Philippa Kaur

SHORTAGES AND bottlenecks have been a source of constant frustration for manufacturers around the world for two pandemic-afflicted years. For a handful of companies in the business of keeping factories running and supply chains intact, these frustrations have been a source of cheer—and profits. Japanese makers of industrial equipment, in particular, have seen orders surge as companies turned to automation, first amid the disruption wrought on human workforces by covid-19, then as a result of tight labour markets and rising wage costs.The world’s stock of industrial robots has tripled in the past decade. According to the International Federation of Robotics, a trade group, Japan furnishes 45% of new ones each year. It also produces lots of other automation equipment, from laser sensors to inspection kit. Even after the recent sell-off in tech stocks, Japan’s four standout gear producers—Keyence, Fanuc, SMC, and Lasertec—are collectively worth two and a half times what they were five years ago (see chart). Last year the founder of Keyence, Takizaki Takemitsu, briefly became Japan’s richest man. His $29bn fortune is half as large again as that of Son Masayoshi, a flamboyant tech investor who is corporate Japan’s most globally recognisable face. Mr Takizaki’s firm and its fellow equipment-makers are hardly household names. But the hardware they produce is becoming as mission-critical to many industrial supply chains as semiconductors are.It is no surprise that Japan, a famously robot-loving place, has spawned a strong Automation Inc. Just-in-time manufacturing, pioneered by efficiency-obsessed Japanese companies such as Toyota in carmaking or Panasonic in consumer electronics, has involved replacing humans with machines for decades. This source of competitive advantage became an existential necessity for domestic manufacturers after Japan’s working-age population began to shrink in the 1990s. Today it is becoming one for other rich countries as they enter demographic dotage. Keyence and SMC now derive more than half their revenues from abroad. Fanuc and Lasertec are even more international, with more than 80% of sales coming from overseas.Some of the new foreign demand is the result of the world’s insatiable hunger for computer chips. SMC, which sells pneumatic control devices to chipmakers, has seen its business boom, especially as places including America and Europe strive to bring more semiconductor production home, says Masahiro Ota, who sits on SMC’s board. Lasertec enjoys a near-monopoly on inspection tools for the most advanced semiconductor photomasks—plates through which circuit patterns are etched onto silicon wafers. Its share price has ballooned four-fold since the start of 2020, making it one of the best-performing blue-chip stocks in Asia. Keyence’s precision sensors are likewise crucial for the detection of flaws in semiconductor surfaces.The companies’ devices are, of course, also handy in other sectors. Fanuc, which makes large factory-floor robotic arms, has long been a fixture of car assembly lines. Mike Cicco, who runs Fanuc’s American operations, notes that the development of electric cars requires a range of new capabilities on the part of carmakers—and that in turn necessitates new types of robot. Fanuc expects to supply Ford’s factory in Cologne, in Germany, with 500 robots this year as the plant becomes the Ford Cologne Electrification Centre.Being indispensable has proved to be lucrative. All four stars of Japan’s automation-industrial complex boast operating-profit margins of over 20%. That of Keyence, the most profitable of the lot, exceeds 50%. The firm has reported record net profits in each of the past three quarters. Like chip firms such as Nvidia, Keyence does not manufacture products but rather designs them and assists customers in deploying them in their factories. Lasertec, too, does little of its own manufacturing. This capital-light approach helps sustain profits. Keyence spends just 3% of its net sales on research and development (R&D). Similarly, SMC spends around 4%. Fanuc does make almost all its products independently and invests more in production capacity and R&D. But it uses that capital efficiently, not least, as befits a robot-maker, by deploying plenty of its own robots to build robots for customers. Its biggest “lights out” factory can run for more than a month with no pricey human operators around.Japan’s automation firms also owe some of their success to corporate culture. SMC maintains a network of 6,000 salespeople who double as systems engineers with in-depth knowledge of customers’ equipment. Keyence uses no middlemen to sell its products, relying entirely on its own sales force. As with SMC, many are engineers, who spend a lot of time on customers’ factory floors identifying niggles and tweaks that might otherwise go unnoticed. They are rewarded handsomely for their efforts. Nikkei, a Japanese publisher, reports that average salaries at Keyence exceeded $150,000 in the last fiscal year.The automation stars, like Japan Inc as a whole, tend to be less generous with shareholders. Most sit on piles of cash; Keyence held over $10bn in current assets in the last financial year. The reserved character of the companies and their tightfistedness is so well-established that some investors say any sudden shifts in that attitude may be a sign of big and possibly unwelcome changes at