🌌 Reshaped #27
Short edition: biotech IPOs, platform clashes, gig regulation, diversity in the innovation economy, and African digital taxes
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.
This is a shorter issue, only featuring some of the most relevant news of the week.
The State
Gig regulation
Gig economy regulation is the hot topic of the week. A few days ago, Uber and Lyft announced that they will appeal a new California law that makes it mandatory to treat riders as employees instead of contractors (Financial Times). They also threatened the interruption of their services in the state at least until November. Uber CEO Dara Khosrowshahi tried to find an alternative way of regulating gig work, focusing on three points. First, if all drivers were employees, Uber would be able to afford to pay only a small fraction of them in a small number of cities. In other words, many drivers would have to find another job. Second, drivers would lose their flexibility, which is a key benefit for them. Third, consumers would have to pay more for rides — this is the inescapable consumeristic defense argument.
As a solution, Khosrowshahi claims that gig companies “need to pay for benefits, should be more honest about the reality of the work and must strengthen the rights and voice of workers”. This translates into companies providing cash to drivers to be spent on the benefits they prefer (from health insurance to paid time off). In addition, companies should “be more transparent about what drivers make and the realities of the work”, while “acting on driver concerns” by asking their opinion on their working conditions. As a third way, this proposal seems quite reasonable. On one hand, it increases the cost of riders, but much less than their transformation into employees; there would be no major business model shift to cope with. On the other, the various commitments about transparency and care can be easily circumvented later on.
What the current regulatory landscape is missing, however, is consistency with the historical events that brought the gig economy to the current situation. As perfectly highlighted by Veena Dubal on Logic some months ago, Uber and Lyft emerged after the 2008 crisis, when the Obama administration sponsored VC-backed micro-entrepreneurship as a means for fast economic recovery. The political scenario was favorable for disruptors willing to challenge existing business strongholds — but just to replace them with theirs. Now, regulators expect these same companies to go back to a sort of pre-neoliberal economic system, without taking into consideration their strict ties with equity investors, political parties, and social actors.
For sure, the 2020 gig economy landscape is a direct result of lax regulation during the 2010s. The fact that regulators are taking different directions now is a positive sign of awakening. But, at the same time, you cannot destroy in a day what you contributed to building in a decade or more. This requires a long and complicated process of participative policy design that goes far beyond mere regulation.
Digital taxes
A new chapter in the fight between tech giants and European regulators regarding digital taxation has just begun. One of the best definitions of this clash was recently provided by The Economist.
The root cause of the dispute is a flaw in the international tax system. In order to avoid taxing businesses twice, governments typically apply the corporate tax to firms that are legally domiciled on their shores or have a local physical base, and link the amount due to the location of their assets and production. But now many companies provide online services and can shift intellectual property to low-tax regimes with the click of a button. A system intended to stop profits being taxed too much allows them to be taxed too little.
Big Tech has already found its ways to bypass those measures. In the UK, where the 2% digital services tax (DST) was recently implemented, Amazon will increase fees on third-party sellers by the same amount, as it did in France one year ago. Nonetheless, the digital tax wave has now expanded to Africa. Kenya and Nigeria are considering new tax frameworks to collect cash from digital giants operating in the country (Quartz). This battle might be a matter of fairness and better welfare for Western economies, but it becomes a fundamental development tool for African countries, where digitalization plays a key role in taking millions out of poverty (take a look at this speech by Amina Mohammed to get the magnitude of this process in the continent).
The markets
Platforms
The war between platforms and their external participants is nothing new. Amazon and its third-party sellers or Apple and its external developers are probably the most relevant example of it. Apple was even accused by some of them of anti-competitive behavior for charging a 30% fee on in-app purchases. The most recent case happened this week with Epic Games, the company that develops Fortnite, which has sued Apple and Google for having banned the popular game from their app stores (The Verge). The reason for the ban was that Fortnite had introduced an external payment system to bypass the platform fee — actually, it was a trap to make it evident that these platforms operate as monopolies.
This translated the legal battle started with Spotify and Rakuten into something bigger. Fortnite has some 350 million players worldwide (for a detailed analysis of Epic Games, see this series of articles by Matthew Ball) and Apple could suffer major economic consequences for an eventual, perpetual ban. Sales of iPhones might drop, especially among its youngest users, by a significant percentage. Recovering from such a loss in brand equity might take years. For this reason, Apple could end up favoring some form of compromise to avoid this scenario.
Business models
In the meanwhile, Apple is planning to launch subscription bundles to make it more convenient to access multiple services (Bloomberg).
A basic package will include Apple Music and Apple TV+, while a more expensive variation will have those two services and the Apple Arcade gaming service. The next tier will add Apple News+, followed by a pricier bundle with extra iCloud storage for files and photos.
This is relevant for many reasons, but one in particular: despite its size, Apple joins the club of companies that adapt their business model to generate recurring revenues. This is a ubiquitous trend in tech, but it is especially pursued by startups willing to make their cash flows more regular and sustainable. However, this growth lever was too big to be ignored by Apple, which will officially launch service bundles in October.
The speculators
IPOs
Despite the pandemic, there is a positive sign in IPOs for biotech companies, which were capable of raising a record $9.4 billion from going public (The Wall Street Journal). According to some experts, the pandemic might have played a decisive role in this spike in IPOs, driving generalist investors from other sectors into biotech to compensate for low returns in traditional industries. The Nasdaq Biotechnology Index (NBI) has been outperforming the S&P 500 for many months in a row (see chart below), which increases the willingness to invest in the industry.
However, the news of the week in this domain is for sure the upcoming IPO of Airbnb. The company had to delay its plan to go public due to coronavirus, which has caused tremendous trouble in the travel industry. The surprising move could allow Airbnb, which was valued at $18 billion, to go public within 2020 (The Wall Street Journal). Here, timing is key. There is a narrow window for Airbnb to go public between the end of massive lockdowns and the eventual start of new anti-COVID measures in autumn. Despite the drop in valuation (down from a $31 billion high in 2017), the opportunity is huge for the company. Similarly, Palantir is planning to go public through a direct listing by next September (MarketWatch).
Venture capital
This summer is particularly hot for VC deals. Impossible Foods raised $200 million at a $4 billion valuation (TechCrunch). The company, which produces plant-based substitutes for meat products, has received a total of $1.5 in external funding. Meantime, the debate about diversity in the venture capital industry continues to draw attention. According to a new study by Paul Gompers and Silpa Kovvali, diversity is a key driver for a VC fund’s financial performance, as it reduces the bias derived from investors’ cultural and social affinity (Harvard Business Review).
It’s against that backdrop that venture capitalists choose their collaborators at other firms, investing their money side by side and joining the boards that guide the start-ups. Most investors specialize in a particular industry or sector, so potential partners are easy for researchers like us to identify: They are investing in the same types of deals at around the same time. And venture capitalists are far more likely to partner with people if they share their gender or race. They’re also significantly more likely to collaborate with people if they share their educational background or a previous employer.
The relevance of inclusion for the advancement of our societies goes far beyond the world of venture financing. According to a new report by Lisa D. Cook, the output of innovation processes would be higher (between 0.6% and 4.4% in GDP) if women and minorities had the chance to have fairer access to them. The chart below, which illustrates the unemployment rates among scientists and engineers, reflects perfectly the barrier of inclusion in most science-related jobs.
Thanks for reading. Have a nice weekend!
Federico