“Have you looked at our caps recently?” is the question a worried Nazi soldier puts to his comrade in a comedy sketch performed by David Mitchell and Robert Webb. He has just noticed that their uniforms are emblazoned with skulls; a doubt is nagging away at him. “Hans,” he asks. “Are we the baddies?”Listen to this story. Enjoy more audio and podcasts on More
Three years ago no one had heard of BioNTech. Today the German biotechnology firm is a household name, which last year raked in revenues of $19bn. The company owes both the lustre and the lucre chiefly to the successful mrna covid-19 vaccine which it developed in partnership with Pfizer, an American drug giant. Yet even the effective jab has not immunised it from a downturn afflicting the biotech industry. On August 8th BioNTech reported that sales fell by 40% in the second quarter, year on year, as fewer people are left unjabbed and unboosted. Its share price tumbled by nearly 9%.The biotech industry is particularly vulnerable to the syndrome of slowing economic growth, higher inflation and rising interest rates. As with other tech startups, rate rises make promised profits, most of which lie far in the future, look less hale today. Unlike software firms, biotech companies need constant injections of capital to develop their drugs, which takes lots of time and money. Until recently that money was easy to tap. Biotech startups raised $34bn globally last year, twice the figure in 2020. In the first six months of 2021, 61 such firms launched initial public offerings (ipos) in America alone. Since then cash has grown scarcer. The first half of 2022 saw just 14 American ipos. None of the 24 startups that Silicon Valley Bank, a lender to techie companies, expected to go public this year has made the jump. Funding for private biotech businesses is down, too. Banks are reluctant to lend to early-stage firms, whose fate is tied to treatments that might never materialise. Many companies are shedding staff. This week Atara and MacroGenics, two medium-sized public firms, announced big layoffs. An index of biotech companies listed on New York’s Nasdaq exchange has fallen by a quarter since its peak a year ago, further than the sliding nasdaq index overall (see chart). Valuations of unlisted companies are dropping faster than ever, says Lain Anderson of L.E.K. Consulting. Not all will pull through.As non-specialist investors swept up in the pandemic biotech boom retreat, more discerning ones are sharpening their pencils. Some companies suddenly look cheap, especially those with proven treatments or drugs in late-stage trials. Venture-capital firms have raised over $100bn to invest in life-sciences businesses in the past three years, notes Tim Haines of Abingworth, a biotech-focused asset manager. They still have plenty of unspent “dry powder” to deploy. Big pharma in particular may be eyeing up biotech startups with promising drug pipelines. The giants will see some $300bn-worth of patents expire by 2030, says Mr Haines. Pfizer has been particularly acquisitive—and, thanks to the $37bn it earned last year from sales of its covid vaccines and treatments, particularly flush. On August 8th is agreed to pay $5.4bn for Global Blood Therapeutics, a maker of a treatment against sickle-cell disease, bringing its total takeovers to more than $25bn in the past 12 months.As for Pfizer’s covid-vaccine partner, BioNTech, it is still worth five times what it was before the pandemic, despite a 50% crash in its market capitalisation since the peak a year ago. Don’t bring out the defibrillator just yet. ■ More
Soon after Nancy Pelosi, speaker of America’s House of Representatives, left Taiwan on August 3rd, China launched war games around the island, which it claims as its own. A sabre-rattling response to Ms Pelosi’s intentionally provocative act, these were also a dry run for a bid to reunify Taiwan with the mainland by force, which China does not rule out. Troubling, then, for Taiwan and its Western backers, that in American simulations of the conflict the Chinese side often prevails. One congressional report in 2018 warned that America could plausibly face a “decisive military defeat” against China in a battle over Taiwan. Since then China has continued to chip away at American military superiority, including its technological edge. Pushing that edge is therefore a priority for the Department of Defence (dod). And that would be easier if America’s world-beating software developers worked more closely with its equally formidable armsmakers, thinks Michael Brown, who heads the department’s Defence Innovation Unit. Katherine Boyle of Andreessen Horowitz, a venture-capital (vc) firm, observes that America’s largest weapons manufacturers lack top-flight programmers. Silicon Valley has them in spades—but has also long displayed an aversion to battlefield technology. Now geopolitical strife, from