Philippa Kaur

“WHITE HOT”, a new documentary, traces the rise and fall of Abercrombie & Fitch, an American fashion label that soared in the early 2000s before crashing just as dramatically. The film explores the firm’s obsession with employing a certain type of staff—handsome, chiselled, white—which led to damaging claims of racism and sexual harassment. But just as harmful to Abercrombie was that it became dated. Its low-rise jeans, cropped ­T-shirts and migraine-inducing cologne, “Fierce”, became inseparably linked with Americans who came of age around the turn of the century. The price of being so closely associated with one generation was that the next wanted nothing to do with it.Facebook, which took off around the same time, may be experiencing a similar problem. Its millennial identity is embodied in its 37-year-old founder, Mark Zuckerberg, who still wears his college uniform of skinny jeans and hoodie (though these days his hoodies are bespoke). The social network, which began as a way for oversexed Harvard undergraduates to rate each other’s looks, is now seen by youngsters “as a place for people in their 40s and 50s”, in the words of one leaked internal memo. Investors consider ­Facebook unfashionable, too: its parent company, Meta, has lost 39% of its market value this year, including a plunge of $232bn in February, the biggest one-day drop in stockmarket history.Some of Facebook’s problems are overstated. With 2bn daily users, nearly one in three humans, growth was bound to sputter. Its loss of 1m users in the last quarter of 2021—the firm’s first ever fall—was attributed to a rise in the price of mobile data in India. A decline in European users in the latest quarter followed Meta’s ejection from Russia. Privacy rules introduced by Apple are a more serious problem, expected to cost Meta about $10bn this year by making it harder to target ads for iPhone users. But the company is devising workarounds. In February it said that since September it had clawed back half of the 15% reduction in its ability to determine ads’ effectiveness. Similarly, it may be better able than most to absorb the cost of new tech rules being written in Europe. Firms like Meta “have a cockroach-like ability to find ways to maintain business as usual”, says Mark Shmulik of Bernstein, a broker.Yet if these hurdles can be overcome at a price, the ageing of ­Facebook’s audience seems inexorable. In rich countries, which matter most to advertisers, young users appear to be drifting away. Frances Haugen, a former Facebook executive, made headlines last year for blowing the whistle on failures of content moderation. But her more important revelation was that engagement among young Americans had plummeted. In Facebook’s five most important countries, account registrations for under-18s had fallen by a quarter within a year, she said. Independent estimates corroborate her claims. In Britain 18- to 24-year-olds are spending half as much time on Facebook and Instagram, its sister app, as they were four years ago, estimates Enders Analysis, a research firm. Mr Zuckerberg admitted last year that, amid competition from TikTok and others, Facebook had neglected young people: “Our services have gotten dialled to be the best for most people who use them, rather than specifically for young adults.”In the past, saving the flagship app was Mr Zuckerberg’s priority. After the acquisition of Instagram in 2012, Facebook reportedly limited its adoptive sibling’s ability to hire staff, out of fear that it would cannibalise Facebook’s users—“like the big sister that wants to dress you up for the party but does not want you to be prettier than she is”, in the words of a former Instagram executive quoted in “No Filter”, a book by Sarah Frier. Today Mr Zuckerberg seems willing to sacrifice his first-born to protect the wider business. Efforts to attract young people have focused on other apps, such as Messenger Kids and Instagram Kids (which was shelved last year). Reels, Meta’s TikTok clone, was rolled out first on Instagram. Last year Mr Zuckerberg even dropped the Facebook name from his company, the better to insulate the business from its least fashionable brand. Where once Mr Zuckerberg’s obsession was repairing the ageing Facebook mothership, now he is scrambling lifeboats in all directions: four new virtual-reality headsets are expected in the next two years, as well as a smart watch.The Face that launched a thousand shopsThat is the right thing to do. But it raises the question of what will become of the world’s biggest social network as it begins to decay. Once-mighty sites like MySpace endure, like abandoned digital ruins. Far in the future, will Facebook, too, become a ghost town?Not necessarily. Young users are unlikely ever to return to Facebook for social networking, which they increasingly do on apps like Snapchat or BeReal, a photo-messaging service that is spreading on college campuses. But networking is only one function of social media. People also use it to be entertained, and increasingly to buy things. Facebook is losing its appeal as a place to socialise, but it may reinvent itself as a platform for other activities.In entertainment, TikTok is well ahead. Meta’s first attempt to copy it, with Lasso, in 2018, failed. Having proved a hit on Instagram, where it accounts for 20% of time spent, Reels is building an audience on Facebook, too. Facebook’s newsfeed is being revamped along TikTokian lines, to recommend content suggested by artificial intelligence, whether or not it was posted by a friend. Facebook has long run an eBay-esque Marketplace, and in the pandemic launched Shops, to bring more e-commerce onto its own platform. Its latest earnings call promised investment in a service to let users send messages to companies through ads.Abercrombie has dropped its elitist style in favour of “championing inclusivity and creating a sense of belonging”. Half-naked hunks are out, replaced by plus-size models in comfy athleisure wear, and last year revenue was back to 80% of its peak. Facebook will likewise never be cool again. But there is plenty of less glamorous money to be made.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

