The Second Cold War
And other signals of change this week: Revolution lives in social media. A new breed of Tech leaders? Big Tech getting bigger... and a new regulatory "techlash" as a (potential) consequence
The Second Cold War
“Anti-Huawei” rules triggering a redesign of Tech’s supply chains: China and the US keep fighting a new, different kind of Cold War, focused on Technology, which both countries see as the key strategic asset for the future. At the moment 5G, and the leading global vendor for 5G network equipment (China’s Huawei), are at the center of the dispute, and the US has recently imposed new rules forbidding US suppliers to provide equipment to build Huawei’s chips
In response to the threat, Huawei keeps looking for solutions: Under the threat of not being able to build their own chips, the Chinese company is in talks with rival mobile chip makers MediaTek (Taiwan) and Unisoc (China) to buy alternatives to in-house chips and try to keep its smartphone business afloat (Story)
Meanwhile, American semiconductor companies want to “Americanize” their supply chains: The US semiconductor industry is trying to take advantage of the obvious interest of the Trump administration and get subsidies to build local factories and research labs, to “keep ahead of China” (Story)
This is already affecting the Global telecom market:
Canadian operators are not counting on Huawei for 5G: This week two large Canadian operators, BCE and Telus, announced their choices of suppliers for their 5G networks, and Huawei was not one of them. The winners were Ericsson and Nokia (Story)
The UK is debating what to do: The UK government has asked the National Cyber Security Centre to review the impact of US sanctions on Huawei and make recommendations for the British market. Many people see this as a second opportunity to remove Huawei from UK’s 5G networks, after a decision last January to give the Chinese company a limited role as 5G supplier (Story)
Amid these fights, Ericsson is emerging as the big winner (for now): Given Huawei’s political problems, and given Nokia’s delays in its higher quality 5G products, Ericsson is seen as the big winner, and the potential 5G leader globally, at least for now (Story)
South East Asia is becoming a battleground between the two Tech super-powers:
Chinese giants ByteDance and Alibaba are fighting against US rivals in Singapore: ByteDance, owner of super-successful TikTok, is moving to a much larger local office, while Alibaba plans to set its global headquarters at a skyscraper in the city’s central business district, after investing $600m in the building. So they will now be neighbors of Facebook, Amazon, Google and Microsoft, which are still growing in the area (Story)
Facebook keeps expanding in the region. Now Indonesia: In another sign of competition heating up in the region, Facebook just announced a (not-disclosed) investment in Gojek, Indonesia’s biggest unicorn. Facebook’s interest is apparently focused on GoPay, Gojek’s digital payments arm (Story)
Europe is trying to emerge as a “third way”, but still under pressure:
The European car industry shows it needs American self-driving technology: European politicians often claim they would like to become technologically independent from the US (and China), but reality is tough. An example of this is the car industry, where Europe keeps a lead that is now under threat, in the transition to autonomous vehicles. This week Volkswagen announced an investment of $2.6bn in an American self-driving car startup, Argo AI (Story)
The revolution now happens in Social Media
Social media has turned into the natural place for political disputes: This has been a week of protests and riots across the US, and social networks have provided a real-time chronicle of what was happening, often distributing images that have amplified the current tensions. Social platforms are perceived to have played also a significant role in galvanizing the protests, by showing the video of George Floyd’s unfortunate arrest (Story)
Political protests have driven Twitter’s audience to record levels: The good side of this for social apps is obviously a large increase in user engagement. Twitter announced this week a historical record number of new app installs (Story)
But all this is increasing risks for Social Media platforms: However, the political controversies online, that in the US (and increasingly everywhere else) usually involve the President’s direct participation, also create challenges for Facebook and Twitter. When Trump announced an executive order last week, calling to review the liabilities of these platforms, investors panicked and sent Twitter’s share price down -5% (Story)
Facebook is trying to keep a “neutral” position to political content, but that’s also difficult: Meanwhile, after a lot of public controversies, including the platform’s role in the Brexit referendum and in the last US general election, Facebook has adopted a more “laissez faire” approach (vs. e.g. Twitter) but this is also creating them problems, including some internal backlash. On Friday, Zuckerberg said they will now review its content policies relating to threats of state use of force (Story) (Story)
A new breed of Tech leaders
This week confirmed that Zoom has been big winner in the crisis: We already knew that Zoom’s user base had exploded, driven by stay at home policies and people shifting business and personal meetings to online. But this week, at its quarterly results conference, the company confirmed that they are monetizing this massive growth. Revenues reached $500m last quarter, and the company now expects to generate $1.8bn in this fiscal year. Shares jumped, and they have already tripled this year… (Story)
China also has a winner, after a global TikTok boom: Meanwhile, and also driven by COVID lockdowns, the Chinese-owned social app TikTok is growing massively, and becoming addictive during the pandemic, as a “needed dose of daily silliness” (not only for kids anymore…) (Story)