the firms.Investors have to rely on such rune-reading because it is not always clear what is going on inside the companies, at least by contemporary Western standards of open shareholder relations. SMC’s “traditional Japanese approach to corporate governance”, as Baillie Gifford, a tech-focused British asset manager, delicately put it in 2020, offers only limited engagement with shareholders. One asset manager with a stake in Keyence reports never speaking directly with its management.As the companies become ever more international, they will face pressure to be more candid—and less frugal, both with payouts to shareholders and with investments. Fanuc increased its dividend sharply in 2015 under pressure from Third Point, an American activist hedge fund. As Japan becomes less averse to gadfly investors, Automation Inc should expect more such calls. To maintain their innovative edge, meanwhile, the firms may need to spend considerably more on R&D. Amid tech-inflected geopolitical tensions with the West, China wants to reduce its reliance on foreign suppliers of all manner of advanced technology, including robotics. If successful, the Chinese strategy would at once deprive the Japanese firms of a big market and create new global rivals. Becoming indispensable is one thing. Staying so is quite another. ■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 “Automation Inc” More

THROUGHOUT 2021 corporate profits in America seemed immune to infection, inflation and snarled-up global supply chains. With most of the country’s biggest firms having reported their latest quarterly results, revenues and earnings in the last three months of the year seem poised to set another record. The technology industry’s annual profits rose by a quarter, compared with 2020. Among property firms in the S&P 500 index they swelled by a third. Net-profit margins have edged down from their recent peak in the second quarter of 2021 and analysts forecast lower earnings and sales in the first three months of 2022. It may prove to be a brief sniffle caused by unusually strong seasonal factors. But America Inc no longer looks totally impervious.■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 “How long can America Inc’s profits keep rising?” More

THE RICH world has a sleep deficit. The average American adult snoozes almost two hours less than their great grandparents did. More than a third of Americans get less than seven hours of kip a night. The resulting fatigue has been linked to Alzheimer’s disease, hypertension and other ailments. It may cost America’s economy as much as $400bn a year, according to one study. Other wealthy countries are similarly sleepless. Consumption of alcohol and caffeine are partly to blame, as is exposure to phone and computer screens. Ironically, people are turning to some of those same devices for help.Tiny sensors are now more easily embedded into wearable gadgets to observe users overnight. Consumer-electronics giants such as Google, Samsung and Huawei offer sleep-related technology in their gadgets. Although Apple seems to be winding down Beddit, a Finnish maker of bed sensors it acquired in 2017 for an undisclosed amount, it has incorporated sleep functionalities into its new smart watches.Specialist “sleep-tech” startups offer fancier wares. Oura Health, also from Finland and valued at nearly $1bn, sells a $300 titanium ring that weighs a few grams and has built-in heart-rate, oxygen and activity monitors; Kim Kardashian is a fan. Kokoon, a British firm, makes a wireless headset whose tiny earbuds play relaxing sounds while sensors infer the sleep stage from blood-oxygen levels. Eight Sleep, an American one, charges $2,000 for its app-synched mattress that heats up and cools as the sleeper’s body temperature changes through the night.The combination of more sleeplessness and better technology has led to a boom in the sleep-assistance industry. Global Market Insights, a research firm, reckons that worldwide revenues from sales of such gizmos reached $12.5bn in 2020 and could be more than triple that in five years. Matteo Franceschetti, boss of Eight Sleep, thinks the addressable market for his company is “literally everyone in the world”. After all, everybody sleeps.True. But not everybody sleeps poorly (or can afford to splurge $2,000 on his firm’s self-styled “Lamborghini of mattresses”). And the technology, though it is improving, remains far from perfect. Sleeping with a watch strapped to your wrist is irritating, and the battery may die overnight. Your correspondent struggled to wear the Kokoon headset over the satin scarf protecting her hair, and the “brown noise” designed to drown out snoring sounded more like the jarring static of an old television set.There are problems with sleep-tech’s business models, too. People can get bored of wearables, and frustrated when the touted improvements fail to materialise. According to a survey last year by Rock Health Advisory, a consultancy, almost 40% of sleep-wearables users abandoned their devices, mostly because they did not have the desired soporific effect. Kokoon, Oura and Eight Sleep have all recently introduced membership models to try and keep people updating their devices. Subscriptions give the companies a more stable revenue stream than one-off device sales, as well as providing data that can then be used to improve their products. But it can also be interpreted as an