Reshaping finance
And also: The Second Cold War / Preparing for a new world (with big corporate moves) / Big Tech regulation getting closer
Digital technologies have started to reshape finance
Finance (pushed by e-commerce) is becoming “the new telecoms”?: Value in the financial industry is moving to payment firms and fintech companies, and the trend has recently accelerated with the pandemic and the rapid evolution of retail into digital. All this is happening at the expense of traditional banks, that are being forced to play a role of enablers from a set of lower margin, capital intensive “core banking” activities, which are also heavily regulated. This looks parallel to what has already happened with the internet, where network infrastructure (provided by telecom operators) plays a similar “enabling” role to money (provided by banks) in finance, and then innovative app providers create value “over the top” of this enabler. So, extrapolating, we would expect a continuous expansion in the scope of fintech apps, beyond pure payments. And possibly also an emerging need of new regulations for the industry, to keep it sustainable (just like what we’re starting to see in telecoms) (TheEconomist)
The regulatory debate about fintech has actually started already, as adoption becomes massive: Only in the UK, more than half of the population have used a new form of payment during the COVID lockdowns, and more than 20% tried online shopping for the first time. So now we seem to have both mature technologies and customer demand to make radical change possible. The problem is that this change would be able to circumvent many of the current customer-protection rules that governments have created in the past. So the debate has started about how should regulators address this. Some think that a light-touch approach would be the best solution, but others point to recent scandals, and suggest e.g. that central banks should create their own, “official” digital currencies, to eventually substitute current bank notes (FT)
As one would expect, digital payment apps are also becoming a focal point for the Second Cold War: We’ve already commented here about the plans of Ant Financial, an Alibaba subsidiary, to launch an IPO in Hong Kong and Shanghai, aiming to raise $35bn, on a valuation higher than $250bn. Now a cloud of uncertainty has started to form over this, and rumors are growing that the Trump administration is exploring national security restrictions on Chinese electronic payment platforms like Ant and Tencent, in a similar move to what they’ve done with Huawei, TikTok and WeChat. Even if Ant’s current revenues are coming almost exclusively (95%) from China, this could hurt future global expansion expectations, and the valuation (FT)
The Second Cold War might lead to a “big global technology uncoupling”
The world may divide in 2 blocks of technology standards, led by the US and China, with Europe “in a difficult position”: This week the Financial Times published a series of articles about the “New Cold War” between the US and China, and its potential implications for the world of technology. Industry standards are a key component of how technology is built, and both super powers are fighting to control them. China in particular is trying to leverage its technical strength to shape telecom standards (at the ITU). If this happens, then the US could try to use a different set of standards, for national security reasons, just like railways in some countries use different track widths. This may look far-fetched, but some analysts remind us that China is looking to use “civil” technologies like 5G or AI, for military purposes. The end game could be the formation of 2 different global blocks of standards, with limited interoperability, and with Europe in an “extremely difficult position” (FT)
In Europe, some voices claim for a more explicit support of the US block: Maybe not surprising, coming from a UK newspaper, but the claim in the Financial Times is that Europe (and the UK) should join the US to re-build a new “international order” framework for a new age of technology, including a common position in relation to semiconductor design and production, to fintech innovation and to safety guarantees for AI applications. Of course, this would require collaboration from the US government, so the effort would be linked to a Biden win in the coming election (FT)
A parallel implication is the global fragmentation of supply chains: There were already signs of this before the pandemic. For instance, Taiwanese companies, that still have manufacturing plants in mainland China, had already started to move to other places since approx. 10 years ago, as qualified labor started to become scarce in China’s coastal regions. This has now been accelerated, with many foreign firms concerned about data security and privacy issues, and about potential geopolitical effects that could disrupt their supply chains. amid the current commercial disputes. Still, many companies are waiting until the US election, to better understand what flexibility they may have. Taiwan sees an opportunity in this, to become the “co-ordinating center of the global supply chain” (FT)
In particular, there is an emerging war to control some “strategic” minerals: Western nations trail China in producing and processing rare-earth minerals like yttrium, lanthanum, gadolinium and others, which are critical to build computer memories, rechargeable batteries for electric vehicles, cell phones and many other high-tech products. In the (apparently) coming fragmentation of the world in blocks, this could hurt the competitiveness of the US-centric one. So the Americans have just declared a national emergency about this, and authorized the use of extraordinary measures to accelerate the development of mines for these minerals (WSJ)
Meanwhile, Samsung looks like a short-term winner in the tech cold war, taking advantage of Huawei’s weakness: Huawei continues to be an “early victim” of all these battles, with bans affecting their fast growing smartphone business, and also their opportunities in 5G networks. In both spaces, but very particularly in the smartphone market, Samsung is emerging as a winner. The company just made a forecast of their 3Q20 operating profit implying a +60% annual growth, driven by a recovery of their leadership in global smartphone sales, where they had recently ceded the top spot to Huawei (FT)
Big corporate moves accelerate: signs of a paradigm change?