Chinese bellicosity to Russia’s invasion of Ukraine, is suddenly making the defence sector look more moral in techies’ eyes. At the same time, technology is changing how wars are fought. And big tech and scrappy startups alike see the dod’s $140bn annual procurement budget, plus American allies’ smaller but cumulatively significant kitties, as ripe for eating into. Giants from Amazon to Microsoft are pitching for Pentagon contracts. vc funding for American aerospace and defence startups has tripled since 2019, to $10bn (see chart). In the first half of 2022 such firms raised $4bn, down a bit from the last six months of 2021 but not as sharply as for startups overall. On August 8th Palantir, a listed data-analytics firm which works with military and intelligence agencies, reported better-than-expected second-quarter revenues of $473m, up by 26% year on year. The period of estrangement between the crucible of America’s tech and the Pentagon may, in other words, be coming to an end. The renewed bonhomie may reshape America’s mighty military-industrial complex.The dod played a large role in seeding Silicon Valley’s early technologies, from radar to semiconductors. Lockheed once built missiles in Sunnyvale, a city wedged between Mountain View (now home of Google and its parent company, Alphabet) and Cupertino (which is Apple’s). The Vietnam war changed all that. Anti-war sentiment permeated Stanford’s lecture halls and faculty lounges, and the nearby garages of startup founders of the day. Protests against the conflict led the university to ban classified research and military recruitment on its campus in Palo Alto. In 2018 a protest by thousands of Google employees successfully stopped their employer from bidding for a Pentagon cloud-computing contract. The search giant’s guidelines for its artificial-intelligence (ai) projects explicitly rule out weapons-related work. Silicon Valley forgeNow two forces are pulling Palo Alto and the rest of the valley closer to the Pentagon. The first is the mounting geopolitical risk. Even before Russia’s invasion of Ukraine reminded the West that big wars can still occur, a growing sense of insecurity was causing countries to beef up their defence budgets. Globally these exceeded $2trn for the first time in 2021. Citigroup, a bank, reckons that 2% of gdp will go from being a largely ignored target for defence spending among nato members to the alliance’s de facto floor. That would greatly expand the worldwide addressable market for American tech firms dabbling in defence. Christian Brose, strategy chief of Anduril, which makes anti-drone and other defence systems, says his firm will look to America’s allies to fuel growth. Since the start of the Ukraine war several European defence ministries have expressed interest in Palantir’s data analytics.The second force is technology, which is reshaping 21st-century warfare. Computing, and in particular ai, is finding its way into weapons, and the command-and-control systems that connect them to one another. The Pentagon is therefore looking beyond its usual contractors to places like Silicon Valley, whose machine-learning chops put the “primes”, as defence giants such as Raytheon or Lockheed Martin are known in the business, to shame. That is a big reason why Ash Carter, defence secretary under Barack Obama, created the Defence Innovation Unit in 2015. “Less of the tech the Pentagon needs is developed inside and more of it is becoming commercial and dual-use,” explains Mr Brown.Rather than buy isolated “platforms”—aircraft, tanks and other advanced systems—the dod would also like to build more networks of cheaper battle units. Last year Israel demonstrated how this might work by deploying swarms of connected drones in Gaza. The Pentagon hopes to do something similar through its Joint All-Domain Command and Control (jadc2) system, which enables data-sharing among sensors and battle units in real time. This has led to a shift in how the Pentagon views technology, says Raj Shah, director of Shield Capital, a military-focused vc firm. The future of warfighting is “software first”, reckons Seth Robinson of Palantir.This is good news for software pedlars. Big tech already equips the armed forces and law enforcement with things like cloud storage, databases, app support, admin tools and logistics. Now it is moving closer to the battlefield. Alphabet, Amazon, Microsoft and Oracle are expected to divvy up the $9bn five-year contract to operate the Pentagon’s Joint Warfighting Cloud Capability (jwcc). Last year Microsoft was awarded a $22bn us Army contract to supply its HoloLens augmented-reality headset to simulate battles for training for up to ten years. The software titan is also helping develop the air force’s battle-management system, which aims to integrate data sources from different parts of the battlefield. In June Alphabet launched a