implicit acknowledgement that the devices are not an instant cure. (Oura says that it now offers various other insights into ring-wearers’ health that are not directly related to sleep.)Many scientists worry that, as with many emerging consumer-health technologies, sleep-tech often lacks the gold-standard randomised controlled clinical studies where it is tested on many patients and against placebos. Ingo Fietze runs a sleep centre at Charité Berlin, a big university hospital, and studies novel gadgets and mattresses at a private lab he set up on the side. He says that when he asked Samsung, a South Korean device-maker, and Huawei, a Chinese one, to share the methods behind their watches’ metrics, he did not hear back. In any case, says Mr Fietze, no existing wearables, which track sleep using various proxy measures, can match a clinical polysomnogram (PSG), which takes data directly from the brain using electrodes. Samsung did not respond to a request for comment. Huawei says its device measures sleep duration with accuracy comparable to a PSG.Sleep-tech may, scientists concede, help mild insomniacs and sensitive sleepers decide whether they need clinical interventions. Monitoring blood-oxygen in real time, as some wearables do, can help identify disorders including sleep apnea, a condition whose sufferers stop breathing while they sleep and which afflicts perhaps 1bn people around the world. But ultimately, Mr Fietze believes, “no gadget can make your sleep better.” If consumers in need of more shuteye reach a similar conclusion, sleep-tech investors’ dreams of riches may turn into a profitless nightmare. ■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 “Slumber party” More

CORPORATE CULTURE is often like mist—indubitably there but hard to pin down. Occasionally it solidifies into something ugly. Take the following figures from an external investigation commissioned by Rio Tinto, a global mining giant, into its workplace culture. Almost half of Rio’s employees report having experienced bullying in the past five years. Almost a third of its female workers have endured sexual harassment; 21 women reported an actual or attempted sexual assault. Two in five Australian Aboriginal and Torres Strait Islanders employed by the company have experienced racism.The report is an admirably open attempt to face up to a toxic culture. As well as survey data, it contains testimony from interviews and focus groups. It was published on Rio’s website earlier this month, along with an apology from Jakob Stausholm, the firm’s boss. Such unusual transparency seems to be building trust: half of the firm’s employees said they were extremely or very confident that Rio would make meaningful progress in stamping out sexual harassment and racism. The report is a product of specific circumstances. Rio’s reputation was badly tarnished in 2020, when it destroyed Juukan Gorge, a mining site in Western Australia whose ancient rock shelters were sacred to indigenous people. That cost Mr Stausholm’s predecessor his job, kick-starting efforts to change the way the firm was run. Rio’s culture is traceable, at least in part, to the idiosyncrasies of the mining industry. Its workforce is 80% male, and the worst behaviour occurred on remote sites where employees fly in or drive in for stays of several days, or live full-time in company housing. Machismo and isolation make for poor bedfellows. But it would be a mistake to regard Rio’s soul-searching as a curio from the world of alpha males and excavators. For both its findings and the fact of its existence hold wider lessons. First, it shows how a corporate culture can rot. The worst abuses may have been more prevalent in the firm’s remote reaches but they were present at its heart, too. The highest rate of sexual harassment was found in the firm’s iron-ore division, but next came Rio’s strategy, sustainability and development group. Widespread suspicion of the company’s internal reporting mechanisms and a fear of speaking out are evident. “The minute you raise an issue about a senior leader, you’re done,” said one employee. “I don’t want to rock the boat so hard that I fall out of it,” echoed another. Interviewees accused Rio of rewarding bullies, and of pushing high performers up the corporate ladder irrespective of how they behaved. Among other things, the firm says it will set up a specialist unit designed to respond to complaints of harmful behaviour, and to provide support to people who blow the whistle. Whatever the right answer, the report raises questions that executives in all organisations confront: what to do with talented jerks, and how to make sure people voice concerns if something is going badly wrong. Second, it may be a harbinger of wider demand for data on corporate culture. For all that managers bang on about people being an organisation’s greatest asset, precious little information is available to outsiders about how employees are treated and encouraged to behave. This may be because of the mist problem: it is hard to measure culture. It may be because investors haven’t much cared. That may be changing. Labour shortages have focused attention on how well firms retain workers. Research from Donald Sull at the Massachusetts Institute of Technology and his co-authors finds that a toxic culture is ten times more important than pay in predicting industry-adjusted staff turnover. Movements like #MeToo and Black Lives Matter have pushed issues of gender and racial equity up the corporate agenda. Allegations of sexual misconduct have battered the reputations of Axel Springer, a media giant, and Activision Blizzard, a video-game publisher just acquired by Microsoft. Late last year investors in the software giant adopted a shareholder proposal requiring it to report on its own sexual-harassment policies. Regulators are making noises about more disclosure on human capital; Gary Gensler, chairman of America’s Securities and Exchange Commission, wants proposals in this area.Rio Tinto’s problems are extreme. But they are not unique. And in opening up about its corporate culture, it is, in one way at least, ahead of its time. More

