๐ Reshaped #21
The breakup conundrum, African entrepreneurship, Facebook boycotts, Indian bans, funding rural research and much more
Welcome to a new issue ofย Reshaped, a newsletter for those who do not want to miss a thing about the huge transformations of our time.
In this issue, I focused my attention on the antitrust movement against Big Tech that is back to popularity all around the world. Will be enough (if feasible) to break up tech giants? I also dedicated some space to the African entrepreneurial ecosystem, where VC investments have dropped enormously since the start of the pandemic. While I am writing, there are no news regarding the ban of 59 Chinese apps by the Indian government, which is extremely relevant as it show the link between social media networks (and the data structures they entail) and international relations.
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News
๐ฑ India announced the ban of 59 Chinese apps, accused of violating user privacy and national security (TechCrunch). This is just another step in the growing tensions between the two countries, which involve also other business sectors. The ban will have huge consequences on Chinese tech companies due to the dimension of the Indian market for digital solutions. This is why firms like Tik Tok are willing to find a peaceful solution with the local government in order to avoid losses and prevent a mass switch to American competitors. However, the ban has disappointed millions of Indian content creators (BBC), which could push Narendra Modi to alleviate these measures in the next weeks.
๐ Many companies are boycotting Facebook advertising because of its hate speech and misinformation policy (The New York Times). Pressures began to increase after Mark Zuckerberg refused to follow Twitter in labeling some of Donald Trumpโs posts. The list of companies that have stopped advertising expenditures on the platform includes tech and retail corporations, which are huge revenue drivers for Facebook. Online advertising represents 98.5% of total revenues for the company and it is crucial for Zuckerberg to take a clear position on the topic to avoid huge consequences in Q3. However, Facebook seems to be well positioned to respond to the boycott and the main source of worries will remain platform regulation (The Economist).
๐ฒ Uber is reportedly trying to acquire the ride-hailing company Postmates for $2.6 billion (The New York Times). After the failed takeover of Grubhub, Uber โ which is trying to reduce costs by moving some engineering teams in India โ is trying to compensate with this smaller rival, which retains about 8% of market shares in the US. Even if this acquisition is uncomparable to the failed one, Uber Eats would still be the second-largest actor in the market after DoorDash, valued at $16 billion and willing to go public soon. Meanwhile, Postmates is deciding whether to accept the offer or go public (CNBC).
๐ฝ African impact investing institutions are very active in sectors like healthcare and agriculture (Quartz). The reduced deal activity of VCs in the continent caused by COVID-19 โ estimated at -40% FY โ makes impact investing even more relevant for the short-term survival of many ventures. Healthcare and agriculture have the potential to improve living conditions for large shares of the African population, which makes those investments attractive also for publicly-funded investors. This could prove even more relevant as the pandemic is damaging the African middle class and its hopes to drive the economic development of the continent.
๐ The insurance startup Lemonade went public with a successful IPO (Financial Times). The SoftBank-backed company had a private valuation of $2.1 billion but priced its IPO at just $29 per share, with a much lower market capitalization. However, the price went up to almost $70 per share, with a total market cap of $3.8 billion and gross proceeds of roughly $320 million. The company is starting to operate outside the US and plans to reshape the insurance industry through flat fees and fast claim payments.
Unlike other insurtech companies, Lemonade is a so-called full stack insurer, meaning that it takes risk on to its own balance sheet rather than passing it all on to a more established insurer. That means it has more control over what policies it sells, but it is also a more capital-intensive business model.ย
โ๏ธ Is breaking up enough?
2019 was the year of techlash. Scholars, politicians, journalists, and many practitioners all started to question the unrivaled power of Big Tech and the consequences of digital surveillance on human freedom. After a drop at the beginning of 2020, now the techlash seems to enter a more material dimension: that of antitrust. Enforcers all around the world seem ready to battle against the excessive power of Amazon, Google, Facebook, and Apple under the break-up slogan popularized by former Democratic candidate Elizabeth Warren.
However, simply breaking up Big Tech would probably have little effect on market dynamics and consumer protection. Keeping Facebook separated from Instagram and Whatsapp can do nothing if the firm still manages to exchange data from one platform to the other and keep users hooked in the loop. Regulators can work so that existing network effects do not reduce the capability of new entrants to compete with existing platforms โ which requires a regulation effort more than industrial reorganization.
Ingenuity is not the only sin of those who believe that breaking up Big Tech will restore fairness in the digital market. The size of tech giants is not only due to the inner characteristics of the industry or the scaling potential of digital technologies. It is strongly correlated to the government procurement of military solutions that started in the US after the Second World War. National champions were useful to balance the Soviet rising power and reduce friction (and price) in the procurement process.
With China on the rise and the need to find new balancing forces, it is unlikely that the US will renounce to their once glorified tech stars. Imagine a bunch of small American tech players fighting Chinese behemoths in the race for connectivity infrastructures, social network dominance, and space. Current giants would simply be replaced by new ones, which would brand themselves as fair and purpose-driven alternatives to the evil Big Tech โ until a new techlash emerges.
But there is another force that stands between Big Tech and the breakup hypothesis, and it has to do with the nature of the innovation economy. The starting point is that Big Tech has more than $450 billion in cash, which makes it extremely resilient in front of exogenous shocks and always capable of making strategic acquisitions of new entrants. This secondary market for tech startups has come to be a fundamental source of exits for many actors in the innovation economy, especially those with relevant networks โ the two biggest acquisitions of the last 20 years are a messaging app and a social network for professionals (see figure below).
This cash pile makes Big Tech a sort of exit monopoly in times of narrow IPO windows, when digital ventures find it hard to go public. This means incumbents play the key role of equilibrium-providers in the tech industry, where startups are torn between harsh competition and rich acquisitions depending on the sector dynamics of the moment.
