if our world shifts to digital, connectivity will become an (even more) critical infrastructure (Bloomberg)
Lack of trust is a driving engine for the Second Cold War
The TikTok affair reveals how difficult is to solve “trust issues” behind governments:
A decision was made last weekend about the sale of TikTok US: It looks like Oracle was the winner (vs. Microsoft), but this probably is linked to the sale finally having turned into something closer to a partnership, e.g. with no transfer of assets, according to initial reports. Most importantly, the deal will not include the sale of the video-feed algorithm. So we would be talking about a cloud infrastructure / hosting deal that will ensure that American citizens’ data will remain in the US. Some experts have commented that, if the White House accepted, this would prove that “the exercise was pure gift”, rather than a legitimate security / trust concern (WSJ)
Trump is apparently pushing for control of TikTok US by American investors, as the only way to ensure trust in the company’s operations. The rationale is that if control is kept in Chinese hands, the concerns on potential access by the Chinese government to US user data will remain. ByteDance is currently 40%-owned by US investors like Sequoia or General Atlantic, but decision making is still in the Chinese side. A possible way out of this mess would be an IPO (WSJ)
ByteDance is offering Oracle to review TikTok’s source code, but this could be not such a big thing: In this scenario Oracle will be able to confirm that data from the app isn’t going to China, but (1) some analysts have commented that implementing these measures could hurt the app’s performance or its profitability, and (2) others argue that this shows that ByteDance doesn’t actually need TikTok US (or any of the other TikTok international operations) to survive, and could leave the product, and the algorithms behind, stagnate, while they develop more advanced products for the domestic market (WSJ)(Bloomberg)
While the deal is clarified, the app’s downloads are starting to be blocked: We’ve already crossed the deadline, and the ban for downloads of TikTok (and Tencent’s WeChat) in the US has started this Sunday. US companies can still provide web hosting services to TikTok (in its current shape) until Nov 12, turning this into the effective deadline for using the app (WSJ)
Then, the Tencent affair could be even more complex:
WeChat has effectively been banned this weekend: Unlike TikTok, WeChat won’t be able to use local web hosting services in the US after this Sunday, so the performance of the app may decline drastically and people would effectively have to stop using it. This happens after some user groups had requested the courts to halt Trump’s order to ban the service (WSJ)(Bloomberg)
But the Tencent story doesn’t end with WeChat. There are games too (including Fortnite): Many people ignore that Tencent is the world’s leader in video games, and that it owns Riot (the US-based game developer behind the massively popular “League of Legends”) and has a 40% stake in Epic Games (the owner of Fortnite). Consistently with this, this week the Trump administration asked American gaming companies to provide information about their data-security protocols involving Tencent. Let’s see where this takes us (Bloomberg)
Lots of trust issues also around the acquisition of Arm by Nvidia:
This week we had full confirmation of the $40bn acquisition of Arm by Nvidia, and everyone saw this as a big deal for Nvidia, e.g. Bloomberg journalists claimed that it could be the “final piece Nvidia needs to dominate the industry for a generation” (Bloomberg)
But this could impact Arm, as customers may lose trust in them as a “neutral” player: As we said last week, Nvidia could indeed benefit from finally having a (very) strong position in general-purpose processors, apart from getting substantial royalty fees. But the risk is that current Arm customers like Samsung, Apple and Qualcomm might now be reluctant to maintain their relationships, as their provider will be owned by one of their biggest competitors (WSJ)
For this reason, there are also concerns that the Chinese regulators won’t approve the deal: Arm falling in the hands of an American company is bad news for China, where the local semiconductor industry regularly buys Arm’s designs. So Chinese regulators are uneasy with this deal. You may think that Nvidia and Arm could proceed with the plan even if the Chinese don’t approve the acquisition, but there are significant risks for both companies, which have substantial sales in China (FT)
Investors prefer the Cloud (and Videogames) rather than Telecoms
European telecom operators, with low valuations, could be targets of Private Equity funds: Demand for connectivity may have grown significantly in many European markets during the COVID crisis, but the value of listed European telecom operators has dropped almost -20% since last year. Investors are worried by high debt, excessive corporate structures and poor operational performance. This climate looks propitious for Private Equity funds to enter the market and catalyze a much needed turnaround. They’ve started by acquiring infrastructure assets, but the next step could be full operators (there are rumors about BT, Telia and KPN) (FT)
This is creating concerns on Europe falling behind in 5G: The European Round Table, a forum of 55 members, has just published an industry report claiming for “urgent action” to address the gap that has been created vs. Asia and the US. There are regulatory (e.g. not sufficient spectrum allocated yet in many European markets) and historical issues (e.g. low penetration of 4G, overall), but lack of confidence from investors is also a major barrier (WSJ)