new unit, Google Public Sector, which will compete for the dod’s battle-networks contracts. In a departure from the company’s earlier Pentagon-shy stance, Google’s cloud chief, Thomas Kurian, has insisted that “We wouldn’t be working on a programme like jwcc purely to do back-office work.” Smaller firms, too, spy an opportunity. In January Anduril secured a contract to build anti-drone defences worth $1bn over ten years. The following month another startup, Skydio, won one to sell the us Army $100m-worth of drones. Palantir is one of several tech firms with contracts to flesh out the jadc2 vision. In July c3.ai, a software firm that went public in 2020, was picked by Raytheon, the biggest prime, to develop ai for a long-range precision-targeting system. Steve Walker, chief technology officer of Lockheed Martin, Raytheon’s main rival, says that his company is also looking to work with such firms. Tech’s conquest of warfighting is far from assured. The tech giants’ earlier sorties into defence have a mixed record. Little appears to have come out of a big dod programme from 2015, joined by Apple, to develop battle-ready wearables. The jwcc project was revived after an earlier version, called jedi, was cancelled amid lawsuits from Amazon, which had lost the contract to Microsoft. Microsoft’s HoloLens award has been plagued by delays and criticised as wasteful. Despite robust revenue growth, Palantir reported another loss last quarter, disappointing investors who were expecting the 18-year-old firm to make money at last. Its share price tumbled by more than 10%.Among the upstarts, Anduril and Skydio remain exceptions among smaller firms in winning big contracts. Most startups, says Ms Boyle, are “waiting to see if they are going to get a major contract”. A fraction of the $1trn that America has spent on defence procurement since 2016 has gone to non-conventional defence contractors. As that share rises, the primes, which retain a lot of power (and armies of lobbyists) in Washington, may become less welcoming of the newcomers. Such obstacles may yet be overcome—not least because it appears to be in the interests not just of the tech disrupters but also of the Pentagon. At the end of 2020 America at last defeated China in one of the Pentagon’s war games. The winning move was not more and better hardware. It was the roll-out of clever software-enabled systems like jadc2. ■For more analysis of the biggest stories in business and technology, sign up to The Bottom Line, our weekly newsletter. More
Xi jinping has a master plan for China. Its ultimate goal is for the country to be the 21st century’s dominant superpower, both feared and admired. China’s bellicose response to the visit to Taiwan by Nancy Pelosi, the speaker of America’s House of Representatives, encapsulates the desire to be fearsome. As for admiration, that is to come from growing economic and technological heft. Here, Mr Xi’s plan involves a reshaping of Chinese private enterprise. At first blush, this exercise has been painful for business. Last year the combined market value of China’s largest private companies fell for the first time, according to the Peterson Institute for International Economics (piie). A crackdown against successful internet firms has wiped as much as $2trn from their collective market values. On August 4th Alibaba, an e-merchant, reported its first ever quarterly decline in revenues. A day earlier its financial affiliate, Ant Group, revealed a slide in profits. Jack Ma, who co-founded both firms, may soon concede control of Ant. His net worth has fallen by more than $20bn in the past couple of years. That of Hui Ka Yan, founder of Evergrande, a property giant, has crashed from $40bn in 2020 to $6bn. Last month Carlos Tavares, the boss of Stellantis, a carmaker (whose largest shareholder, Exor, part-owns The Economist’s parent company), said it would exit a Chinese joint-venture after complaining of “growing political interference”.Yet if you look closer the picture is more complex. Even as some firms suffer, a new cohort of tycoons is thriving in Mr Xi’s China. China’s ten richest tycoons have accumulated a net $167bn in fresh wealth since the start of 2020, according to data from Bloomberg, a financial-information firm. Even as old corporate darlings decline, new ones are rising. In the past few weeks The Economist has spoken to several of the new champions, and the mood is surprisingly upbeat.China’s private sector has grown into one of the most dynamic in the world. According to the piie, by 2020 privately controlled companies accounted for more than half of the market capitalisation of China’s 100 biggest listed firms, compared with less than a tenth a decade earlier (see chart 1). Private companies employ 80% of urban workers, or around 150m all told, and account for 60% of Chinese gdp. Thirty-two of them feature in the Fortune 500 