The Antitrust Tsunami
And also: Other stories from the digital Techlash. Telecom operators are back to basics, with 5G as their big hope. Technology invades entertainment, healthcare, finance
An Antitrust Tsunami, and other stories of the great Techlash
An antitrust tsunami is coming after Big Tech
The courtroom sessions of the Epic vs. Apple case have finalized. A decision is not expected until August: The end of the trial was organized as a debate of ideas between the two contenders. As in many other disagreements, a key issue here is the definition of the relevant market on which competition should be analyzed. For Apple, this should be include how apps are distributed across different devices on which games can be played, while for Epic the focus should be exclusively on iPhones. A final decision by the judge is expected before August 13 (the first anniversary of the Epic accusations) (WSJ)
The judge has compared Apple’s position with those of railroads and credit card companies in the past: During the trial, Judge Gonzalez Rogers made references to “previous precedent-setting cases” involving American Express or the St Louis Railroad, and suggested they should be extrapolated to the digital economy. In both cases, this could be related to an old antitrust doctrine called “essential facilities”, that targets cases where a company owning a “bottleneck” asset exploits that position to block out competition. Should sound familiar to readers from the telecom industry… The question is if there is enough evidence that Apple owns an “essential facility”. And of course this depends on the relevant market (WSJ)
In Washington, an antitrust suit has been launched against Amazon: Last Tuesday, the District of Columbia launched an antitrust suit against Amazon, accusing the company of blocking third-party sellers in the platform to offer better deals elsewhere. Amazon has argued that sellers set their own prices, and the company’s advocates claim that this third-party business actually benefits consumers. Until 2019 Amazon explicitly forbid US sellers from offering better prices or better terms in any other website. They have removed this policy, but they’re using a new one that some perceive as an almost identical replacement (WSJ)
In the EU, countries want more antitrust powers, and tougher measures, with Big Tech’s M&A activities as a key target: Germany, France and the Netherlands complained this week that the EU is too weak on Big Tech, specifically on M&A deals that have helped the Silicon Valley giants to eliminate potential competitors. Representatives from the three countries want more power to national governments to directly act in these questions. Interestingly, this “threat” of local governments being potentially more aggressive, has already been used by EU officials to try to convince Big Tech firms to negotiate with the regional authorities (FT)
Meanwhile, in the UK a debate has started, to discuss if restricting Big Tech’s M&A deals could actually be counterproductive: The UK competition regulator, no longer constrained by any EU rule, is moving in the same direction, and has proposed a tougher approach to acquisitions by Big Tech companies. This opinion piece at the Financial Times, linked to a think tank funded by Google, argues that this could be counterproductive, because (1) acquisitions can help Big Tech companies compete more effectively against each other, reducing their power; and (2) they are also one of the most effective ways for entrepreneurs to “monetize” or “exit” their startups. Some may see traces of cynicism here, but the author might also have a point (FT)
Germany is already targeting Google, using a recently approved new law: In Germany, the local regulators are preparing to act against Google, invoking a new rule that was approved in January, that targets companies of “paramount significance for competition across markets”. Now the question is if Google can be classified in that way. But given the relevance of the products offered by the company, and how much user data they manage, it looks likely that the process will move ahead (WSJ)
Pressure is also increasing on Big Tech companies to improve their corporate governance: A new wave of claims against the lack of “corporate democracy” in Big Tech companies came this week. In part, this was triggered by the contrast with other industries, like oil, where companies like ExxonMobil or Chevron were forced to make “hard” decisions at a board level, to accommodate shareholder demands. Meanwhile, in companies like Facebook or Google, the existence of two different classes of shares, with the publicly traded ones only offering economic (and not decision-making) rights, are limiting the power of shareholders to force any change. This FT article talks about a “parody of boardroom accountability” and claims that “levels of shareholder dissatisfaction have been edging up” (FT)
The risks of content moderation: look at India: Once there is an agreement on the need of content moderation, many people think that it should be governments or national authorities, rather than companies, who make these decisions. Sounds fine. But things are far from being so easy. Yes, no one wants to be controlled by large corporations, and even less by foreign ones, an anathema for the rapidly growing national-populist sector in many Western democracies. But the alternative is not so clear. Many could remember that internet appeared as a “liberation” tool against abuse by local governments and their associated establishment. And this is not just theory. China is a clear example of how authoritarian governments react to “free” internet apps, and shows what can happen when they decide to “moderate” content. But many more cases are starting to proliferate elsewhere. Just look at India this week