It comes as no surprise that many startup accelerators teach their cohorts to build digital ventures that have the potential to be acquired by big corporations. To some extent, this sets a standard that is not only technological or product-oriented. It has huge organizational implications in how those ventures structure their scaling phases and deal with internal workforce management. VCs may laugh at founders branding their ventures as the new Amazon, but end up investing in business models that fit this dominant scheme under both the technological and the economic lenses.
This means that, unless your company is ByteDance and you want to challenge the current champions of the social media market, you are happy to know that there is a relatively easy path to follow in the world of digital ventures to sell and get rich. And this applies not only to founders, but also (especially?) to their financial backers. Lower returns due to reduced economies of scope and higher costs from taxation would hamper profitability and cash availability for Big Tech, which would probably spend less on tech startups.
Hence, as the vast majority of startups have no intention or capability to challenge dominant incumbents, we end up with the majority of the actors of the innovation economy โ tech companies, startups, financial speculators, and some parts of the state โ willing to maintain the status quo. Breaking those links is the top priority of antitrust enforcers and privacy regulators, who have to imagine a new competitive landscape to replace the current one.
As argued by Frank Pasquale, a scholar I have the pleasure to read and mention quite often (also here on Reshaped), it is time to think about a โDigital New Dealโ that is not limited to antitrust enforcement. We need to rethink the profit formula of digital business models if we are truly willing to challenge the chains that tie together the players of the innovation economy.
First is more robust antitrust enforcement. We really need to take a second look at the accumulation of mergers and acquisitions of so many companies by the dominant platforms. The second are nondiscrimination principles. I realize sometimes there can be big efficiencies from having massive firms, but even if we conclude that the efficiencies outweigh the costs, we still have to make sure they don't discriminate against rivals, and especially against rising rivals. The third is transparency. We just don't know what's going on in so many of these situations, and we need to ensure that really qualified people can look under the hood and understand how this is working. And the fourth is aspects of public utility regulation, and that would include limits on prices.
Alternative perspectives
โ In a discussion with Asher Schechter on ProMarket, Mehrsa Baradaran claims that the US has never been a purely capitalist economy, providing state subsidies for some to the detriment of others. This reflects in the racial injustices that have culminated in the current protests. According to the author, social justice in the country can only be achieved through economic parity.
Black Capitalism was the system that Nixon started: a form of black capitalist system that he called his economic agenda for black America. What it meant essentially was that he would maintain a segregated economy and black businesses were supposed to just fix these structural problems. Black banks were created at a time of heavy segregation and Jim Crow out of necessity. White institutions were not serving blacks, so black entrepreneurs created black funeral homes, black banks, black insurance, black colleges, and other businesses. Thatโs always been a separate system that has existed for black communities. [โฆ] Black capitalism, the way that Nixon did it, is different. He used it as a way to maintain a segregated system.
๐งช On Eos, Heidi Steltzer claims that science should have more robust ties with rural communities. A more community-oriented scientific research leads to improved trust in science and to a better understanding of nature.
COVID-19 has brought to light yet another advantage of funding science at rural colleges and universities. The pandemic is putting some global change science on hold, leaving critical environmental data sets uncollected. But, as a rural scientist, I can hire students and conduct research in our area, even with travel restricted. With the help of pandemic relief funding, we could study how the mountains in which we live are responding to this great shift in human activity.
๐ On The New York Review of Books, Jonathan Zimmerman examines the correlation between the rising cost of undergraduate studies and rising inequalities in the US. The debt burden is particularly relevant for students of color, while elite colleges are increasingly composed of rich people.
We like to imagine college as an egalitarian force, which reduces the gap between rich and poor. But over the past four decades it has mostly served to reinforce or even to widen that gap. During these yearsโand for the first time in American historyโa college degree became the sine qua non of middle-class stability and self-sufficiency. Yet rising tuition and declining government assistance has put the degree out of reach for many Americans; others have had to borrow huge sums, saddling their families and futures with crippling debt. [โฆ] Given all of this bad news, why do millions of Americans continue to seekโand pay forโhigher education? The standard answer is that theyโre anxious about their economic futures. A college degree seems to promise higher wages along with an insurance policy against layoffs, health care emergencies, and all of the other unforeseen catastrophes that can bring ruin and destitution.
Similarly, on The Atlantic, Arthur C. Brooks explains why a college degree might lead to financial security but fails to guarantee a happy life.
Other readings
๐ค On The New York Times, Mehrsa Baradaran critiques the neoliberal structure of modern finance and proposes new regulation for banks, fairer taxes, and a greater role of the state in granting the efficiency of public services.
๐ท On Scientific American, Emily Willingham examines the reasons why some men refuse to wear a face mask. Similar to how some of them relate to condoms, it has a lot to do with masculinity.
๐ฉ On openDemocracy, Michael Ngoasong reviews the many benefits of investing in African female entrepreneurship.
๐บ On The Conversation, Samuel Couth reports a correlation between hair loss and going to concerts or clubs with loud music.
๐ข On Barronโs, Al Root interviewed the well-known finance professor Aswath Damodaran. Besides providing useful hints on how stocks have evolved in recent times, Damodaran states that there are some sectors of the economy that will never go back to a pre-COVID valuation.
[โฆ] there are some businesses where the damage is permanent. The cruise-line business. Itโs never going to go back to a pre-crisis valuation for good reason. But Iโll make it broader. I think infrastructure businesses [airlines and telecommunications], especially ones with a lot of debt, are going to be permanently marked down after this crisis because people have learned that these companies are very fragile. They are not designed to live through a crisis like this one.
Thanks for reading.
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Have a nice weekend!
Federico