JACK MA, CHINA’S most famous entrepreneur, has not been one to mince his words about the role of government and business. At a meeting with corporate leaders in Bali in 2018 he told the audience that it is not the government that makes business and innovation happen. That is the work of entrepreneurs, he insisted: “They have the ideas and dreams.”A harsh crackdown that began in late 2020 on China’s largest consumer-internet groups has made such inspiring sentiments harder to sustain. For the first time the leading firms are suffering slowing revenue growth. Alibaba’s revenues rose by just 10% in the final three months of 2021, marking its slowest quarterly expansion since going public in 2014. Tencent, an internet-services and video-game Goliath, notched 8% revenue growth in the same period, its slowest rate since being a public company. JD.com, another e-commerce group, announced solid revenues but Richard Liu, its founder and chairman, resigned in April, one of many high-profile entrepreneurs to do so in the past couple of years. Although Meituan, a delivery giant, reported revenue growth of 30%, local media reported it plans to axe up to 20% of its employees in core business units. Shares in those four companies, along with Pinduoduo, yet another e-commerce group, have shed about $1.5trn in value since February of last year.The government’s campaign is moving into a new phase in 2022. The sorry state of the Chinese economy has forced regulators to delay further planned punishment for companies in the hope that they can help recharge growth. In the most positive signal for the sector in over a year, the central government said on April 29th that it planned to normalise regulation and “promote the healthy development of the platform economy”.The share prices of several companies, including Alibaba, soared on the news. But some new rules have only been put off for a later date, according to the Wall Street Journal. And much damage has already been done. The entrepreneurs behind China’s biggest tech successes have come to a grim reckoning: that because of government meddling they will be unable to innovate, and may even become boring.When Mr Ma celebrated Chinese enterprise in Bali, Alibaba and Tencent were by then two of China’s biggest private investors, pushing into an array of businesses within the country and abroad. Acquisitions seemed to ensure them an early toehold in hot new areas of growth. Online education and health, media and entertainment, banking and lending services, promising data-harvesting businesses: all were fair game. Mr Ma proved how powerful a tech entrepreneur’s financial dreams could be. By 2020 Ant had swallowed up 15%, or 1.7trn yuan ($257bn) of the market for total outstanding consumer loans in China.For a time the empire-building of Mr Ma and other Chinese entrepreneurs bore a striking resemblance to the expansionary tendencies of America’s tech titans. As Jeff Bezos, founder of Amazon, was buying the Washington Post, and Jack Dorsey of Twitter, a social-media group, was launching Block, a payments platform, Mr Ma was scooping up his own media assets and building a finance conglomerate.Bottling up the genieAmerican tech bosses are still reshaping and expanding their empires. Mark Zuckerberg, founder of Facebook, is seeking to turn his social-media group into a “metaverse company”, bringing virtual reality to the mainstream. Elon Musk, boss of Tesla, an electric-car maker, is buying Twitter. Chinese empire-builders, by contrast, are tempering their ambitions.Beijing’s regulatory crackdown has greatly discouraged risk-taking. Tencent’s hefty expansion into online education in 2019 is now a dead end, as is that whole industry, after sweeping new rules on the services that can be offered to school-age pupils were announced last year. Investors want nothing to do with Chinese fintech after Ant’s initial public offering was crushed by Communist Party leaders in late 2020. Forget about massive data-crunching businesses, too, where the government’s new framework for control and ownership over personal and financial data will limit private innovation. Online video-games, Tencent’s largest revenue generator, have also come under attack. The government has signalled that it will no longer tolerate private investment in news-gathering, putting Mr Ma’s media empire at risk. It may even be planning to take small stakes in tech groups in order to guide their development.The companies’ strategies reflect limited options for rapid growth. Take Alibaba and its three core areas of operation: international, such as Lazada, an e-commerce group based in Singapore; within China, dominated by e-commerce; and a tech division that counts cloud computing as its biggest engine of growth. Alibaba’s solution to a long-expected slowdown in Chinese e-commerce as the market becomes saturated has been to move downmarket into smaller cities across the country with the expansion of Taobao Deals, a platform that allows groups of people to buy products at lower cost. Alibaba has recently started playing down this strategy to analysts and investors, who are underwhelmed by the low margins associated with such businesses.Alibaba’s global business has grown rapidly, mainly because of the fast expansion of Lazada. But its retail operations abroad have contributed only about 5% of overall annual revenues since 2017 and are unlikely ever to make up a meaningful part of the Alibaba empire. Its prospects of breaking into developed markets in America and Europe are close to non-existent. Some of that pessimism is based on America’s increasing distrust of Chinese companies. In 2018 Ant’s attempt to buy an American payments group was shot down by regulators in Washington on national-security grounds. This has pushed Alibaba to focus more on developing markets with much less spending power.Chinese regulators, too, have clamped down on the firms’ foreign investments. They have also stepped up prevention of monopolistic behaviour at home, stifling domestic investments. Alibaba was one of China’s biggest corporate acquirers in 2018, when it pulled off about $18bn in mergers and acquisitions. In 2021 that slumped to $5.7bn, over four-fifths of which was spent within China, according to Refinitiv, a data company. The acquisitive Tencent’s dealmaking was valued at $20bn last year, down from $32bn in 2018 (see chart). The company also sold about $16bn in shares in JD.com in December, sparking fears that regulators were pushing it to unwind its sprawling empire.As customary sources of revenues come under further pressure China’s internet giants have gamely talked up a new stage of innovation—one in which the firms’ ambitions are much more clearly defined by the state. The government wants China’s future tech giants to make or design semiconductors and artificial-intelligence (AI) software, and run cloud-computing businesses. It has been designating specific areas in which companies should lead, giving an unambiguous green light for private entrepreneurs to go after the next big thing, as long as it lines up with policy goals. Baidu, best known as China’s online-search champion, is the government’s first choice for leading AI and autonomous-driving businesses. On April 28th the firm was awarded China’s first permit allowing driverless ride-hailing on public roads.Many tech companies have taken the hint. Alibaba relies heavily on the success of its cloud-computing division, which leads the market and brought in 8% of total revenue in the last quarter of 2021. In February Daniel Zhang, Ailbaba’s chief executive, told analysts that cloud-computing could be a trillion-yuan business by 2025 and be transformed into his firm’s main activity. Tencent and Baidu have large and growing cloud operations, too. Most business-to-business services will one day be dominated by the incumbent tech groups, says Elinor Leung of CLSA, an investment bank.Such top-down delegation of entrepreneurial activity cannot be completely written off, says Sam Hsu of the Wharton School in Pennsylvania. State-backed research and development is commonplace in