ranking of the world’s biggest firms by revenue, up from none in 2005. The march from Maoism to markets has been long and arduous. Until 1992 “entrepreneurs were looked down upon”, recalls Zheng Chunying, back then a government functionary in Liaoning province. But China was buzzing with talk of change and its ailing leader, Deng Xiaoping, had just reaffirmed the government’s commitment to economic reforms. Liaoning’s local government began encouraging officials and Communist Party members to start their own firms. Mr Zheng became the proud co-owner, with his wife and sister, of a small shop that sold imported clothing from Hong Kong and shoes from Europe. When in 1996 officials were suddenly banned from running businesses, he quit his government job rather than closing his shop. He was one of a cohort who chose business over bureaucracy. His decision was vindicated in 2002. That year the party constitution was amended to allow businesspeople to become members. In the following years Chinese business went from strength to strength. Businesspeople cite the first five years of Mr Xi’s leadership between 2012 and 2017 as the heyday of private enterprise. Technology groups such as Alibaba and Tencent, and conglomerates like hna and Dalian Wanda rose to global prominence. Their founders became household names—and accumulated Croesus-like riches. Five years ago the mood began to shift. First came a swift crackdown on the conglomerates, some of which subsequently went bust (for example, hna) or were nationalised (Anbang, a big insurer). Then thousands of privately run shadow banks were shut down. In the past two years came the turn of the tech giants, slapped with regulatory probes, fines and tough new rules on everything from user data to treatment of workers, and of property firms, whose ability to take on new debt the government started to restrict. Look beyond tech and property, though, and things look rather different. Many large private companies “have not only avoided regulatory assault but have also grown bigger”, says Huang Tianlei of piie. Anta, based in the coastal Fujian province, has built a global sportswear empire. Batteries built by catl, another Fujian firm, can be found in many of the world’s evs. Zhifei Biological, a maker of covid-19 and other tests from the central city of Chongqing, has come out of nowhere to land on the Fortune 500 list. Mr Zheng’s firm, Jala, now employs 8,000 people and is one of the largest domestic makers of skincare products. His firm has become an important part of a cosmetics development park called “Oriental Beauty Valley”, where local brands have been encouraged to set up labs and hire scientists.The bosses of these new corporate champions are dislodging tech moguls as owners of China’s biggest fortunes, notes Rupert Hoogewerf of Hurun, a compiler of rich lists (see chart 2). China’s wealthiest man is now Zhong Shanshan, who built Nongfu, which sells bottled water. Many tycoons have greatly added to their personal wealth with direct help from local authorities. Take Muyuan, which has grown into one of the world’s biggest hog producers. The Communist Party of Nanyang city, where the company is based, has an explicit goal of putting it on the Fortune 500 list. In late 2021 the local party told officials to make land available for Muyuan, and to streamline its various applications and inspections. The company is to receive subsidies for farm equipment, and local engineers and other workers are to be connected with the company, the plan ordains. The fortune of Muyuan’s founder, Qin Yinglin, has swelled to $23bn.As for the next generation of entrepreneurs, Mr Xi recently urged them to “dare to start a business”. His message has been one of unwavering support for startups—as long as they are focused on the areas the government has prioritised. These include high-end manufacturing, green energy and cloud-computing. The central government wants to create 1m innovative small and medium-sized firms between 2021 and 2025. Of those, 100,000 will be dubbed “specialised new enterprises” and 10,000 will earn the distinction of “little giant”. The state still takes direct stakes in private companies. But it is finding new ways to influence and guide the private sector, often through industrial parks and a system of state-designated status. Startups are free not to participate but many will find great benefits to becoming part of these ecosystems of talent, capital and market access. Designations such as “little giant” act as endorsements and signal where capital ought to flow. They also make for “good public relations”, says Gu Jie, founder of Fourier, a robotics startup. Obtaining them eases access to places like Zhangjiang Robotics Valley in Shanghai, part of a larger high-tech development zone housing 150 research and development (r&d) centres, more than 24,000 companies and 400,000 