IBM officially made the move into what they expect will be the next phase for the company: Under Lou Gerstner, IBM shifted from a product company into a services factory, and this allowed them to survive the paradigm change in computing that came with the PC. The sale of the (low margin) company’s personal computing business to Lenovo was one of the signs that certified this evolution. But now even the service business is not so exciting anymore, as customers are increasingly avoiding to build their own computing infrastructure, so many of them no longer require any external company to help them operate and maintain it. The reason is that they’re choosing the much more flexible and powerful option to consume computing infrastructure in the same way as they use e.g. energy. And all that has been enabled by the cloud, with companies like AWS, Microsoft (Azure) and Google (Cloud) profiting from the trend. IBM is moving to play a role in that space too, with its own cloud offer, and with acquisitions like Red Hat, that would theoretically put them in a position to “commoditize” the currently leading offers in the market. So this week IBM announced they were spinning off the “legacy” service business (4,600 clients in 115 markets, with $19bn revenues and addressing a $500bn market, but with poor recent performance) from the new “core” business, representing approx. three quarters of total revenue, and including Cloud as well as future bets like AI or Quantum Computing (NYTimes)(WSJ)
In a totally different field, Disney is under pressure from an activist investor to embrace the new age of entertainment: Daniel Loeb, an activist investor, has sent out a letter to Disney’s CEO asking for a radical change in the company’s strategy, to focus almost exclusively in its emerging streaming business. The proposal includes the reallocation of $3bn currently dedicated to paying dividends into content production for the Disney+ streaming platform. This looks rather unusual, as activist investors tend to increase the payoff rations of targeted companies, rather than the opposite, and shows how evident it is (for some investors) that Disney has a large opportunity in streaming. Loeb has also asked Disney to leave the theatrical films business, currently under massive impact from the pandemic, to “embrace the shift from the box office to the home” (FT)
Also in the content space, but from the frontier with telecoms, AT&T keeps reorganizing its Warner Media subsidiary: The pandemic has not come at a good time for AT&T, which had just acquired the Time Warner asset that was supposed to be the tool to turn the company into a giant at the frontier between telecoms and media. But the virus is drastically reducing income from movie tickets, cable subscriptions and TV ads, so AT&T is now forced to restructure, with a plan under way to cut costs by -20% and fire thousands of people. So the company is now seeing how different, and more uncertain, the content business is vs. core telecoms. Even where they would suppose to be more robust, i.e. in video streaming, HBO Max has had a lukewarm start, with only 4.1m subs having activated the app after the first month (WSJ)
In telecoms, restructuring continues across the world:
In Japan NTT, after announcing the consolidation of DoCoMo, is now looking to sell assets: One of the “synergies” or advantages that NTT is mentioning when talking about the NTT DoCoMo buyout is the ability to more easily sell assets, as the company looks to generate cash flow to repay the deal and invest in new businesses, while keeping the dividend. NTT wants to increase investment out of Japan, to reinforce its global enterprise unit, NTT Communications, also to be supported by NTT DoCoMo capabilities. No particular assets have been mentioned, but one tends to think about physical infrastructure… (Bloomberg)
In Sweden, Telia has just sold its global wholesale unit: This may look like a secondary deal, but it’s a rather important one, because their international telecom carrier business was the largest in the world, including 65,000km of fiber routes globally, and points of presence in 115 countries, with 900 clients. The unit has been sold to a consortium of Swedish pension funds, for $1bn, but this is no unicorn, but a non-growing business, with wholesale voice in decline, and with data transport being largely integrated by the “Big Tech” players (FT)