IN 2013 THE EU launched an ambitious project. The aim was to double the share of microchips made in Europe to 20% of the global total by 2020. Nearly a decade later it remains stubbornly stuck at 10%. If that were not bad enough, Europe no longer makes any of the most advanced chips of the sort that go into data centres or smartphones (see chart). So, prompted by shortages of semiconductors and their growing importance for all sorts of industries, the bloc is having another go.Judged by numbers alone, the EU’s new Chips Act, unveiled on February 8th, could move the needle. It is meant to generate public and private investment of more than €43bn ($49bn), about as much as a similar package working its way through America’s Congress. More than two-thirds of this money is supposed to take the form of state subsidies for new leading-edge chip fabrication plants, or “mega fabs”—thanks to a more generous interpretation of EU restrictions on state aid. The rest will go to other chipmaking infrastructure.Reality is likely to prove trickier. To understand why, it helps to see the semiconductor industry not just as a collection of huge fabs, of which the most sophisticated can cost more than $20bn a pop, but as a global ecosystem of thousands of companies. Even more than in other high-tech industries, research and development (R&D) usually takes years and costs billions. New chips are designed by specialised firms using complex software made by other companies still. And after chips leave a fab, contract manufacturers assemble, test and package them (ATP, in the lingo).Seen though this ecosystemic lens, the EU’s position is both stronger and weaker than its small share of global chip output might suggest. Start with the strengths. The continent maintains a leading position in semiconductor R&D. One of the industry’s main brain trusts, the Interuniversity Microelectronics Centre (better known as IMEC), is based in Belgium.Europe’s firms also make many of the machines that make fabs tick. ASML, a Dutch firm with a market value of €230bn, is the sole global supplier of the lithographic equipment without which fabs cannot etch the most advanced processors. Only Nvidia, an American chip-designer, and Taiwan Semiconductor Manufacturing Company (TSMC), the world’s biggest contract manufacturer of chips, are worth more. An array of smaller European outfits enjoy dominant positions in the complex chipmaking supply chain. Carl Zeiss SMT makes lenses for ASML’s lithography machines (and is co-owned by it). Siltronic manufactures silicon wafers onto which chips are etched. Aixtron manufactures specialised gear to deposit layers of chemicals onto those wafers to make circuits.Once you widen the aperture to the whole ecosystem, Europe’s biggest chipmakers, Infineon, NXP and STMicroelectronics, also appear less benighted. Yes, half of the continent’s capacity is for chips with structures (“nodes”) measuring 180 nanometres (billionths of a metre) or more, generations behind the technological cutting edge, dominated by TSMC and Samsung of South Korea, whose transistors come in at a few nanometres. But those nano-electronics are most useful for consumer devices, the bulk of which are assembled in Asia. By contrast, the larger European nodes are sufficient for the continent’s many industrial firms that require specialised silicon for things such as cars, machine tools and sensors. “European chipmakers focus on their customer base,” explains Jan-Peter Kleinhans of SNV, a German think-tank.If the Chips Act is a guide, European policymakers worry that these genuine strengths are not enough to offset the EU’s weaknesses. Besides lacking cutting-edge fabs, Europe is short of companies with the know-how to design the smallest chips, such as Nvidia. It is similarly behind in ATP, where most capacity is in China and Taiwan. Once approved by member states and the European Parliament, the EU law is meant to help Europe catch up. Besides the nearly €30bn for mega-fabs, it has pencilled in €11bn for things like a virtual chip-design platform open to all comers and other infrastructure, including pilot production lines for leading-edge chips. But half of that is to come from member states and the private sector. The EU’s contribution of less than €6bn will, as with the bloc’s other programmes, come with many bureaucratic strings attached.A bigger problem is the act’s focus on luring giant chipmakers to build mega-fabs. TSMC and Intel, its American rival, have signalled they would consider Europe only if governments shoulder a big part of the costs (40% in Intel’s case). To enable such deals, the first of which is expected in weeks, the European Commission wants to relax