workers. The local government owns and runs the zone. Startups benefit in other ways. Mr Gu, whose firm is based in Zhangjiang, notes that securing the metal components for Fourier’s prototypes takes weeks rather than months, because many of the suppliers themselves reside in the technology park. He has also been able to tap the local talent pool, hiring more than 600 engineers and scientists in the past few years. Doing that in Silicon Valley or other global tech hubs would be time-consuming and prohibitively expensive, Mr Gu observes. Fourier has attracted money from SoftBank, a Japanese tech-investment group, and Aramco Ventures, the venture-capital arm of Saudi Arabia’s oil colossus. It has also been backed by several Chinese government funds. These state investments were smaller than SoftBank’s. But they send an message to the market about Fourier’s prospects. Such guidance funds, as they are called, many of them run by local governments, are proliferating. Other government entities have taken over the controlling rights to an average of 50 privately run listed firms each year over the past three years, up from six in 2017 and 18 in 2018, reckons Fitch, a rating agency (see chart 3). The recipients of their largesse do not see this as the first step to nationalisation. Zhou Hanyi, co-founder of Xinzailing, a firm specialising in lift safety, likens it instead to a bank loan without a fixed maturity, which does not typically engender state meddling. The state’s goal in promoting state guidance funds and schemes like “little giants” is to boost r&d and help train new talent. If a particular company fails, its technology and workforce can be absorbed by other firms without too much waste, says Christopher Fong of Welkin Capital, a private-equity firm in Hong Kong (and an investor in Xinzailing). Older businesses, too, are opting to join state-backed innovation parks. Mr Zheng, who built Jala without state help (or even a party membership), has started collaborating with a district government in Shanghai. All this hints that Mr Xi’s ideal private sector might look something like Germany’s Mittelstand, according to Enodo Economics, a research firm in London: “a large stable of small private firms that are innovative, generate high-paying jobs and produce technologically advanced manufactured goods”. Will it work? Some entrepreneurs say bureaucracy is being cut back in professionally managed industrial zones and that the state is meddling less in their operations. Yet there are several reasons for scepticism. In practical terms, Mr Xi’s pursuit of higher-quality growth is easier in some parts of the country than in others. The startup zones in Shanghai are well-tuned machines with professional staff. Some employ former Wall Street bankers. By contrast, an analyst who recently visited an industrial park in the southern Hunan province recounts that it resembled a movie set made to look like Hangzhou without any real innovation taking place. When startups soak up local-government largesse, moreover, they also tie themselves to the fate and interests of local officials. This has always been a risk for companies but is becoming a more pressing concern as local governments’ involvement in business becomes tighter. Last year the local government conducted a sweeping review of the holdings of 25,000 officials and their family members in Hangzhou, another big tech hub and home of Alibaba. The city’s party chief, believed to have links to the e-commerce giant, was put under investigation and expelled from the party. Mr Xi’s vision faces another, more fundamental challenge. As a recent report from the Institute on Global Conflict and Co-operation, a think-tank at the University of California, San Diego, puts it, the idea is ultimately for private firms to “cluster and fill in the rest of the supply chain” around the state sector. In other words, rather than compete in a marketplace for customers who are themselves subject to competitive pressures, private companies are increasingly expected to cater, directly or indirectly, to the state itself. Some may still try to dream up new products and services that appeal to a wide audience. But if more entrepreneurs find cosying up to government a surer road to entrepreneurial success, the private sector may lose some of its dynamism. Deng and his successors understood the flaws of too much state control. Mr Xi seems intent on proving them wrong. As for China’s new tycoons, they will, like pragmatic businesspeople everywhere, adapt in order to prosper for as long as they can. ■ More