even the most market-driven economies. The momentum building in China may eventually enhance the underlying technologies on which a new wave of enterprise will take root.Finding state-endorsed technologies to invest in is certainly politically expedient for the largest internet platforms, says Robin Zhu of Bernstein, a broker. Robin Li, the founder of Baidu, has embraced his firm’s party-picked mission with such zeal that he even wrote a book on autonomous driving last year. Yet even self-driving cars and other state-backed projects will probably fall short of the growth rates to which the companies grew accustomed in the heady 2010s.Alibaba is again a case in point. Aliyun, its party-approved cloud business, has suffered big setbacks recently. It lost ByteDance, the owner of TikTok, Western teenagers’ favourite time sink, as a customer. A steady stream of state-controlled companies are leaving it for cloud platforms owned by other state groups. China’s big telecoms firms, which have competing businesses, are expected to eat up market share in the lower-value-added part of cloud services. There are limits to how much Aliyun can earn in foreign markets, where a distrust of Chinese technology has led to the banishment of tech compatriots such as Huawei, a telecoms-equipment maker. Aliyun’s revenues grew by 20% year on year in the last quarter of 2021. Not bad, you might think. But much slower than analysts had anticipated.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

RESTORING THE supremacy of America’s First Amendment on Twitter seems priority number one for Elon Musk. Inconveniently, his acquisition of Twitter comes as several countries are passing laws to regulate how social-media firms should moderate content.The European Union’s Digital Services Act (DSA), which was agreed on April 23rd, will do most to stymie Mr Musk’s plans to turn Twitter back into a place where almost anything goes. “Be it cars or social media, any company operating in Europe needs to comply with our rules—regardless of their shareholding,” Thierry Breton, the EU’s commissioner for the internal market, warned (on Twitter, naturally) hours after the buy-out was announced.Bureaucrats in Brussels will not now tell Twitter and other social-media firms which type of speech they should take down, explains Julian Jaursch of SNV, a think-tank based in Berlin. Instead, the thrust of the DSA, which is set to apply fully on January 1st 2024, is to push services to systematise and strengthen their content moderation. For instance, Twitter will have to be more transparent over how it polices its platform, follow regulators’ advice on how to improve things, provide a way for users to flag bad content easily and give vetted researchers access to key data. Repeated violations can lead to hefty fines: up to 6% of global annual sales.Surprisingly, given Britain’s long tradition of protecting free speech, its Online Safety Bill, which was recently introduced in Parliament, goes further. Details still need to be hammered out but the bill will require internet platforms, among other things, to go after not only illegal content, such as child pornography, but “legal but harmful” abuses such as racism or bullying. Fines are higher, too: up to 10% of global revenues.Other countries, including Australia and India, have recently passed their versions of such laws. Even in America there is a big debate about how to reform Section 230, the provision in the Communications Decency Act that shields online services from liability for content published on their platforms. Yet it is unlikely to result in legislation in the foreseeable future. Democrats want stricter rules whereas Republicans fear censorship—and Congress is paralysed.Yet even without all these laws, Mr Musk may soon come to realise some content moderation is needed. After years of debate and experiment, even a few free-speech advocates argue that, while tricky, if done well it “actually enables more free speech”, in the words of Mike Masnick of Techdirt, a blog. “What content moderation does,” he recently wrote, “is create spaces where more people can feel free to talk.”For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Business section of the print edition under the headline “Moderating power” More

INFLATION IS MAKING up for lost time. A word that many thought had gone the way of peroxide hair and trench coats in the early 1980s is now back on almost every CEO’s lips as they run through a barrage of compounding shocks—war, commodity crisis, supply-chain disruption and labour shortages—in their companies’ first-quarter results. From December to March, almost three-quarters of firms in the S&P 500 mentioned inflation in earnings calls, according to FactSet, a data gatherer. Such is the novelty, it runs the risk of making such turgid occasions almost riveting.In rich countries, producer prices are surging at their fastest rate in 40 years. That sounds bad. On the ground some say it feels awful. Thierry Piéton, chief financial officer of Renault, said the French carmaker initially predicted raw-material costs would double this year. Now it thinks they will triple. Elon Musk says Tesla’s suppliers are requesting 20-30% increases in parts for electric cars compared to this time last year. Others talk of five-fold increases in the costs of sending containers between Europe and Asia, a dearth of truck drivers in America, and a scramble for everything from corn syrup to coffee beans and lithium.Amid such a maelstrom, the perils of getting inflation wrong are obvious. You only need to look at Netflix, trying to raise prices in the midst of a brutally expensive streaming war, to get a sense of the risks involved. Yet in general, some of the world’s best-known companies are coping. After years of negligible increases, they have managed to push up prices without alienating their consumers. How long they can continue to do so is one of the biggest questions in business today.In some cases, as Mark Schneider, boss of Nestlé, the world’s biggest food company, puts it, the public understands that “something has to give.” War, after all, is on the TV, and the pandemic is still fresh in people’s minds. Inflation is less alien by the day. In other cases, pricing is done more sneakily: offering premium products to those who are still able to splash out, or cutting costs for those for whom affordability is the overriding concern. Many of the biggest firms do both.The immediate advantage goes to those with the strongest brands and market shares. That gives them more flexibility to raise prices. Coca-Cola, with almost half of the world’s $180bn fizzy-drinks market, used price and volume increases to deliver bumper earnings, which one analyst described as a “masterclass in pricing power.” Nestlé, which has barely increased prices for years, raised them by 5.2% year on year in the first quarter, its biggest increase since 2008. There may be more to come, it reckons. Mr Musk said Tesla’s price increases were high enough to cover the full amount of cost increases he expects this year. Yet still the vehicles continue to fly out the door.Such firms benefit from