🌌 Reshaped #44
The antitrust case against Facebook, IPO bonanza, wealth taxes, EV batteries, personal productivity and much more
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 incredibly successful IPOs of Doordash and Airbnb this week demonstrated once more that we need to improve our understanding of the current tech bubble. Typical answers — including low interest rates, the effects of the pandemic on tech stocks and the scarce attractiveness of value investing — seem to be missing some crucial elements. At the same time, the US launched its antitrust case against Facebook, just a few weeks after that against Google. Both phenomena — the tech bubble and the global antitrust efforts — will reshape the tech industry in the years to come.
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Policy
Antitrust
On Wednesday, the US has finally launched its largely anticipated antitrust action against Facebook, accused of attempting to dominate the social media industry by acquiring competitors (Wired). The company reacted with a very straightforward argument: public authorities once allowed the acquisition of Whatsapp and Instagram, which makes these accusations seem more like “we failed, you pay”. Like in most ex-post antitrust cases, there is no way of avoiding inconsistency between what a regulator once conceded and what it now pretends.
However, this is not a justification for lax antitrust enforcement. As Matt Stoller simply put it, “what Mark Zuckerberg did at Facebook is engage in systemic criminal behavior, and he was able to do so because law enforcers refused to enforce the law against the powerful”. If Facebook limited competition in social media markets through aggressive acquisition strategies, the natural remedy is breaking it up. As observed by Hal Singer on ProMarket, though, this is neither easy nor fast.
To get to divestiture, two things need to happen. First, the plaintiffs must prevail under antitrust’s liability standard, proving that Facebook violated the law. Second, conditional on a finding of an antitrust violation, the plaintiffs must convince the judge that divestiture is warranted.
The awakening of antitrust authorities in the US is, in any case, already good news whatever the result of the suit (The Economist). It is fundamental to prevent similar scenarios in the future by enforcing stronger ex-ante regulation and setting clear rules for competing in digital markets.
➡️ Under attack for its dominance of digital markets, Big Tech is facing its Standard Oil moment (Financial Times).
Regulation
Twitch, the popular Amazon-owned live streaming platform, announced a new set of rules to limit hate speech and sexual harassment (The New York Times). To come up with these rules, the company has been talking with users for months, in a process that should be replicated by many other digital startups.
Under the new guidelines, Twitch will ban lewd or repeated comments about anyone’s physical appearance and expressly prohibit the sending of unsolicited links to nudity. The company also said it would prohibit streamers from displaying the Confederate battle flag and take stricter action against those who target someone’s immigration status. Violators could receive warnings, temporary suspensions or permanent bans from the platform.
Fighting misinformation and hate speech is a priority for regulators worldwide. On Monday, the European Commission Vice President Vera Jourova invited Google to do more in that sense in a call with CEO Sundar Pichai (Reuters).
➡️ Australia passed a new law that will force Facebook and Google “to negotiate a fair payment with news organisations for using their content” (The Guardian).
Technology
European tech
Atomico has recently released an extraordinary report on the state of European tech. The document is plenty with invaluable information ranging from investments to innovation policy and it would be impossible to provide you with a comprehensive summary. I strongly invite you to check the report depending on your particular interests. Here, I will focus on investments into purpose-driven tech companies, which are expected to exceed $6 billion this year (see chart below). In particular, “80% of this capital [the green part of the stacked columns] has been invested in purpose-driven companies where impact is at the core of their business model”.
It is interesting to notice that the majority of these investments went to climate tech (SDG 13), which raised more than $11 billion since 2016, and energy (SDG 7), which raised $9.7 billion in the same period (see chart below).
However, many improvement areas persist in the EU, where only 37% of founders are aware of the upcoming Horizon Europe programme (see chart). In addition, in spite of the vast efforts of the European Commission, bureaucracy still plays a relevant role in slowing innovation in the continent (see chart).
➡️ The University of Cambridge has recently released a new framework to support companies in their path towards net zero.
➡️ Apple co-founder Steve Wozniak has launched a new startup called Efforce, which uses blockchain to finance energy efficiency projects (Yahoo Finance).
Vehicles
The biggest news in tech this week is related to lithium batteries and electric vehicles. Quantumscape, a startup backed by Volkswagen that went public through a merger with Kensington Capital Acquisition two weeks ago, announced on Tuesday that it has developed solid-state lithium-metal batteries that radically outperform competitors (see the full video of the showcase for more information). These batteries would allow electric vehicles to charge up to 80% in about 15 minutes, with an expected lifecycle of 12 years in normal use scenarios (CNBC). This could provide Volkswagen with an edge in EV production in both consumer and industrial segments. According to Barron’s, this technology is part of the R&D programs of virtually all companies in the sector, with Samsung holding a leading position in it.
If electric vehicles are surrounded by increasing hype, the same cannot be said about autonomous vehicles. Uber will transfer its Advanced Technologies Group (ATG) to the AVs startup Aurora, backed by Amazon, also investing $400 million to take a 26% stake in the company (The Economist). Similarly, Uber sold its flying taxi division Elevate to Joby Aviation, investing $75 million in the company (The Guardian). Uber is clearly trying to externalize expensive R&D efforts to companies it can control to exploit eventual future technological advancements. By doing so, it shows increased attention on profitability and the willingness to keep backlash deriving by poor results in innovation processes as far as possible.