Fifteen years after its launch, the iPhone “continues to change the world”, said Tim Cook, Apple’s chief executive, as the company reported quarterly earnings on July 28th. It has certainly changed Apple. In an otherwise bumpy week for technology stocks, the world’s most valuable company beat forecasts to report a modest year-on-year increase in revenue. That was in large part thanks to the iPhone, which generated sales of more than $40bn in the latest quarter.Yet as the worldwide smartphone market matures, the iPhone’s dominant role in Apple’s fortunes is diminishing. Whereas at its peak the device made up two-thirds of the firm’s revenue, in the latest quarter its contribution was just under half (see chart). In Apple’s flying-saucer-like headquarters in Cupertino, California, engineers are working on all manner of gadgets that might one day succeed the smartphone. But a big part of Apple’s future is already clear: a growing chunk of revenue and an even larger slice of profits will come not from any product, but from services.For its first three decades Apple Computer made just what its name suggested. In 2006 its Macintosh desktops and laptops were outsold for the first time by something else: the iPod music player earned Apple more revenue. The next year the company launched the iPhone, and dropped Computer from its name. Over the following decade there were times when it could reasonably have been called Apple Telephone: in 2015 iPhone sales amounted to $155bn, twice as much as Apple made from all its other activities combined.Now, after a decade and a half of expansion, the global smartphone market has plateaued, according to idc, a data firm, which also forecasts no growth over the next four years. Apple still has room to increase its market share. Although in America the iPhone accounts for nearly half of smartphone sales, in Europe it makes up more like a quarter, according to Kantar, a research firm. Nonetheless, the years of rocket-powered annual growth are over.Apple has brought in new revenue with other devices. Its AirPods have become the market leader in smart earphones and the Apple Watch is the most successful of its kind. Last year these “wearables” and home accessories contributed a tenth of Apple’s revenue. In 2023 the company is expected to launch its first augmented-reality headset, a technology Mr Cook has described as “profound”. Apple is making interfaces for cars and may one day build the rest of the vehicle, too. Some in the company predict that its forays into health care will eventually rank among Apple’s greatest contributions.As it dreams up more gadgets to sell to more people, however, Apple is employing another strategy in parallel. The company has so far put 1.8bn devices in the pockets and on the desks of some of the world’s most affluent consumers. Now it is selling access to those customers to other companies, and persuading those who own its devices to sign up to its own subscription services. As Luca Maestri, Apple’s chief financial officer, said on a recent earnings call, the Apple devices in circulation represent “a big engine for our services business”. The strategy is picking up speed. Last year services brought in $68bn in revenue, or 19% of Apple’s total. That is double the share in 2015. In the latest quarter services’ share was even higher, at 24%. Apple doesn’t break down where the money comes from, but the biggest chunk is reckoned to be fees from its app store, which amounted to perhaps $25bn last year, according to Sensor Tower, a data provider. The next-biggest part is probably the payment from Google for the right to be Apple devices’ default search engine. This was $10bn in 2020; analysts believe the going rate now is nearer $20bn. Apple’s fast-growing advertising business—mainly selling search ads in its app store—will bring in nearly $7bn this year, reckons eMarketer, another research firm.Most of the rest comes from a range of subscription services: iCloud storage, Apple Music and Apple Care insurance are probably the biggest, estimates Morgan Stanley, an investment bank. More recent ventures like Apple tv+, Apple Fitness, Apple Arcade and Apple Pay make up the rest. New services keep popping up. Last November Apple launched a subscription product for small companies called Apple Business Essentials, offering tech support, device management and so on. In June it announced a “buy now, pay later” service. The company claims a total of 860m active paid subscriptions, nearly a quarter more than it had a year ago.Services are a juicy business. Some, notably tv, are costly for Apple and seem to be partly about burnishing the company’s image (successfully so, if its “best picture” Oscar for “Coda” in March is any indication). Others, though, particularly the app-store business and “Google tax”, contribute handsomely to the bottom line. In the latest quarter Apple’s gross margin on its products was 35%, whereas on services it was 72%. In 2021 services accounted for 19% of Apple’s revenue but 31% of its gross profit.Apple’s business model “is evolving from maximising unit growth to maximising installed-base monetisation”, believes Erik Woodring of Morgan Stanley. He argues