another factor associated with brand power: premiumisation, or their ability to raise the cost of already pricey products. The trend appears to be holding fast. In Nestlé’s case there are, as yet, few signs that well-heeled consumers are trading down from, say, Nespresso pods to Starbucks capsules to (heaven forbid) spoonfuls of Nescafé.Pet owners are the most bounteous. Nestlé’s Purina pet-care division, with telltale products like “Fancy Feast”, achieved the largest price increases across all categories during the quarter. Parents are far more parsimonious; they are much less willing to pay a high price for baby formula—though Kimberly-Clark, another consumer-goods company, has high hopes for premiumisation of nappies in China. As Michael Hsu, its CEO, put it, “the value per baby is less than half of what it is in developed markets like the United States”. Consumers in rich countries are also better able to cope with price rises than those in poorer ones. Firms like Coca-Cola offer better-packaged premium products in America and Europe, and more value-conscious ones in emerging markets.So much for the haves. What about the have-nots? If firms can’t raise prices, why not shrink the products they sell instead. This tactic, baptised in Britain in 2013 as shrinkflation, dates back a lot further. Hershey’s, an American confectioner, proudly recalls how in the 1950s it responded to fluctuations in cocoa-bean prices by regularly changing the weight of the bar, rather than the five-cent price. No one admits to shrinkflation these days. But they are rebranding it in ways that are cool, thrifty—and in some cases even environmentally virtuous.Renault, whose executives describe Dacia, a subsidiary making its cheapest cars, as an “everyday-low-price sort of brand”—somewhat like a soap powder—is hot on the trend. It is slashing the number of different parts across its models; that means more leverage with suppliers since fewer parts are bought but in larger volumes. Likewise, there’s plenty of talk among snack producers about reducing packaging sizes of cheap products, not just to cut costs but to save on waste. Coca-Cola is selling drinks by the cupful in India. In Latin America it is expanding its use of refillable bottles. In America’s south-west, it is piloting a scheme for use of returnable glass bottles. Rather like hotels asking guests to use fewer towels to spare the environment, it will surely be good for the bottom line, too.ElastoplastThe good news is that consumers have, by and large, taken the inflationary shock in their stride so far. As chief executives have repeated in recent weeks, the sensitivity of shoppers to rising prices, or what they (and economists) call price elasticity, is not as bad as they had feared. But it is still only early days. Many consumers may not know yet how convulsive an inflationary environment can be. If prices continue to increase, and outpace growth in incomes, eventually the shock will sink in. Then the biggest question will not be how price-elastic people are, but whether spending snaps altogether. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.Read more from Schumpeter, our columnist on global business:Elon Musk’s Twitter saga is capitalism gone rogue (Apr 23rd)How much of a risk is opacity for China’s Shein? (Apr 16th)Save globalisation! Buy a Chinese EV (Apr 9th)This article appeared in the Business section of the print edition under the headline “Top dogs and babies’ bottoms” More

HAVE YOU ever actually read a terms-and-conditions document? WordPress, a service for building websites whose clients include the White House and Disney, thinks anyone who has deserves congratulations. Its terms of service are the usual endless scroll of legalese, until you reach section 14, on disclaimers. Buried in the verbiage about warranties and non-infringement is a short, odd sentence: “If you’re reading this, here’s a treat.” Click on the link, and you see a picture of some appetising Texas brisket. Suitably revived, you can then move on to the stuff about jurisdictions and applicable law.Coming across an Easter egg, the name given to unexpected messages or features hidden somewhere in a product, is not like seeing funny advertising or following a humorous corporate social-media account. Easter eggs are winks, not gags; asides rather than stand-up. A new paper on their use in software, by Matthew Lakier and Daniel Vogel of the University of Waterloo in Canada, describes various motivations for them, from rewarding users’ curiosity and acknowledging the work of developers to building hype and recruiting employees. But their defining characteristic is that they are playful.On Google’s search engine, treats famously abound: if you search for the word “askew”, for example, the results page is somewhat off-kilter. Tesla cars are jampacked with references to pop culture: entering 007 into a text box on the car’s console, for example, will change the image of the car to one used by James Bond in “The Spy Who Loved Me”. Tapping repeatedly on the software version number in the settings menu of an Android phone will usually open up a game (on version 11, the game is unlocked by repeatedly turning a dial that goes all the way up to that number, an in-joke nestled within an in-joke).Not everyone likes playfulness in their products. Microsoft got rid of Easter eggs from its software in 2002, when it launched an initiative called Trustworthy Computing. It worried that they might introduce vulnerabilities, prompt questions among users about what else might be lurking in its code, or simply get people asking why its engineers did not have anything better to do. “It’s about trust. It’s about being professional,” explained a blog by one of its developers in 2005.Obviously, playfulness has limits, particularly when applied to products that must not go wrong or to services whose reputation rests on sobriety. You probably don’t want engineers at Airbus or Boeing to spend too much time on giggles. The idea of a frisky auditor sounds more like a fetish than a recipe for commercial success. Giving rein to employees’ creativity has risks: jokes can easily backfire. But Easter eggs do not have to be embedded in code to have an impact: playfulness is a mindset which can show up in design choices or tweaks to wording. And in many contexts, irreverence can foster loyalty rather than weaken it.Making references that rely on users’ knowledge of a product is a way of adding to a sense of community. Hit a broken page on the Marvel website and you’ll be taken to one of a series of quirky 404 pages; one shows Captain America grimacing and the tagline “ HYDRA is currently attacking this page!” Elon Musk routinely uses playfulness to signal his anti-establishment credentials to his army of fans: by including the number “420” in his recent offer price for Twitter, he appeared to be making a reference to marijuana. (If you find this funny, you’ll be thrilled to know that Tesla vehicles can also make fart noises.)In-jokes can be used to reinforce brands. While readers of the New Yorker wait for their app to load, messages like “Captioning cartoons” and “Checking