state-aid rules to let member states subsidise such fabs “up to 100% of a proven funding gap” if they are “first-of-a-kind” or would “otherwise not exist in Europe”.If such criteria were meant to avert a subsidy race, they look copious and fuzzy enough for countries to try and game them. Worse, the resulting fabs may end up underused. By the time they are ready in a few years, the chip shortage may have turned into a glut. And if the EU’s efforts to boost Europe’s chip-design firms fail, European fabs would have to rely on foreign chip-designers for custom. Why, asks Mr Kleinhans, would American firms choose to have their chips manufactured in Europe rather than in Asia or at home?Thierry Breton, the EU commissioner in charge of industrial policy, envisions a Europe of “mega fabs” that not only serve the continent’s own demand, but world markets. Europe may be better off propping up its chip ecosystem by investing in things like basic research. Mr Breton doesn’t need to pick Europe’s chipmaking winners. As the EU’s semiconductor stars show, the market can do that just fine.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

FEW COMPANIES are more emblematic of the tech-obsessed, easy-money era of the early 21st century than SoftBank, the Japanese investment conglomerate founded and run by Son Masayoshi, or Masa for short. Starting life as an obscure Japanese internet company before the turn of the century, it has made one debt-fuelled bet after another to become first a telecommunications giant, and then what Mr Son last year called the world’s biggest venture-capital (VC) provider, comfortably ahead of Tiger Global, a New York hedge fund, and Sequoia Capital, a VC powerhouse. Parts of its balance-sheet are opaque yet it continues to borrow heavily and is one of the world’s most-indebted non-financial firms. Like many of the Silicon Valley firms it invests in, it has a dominant founding shareholder who is not averse to spouting gobbledygook. Mr Son says he invests with a 300-year horizon, making SoftBank as close to immortal as financial firms get. But it is the here and now that he should be most concerned with.That is because the tech boom, which SoftBank has both fuelled and benefited from, may be coming to an end. In the face of the highest rates of inflation in decades, central banks have started to raise interest rates. That threatens to tighten credit markets for highly leveraged entities like SoftBank. More important, higher rates make a big difference to the long-term value of the sort of high-growth tech startups it invests in, whose profits are in the distant future. As one of the highest rollers in two of the business megatrends of the past few decades, it is worth asking what would happen if tech fandom and easy money prove evanescent. As Warren Buffett once said, it’s only when the tide goes out that you can see who is swimming naked. What, Schumpeter wonders, is the state of Mr Son’s bathing attire?Mr Son, like Mr Buffett, enjoys a colourful turn of phrase. On Feb 8th, reporting an 87% year-on-year slump in SoftBank’s net profit in the nine months to December, he was blunt. Not only was the company in the midst of a blizzard that started last autumn, he said. The storm had got worse in America and elsewhere because of the threat of rising rates. Though SoftBank eked out a small profit in the most recent quarter, the two most important variables that Mr Son watches like a hawk deteriorated sharply. One was the net value of SoftBank’s portfolio of assets, which fell by $19bn to $168bn. The other was the value of its net debt relative to equity, which reached the highest level since 2018 when SoftBank floated its Japanese telecoms business.To gauge the risks, start with the asset side of those calculations. However much of a brave face Mr Son puts on it, there is scant good news. On the day of its results SoftBank confirmed that it had called off the sale of its British chip business, Arm, to Nvidia, a California-based semiconductor firm, because of regulatory pressure. At Nvidia’s highest price, the implied sale value was above $60bn, or about twice what SoftBank paid for Arm in 2016. Instead SoftBank will sell shares in Arm in an initial public offering (IPO) in the next financial year. Mr Son noted that the underlying profits of Arm’s chip business are estimated to have improved recently, which may make it more attractive. Yet Kirk Boodry of Redex Research, a firm of analysts, reckons an IPO has little chance of generating as much value as a sale. Moreover, potential investors need only look at the poor public-market performance of almost all the 25 companies SoftBank listed in the past ten months to know that tech IPOs are no longer a gravy train.Also on the asset side are SoftBank’s troubled investments in China and in its two Vision Funds, which invested in a whopping 239 young companies last year. Alibaba, the embattled Chinese tech giant, was once the cornerstone of SoftBank’s investment strategy, accounting for 60% of net assets. Now SoftBank treats it like a get-out-of-jail-free card, selling stakes to fund riskier ventures elsewhere. Its weight in the portfolio has shrunk to 24%. On February 7th Alibaba’s share price fell by 6% on fears that SoftBank would cut its stake yet more. For SoftBank, Alibaba is now vastly eclipsed in importance by its two Vision Funds, which account for almost half of the group’s net