Meanwhile, the space startup Aevum unveiled its Ravn X launch vehicle, a drone aircraft that could allow the company to dominate the small launch market through unmanned, autonomous vehicles (TechCrunch).
➡️ Zoom largely benefited from the pandemic, but how will it cope with a post-pandemic world (Recode)? Very interesting article.
➡️ Tesla is raising funds by selling $5 billion in stock (TechCrunch). It is not clear whether the company needs that cash or not; however, this is a way to exploit the high valuation and avoid debt instruments.
➡️ Apparently, some types of AI need to rest just like humans do to preserve their correct functioning (Scientific American).
Finance
IPOs
This week, Doordash, Airbnb and C3.ai went public with roaring IPOs. Despite being still unprofitable, DoorDash closed at $190 per share, 86% above the IPO price of $102, raising $3.4 billion at a $72 billion valuation (Financial Times). Similarly, Airbnb — we could not imagine anything similar a few months ago, when a pandemic literally froze global tourism — closed at $145 per share, 113% above its IPO price of $68, raising $3.5 billion at an outstanding valuation of $100.7 billion (CNBC). This IPO bonanza, paired with the record set by SPAC acquisitions (see below), is generating many concerns. I continue to believe that this is fundamentally different from the dot-com bubble; however, as reported by Erin Griffith on The New York Times, those who experienced it two decades ago see similar patterns.
On Bloomberg, Chris Bryant analyzes how the interests of hedge funds — which are big SPACs investors — diverge from those of retail investors. Basically, hedge funds provide initial capital to SPAC sponsors and then, after the merger with a target company is announced, exit thanks to their redemption right (see picture below). In doing so, they profit with virtually no risk at the expense of long-term investors like retail and institutional investors. As a partial solution to this problem, “sponsors [could] search for a target to merge with first, and only then raise money from institutional investors and pursue a traditional IPO or direct listing”. In such a case, hedge funds would lose their warrants and share the same risk as other investors interested in the long-term performance of the company.
➡️ Masayoshi Son is planning to take SoftBank private by gradually buying back shares, despite earlier announcements to keep the company public (The Japan Times).
Asset management
A couple of weeks ago, I wrote about the growing concentration of the asset management industry, dominated by BlackRock, Vanguard and State Street. Now, a new paper explores the impact of these “New Permanent Universal Owners” on traditional shareholder capitalism. The gradual shift from actively managed to passive funds (like ETFs), which have similar returns but lower costs, has been often defined as a way to democratize investments. The most straightforward consequence, however, has been the growth of financial giants, capable of exploiting economies of scale.
This is markedly different from the fragmented actively managed mutual funds industry characterized by centrifugal market forces — there is no significant advantage from being much bigger than the competitors. In contrast, first-mover advantage combined with powerful economies of scale and liquidity benefits of large index funds — centripetal market forces — make it unlikely that the dominant position of this trio of passive asset managers is going to be challenged in the near future.
This concentration of stocks in the hands of index funds is happening not only in the US but also in some of the biggest European countries and Japan (see chart below). The main consequences could be lower competition between companies and short-termism. Indeed, by acting as “intermediaries for end-investors that seek exposure to entire markets”, these companies do not invest in specific companies that are considered the best options available; instead, they distribute ownership over various companies in the same market. Put it differently, this type of investors tend to freeze competitive dynamics across markets as they are.
➡️ Due to growing pressure from stakeholders, BlackRock promises to do more to make corporate sustainability commitments become reality (Financial Times).
➡️ A new report by the Paulson Institute explores the global biodiversity funding gap, estimated at $711 billion, and provides insights on how to close it to protect natural capital and biodiversity.
The big picture
On The New Yorker, John Cassidy reports about a potential wealth tax in the US, where the pandemic resulted in a surge in the wealth of tech billionaires while causing mass unemployment and financial insecurities for the many. In doing so, he mentions a recent proposal to the British government that only applies the tax to the wealth accumulated in the past, which should not negatively impact future investments.
[…] anyone with over-all wealth, including financial assets and real estate, of more than five hundred thousand pounds would be obliged to pay an annual levy of one per cent for five years. Other versions of the plan are more progressive, with higher tax rates exercised on the largest fortunes […]. Because this tax would involve a onetime hit on wealth that has been accumulated in the past, it shouldn’t affect incentives to work and invest in the future, the report adds, gesturing toward a concern that many critics of wealth taxes have used to knock down such proposals.
See also:
A recent report by Brookings on the risks of relying upon futurist thinking to cope with the uncertainty of our times. The shift from probabilistic to possibilistic thinking might result in “creatively generating scenarios outside of expected outcomes with a focus on impacts rather than probabilities” and distort policymaking.
In a long piece on Mother Jones, Tommy Craggs explains why cultural politics are extremely relevant, mainly because “people’s material concerns, about their jobs and their wage and their health, are bound up with their values, their identities—their culture”.
On The New Yorker, Cal Newport describes “the rise and fall of getting things done”, claiming that the toxic culture of personal productivity ultimately failed to deal with “the insidiously haphazard way that work unfolds at the organizational level”. Very recommended read.
If you made it to the end of this issue, you deserve an extraordinary gift. Researchers at the University of Chicago have developed a tool that estimates the evolution of energy transitions in the US between 1800 and 2019 — with both energy sources and use. Warning: it causes addiction and you may end up playing with it for hours.
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.
Have a nice weekend!
Federico