facts” appear at the bottom of the screen. On an iPhone’s web browser, Apple uses circular-rimmed glasses as the icon for its reading-list feature, in an apparent tribute to Steve Jobs.Showing playfulness is above all a way of bestowing humanity on companies and their products. Slack, a messaging platform, offers users a chance to pick various notification sounds. The explanation for the one marked “hummus” is that a British employee said this word in a way that tickled colleagues: it is her voice you can hear.There is no utility at all to this feature, or to knowing the story behind it. But far from eroding trust, the decision to include this sound in the product creates a sense that a group of actual humans is behind it. Playfulness may sound unprofessional. It can be seriously useful.Read more from Bartleby, our columnist on management and work:Startups for the modern workplace (Apr 23rd)How to sign off an email (Apr 16th)How to make hybrid work a success (Apr 9th)This article appeared in the Business section of the print edition under the headline “Easter eggs and other treats” More

ELON MUSK, the world’s richest man, has described Twitter as the “de facto public town square”. On April 25th he struck a deal to take it private in what will be one of the largest leveraged buy-outs in history. Mr Musk, the boss of companies including Tesla, a carmaker, and SpaceX, an aerospace firm, put together an all-cash offer worth about $44bn. He is stumping up the bulk of the financing himself, in the form of $21bn in equity and a $12.5bn loan against his shares in Tesla. If it is a big deal in business terms, it could be bigger still in what it means for the regulation of online speech.Twitter isn’t an obviously attractive business. With 217m daily users it is an order of magnitude smaller than Facebook, the world’s largest social network, and has slipped well behind the likes of Instagram, TikTok and Snapchat. Its share price has bumped along for years: last month it was lower than at its flotation in 2013. It is like a modern-day Craigslist, writes Benedict Evans, a tech analyst: “Coasting on network effects, building nothing much, and getting unbundled piece by piece.”But Mr Musk isn’t interested in Twitter as a business. “I don’t care about the economics at all,” he told a TED conference earlier this month. “This is just my strong, intuitive sense that having a public platform that is maximally trusted and broadly inclusive is extremely important to the future of civilisation.”His willingness to spend a big chunk of his fortune on making Twitter more “inclusive” follows a period in which it has tightened its content moderation. A decade ago Twitter executives joked that the company was “the free-speech wing of the free-speech party”. But the presidency of Donald Trump and the covid-19 pandemic persuaded the company (and most other social networks) that free speech had some drawbacks. Mr Trump was eventually banned from Twitter, as well as Facebook, YouTube and others, following the Capitol riot of January 2021. Misinformation about covid and other subjects was labelled and blocked. In the first half of 2021, Twitter removed 5.9m pieces of content, up from 1.9m two years earlier. In the same period 1.2m accounts were suspended, an increase from 700,000.How might Mr Musk change things? He has said that he will publish Twitter’s code, including its recommendation algorithm, in a bid to be more transparent. He proposes to authenticate all users and to “defeat the spam bots”. And he will be “very cautious with permanent bans”, preferring “time-outs”, he told TED. This suggests a reprieve for Mr Trump and other banned politicians, as advocated by groups including the American Civil Liberties Union, which counts Mr Musk as one of its largest donors. The spectre of reinstating the tweeter-in-chief appals many on the left. So does Mr Musk’s impatience with what he describes as “woke” culture (“The woke mind virus is making Netflix unwatchable,” he tweeted earlier this month, following the video-streamer’s loss of subscribers). A poll in America by YouGov this month found that whereas 54% of Republicans thought that Mr Musk buying Twitter would be good for society, only 7% of Democrats agreed.Since Twitter users lean Democratic, his plan could prove unpopular. Even apolitical users may not like the look of Twitter with freer speech. Moderation weeds out bullying, abuse and other forms of speech that are legal but make for an unpleasant experience online. Social networks that began life with the aim of allowing anything legal, such as Parler and Gettr, eventually tightened up their censorship after being deluged with racism and porn.If Twitter were to take a purist line on free speech, the immediate winners might therefore be its more censorious rivals, suggests Evelyn Douek, an expert on online speech at Harvard Law School. Until now, the main social networks have set roughly similar content-moderation policies, each reluctant to be an outlier. “You can imagine a Twitter with Trump back on its platform just being in the headlines all day, every day, while the other platforms sat back and ate their popcorn,” she says.Mr Musk has never seemed to mind being in the headlines. Even so, he may find it harder than he expects to do away with moderation. Boycotts by advertisers, who provide nearly all of Twitter’s revenue, may not bother him. But Twitter’s app relies on distribution by Apple’s and Google’s app stores; both suspended Parler after the Capitol riot. Governments are also tightening their laws on online speech. On April 23rd the European Union announced that it had agreed on the outline of a new Digital Services Act, which will oblige social networks to police speech on their platforms more closely. Britain is cooking up a still-stricter Online Safety Bill. Twitter fielded 43,000 content-removal requests based on local laws in first half of 2021, more than double the number two years earlier.Another question is whether Mr Musk will manage to stick to his own principles. Social networks face a conflict of interest when the people setting moderation policies are also in charge of growth, notes Ms Douek. Would Mr Musk’s approach to free speech be swayed by his many other interests? Tesla, for instance, hopes to expand in China, whose state media are given prominent warning labels by Twitter. As a Twitter user, Mr Musk has a record of using the platform in a vindictive way. He was sued (unsuccessfully) after labelling one online enemy a “pedo guy”; last week, after a spat with Bill Gates, he posted an unflattering picture of the Microsoft founder with the caption “in case u need to lose a boner fast”.Mr Musk insists that as the platform’s owner he will be even-handed. “I hope that even my worst critics remain on Twitter, because that is what free speech means,” he tweeted on April 25th, shortly before the company’s board accepted his offer. Some users had other ideas: on the same day, one trending topic was “Trump’s Twitter”.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