that pushing further into services could add another $1trn to the company’s $2.6trn market capitalisation. The average Apple user spends about $10 a month on Apple services (including app-store purchases), much less than they might spend on subscriptions to services like LinkedIn or Peloton, points out Mr Woodring, suggesting plenty of “runway” for growth.For now the market treats Apple as a hardware business. Its shares trade at an 18% discount to tech platforms such as Google’s parent company, Alphabet, and a 49% discount relative to streaming services like Netflix, calculates Morgan Stanley. Apple seems to be nudging investors towards thinking of it as a services firm. It has, for instance, increased disclosures in recent years about its estimated number of “active” devices. Mr Cook declared recently that integrating Apple’s services with its hardware and software was “at the centre of our work and philosophy”. Soon it may even sell its hardware on a subscription basis. In March Bloomberg reported that Apple was working on an iPhone subscription plan, offering regular hardware updates for a monthly fee.Pushing into services carries risks. Consumers are not used to subscribing to devices (though many already pay for their phone in instalments, which isn’t so different). Apple would need to find a way to offer subscriptions without alienating the retailers and mobile-phone operators through which it currently sells 85% of its iPhones, points out Mr Woodring. Services face particularly acute regulatory risks, as European trustbusters circle the app store. And although subscriptions offer steady income, not all services are recession-proof. Apple warned on July 28th that growth in services revenue would decelerate in the next quarter, partly owing to what Mr Cook called the “cloud” hanging over digital advertising.Hardware will probably always be Apple’s main business. It may even be that one of the secret projects in the Cupertino flying-saucer turns into another iPhone-like smash-hit. But with nearly 2bn Apple devices in circulation, there is a big and only partially tapped opportunity to sell people things to do with them. Consumers will doubtless keep buying Apple’s shiny gadgets. From now on, when they do so, they will be acquiring not just swanky new devices for themselves but tiny digital storefronts for Apple. ■For more analysis of the biggest stories in business and technology, sign up to The Bottom Line, our weekly newsletter. More
The id.buzz camper van is a symbol of what Herbert Diess hoped to achieve as boss of Volkswagen. The battery-powered update of the classic vw bus, launched in 2022, sought to haul an old-fashioned institution into the electric era. But Mr Diess’s effort to turn the German giant into an electric-vehicle (ev) juggernaut ended abruptly on July 22nd, when the firm announced he would leave the top job in a few weeks. He will be succeeded by Oliver Blume, who now runs Porsche, the group’s high-performance marque. Listen to this story. Enjoy more audio and podcasts on More
It is the world’s most tired interview question: what is your greatest weakness? And Rishi Sunak, one of the two remaining candidates in the race to become Britain’s prime minister, gave the world’s most tired answer—perfectionism—when he was asked it at an online hustings earlier this month. Listen to this story. Enjoy more audio and podcasts on More
To understand the significance of the drawn-out takeover battle for Spirit Airlines, a Florida-based ultra-low-cost carrier (ulcc), it helps to know something about one of the main protagonists. Even his opponents describe Bill Franke as brilliant. The entrepreneur is now in his 80s, but he once recounted how, on his first experience of air travel, as a young boy flying with his family to Paraguay in 1948, he had to suck oxygen from a tube as the Douglas dc-4 ascended over the Andes. It must have gone to his head. Since then he has become one of few people to have made billions out of aviation, despite the industry’s tumultuous ups and downs.His secret has been rigid adherence to the no-frills model: low basic fares, lots of add-ons, single-manufacturer fleets, fuel efficiency and strict cost-control. In 2006 his private-equity firm, Indigo Partners, took over Spirit, sold it in 2013 and bought Frontier Airlines, a ulcc based in Denver. Indigo has big stakes in Wizz Air, one of Europe’s biggest low-cost carriers, Volaris in Mexico and Jetsmart in South America. This year he went further, orchestrating Frontier’s $2.6bn cash-and-shares merger with Spirit. The aim was to create America’s fifth-largest airline, a jumbo-sized ulcc that would combine networks on either side of the United States with little overlap. It was Mr Franke at his intrepid best. Against him was a bigger-spending foe, though. JetBlue Airways, on the more gentrified end of low-cost air travel, had