The big guys look concerned, and are starting to fight: In some cases, the growth that these emerging “champions” are getting could be at the expense of the “addressable market” of current leaders, like Microsoft, that views the space of video communications where Zoom has succeeded as its own territory. Rumors are that the company’s competitive aggressiveness these days is back to the levels that used to be the norm when Steve Ballmer led the operations (Story)
A potential scenario is that most of these successful apps will be absorbed by Tech Giants: So small but successful companies, like Zoom or Slack, are under threat of being crushed by the enormous power of Big Tech players like Microsoft. A natural way to respond to this is to partner with the enemy’s enemies, and that’s what Slack has just announced: an agreement with Amazon AWS to compete head to head vs. Microsoft Teams (Story)
But this often leads to their decadence, or at least many people see it that way: The risk of getting too close to Tech Giants is that some of your more talented workforce could feel uncomfortable, or could have the impression that they won’t be able to be so innovative or creative as in the “startup mode”. This is what Cruise (a self-driving tech subsidiary of General Motors) is trying to target in Zoox, a startup on the way to be acquired by Amazon. This week we learned that Cruise’s founder has sent an email to Zoox’s employees telling them that “it is very unlikely that the full value of the rewards earned at Zoox will be recognized after the deal” (Story)
Big Tech getting bigger…
Tech Giants, with deep pockets, are taking advantage of the crisis: E.g. Amazon, that we know is on the way to expand its own logistics, including air cargo operations, wants to take advantage of the deep crisis of the airline industry and get some new airplanes at a good price. They announced this week that they had leased 12 converted Boeing 767-300 passenger planes. These will be added to an already existing fleet of 70 aircraft (Story)
And even some with problems remain attractive for investors: Silver Lake, one of the most active Private Equity funds during the COVID crisis, is betting on technology companies that are struggling from exposure to industries badly hit by the crisis, like travel (e.g. Expedia). Silver Lake’s approach combines tech investing and value investing, and because of this, they’re looking at companies with valuations below what would be justified by their (solid) fundamentals or future perspectives (Story)
Leading platforms are accelerating their disruption of traditional industries: Google, through YouTube, wants to take advantage of the “Great Acceleration” of digital adoption to capture ad dollars from traditional TV. But this is proving to be a challenge for now, as many marketers prefer to invest in more “professional” streaming video platforms like Disney+ or Hulu (Story)
This week we thought we saw a sign of that in telecommunications: Disruption has not affected the telecom industry so much, until now, as the enormous investments required to build and maintain networks have acted as a barrier to entry. But, after Facebook’s acquisition of a 10% stake in Reliance Jio last month, some people think that the first example of Tech Giants landing in a telecom market could be India. Since the Jio deal, there have been rumors of Google buying a stake in Vodafone Idea and (this week) of Amazon buying into Bharti Airtel. For now, Bharti has denied this (Story)
Further integration between apps and network access could start to happen, anyway: Meanwhile, in the US some Senators have remembered the Net Neutrality regulations from the past, when AT&T announced this week that they will launch a commercial bundle combining mobile connectivity and HBO Max, in which data consumption for video streaming won’t be counted against the users’ plans. Probably the kind of service that Big Tech platforms could think to offer if they owned a telecom operator (Story)
… But with more risks of a regulatory “techlash”
The acceleration of digital adoption in all human activities is a challenge for regulation: We’ve already discussed here how the COVID crisis has accelerated the adoption of digital apps, and that this was increasing the power of the “FaaaM” Tech Giants. So now the debate is if we should believe that these companies will self-regulate and be “responsible citizens” or if they should be regulated ex-ante. A key problem is how to balance the protection of citizens with the opportunity to provide them with attractive digital tools that can drive economic growth (Story)
Tech companies are coming out stronger from the crisis, so some governments want to make then fund the recovery: A more direct question in the short-term is the possibility to tax these companies and use the money to pay for the economic re-build that will have to happen soon. The rationale looks clear and easy to sell to voters, as the Tech industry is also the one that is profiting most from the transition (Story)
Zoom, a winner in the crisis, now forced to keep an “open door” for the FBI: Another example of the emerging questions is the pressure on Zoom, the leading provider of digital videoconference apps, to leave “open doors” for the police to inspect communications if required. As a consequence of this, they’ve decided not to apply end-to-end encryption to free sessions, while keeping this higher privacy feature for paying customers. They’ve received lots of criticism online (Story)
Google remains under suspicion for amassing people’s data: Finally, we should expect that governments’ battle against digital platforms to limit what they can do with people’s data will only continue or increase, as more and more data is generated by users that live and work fully online. A class action lawsuit against Google was filed by three consumers in California this week, arguing that the company keeps users’ data even when they opt out of sharing them (Story)