assets. These inched up in value in the most recent quarter, mostly because of valuation gains in unlisted firms. If the stark sell-off of SoftBank’s publicly traded firms is any guide, however, it may be only a matter of time before valuations of firms in the pre-IPO stage get caught in the same tech-market malaise.SoftBank’s debt situation is worrying, too. It said its loan-to-value (LTV) ratio, or net debt as a share of the equity value of its holdings, was 22% at the end of December, up from 19% three months earlier; it considers 25% to be reasonable in normal times. However, others calculate the ratio more conservatively, including additional liabilities such as margin loans, investment commitments and share buybacks that SoftBank excludes. Sharon Chen of Bloomberg Intelligence, a financial-analysis firm, says that based on her measurements, SoftBank is getting close to the 40% LTV threshold that S&P Global, a ratings agency, has said could be a trigger for a debt downgrade (though the plan to list Arm could ease the pressure). A further sale of Alibaba shares could be used to cut debt, but might also lower the quality of the portfolio—another rating-agency red flag.The Son also setsSoftBank has had enough debt-related troubles in the past for Mr Son to realise the dangers. The global financial crisis of 2007-09 struck just as SoftBank had geared up massively to buy Vodafone Japan, a telecoms firm. It has long pledged to keep enough liquidity on hand to fund two years of debt payments. But its longer-term financial stability rests on two variables—the value of its assets and the size of its debts—which would both benefit from an obsession with prudence, not growth. More than a pair of speedos, Mr Son needs a wetsuit. For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

A TEENAGED girl who periodically transforms into a giant panda is the improbable star of “Turning Red”, a coming-of-age movie from Disney due out next month. The world’s biggest media company, which will celebrate its 100th birthday next year, is no adolescent. But Disney is going through some awkward changes of its own as it reorganises its business—worth $260bn—around the barely two-year-old venture of video-streaming.So far the experiment has been a success. The company’s streaming operation, Disney+, initially aimed for at least 60m subscribers in its first five years, ending in 2024. It got there in less than 12 months, and now hopes for as many as 260m subscribers by that date. Bob Chapek, who took over as chief executive just before the pandemic, is convinced that Disney’s future lies in streaming directly to the consumer, his “north star”. Disney+ is all but guaranteed to be among the survivors of the ruthless period of competition that has become known as the streaming wars.But doubts are surfacing across the industry about how much of a prize awaits the victors. Every year Disney and its rivals promise to spend more on content. And yet the growth in subscribers is showing signs of slowing. A realisation is setting in that old media companies are pivoting from a highly profitable cable-tv business to a distinctly less rewarding alternative. Amid a bout of market volatility which last week saw Alphabet’s and Amazon’s share prices rise by a tenth or more and Meta’s fall by a quarter, investors are awaiting Disney’s quarterly results on February 9th with some trepidation. So, too, is Mr Chapek, whose contract expires one year from now.Markets took fright last month when Netflix, the leading streamer, forecast that in the first quarter of 2022 it would add just 2.5m new members. That would be the weakest first quarter since 2010, when most Netflix subscribers still got dvds by mail. Its share price fell by more than a quarter on the news. The previous quarter Disney said it had added only 2.1m streaming subscribers, the least in its short experience, sending another judder through markets. With some exceptions, growth has slowed across the industry (see chart 1).The firms blame temporary headwinds: a continuing covid hangover, content delays and, in the case of Apple tv+, the phasing out of free trials. But some analysts are concluding that the ceiling for subscriptions is lower than they had thought. Morgan Stanley, an investment bank, now thinks Netflix will end 2024 with 260m global members, down from its earlier estimate of 300m. And though streamers see the potential to raise prices in rich-world markets, that will be harder in the faster-growing poor ones. In India, Netflix recently slashed the price of its basic plan from $6.60 to $2.60 a month. Morgan Stanley now expects Netflix’s total revenue to grow by about 10% a year in the medium term, not the 15% or more it had previously predicted.As revenue growth slows, costs swell. Media firms will spend more than $230bn on video content this year, nearly double the figure a decade ago, forecasts Ampere Analysis, a research firm. Netflix’s weak results came despite what it billed as its “strongest content slate ever”, including “Squid Game”, its most popular series, and “Red Notice”, its most successful film. Disney+ is doing far better than the company ever dreamed—but it is costing more, too. Three years ago Disney said it would spend about $2bn on streaming content in 2024. Mr Chapek recently said the figure would be more than $9bn.Spending is going up partly because the costs of filming have risen. The