MAKING CHIPS is complex work. Semiconductor manufacturers such as Intel, Samsung and TSMC themselves rely on machine tools built by an array of firms that are far from household names. The equipment sold by Applied Materials, Tokyo Electron, ASML, KLA and Lam Research is irreplaceable in the manufacture of the microscopic calculating machines that power the digital economy. A supply crunch, coming after years of ructions between America and China over control of technology, has made governments around the world more aware of the strategic importance of chipmaking. The significance of the kit used to make chips is now being recognised, too.The tools handle the complications involved in scratching billions of electric circuits into a silicon wafer. Those circuits shuttle electrons to do the mathematics that draws this article on your screen, allows your fingerprint to open your phone or plots your route across town. They must be perfect. KLA makes measurement tools which are essentially electron microscopes on steroids, scanning each part of a finished chip automatically for defects and errors. Some Lam Research tools are designed to etch patterns in silicon by firing beams of individual atoms at its surface. Applied Materials builds machines which can deposit films of material that are mere atoms thick.The Chinese government’s efforts to develop a large and advanced semiconductor industry at home using this mind-boggling technology has led to a rapid shift in the source of the revenues for the firms making it over the past five years. In 2014 the five main toolmakers sold gear worth $3.3bn, 10% of the global market, to China. Today the country is their largest market by a significant margin, making up a quarter of global revenues (see chart). Of the $23bn in sales for Applied Materials, the largest equipment-maker, during its latest fiscal year, $7.5bn came from China. It accounts for over a third of Lam Research’s revenues of $14.6bn, the largest share of any big toolmaker (though the firm notes that some portion of Chinese sales are made to multinational firms that operate there).This new reliance has created political and commercial problems, particularly for the trio of American toolmakers: Applied Materials, KLA and Lam Research. The Chinese government has thrown hundreds of billions of dollars at the country’s chipmakers. As each of the American trio is dominant across different steps of the chipmaking process, the unavoidable conclusion is that America’s most advanced technology is furthering China’s economic goals. There is strong bipartisan agreement in Washington that this is unacceptable. America’s government has long sought solutions to this uncomfortable reality. In December 2020 it placed SMIC, China’s leading chipmaker, on an export blacklist. Any American company wishing to sell products to SMIC had to apply for a licence. But tools have kept flowing to the Chinese firm, in part because America acted alone. The Chinese government’s lavish subsidies have instead started finding their way to non-American competitors. Applied Materials noted that this might help other firms as, in effect, shutting it out of China “could result in our losing technology leadership relative to our international competitors”. The issue is becoming ever more acute. SEMI, the global semiconductor-tooling trade body, announced on April 12th that worldwide industry revenues from China grew by 58% in 2021, to $29.6bn, cementing its place as the world’s largest market. So is political pressure. In March two Republican lawmakers wrote to America’s Department of Commerce demanding a tightening of export controls on chip technology going to China, specifically mentioning semiconductor-manufacturing equipment.China’s appetite for chipmaking tools is also causing commercial difficulties for non-Chinese chipmakers, depriving them of equipment and hence their capacity to manufacture chips. On April 14th C.C. Wei, the boss of TSMC, said the Taiwanese firm had encountered an unexpected “tool delivery problem” that threatened its ability to make enough chips. Though he did not blame China, chip-industry insiders claim it as the likely cause. TSMC has warned Apple and Qualcomm, two of its largest customers, that it may not be able to meet their demand in 2023 and 2024, according to two independent sources.Over the past four months the American toolmakers have started working with the government, through Akin Gump, a firm of lawyers and lobbyists based in Washington, DC, to find a way round the problem. The toolmakers formed the Coalition of Semiconductor Equipment Manufacturers late last year to further those aims, hiring Akin Gump to represent them. Lawyers have been poring over the products of Applied Materials, Lam Research and KLA in an attempt to identify workable export controls under which less advanced tools that are no use for cutting-edge manufacturing might still be sold to China, while more advanced tools would still be prohibited. That would allow the toolmakers to keep a portion of their Chinese revenues. Efforts to figure out where to draw the line continue. Akin Gump has been lobbying cabinet members and legislative leaders on behalf of the coalition, and is in ongoing discussion with both the Biden administration and members of Congress. “The plan is being driven by the Biden administration,” the Coalition said in a statement on April 25th.The proposal hinges on getting America’s allies—in particular Japan and the Netherlands, home to Tokyo Electron and ASML—to enforce the same export controls on their toolmakers. The chances of this have increased since Russia’s assault on Ukraine. Officials around the world have been regularly putting their heads together to understand the effect America’s bans on trade with Russia will have on their countries. That has created channels through which the complex task of shutting China out of advanced chipmaking, a far trickier task than curbing sales of widgets, might take place.The plan may yet fall apart. China is unlikely to accept it meekly. Hawks in Washington may push for harder restrictions. Defining what equipment can still be exported to China may prove too difficult. But if it works, Chinese chipmakers would need decades to catch up with the West. And America would have met the goals of suppressing Chinese semiconductor development while causing minimal harm to its own industry.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