offered $3.7bn in cash for Spirit. On July 27th Spirit and Frontier called off their merger agreement. A day later JetBlue said it had agreed to buy Spirit. Whether the deal succeeds partly depends on the answers to two related questions.The first has to do with the zeal of President Joe Biden’s antitrust crackdown. His administration wants to usher in a new era of pro-competition litigation. Airlines are near the top of its hit list. The second question concerns the structure of the industry itself. Who could do more to bash down the prices of the high-fare heavyweights such as Delta, United and American Airlines? Is it the “tweeners” like JetBlue that call themselves low-cost but resemble full-service airlines? Or the insurgent ulccs that promise a Spartan model, grumpy passengers notwithstanding? In its campaign to inject more competition into American business, the White House has drawn attention to what it considers an overconcentrated domestic airline industry. The Department of Justice (doj) is on the warpath, too, on behalf of “travellers who cannot afford a plane ticket home to visit family”, as Jonathan Kanter, assistant attorney-general, has put it. He makes clear the doj is keen to “litigate, not settle”. Last year it sued to block the so-called Northeast Alliance between American and JetBlue in America’s lucrative north-east market. This would not only harm passengers in New York and Boston, it argued, but diminish JetBlue’s incentive to compete on fares with American across the country. The case goes to court in September. It is a big reason why Spirit has reservations about selling itself to JetBlue. It could drag on for months, leaving Spirit’s shareholders in limbo. There is a bigger reason, however. JetBlue’s takeover of Spirit would be even likelier to fall foul of the doj than either the Northeast Alliance or a Frontier-Spirit combo. The transaction could potentially be tied up for not months but years. JetBlue, after all, has its sights set on eliminating Spirit, America’s largest ulcc, simply to bag its aeroplanes, pilots and airport slots. JetBlue also intends to remove seats on aircraft it takes over from Spirit in order to offer its plusher service, which would inevitably push up average seat costs. Moreover, it will have less incentive to sell its lowest no-frills fares on routes formerly operated by Spirit.JetBlue counters that acquiring Spirit will make it a stronger rival to the network carriers, bringing down prices overall. It cites the “JetBlue effect”, which, it claims, forces legacy carriers to drop fares by about 16% on average when it goes head to head with them on non-stop routes. That may be so. Yet it ignores the impact of its higher fares on passengers who might have flown on Spirit. That leads to the second question: what industry structure would promote lower fares and more choice overall? JetBlue contends that its in-between model has three times more of a fare impact on legacy carriers than the ulcc model does on similar routes. Frontier calls this a fantasy. It notes that JetBlue itself has admitted to lowering fares in response to its no-frills rivals. It also argues that the “ulcc effect” drives fares down for longer than the JetBlue effect does.Moreover, it is possible that a bigger no-frills carrier would create demand from a new cohort of travellers, as has happened in Europe. Keith McMullan of Aviation Strategy, a consultancy, notes that in 2019 Spirit and Frontier had a combined domestic market share of 8%. That compares with a total of 20% in Europe for Ryanair, a Dublin-based no-frills giant, and Wizz Air. A combination of Frontier and Spirit, especially with the hundreds of new Airbus jets both firms have on order, might have increased that share significantly, making it as disruptive as its European counterparts. No thrills JetBlue shrugs off the threat its annihilation of Spirit would pose to America’s no-frills market. Its advisers argue that Frontier and other ulccs could quickly move into parts of America vacated by Spirit. That overlooks the troubled state of the industry since the covid-19 pandemic. Pilots, crew and engineers are thin on the ground (and off it). Travel chaos abounds. Normally, when the industry suffers a slump, a shake-out helps ease such bottlenecks in favour of low-cost airlines. That hasn’t happened yet, perhaps because overconcentration has cushioned the impact on the debt-laden legacy carriers. It may do soon. It is a pity that a combined Frontier and Spirit, chaired by the indefatigable Mr Franke, may not be around to fly the flag for creative destruction. ■Read more from Schumpeter, our columnist on global business:Meet Keyence, consultant to the world’s factories (Jul 23rd)Watch Russia’s Rosneft to see the new direction of global petropolitics (Jul 14th)What does the future hold for Reliance, India’s biggest firm? (Jul 9th) More