final season of WarnerMedia’s “Game of Thrones”, in 2019, cost around $15m per episode, which then seemed steep. Amazon’s serialised “Lord of the Rings”, due in September, reportedly cost about four times as much. And audiences have become more demanding. Most people used to cancel their cable-tv subscription only when they moved house, says Doug Shapiro, a former chief strategy officer at Turner Broadcasting System, a television company. Now, he says, they are “becoming accustomed to churning on or off over the quality of content”, signing up to devour the latest hit and then cancelling their membership. Apple tv+, which has the most serious retention problem, loses a tenth of its customers every month, according to Antenna, a data firm, meaning that every year it churns through the equivalent of more than 100% of its members (see chart 2).The combination of rising costs and slowing revenue growth “calls into question the end-state economics of these businesses”, argues MoffettNathanson, a firm of analysts. Netflix, the most successful of the bunch, expects its operating margin to shrink in 2022, for the first time in at least six years, to 19%; it has attributed its compressed margins to higher spending on programming. MoffettNathanson adds that these figures flatter the firm’s performance. Like other streamers, Netflix amortises the cost of content over several years, when in reality most of its shows are binged in a matter of weeks. (The company insists that its amortisation schedule is based on viewing patterns.)Streaming’s pinched economics are especially galling for old media firms like Disney, which are used to the far more profitable cable-tv business. Last year Disney reported an operating margin of 30% for its linear tv networks, a typical figure for the industry. The average American cable bill is nearly $100 a month—and viewers are usually subjected to advertising on top of that. Media firms are accelerating the decline of this profitable business by shifting their best content from cable to their streaming services. They are also forgoing box-office revenue by sending movies straight to streaming (though covid-related cinema closures have often forced their hand). Animators at Disney’s Pixar studio are said to be miffed that “Turning Red” is not getting an outing at the cinema in most countries.There is little choice but to stick with the strategy. Cable is not coming back; streaming is expected to account for half of tv viewing in America by 2024. The focus is increasingly turning to how to make the new business more profitable. Streamers increasingly drip-feed new episodes rather than dropping entire series. Bundling is becoming more common: Disney sells Disney+ along with espn+, its sports streamer, and Hulu, a general entertainment service that it jointly owns with Comcast, a cable giant. Apple and Amazon both package tv with other services. WarnerMedia and Discovery are set to merge this year. There may be more to come. “If Netflix is decelerating more rapidly than expected, the great streaming rebundling may need to begin sooner rather than later,” writes Benjamin Swinburne of Morgan Stanley.The hope at the bigger media firms is that the streaming wars will eventually claim some casualties, leaving the survivors free to raise their prices and dial down spending on content. Peacock, Comcast’s streamer, is trailing. Viacomcbs, which owns Paramount+, is the subject of endless takeover rumours. But even their exit from the industry would leave some determined competitors. Warner-Discovery is betting its future on streaming. Apple and Amazon are getting better at making hits, and have enough money to run at a loss for as long as they like. Disney and Netflix are not going anywhere. It looks like being a long war, and short on spoils. More

THERE COMES a time in every great bull market where the dreams of investors collide with changing facts on the ground. In the subprime boom it was the moment when mortgage default rates started to rise in 2006; in the dotcom bubble of 2000-01 it was when the dinosaurs of the telecoms sector confessed that technological disruption would destroy their profits, not increase them. There was a glimmer of a similar moment when Meta (the parent company of Facebook) reported poor results on February 2nd, sending its share price down by 26% the next day and wiping out well over $200bn of market value. That prompted a further sell-off in technology stocks. Along with low interest rates, a driver of America’s epic bull run of the past decade has been the view that big tech firms are natural monopolies that can increase profits for decades to come with little serious threat from competition. This belief explains why the five largest tech firms now comprise over 20% of the S&P 500 index. Now it faces a big test.Since listing in 2012 Meta has exemplified big tech’s prowess and pitfalls. For a glimpse of the caricature, consider the American government’s antitrust case against it first launched in 2020. It describes an invincible company in a world where technology is perpetually frozen in the 2010s: “this unmatched position has provided Facebook with staggering profits,” America’s Federal Trade Commission wrote in its lawsuit. Examine the firm’s fourth-quarter results, though, and its position seems rather vulnerable and its profits somewhat less staggering. It comes across as a business with decelerating