The case of India shows how governments can “moderate content”: The government vs. WhatsApp: WhatsApp is suing the Indian government over new regulations that would make it possible for authorities to require them to share people’s private messages. Apparently, the government justifies this by the need to take down “offensive” posts. This is part of an overall initiative to curb “disinformation”. A recent example is the campaign to eliminate all references to an “Indian variant” of coronavirus. The stakes are high for WhatsApp, as India is the app’s largest market, with 530m users (FT)(Blog)
Twitter is also being attacked for questioning the veracity of government’s tweets: In parallel, the police in India have visited Twitter’s local headquarters, after the company’s moderators had tagged a tweet by a spokesperson from the governing party as “misleading”. If we need tools to guarantee freedom of expression, it looks unclear that they should be like these (FT)
Is Bitcoin (and de-centralized apps) the solution? Probably we need to “think bigger” about this issue. Two weeks ago, in a newsletter, Balaji Srinivasan, one of the crypto currency experts at Andreessen Horowitz, published this “manifesto” on what he describes as a future “Pax Bitcoinica” that could replace “Pax Americana” as the framework for a new “world order”. In his view (see point 4 in the article), “Crypto Protects Free Speech”, as decentralized social networks could bypass any restriction by Big Tech firms, while at the same time protecting free speech from authoritarian governments or public institutions. Maybe we should get used to manage “toxic information” in a different way? (CommonSense)
Regulators have turned their sight to cryptocurrencies
Bitcoin’s “social costs” won’t be ignored anymore… Yes, cryptocurrencies and their implications are a central topic in the business press these days. Almost no one is now thinking that they will remain a marginal toy for freaks, and most discussions are on the implications that their wider adoption will have on the way we live and work. So a number of “social costs” of using Bitcoins and some of their cousins are being explored. This Bloomberg article lists some of those. The main cause of concern is, of course, the “dirtiness” inherent to mining crypto, as a very computing-intensive task. But there are more things, including fraud and financial speculation. The takeaway is that this will be a key topic for regulators and policymakers in the coming years (Bloomberg)
There are also concerns on how criminals are using crypto currencies for money laundering: The Financial Times this week also published an analysis of crypto’s “social costs”, focused on how criminals use the technology for illegal activities, including demands of ransom from cyberattacks, exploiting anonymity. Actually a number of “collateral” businesses have been appearing to facilitate “money laundering”, i.e. changing crypto currencies for traditional cash. At the same time, on the “good side”, several “crypto forensics” firms are working to identify specific crypto accounts with suspicious activities, that can then be tracked by the authorities. Investors apparently see this as a promising business, and a single startup, Chainanalysis raised funds at a $2bn valuation earlier this year (FT)
In China, the government keeps moving to get full control of Bitcoin: As in many other digital regulation issues, China is looking at exactly the same problems as Western societies. The main difference, also visible across all topics, is the aggressiveness of the approach. And Bitcoin is not an exception. We already discussed last week how the Chinese government commitment to regulate Bitcoin mining and trading had drastically affected crypto prices. Last Tuesday the WSJ seriously warned investors about any optimism regarding the ability of the Chinese government to control this market (WSJ)
Back to basics in Telecoms, with 5G as a big (but uncertain) hope
With 5G and its substantial needs of cash, telecom operators focus on making connectivity great again
AT&T prioritizes investments in fiber, 5G and (connectivity) customer service: The company had a session with investors this week, after announcing the end of its content adventure with WarnerMedia. And the CEO was clear: the new plan is about re-building a “connectivity franchise”, with heavy investments in 5G and fiber optic networks, and on improving customer service. All this will be funded by a simplification program under way, which is cutting costs of $1.75bn to $2bn per year. The message seems to be that the previous lack of focus was making the company underdeliver in its core connectivity business (as well as in media…)(Bloomberg)
Singtel maintains its “digital telco” narrative, and will spin-off its physical infrastructure, to focus on 5G network platforms and retail: Singtel, another major example of “diversification into digital”, within the telecom industry, is also moving to increase focus. True, they have not renounced to the old “digital telco” label, and the scope of their announcements may sound like nothing new to Western peers. But they’re moving anyway, and consistently with the evolution of the industry into separate layers, that we have already discussed here. They just announced a potential sale of towers and other infrastructure assets, and a focus on 5G connectivity in Singapore and Australia, as a key growth catalyst, through digital enterprise (and government) revenues (Bloomberg)
