🌌 Reshaped #26

A scramble for social media space, AI soft regulation, a new space economy, capitalism's useful idiots and much more

Aug 08, 2020

Welcome to a new issue of Reshaped, a newsletter on the social and economic factors that are driving the huge transformations of our time. Every Saturday, you will receive my best picks on global markets, Big Tech, finance, startups, government regulation, and economic policy.

The week in tech has been dominated by TikTok: its potential ban and acquisition by Microsoft and, most of all, its new competitor Reels. Behind this scramble for social media space lies another step in the cold war between China and the US, a topic that I will address in the next issue thanks to some interesting contributions.

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The State

Regulation

Some issues ago, I wrote that regulation is a way for Big Tech to protect incumbents at the expense of new entrants. Regulation raises the bar and tends to consolidate the industry as it is. This is nothing new: industry giants have always tried to lobby for a certain kind of regulation that prevents major shifts of power. The same applies to AI: Big Tech giants are under scrutiny and cannot afford to behave irresponsibly in this domain, as they fear an even stronger backlash. Hence, they have to make sure that no other company — like a startup that does not care that much about reputation — can do what they cannot. And that is where regulation plays a key role.

However, as explained by Gary Merchant in a new paper, there is an alternative to regulation: soft law. Soft law mechanisms “include various types of instruments that set forth substantive expectations but are not directly enforceable by government, and include approaches such as professional guidelines, private standards, codes of conduct, and best practices”. They can be activated more rapidly than traditional forms of regulation, which is fundamental to avoid long processes of formal policy design. The latter would still be activated — but in addition to a preliminary layer made up of soft law mechanisms. Soft law mechanisms like frameworks and standards tend to be undervalued, but their strength depends almost entirely on that of their sponsors. A joint effort by public and private actors might provide good results in the short term, but the lack of accountability and enforceability would jeopardize all of them in longer time horizons.

Mission-oriented innovation

For the first time in history, a commercial orbital mission carrying a crew composed of two NASA astronauts has taken place, after the successful splashdown of the SpaceX Crew Dragon returning from the International Space Station (Scientific American). This is an important milestone for spaceflight and also good news for the US government, which can now rely on a domestic partner for its space race. NASA Administrator Jim Bridenstine said that NASA is going to externalize part of its hardware to commercial players like SpaceX, which will help to foster the space economy. According to recent estimates, the latter has grown to an outstanding $432.8 billion (CNBC). This illustrates perfectly the role of the state in the innovation economy, with the government acting as a first buyer — thus flattening the market risk curve — and market creator.

The Markets

Social media

TikTok is still at the core of economic and political debates, especially after the potential US ban and the interest of Microsoft in acquiring the social media business units in the US, Canada, Australia, and New Zealand. Now Microsoft seems ready to acquire the whole global business, entering the enormous Indian and European markets as well (Financial Times). However, there is no clarity on the amount Microsoft would pay to ByteDance, while some analysts are skeptical about the synergies between the tech giant and TikTok (CNBC). However, such a popular social media could help the company become more youth-focused, improving brand equity.

Markets would have expected some interest from Facebook, which instead reacted announcing the launch of a TikTok clone called Reels (The Verge). Here, the strategy of Facebook is particularly interesting. Back in 2012, it acquired Instagram for $1 billion. Instagram was a potential substitute as the world-leading social media, due to its excellent market fit with younger generations. The decision to buy was aimed at reacting quickly not to lose market shares in the global social media market — thus avoiding a catastrophe in the style of Nokia.

Since then, three main changes occurred. First, Facebook is under scrutiny for monopolistic behavior, so a takeover could have made things even worse. Second, it has launched huge scouting operations to identify new entrants and mitigate risk through equity financing and acquisition. Finally, it is much stronger in its market due to the acquisition of Instagram and Whatsapp. This explains the decision to make. The technology risk of Reels is very low, being a clone of TikTok and having strong synergies with the current kind of media shared on Instagram. In addition, the large network of existing users and the experience in the sector will reduce market and business risk respectively.

Meantime, the world of social media is being transformed by the pandemic. The decline in advertising spending will transform marketing making it soberer, while many tasks will be externalized to specialized agencies to cut costs (The New York Times). The reduction in advertising spending will surely impact Big Tech companies like Facebook and Alphabet, which rely heavily on their ads revenues. However, at the moment, only the latter had a drop in revenues in Q2. On the other hand, social media have an increasingly important role in supporting bottom-up social movements like Black Lives Matters (The New Yorker).

Global economy

Ian Bremmer, president at Eurasia Group, warns that optimism will not heal the global economy from a depression that will last longer than any other since the Great Depression (Time). He argues that governments should “resist the urge to tell their people that brighter days are just around the corner”. Indeed, the V-shaped recovery outlined by economists like Jim O'Neill seems a utopian scenario, which fails to take into account the nonlinear distribution of vaccines — and, I would add, the variance in local healthcare performances from state to state. Hence, a more nonlinear recovery seems a more realistic scenario (see chart below) that reflects the long path to restoring pre-crisis economic levels in both output and employment rate.