growth, a stale core product and a cost-control problem. The number of users of all of Meta’s products, which include Facebook, Instagram and WhatsApp, is barely growing. Those of the core social network fell slightly in the fourth quarter compared with the third. Net income dropped by 8% year on year and the firm suggested that revenue would grow by just 3-11% in the first quarter of 2022, the slowest rate since it went public and far below the average rate of 29% over the past three years—and below the growth rate necessary to justify its valuation.Meta’s troubles reflect two kinds of competition. The first is within social media, where TikTok has become a formidable competitor. More than 1bn people use the Chinese-owned app each month (compared with Meta’s 3.6bn), a less toxic brand that is popular among young people and superior technology. Despite attempts by Donald Trump to ban it on national-security grounds while he was president, TikTok has shown geopolitical and commercial staying power. Just as the boss of Time Warner, a media behemoth, once dismissed Netflix as “the Albanian army”—an inconsequential irritant—Silicon Valley and America’s trustbusters have never taken TikTok entirely seriously. Big mistake. The second kind of competition hurting Facebook is the intensifying contest between tech platforms as they diversify into new services and vie to control access to the customer. In Facebook’s case the problem is Apple’s new privacy rules, which allow users to opt out of ad-tracking, in turn rendering Facebook’s proposition less valuable for advertisers. So are Meta’s problems a one-off or a sign of deeper ructions within the tech industry? Strong results from Apple, Alphabet, Amazon and Microsoft in the past two weeks may lead some to conclude there is little to worry about. Apple’s pre-eminence in handsets in America and Alphabet’s command of search remain unquestionable. Yet there are grounds for doubt.The competition between the big platforms is already intensifying. The share of the five big firms’ sales in markets that overlap has risen from 20% to 40% since 2015. Total investment (capital spending plus research and development) for the quintet has soared to $300bn a year, as they search for new vistas such as virtual-reality metaverses or autonomous cars. These promise growth but will also lead to more overlap, disrupt existing products and depress short-term returns. Meanwhile, venture-capital funds invested $600bn last year. Some of this will go up in smoke, but some will finance competitors who will eventually pose a threat.And, if you look closely, pockets of strain are emerging beyond social media. Video-streaming has turned into a bloodbath as half a dozen firms throw huge sums at a cash-hungry business that has few barriers to entry. According to the Wall Street Journal, customer churn has exceeded 50% for some streaming services in just six months, one reason why Netflix’s share price has dropped by 33% so far this year. Some other aspiring tech platforms are showing signs of stress: Spotify said this week that subscriber growth would slow down and PayPal walked away from its goal to have 750m users by 2025. Even in e-commerce, where Amazon remains pre-eminent, serious challengers such as the supermarket giants (Walmart and Target) or rival online platforms (Shopify) are making their presence felt. In any case, Amazon’s thin margins and vast investment levels that suggest consumers may be getting a better deal than investors. Although a strong showing from the cloud division divulged on February 3rd may buoy the e-empire’s market value by more than half as much as Meta lost, the cloud business is unlikely to stay as lucrative for ever. Alphabet, Microsoft and Oracle are already trying to compete away some of Amazon’s lofty cloud margins.Meta’s mishaps signal that two changes need to happen, although only one will. One relates to Mark Zuckerberg, its leader and pantomime villain. He is pushing for a leap into the metaverse in which the firm is now investing $10bn a year. His reputation with shareholders rests on successfully completing similarly bold moves in the past: the acquisitions of Instagram and WhatsApp in 2012-14 and a shift from desktop to mobile around the same time. The trouble is that Mr Zuckerberg’s and his firm’s toxic reputation will impede its expansion into new terrain: its plan for a digital currency flopped because governments objected (this week the venture announced that it was winding down). Mr Zuckerberg is a liability, but controls Meta’s voting rights, enjoys a pliant board and so is probably going nowhere. The second change involves how investors and governments think about big tech, and indeed the stockmarket. The narrative of the 2010s—of a series of natural monopolies with an almost effortless dominance over the economy and investment portfolios—no longer neatly reflects reality. Technology shifts and an investment surge are altering the products that tech firms sell and may lead to a different alignment of winners and losers. And, as in previous booms, from emerging markets to mortgages, high returns have attracted a vast flood of capital, which in turn may lead to overall profitability being competed down. Given the enormous weight of the technology industry in today’s stockmarkets, this matters a great deal. And the mayhem at Meta shows it is no longer just an abstract idea. More