AMERICA’S TECH giants make ungodly amounts of money. In 2021 the combined revenue of Alphabet, Amazon, Apple, Meta and Microsoft reached $1.4trn. These riches come from a wide and constantly expanding set of sources: from phones and pharmaceuticals to video-streaming and virtual assistants. Analysts expect the tech quintet’s combined sales to have surpassed $340bn in the first three months of 2022, up by 7% compared with the same period last year. In a quarterly ritual that kicks off on April 26th, when the big five start reporting their latest earnings, the staggering headline numbers will once again turn into headline news.Big tech firms are understandably eager to trumpet these impressive figures, as well as their diverse offerings. They are considerably more coy about how much many of their products and services actually make. Annual reports and other public disclosures tend to lump large revenue streams together and describe them in the vaguest terms. Last year, for example, the five giants’ sales were split out into 32 business segments in total. That compares with 56 segments for America’s five highest-earning non-tech firms. Apple breaks its sales into five slices; Meta into only three (see chart 1). The category that Alphabet labels as “Google Other” made $28bn in revenue last year. It includes Google’s app store, sales of its smartphones and other devices, and subscriptions from YouTube, a subsidiary. Last year YouTube’s advertising revenue, which Alphabet first revealed only in 2020, reached $29bn. That means that in 2021 Google Other and YouTube’s ad business each generated more money than four-fifths of the companies in the S&P 500 index of the biggest American firms.The opacity makes business sense. Keeping rivals in the dark helps ensure that they will not try to replicate a prized business unit and eat into its margins. Andy Jassy, Amazon’s boss, has lamented at the prospect of breaking out his firm’s financials because they contain “useful competitive information”. Annoyingly for Mr Jassy and his fellow tech barons, the veil of secrecy is getting thinner. Regulators, lawmakers and investors see it as a problem, and are calling for more transparency about everything from how big tech’s payments platforms work to the amount of carbon emissions the companies belch out. And new sources of information are emerging, from brokers’ reports, hedge-fund analyses and, most revealing, antitrust court cases brought by would-be competitors and competition regulators around the world. All these are bringing to light details about the inner workings of big tech. To understand it all, The Economist has rifled through court documents, internal emails, analyst notes and leaked files about Alphabet, Amazon, Apple and Meta (Microsoft has managed to avoid antitrust scrutiny this time around, so secret information about its finances is scarcer). What emerges is a picture of big tech in which the titans appear more vulnerable than their superficial omnipotence suggests. Their secretive profit pools are indeed deep. But the firms’ finance secrets betray weaknesses, too. Three stand out: a high concentration of profits, waning customer loyalty and the sheer sums at risk from assorted antitrust actions.Start with the profit pools. The biggest of these tend to be transparent. The iPhone remains Apple’s profit engine, Amazon rakes in most of its money from cloud computing and Alphabet and Meta couldn’t survive without online advertising. The firms are considerably more coy over disclosing details about their smaller but fast-growing units.Perhaps the biggest untrumpeted sources of profits for Alphabet and Apple are their app stores. The firms take a commission on all in-app spending on these platforms, usually of around 30% (though in a bid to appease regulators, they are increasingly offering lower rates for small developers and those whose apps rely on subscriptions). The revenue streams are middling. In 2019 they were around $11bn for Google, according to one case brought against it in America by a group of state attorneys-general. Analysts estimate that for Apple’s store it was $25bn last year.Because the costs of maintaining the app stores are low, however, the profit margins are vast. The operating margin for Apple’s app store has been estimated at 78%, according to one case brought against the firm by Epic Games, a video-games maker. For Google the figure is 62%. That compares with an operating margin of 35% for Apple’s overall business and of 31% for Alphabet’s business as a whole (which continues to rely on advertising for revenues).The app stores are booming. Revenues from related commissions for Google and Apple has roughly doubled between 2017 and 2020, according to the Competition and Markets Authority (CMA), Britain’s trustbusting agency. In 2020 Google’s store had 800,000-900,000 developers offering 2.5m-3m apps. That made it slightly bigger than Apple’s, which was home to 500,000-600,000 developers and 1.8m apps. There is no sign of the growth slowing down or margins shrinking, according to Apple’s Epic case and the CMA probe. The gross margin on Google’s app store has ticked up by a few percentage points in recent years.In Apple’s annual report its app store revenues fall into a category called “services”, which made $68bn in sales last year, or 19% of Apple’s total. But the app store is not the most profitable subset of Apple’s services. Though the exact figure is unknown, the gross margin on Apple’s search-advertising segment is even larger than on its app emporium, the CMA reckons. That, according to the regulator, is down to a deal struck between Apple and Google. The terms mean that Google search is the default option on most Apple devices. In exchange, Google gives Apple somewhere between $8bn and $12bn a year (2-3% of Apple’s total revenue). This arrangement costs Apple close to nothing, so it is nearly all pure profit.Amazon and Meta are (a bit) less secretive about the sources of their revenues and profits. Despite its rebranding and pivot to the virtual-reality “metaverse”, Meta isn’t shy about admitting that it continues to make 97% of revenues from online advertising. Amazon is even happy to disclose revenues of its controversial Marketplace, where third-party vendors sell their wares, paying the equivalent of 19% of those sales for the privilege (up from 11% in 2017) and competing with Amazon’s own retail business. Marketplace contributed $103bn to Amazon’s top line in 2021, a six-fold increase from 2015 and 22% of the company’s total. But it took digging by analysts to estimate that Instagram accounted for $42bn of Meta’s revenues last year, nearly two-fifths of the total and up from a reported $20bn, or a quarter of the total, in 2019. The photo-sharing app’s role in the social-media empire’s prospects has risen dramatically, in other words. And it was a lawsuit brought by the attorney-general of the District of Columbia that revealed Marketplace’s profit margins to be 20%, four times higher than those of Amazon’s own retail business (the case does not specify whether the margins in question were gross, net or operating). All this makes for plenty of deep profit pools. Look closer, though, and they also turn out to be surprisingly narrow. In Apple’s app store, for example, games account for 70% of all revenues, according to documents uncovered during the Epic court battle. Most of this comes from in-app purchases, such as wacky accessories for avatars or virtual currencies. In 2017, 6% of app-store game customers accounted for 88% of the store’s game sales. Those heavy users spent, on average, more than $750 each year.The Epic trial also revealed that the biggest spenders, who made up 1% of Apple gamers, generated 64% of sales and splurged an average of $2,694 annually. Internally these super-spenders were known as “whales”, like their casino equivalents. An investigation by the CMA found a similar pattern