The big hope is that 5G will enable a new wave of revenue growth. E.g. through use cases like e-sports: The shift to connectivity is of course a need for operators that have struggled to grow in adjacent businesses, probably for deep structural reasons, not linked to specific execution strategies. So the remaining route for growth is to leverage 5G connectivity as an essential element of digital-first lives and workplaces. It is not clear how much growth this will bring, or how much could be capture by operators, but this is what can be done. Among the optimists, here we have an article by the WSJ this week, about 5G enabling a “whole new level” for e-sports, through a radical improvement in the realism of action scenes (WSJ)
The US also views 5G as an opportunity to regain control of network technologies, leveraging software (and the cloud) Another disruption that 5G may bring is related to the network supply chain. This is linked to the role of software, because in 5G the architecture is evolving to software-defined network functions running on (potentially) independent hardware. This architecture may be implemented with an integrated approach, by incumbents like Huawei, Ericsson or Nokia, which often still provide better performance. But at the same time, it creates an opportunity for software specialists like Mavenir or Altiostar, to develop network apps that can be run on top of open / generic hardware, potentially even on the public cloud. For obvious reasons, this is exciting the US government, who sees here a path for the country to catch up in the network technology market, that they abandoned when Alcatel acquired Lucent, and become self-sufficient in this space (WSJ)
The expectations on 5G impacting all industries are making this fight more crucial. Cars are an example: Leverage their relative dominance in “all things 5G”, China expects to lead the global market for vehicle-to-vehicle communications, that 5G enables. They’ve been working on this for longer than Europe or the US, and prototypes have already been deployed in some Chinese cities, where cars receive red-light warnings and other notifications. The question now is if restrictions against Chinese solutions could further delay progress with these applications in the West (WSJ)
Huawei is suffering the implications of all this. Its re-focus is triggering a battle for the cloud in China. As it’s publicly known, Huawei is the company that is suffering most from the Second Cold War between the US and China, focused on technology. The company has been forced to abandon its smartphone business, and is trying to develop alternative revenue sources. This may be one of the reasons why they’re making substantial progress as a cloud provider in the local Chinese market, in detriment of the incumbent, Alibaba. Alibaba’s public cloud revenues grew +37% in 1Q21, in what is the lowest revenue growth since the company went public. They’ve recently lost Bytedance, and important customer, that is building its own in-house cloud-computing capability (WSJ)
Meanwhile, a big debate is on the way about the real cost of moving to the cloud: The move by Bytedance in China, to build its own cloud infrastructure rather than remain dependent on a public cloud service, resonates with similar initiatives by companies like Dropbox in the West. This week a blog by Martin Casado from Andreessen Horowitz talks about this and sees it as a sign of a structural trend, that he calls the “Trillion Dollar Paradox”. According to this, for many companies the costs of outsourcing IT workloads to the public cloud are higher than keeping them inside. For this reason, Bytedance, Dropbox, and others would have decide to “repatriate” workloads. And there could be more examples soon. The initial impression is that this may depend on the company. Digital giants like Bytedance make a very intensive use of a large IT capacity, and it may make more sense to insource. However, smaller companies that use IT in a more sporadic way, or that need large capacities only at demand peaks happening from time to time, would be in a different situation (a16z)
Tech invades everything: Amazon accelerates in entertainment, Google in health, Quantum Computing coming to finance
Entertainment: Amazon finally acquired MGM
This confirms the convergence of entertainment and technology. As expected, Amazon closed the acquisition of MGM for $8.45bn including debt. This is the second largest acquisition ever for Amazon, after Whole Foods Market ($13.7bn in 2017). The company is showing it’s fully committed to be a global entertainment leader, and might have also made an offer for Sony Pictures in the past, that Sony declined. After the sale of WarnerMedia by AT&T last week signaled the challenges to get synergies from putting network infrastructure and content together, this deal can be interpreted as a confirmation of the (rather more clear) synergies between technology and content. Yes, John Malone has said there aren’t any. But still… Let’s see what happens, because now 2 out of 3 global streaming giants (Netflix and Amazon) are “tech companies with content assets”(WSJ)