However, a new, inspiring study published on Nature — which borrows Critical Slowing Down (CSD) indicators from physics to study economic growth — suggests that the pre-crisis, slow-growth economic cycle paired with a new recession could find a sort of stability in a global stationary economy, which in turn would be more easily restructured to reflect global emergencies such as climate change and growing inequalities.

CSD theory then suggests that a post-coronavirus recovery could be characterised by weak restoring forces and a slow return to equilibrium. On the one hand, this presents a clear threat to the structural stability of the global economy. On the other, it may offer opportunities for economic restructuring that would not have been possible in a climate of stronger restoring forces characterised by lower CSD.

The immediate reactions of progressive thinkers in front of the coronavirus emergency were maybe too optimistic about the end of neoliberal paradigms and the emergence of a more mission-oriented global economy. In this study, I found a first attempt to provide scientific evidence to these ambitions.

The speculators

Venture capital

Despite the coronavirus shock, VC deals in the US started to reverse the negative trend that started in Q2 2019, even if the total amount invested is almost constant (CB Insights). This VC activism is expected to continue also in Q3, with a particularly intense summer for venture financing.

However, the trend is quite different on the exit side, with a huge reduction in M&As that is not compensated by the increase in IPOs. This is a very worrying trend

The situation for healthcare is slightly better, due to its relevance in a pandemic. This week, Siemens agreed to buy Varian Medical Systems, an important producer of medical equipment, for $16.4 billion in cash (Bloomberg).

The Big Picture

An inspiring article by Sam Grinsell published on Aeon reflects on the concept of the city as an entirely human system, built to separate civilizations from everything that is not included in it. According to him, this is just a lie we tell ourselves that fails to take into consideration the interconnectedness of urban and extra-urban systems.

The city is a lie that we tell ourselves. The crux of this lie is that we can separate human life from the environment, using concrete, glass, steel, maps, planning and infrastructure to forge a space apart. […] Whenever the outside pierces the city, the lie is exposed. When we see the environment reassert itself, the scales fall from our eyes. […] all cities depend on a much wider territory beyond these boundary markers. Some or all of the following need to be brought in from outside to support an urban centre: food, water, building materials (wood, stone etc), workers, traders and their goods, raw production materials (wool, cotton etc), energy (in the form of material to be consumed, such as oil or coal, or on cables connected to a production centre such as a power plant or wind farm).

Such a lie revolves around three different components.

First: that humanity alone makes cities; second, that the city has an outside, a natural world that lies beyond the processes of urbanisation; and, third, that the city is an abstract category of which all individual cases are simply examples.

The same logic is applied in a totally different context by Kurt Andersen on The Atlantic. The author of Evil Geniuses: The Unmaking of America: A Recent History claims that, by being tied to the dominant economic system, educated professionals end up working as “useful idiots” for those who get rewarded by the system itself. Under the illusory aspiration of a brilliant career, most white collars contribute every day to the consolidation of an economic system that has exacerbated social inequalities and discriminations during the past decades.

I also thought: Mea culpa. For those past two decades, I’d prospered and thrived in the new political economy. And unharmed by automation or globalization or the new social contract, I’d effectively ignored the fact that the majority of my fellow Americans weren’t prospering or thriving.

This critique seems to fall in the “meritocracy trap” category. Of course, the ethical dilemma can be easily solved by those who are perfectly aware of the situation and decide that they are fine with it. This happens also at the entrepreneurial level. Take Peter Thiel as an example: he knows that his economic success is built on a profoundly unequal social system, but he thinks it is fine and mocks those who fight for social justice. This kind of approach is perfectly synthesized by Thomas Piketty in the introduction to his last book, Capital and Ideology.

Every human society must justify its inequalities: unless reasons for them are found, the whole political and social edifice stands in danger of collapse. […] In today’s societies, these justificatory narratives comprise themes of property, entrepreneurship, and meritocracy: modern inequality is said to be just because it is the result of a freely chosen process in which everyone enjoys equal access to the market and to property and automatically benefits from the wealth accumulated by the wealthiest individuals, who are also the most enterprising, deserving, and useful.

The problem is that this level of consciousness is quite uncommon in this domain, where lots of “useful idiots” simply avoid thinking about the big picture. The world of entrepreneurship and venture capital is profoundly ignorant about the big picture. Investors like David Galbraith (Anthemis), who take into account the systemic nature of their job, are a rarity in this domain. More than white collars, I think that this process of awareness should start exactly from those who brand themselves as innovative future-shapers.

Thanks for reading.

As always, I am waiting for your opinion on the topics covered in this issue. If you enjoyed reading it, please leave a like (heart button above) and share Reshaped with potentially interested people.