at Google’s app store. In 2020 around 90% of the store’s British sales came from less than 5% of its apps. Once again spending on in-app features in games made up the vast majority of revenue.Spending is concentrated in the online ad industry, too. Another CMA probe looked at data on British advertisers who spent a combined £7bn ($8.9bn) in 2019 on Google Ads, an ad-buying tool aimed at small businesses. The top 5-10% of advertisers by spending made up more than 85% of revenue for Google Ads. The highest-spending sectors were retail, finance and travel. A similar exercise showed an even greater concentration at Facebook. The top 5-10% of the social network’s advertisers made up more than 90% (see chart 2). In terms of sectors, retail, entertainment and consumer goods splurged most.Concentration is also present at the level of “impressions”, as each incident of an advert appearing on a user’s screen is known in the business. That was one finding of internal research by Google, which was unearthed as part of a case bought against the tech giant by another group of American state attorneys-general. The study found that in America 20% of all impressions produce 80% of web publishers’ ad revenue. High-value impressions are ones aimed at users likely to make a purchase. Google referred to this phenomenon internally as “cookie concentration”.Besides a heavy reliance on a few big profit generators, another undisclosed weakness is customer churn. Tech giants’ customers are often assumed to be devoted to their products and services—or even hooked. The companies do not challenge this assumption in public, since it conveys the sense of captive markets, which are beloved of investors. In fact, their markets may not be quite so captive. The Epic case revealed that roughly 20% of iPhone users switched to another smartphone in 2019 and 2020. Leaked documents from Meta show that fewer teenagers are signing up to Facebook, its largest network, and those that do are spending less time on it. Even Instagram, Meta’s youth-friendlier platform, is losing out to rivals. A leaked internal report from March last year found that teenagers were spending more than twice as much time on TikTok, a hip short-video app that has since grown hipper. Young people are not the only group of customers beginning to retreat from the platforms. Another are young companies. Last year was a bonanza for startups. Global venture-capital funding reached $621bn, more than double the previous year’s total. According to a report by Bridgewater Associates, the world’s largest hedge fund, of all the money invested in early stage companies about a fifth is spent on the cloud, a market dominated by Alphabet, Amazon and Microsoft. Another two-fifths goes on marketing, which in the digital realm is dominated by Alphabet, Meta and, increasingly, Amazon. Bridgewater estimates that, all told, around 10% of total revenue of Alphabet, Amazon and Meta is derived from the startup ecosystem. That is the equivalent of $84bn each year. That flow of money may be ebbing. Fears about rising inflation, Russia’s war in Ukraine and the chance of a recession has sent the share prices of tech firms tumbling. The NASDAQ, a tech-heavy index, has fallen by 20% from its peak in November. The falling public markets are filtering down to the startup world. On March 24th Instacart, a grocery-delivery firm, cut its own valuation by 38%. Lower valuations will in turn make it harder for firms to raise capital. Investors say they expect to see startups tightening their belts in the coming months. That means less spending on the cloud and ads.What do all these vulnerabilities add up to? In the worst-case scenario, where the toughest-talking regulators in America, Britain and the EU get their way, the answer is an awful lot. Europe poses the biggest threat. The Digital Markets Act (DMA) is a sweeping new set of EU rules designed to rein in big tech that was finalised last month. It will only affect some business units and is targeted at tech’s European operations. Bernstein, a broker, finds that Alphabet, Apple, Amazon and Meta make $267bn of revenue, about a fifth of their combined total, in Europe. A back-of-the-envelope calculation by The Economist suggests the DMA puts perhaps 40% of the four firms’ European sales at risk. Globally, Alphabet is the most exposed, with nearly 90% of European revenues in danger, equivalent to 27% of the company’s global sales. In America Google’s search monopoly is being targeted in a case brought by a team of state attorneys-general. The Department of Justice is thinking about following suit. That puts American search revenue of $70bn, a quarter of Alphabet’s total, at risk of antitrust action. If Alphabet reduced its commission on in-app payments from 30% to 11%—the share agreed in a deal between Google and Spotify on March 23rd—American app-store revenues would plummet from $11bn to $4bn. Together these actions could imperil perhaps $150bn of Alphabet’s revenue, or about 60% of its global total. Apple’s worst-case exposure is smaller but still significant. If trustbusters put a stop to its sweetheart search deal with Google, that would imperil $12bn-15bn a year. Should Apple follow Alphabet’s lead and slash app-store commissions, or be forced to do so by new laws, its app-related earnings would also drop, from about $25bn to $9bn. Apple’s total exposure would be roughly $35bn, or a tenth of global revenue. Amazon stands to lose up to $77bn per year, or 16% of its global revenue, if it is barred from mixing its own retail operations with those of third parties on Marketplace. Some lawmakers and regulators have been murmuring about breaking up Amazon altogether, into a retailer and a cloud-computing provider, for example. The rump Amazon would either be deprived of its e-commerce sales (about 70% of current revenues) or its cloud profits (about three-quarters of its bottom line). The same voices are calling to split Meta. If America’s Federal Trade Commission got its way and forced the social-media conglomerate to hive off Instagram and WhatsApp, the company could lose $42bn in revenues from Instagram and another $2bn from WhatsApp—or two-fifths of its total.All told, if everything went against big tech, perhaps $330bn in revenues would be at risk. That is about a quarter of the total for Alphabet, Amazon, Apple and Meta. That is before including the two antitrust bills making their way through America’s Congress. Among other things, these aim to stop platform owners, such as app stores and search engines, giving preferential treatments to their own products. The financial impact of such rules is hazy but could, as in Europe, be substantial.This catastrophic case for big tech is unlikely to materialise. Many attempts to check the power of the platforms have gone nowhere. The current crop is likely to be watered down and could take years to take effect. But just a few successful tech-bashing efforts could make a meaningful dent in the firms’ prospects. And by lifting the veil on tech titans’ secret finances, they are already alerting challengers to where exactly margins are ripest for eating into. More