It could also create new regulatory (antitrust) pressures on an increasingly powerful Amazon: On the negative side for Amazon, this deal is increasing the appetite of regulators and activists looking to enforce antitrust measures against the company. In particular, the company’s bundles of its streaming video service with its Amazon Prime e-commerce subscription program are under scrutiny, because it seems to give the company a “serious advantage” against its competitors in the streaming space. For example, there are 200m global subscribers to Amazon Prime, that could almost immediately be considered Prime Video customers, a similar scale to Netflix’s, and much larger than Disney’s. Senator Klobuchar (an ex-presidential candidate for the Democrats) has claimed for a federal probe before authorizing the deal (WSJ)
The trend has increased M&A activity in the content industry, to record levels: There have already been $232bn worth of media transactions so far this year, a number not seen since 2000, and up +640% vs. last year. The need of scale for the streaming business seems to be the driver of all this merger frenzy, with all companies looking to position in the new context that Netflix (supported by the pandemic)has created. The content expense required to remain competitive as a streaming app is growing enormously. E.g. Amazon spent $11bn in 2020 vs. $7.8bn in 2019. And only massive subscriber bases, only accessible for global companies with limited local physical assets, can sustain this pace (FT)
The case of Discovery may show that M&A is not enough. Discovery’s stock price went down in the week after the announcement of the deal to acquire WarnerMedia. The WSJ justifies this by an increasing consciousness of the implicit risk, with Discovery becoming much bigger and much more indebted than before, and facing a challenge business landscape. Also precedents are not good, with e.g. 20th Century Fox having suffered a “serious degradation in performance” after Disney’s acquisition two years ago. So yes, the deal gives Discovery the right scale, but execution will be difficult (WSJ)
In this context, Europe has a content problem, with globalization apparently unstoppable. At the other side of the Atlantic, European media companies are more worried than ever, as they see how these US-based giants compete for global hegemony in the global video streaming market, which has also become the central one for video content. Fragmentation among different countries, with different languages, set Vivendi (Canal+) or Comcast’s Sky at a weaker starting point vs. Netflix, Disney, Amazon, and now Discovery. It is well known that incentives for European creators are much bigger to work for major global streaming apps (like Netflix), as opposed to smaller local distributors. Shows like the Spanish “Money Heist” are a clear example of how a global platform (Netflix in this case) creates opportunities to leverage (and monetize) global viewership scale (Bloomberg)
Health: Google confirms its ambitions
Google just signed a deal with a large US hospital chain. Google has signed an agreement with HCA Healthcare, an American hospital chain, to develop healthcare algorithms using patient records. This reinforces the view of healthcare as one of the “big” future bets for Google, that views the digitalization of medical records as a big opportunity to apply its skills to index, manage and extract value from data. Microsoft is also working on this, as shown by its recent acquisition of Nuance, an “AI for healthcare” specialist. Obviously this is a large opportunity (healthcare is a $3trn market) but there are also significant execution risks, linked to market structure and (very significantly for what Google wants to do) privacy concerns (WSJ)
The American healthcare industry is in (massive) need of disruption, but it won’t be easy… Reading this analysis at the Wall St Journal this week leaves the impression that healthcare in the US could turn into a sort of “digital Vietnam” for technology giants trying to exploit the apparent opportunity. Incumbents (large hospital chains and large insurance companies) are in a very strong position that yes, has negative implications for the quality (and price) of the service. The conclusion is that investors shouldn’t “hold out too much hope about Big Tech companies shrinking (i.e. disrupting) the market”, even if they could gain some market share (WSJ)
Finance: Quantum Computing emerges as a big opportunity… and a threat
Quantum Computing can radically improve the efficiency of financial operations. But its implications on encryption are scaring banks. The promise looks clear, and exciting. The ability to use Quantum Computing algorithms to accelerate the execution of some risk models and some transaction processes could drastically increase the efficiency of the financial industry. Several startups, including Xanadu, PsiQuantum or IonQ, are already working on this, and getting funds are really high valuations. Also companies like BBVA are already thinking how to exploit these efficiencies. However, at the same time, the perspective of having machines able to easily break current encryption codes, based on prime factoring of large numbers, is creating concerns across the industry. And some regulators, including one in the US, are starting to develop new encryption standards, in anticipation of a “quantum catastrophe” (FT)