Meanwhile, (fast growing) cloud-centric stocks are getting hot: The IPO of Snowflake, the “data warehouse in the cloud” company that captured everyone’s attention after the announcement of a $250m investment by Warren Buffet, has been a big success. In the first day of trading, the market cap raised to $70.4bn, not bad for a company that had been valued at $12.4bn in a funding round last February. This is also triple what the company initially targeted for the IPO, just last week, and shows how avid for fast growing companies is the stock market these days (WSJ)
And some of the winners seem to be the usual suspects… Yes, it may seem natural, and even healthy, that fast growing companies capture investors’ money. But the fact that this kind of IPOs create an avalanche of new wealth for an “elite” of notoriously wealthy people, like M Zuckerberg (Facebook), R Hoffman (LinkedIn) or J Dorsey (Twitter) -all of them private investors in Snowflake- probably doesn’t make these things too popular (Bloomberg)
Video games reveal to be another hot space for IPOs: Another very successful IPO this week was the public debut of Unity Software, a provider of an “operating system” for video game developers, which some expect to be a future platform for many other things. The company had already increased the initial price from the $34-$42 range to $44-$48, but even after that the market surpassed the expectations and the stock rose to $76.79 after the first trading day, lifting the valuation to more than $20bn (FT)
Private Equity is increasingly looking at VC opportunities, looking for growth: KKR is one of the companies looking to make acquisitions in the European telecom space, but they have also profited from the massive growth of TikTok, as a reference shareholder of ByteDance (the parent company). This shows an example of the pattern of Private Equity funds entering spaces previously reserved to VCs. The shift implies a deep change in the investment skills required, but it can also be massively profitable. Asian markets (vs. Western ones, e.g. Silicon Valley) seem more open to this. Still, the example of SoftBank shows that some nasty surprises could happen to investors with this strategy (FT)
But the Cloud might be showing the first signs of deceleration
In need of new growth sources, hyper scale cloud providers focus on startups: Partnering with startups has turned into a key competitive weapon in the cloud infrastructure market, and both Microsoft Azure and Amazon AWS are targeting small but fast-growing companies, and offering them “business acceleration” services, as an incentive to sign the contracts to host their software (WSJ)
Microsoft is also looking for opportunities beyond the cloud: Microsoft, one of the companies that have enjoyed a massive revenue growth driven by cloud services, is now looking for other opportunities that can help them keep the momentum. Of course, Azure is still an amazing business, which is still growing more than +40% per year, but Microsoft is so large that keeping a double digit growth rate is quite a challenge anyway. TikTok might have been a way to solve the issue, but as we get more information about the deal with Oracle, it looks increasingly clear that Microsoft has not lost so much with that (WSJ)
In other news from the Big Tech world…
Netflix becomes the largest Hollywood “Major”: Content may be king (or not) but technology has changed it forever. Netflix is already the leading spender in content production globally, with a projected investment of $13.6bn in 2020 (+$3bn vs. last year). This is higher than ViacomCBS ($13.5bn), Disney ($11bn) or NBCUniversal ($9.6bn). Now, welcome to all the hot discussions about how sustainable this is… (FT)
On a related topic, AT&T’s new HBO Max service might be losing steam… AT&T’s WarnerMedia was seen as one of the large new players potentially challenging Netflix in the video streaming space. The company has tried to capitalize their premium HBO asset by launching HBO Max months ago, but unlike Disney+, and even in the middle of the coronavirus lockdowns, that have accelerated demand, HBO Max doesn’t seem to be growing so fast. This might explain that, only months after kickoff, they’re already tweaking the offer, and even considering a free product subsidized with ads (Bloomberg)
The antitrust noise keeps getting louder: This week it was about Facebook, with the FTC reportedly preparing an antitrust lawsuit against the company, linked to the acquisitions of Instagram and WhatsApp, which are seen as deals that helped the company neutralize emerging competitors (WSJ)
But there are also sights of “light at the end of the (regulatory) tunnel” for Big Techs: After imposing fines to Alphabet for almost $10bn in three previous antitrust cases, the EU said this week that Google’e efforts to provide more choice in shopping search (one of the key issues addressed by antitrust) had lead to “good, positive developments” (Bloomberg)
Apple’s traditional September event was less traditional than ever: Apple’s event last Tuesday was far from what it has been all these recent years, because for the first time it didn't include the presentation of the new model of the company’s flagship product, the iPhone, which this year has been delayed until October, affected by delays in the 5G hardware. Instead, we had announcements of a new Apple Watch and a new iPad Air that for many people implies a change in the company traditional “Less is More” approach to commercial offers, as there are now 3 different iPad models, each with different options… (WSJ)