Regulation of Big Tech companies might be closer after this week
A US Congress committee just published a report on the need to regulate Big Tech: A Democratic-led House panel in the US has finished a 16-month analysis of the market power of Amazon, Facebook, Google and Apple. The results were published this week, and they conclude that these companies have leveraged their dominance against potential competitors, and slowed down innovation. No legislation is imminent as a next step, and also there is no bipartisan agreement on the details. But both parties endorse the need to enforce strong antitrust actions against Big Tech companies, and this is seen as one more step towards more severe initiatives… (WSJ)
This has triggered a discussion on the pros and cons… One of the first effects has been the start of debates on the benefits and inconveniences of including the antitrust pressure. The Financial Times says that we need to find the right regulatory balance, because Big Tech companies have also “delivered clear benefits to society”, as the panel report also recognizes, so it proposes to “reinvent the US antitrust model” and expand its scope beyond “avoiding consumer harm” to include the impact of corporate power on competition and innovation. Meanwhile, The Economist this week argues that maybe ex-post antitrust initiatives are not the right vehicle to address this problem, and mentions past examples (including the Microsoft trial, which led to a “forgettable settlement”). They seem to sympathize more with the ex-ante approach that the European Union seems to be following (TheEconomist)(FT)
… and on how feasible it is to effectively regulate: Christopher Mims at The Wall St Journal discusses the argument from Big Tech firms defending that they are too complex and too deep into vertical integration to make it possible to separate different layers (e.g. the platform vs. the own business within each company that exploits that platform, as the regulators are suggesting). To summarize, tech giants would be “too complex to break up”, in a motto that reminds of the “too big to fail” used for banks during the financial crisis. Mims tells us that this is an old argument, often used in previous antitrust processes, and often addressable through new, specific legislation (WSJ)
Meanwhile, more specific short-term battles keep happening:
Apple won’t have to accept Fortnite back at the App Store (for now): A federal judge in the US has ruled that Apple does not need to reinstate Fortnite in the App Store, as Epic Games has actually violated its contract with Apple, and there is “significant public interest” in requiring companies to adhere to contracts, and use the courts “through the normal course” if there is an issue (NYTimes)
More voices in the UK call for a regulatory review of the controversial Arm acquisition by Nvidia: P Mandelson, a former business secretary in the UK, is calling for competition authorities in the UK, China and Europe, to investigate the takeover, on concerns that Nvidia, once the deal is done, could restrict Arm’s ability to supply to all players in the market, in a “neutral” way (FT)
And most people expect a tough scrutiny in China too: Arm’s CEO has also said that he expects tough scrutiny over the deal from China, as Chinese regulators are actually being pushed to do this by local chipmakers, which claim that with this Nvidia would get control over essential technology used in most smartphones and data centers (FT)
Microsoft calls for more safety in social media: Satya Nadella thinks that self-regulation is needed to ensure internet safety, particularly by social media apps. His view is that regulation will never be fast enough to address actual market problems. He claims that Microsoft’s technical experience, e.g. through their management of the Xbox gaming platform, can help with this, and also that they would have applied part of this experience with tools to solve the problems linked to TikTok in the US (WSJ)