The Metaverse plays video games
And also: Peloton and Shopify in problems. Instagram exploring paid business models. Silicon Valley doing (more) basic science. Apple and Google's AR headsets. Chip packaging as an option for China
Microsoft sets the video game industry at the center of the Metaverse
This week the big theme was the announcement of the acquisition of Activision Blizzard by Microsoft. Activision is the owner of the Call of Duty video game franchise and develops other leading games. Microsoft is paying a lot of money, so it looks like an important (maybe even transformational) deal for them. As a minimum, Activision willbring revenues
The immediate interpretation was that this could help Microsoft become the leading force in the video gaming industry, in detriment of their archrival in this space, Sony. Sony’s stock fell substantially after the news. Some people even speculate on this making it easier for Microsoft to build a “Netflix of video games” (at the same time as Netflix is trying to do something very close to that…)
But a deeper perspective points to the deal as a reinforcement of Microsoft’s capabilities to develop virtual worlds. Some video games like Fortnite or Roblox are already working as platforms for content creators to reach wide audiences. The Metaverse vision sounds like a further step in that direction, and the ability to build this type of content platforms could become essential in the nascent ecosystem
The stocks of other video games companies, Electronic Arts in particular, reacted very positively to the announcement, as investors expect more deals in the coming months, and other Big Tech companies (including Apple or Meta itself) could feel “FOMO”1 after this
In any case, all this will have significant execution challenges for Microsoft, including current cultural problems in Activision, and a potential review by antitrust regulators
The week
1. Consumers and businesses, after COVID
What is happening
New consumer risks: some “Pandemic winners” have started to suffer, as people start to recover their previous lives, at least for some activities
Peloton’s CEO has sent a note to employees announcing a review of their workforce size and reset their production levels. There seems to be a “significant reduction” in demand, and shares have fallen -80% year-on-year (WSJ)(WSJ2)
Shopify’s stock was also penalized, after a report that they were cancelling contracts with several logistics partners (Bloomberg)
The post-pandemic economy: China’s aggressive approach to the management of the pandemic is creating new stress on global supply chains (just like it did in early 2020)
China deals with COVID with aggressive policies, looking to fully eliminate thevirus. With Omicron, these policies are leading to similar actions to the ones in Feb 2020, with similar implications on the global supply chain (FT)
Also, the country’s role as a global growth engine is in question, even beyondCOVID. According to analysts, deep reforms of the Chinese economy are still pending (FT)
What it means
It has always been clear that, even if the world after the pandemic won’t be the same as it was before, some of the changes that happened in the initial phases would be reversible. And this seems to be the case with the shift of fitness activities to people’s own homes, which lead Peloton to success in the first months of the pandemic. Investors are now understanding that the company’s growth was not sustainable
The current situation in China, with potential disruptions from the Omicron variant and the need of deep economic reforms, contributes to the current pessimism on our near-term economic future. Disruptions in the global supply chain could also hurt the growthperspectives of Big Tech giants
2. Platforms and digital enablers
What is happening
Instagram is testing a service that will make it possible for content creators to offer paid subscriptions (WSJ)
Bytedance’s revenue growth has decelerated, under pressure from Chinese authorities’ interventionism in technology (WSJ)
A deceleration in subscriber growth made Netflix shares fall (WSJ)(WSJ2)
Investors perceive the acquisition of Activision by Microsoft as a threat to Sony. The company’s shares have suffered the effect (FT)(WSJ)
Artificial Intelligence:
Meta has developed an algorithm that can be trained for multiple purposes. This could be relevant in the path to “General AI” (MITTechReview)
IBM has finally sold its Watson Health division, in what might be seen as a significant milestone in AI history (WSJ)
Connectivity:
In the US, the conflict between the telecom industry and the airline industry about 5G goes on, and is starting to hurt the industries’ (and the US’) reputations (WSJ)(FT)
Semiconductors:
Christopher Mims at the WSJ tells us that a “nanotechnology revolution” is under way, enabled by advanced microchips. A new generation of sensors, including ultra-tiny cameras is apparently around the corner (WSJ)
What it means
Meta’s efforts to develop a new, paid business model for Instagram are consistent with the current pressure on the company to improve the safety of its users. Negative, or even “toxic” effects of the social media algorithms on some users might be driven by the objectives to maximize engagement imposed on the algorithms. A paid business model could help address this
The “nanotech revolution” mentioned by the WSJ this week could be one step forward inthe densification of sources of data, through the tiny (and affordable) sensors that are being developed. This is more fuel for the engine of the current internet economy, with more data to be analyzed with AI algorithms in the cloud, to extract valuable insights
3. Financing digital innovation
What is happening
This has been the worst week for Nasdaq and S&P since the onset of the pandemic. And tech stocks were a key part of that (WSJ)
The Microsoft-Activision deal concentrated the attention of the finance press. More similar deals are expected (Bloomberg), and Electronic Arts is suddenly seen as a red-hot stock (FT)
Private Equity acquisitions might help acquired target firms reduce salary gaps (FT)
Emerging themes for investors:
Deep Tech: Silicon Valley billionaires have started to invest in privately-funded science labs (TheAtlantic)
Metaverse: The Microsoft-Activision deal is seen as the kick-off of a race to build the right skills to success in the Metaverse (NYTimes), so more deals are expected. There is also the impression that antitrust authorities will look at this carefully (WSJ). Apple and Google seem to be developing own Augmented Reality devices (Bloomberg). An analysis of recent patents reveals Meta’s plans to monetize Metaverse (FT)
web3: Big Tech firms are starting to move in this space: Meta works to include NFTs in its apps (FT). Google has created a crypto unit (Bloomberg)
Electric Vehicles: A FT article reminds us (once more) that electric cars won’t succeed unless there is a significant investment in charging networks (FT)
What it means
As Gillian Tett explains in her latest book, the current pressure on firms to create value for all stakeholders, including society, can be linked to an increasing lack of trust on what governments (who used to take care of social and environmental value) are able to do. Asimilar trend, discussed this week by Derek Thompson in The Atlantic, is how companies / entrepreneurs are starting to do basic science, or at least more basic science stuff. This creates potential challenges, but also great opportunities to reinvigorate scientific production in the West
The Metaverse space keeps heating up, with rumors about Apple (and now also Google) developing their own AR headsets
Bad times for tech stocks, amid the current inflationary pressures. Let’s see how it goes after Big Tech’s results in the next few days
4. Building new rules for the (digital) game
What is happening
Financial safety
Governments across the World try to control crypto, concerned about potential fraud / safety issues. This week we saw initiatives in Russia (Bloomberg), Spain (FT) and Singapore (Bloomberg)
Antitrust:
The WSJ predicts a “wave of regulation” coming against Big Tech in the US (WSJ)
The context: a bill currently under discussion in the Senate, that targets the market power of dominant tech platforms (WSJ)(FT)
But legislators may be running out of (political) time, as attention will soon shift to the coming midterm elections (NYTimes)
The “Tech Cold War”
Microsoft confirms that Ukraine has suffered a ”destructive cyber-attack” against its computer networks (NYTimes)
Intel will invest $20bn in a chip-making facility in Ohio, a step for the US to become self-sufficient in semiconductors (WSJ)
In China, Huawei keeps leading a similar effort, with a bet on “chip packaging” as the next generation chip manufacturing technology (FT)
What it means
Regulation looks like a much more serious enemy of Big Tech stocks than inflation forecasts. It remains to be seen if the efforts under way in the US will finally have a serious impact, but they could. And on top of that there are similar efforts in Europe. Just a look at what has happened in China shows how significant this can be, even if China is a very different context (with a more authoritarian government)
“Chip packaging”, a chip manufacturing technology linked to 3D integration, is seen as an enabler of further progress with Moore’s Law. As a “disruptive” force, it could also help China catch up in a space where they’re still far behind the West. Among other things, some of the tools used to build this kind of chips are made by companies out of the US’s scope of control
“Fear Of Missing Out”