Philippa Kaur

FACEBOOK HAS always had two faces. One is the grimace of a company that many people, in particular politicians, love to hate. President Joe Biden recently accused the social-media giant of “killing people” by spreading misinformation about vaccines against covid-19. (He later rowed back a bit after Facebook pointed out it does quite a lot to stop the spread of such content and to promote legitimate vaccine tips.)The other face is a happy one of a firm that users, advertisers and investors cannot live without. Analysts predict it will be grinning again on July 28th, when it presents second-quarter results. Revenues are expected to rise by nearly 60%, year on year, to around $28bn—despite Apple’s update in April to its iPhone operating system that allows users easily to opt out of being tracked around the web by apps like Facebook. That would put it on track to exceed $100bn in sales this financial year. Quarterly net profit could come in just shy of $10bn, double that of a year ago. No wonder Facebook looks poised to become a long-term member of the exclusive club of companies with a market value above $1trn, which it joined earlier this year (see chart).How can a firm with such political baggage be so successful? The answer is two sides of the same coin. With more than 2.7bn daily global users, Facebook’s main offerings—its flagship social network (known internally as Blue), photo-sharing on Instagram and messaging on WhatsApp and Messenger—are a digital magnifying glass of human nature. This glass amplifies the good (neighbourly help amid the pandemic) as well as the bad (conspiracy theories and quack cures). It also serves as a remarkable lens for advertisers to focus in on the world’s consumers. And the two-facedness is likely to become more pronounced should Facebook succeed with its biggest project yet: creating a “metaverse” that would combine a 3D digital world with the 3D physical one.At its core Facebook is a giant advertising machine. Adverts generate 98% of its revenue. Blue remains a dominant ad platform internationally, raking in perhaps $55bn last year, according to estimates by KeyBanc Capital Markets (Facebook does not break out revenues by service). Instagram, which Facebook bought in 2012 for what seemed like a colossal $1bn, now chips in another $20bn or more, taking its share of overall ad revenues to nearly 30%, up from just over 10% in 2017. Debra Aho Williamson of eMarketer, a data provider, praises Facebook’s ability to target ads as “incredibly precise”. Advertisers value this highly: Facebook earns more than $9 a year for every one of its users, about twice as much as Twitter does. The firm observes what its users do not only on its own services, but almost everywhere else online. This lets it pick what products to flog to a given user, identify others with similar interests and find out whether they bought something after seeing the ad.Even before the pandemic hit, this was hard to resist, especially for smaller firms with fewer resources to run sophisticated marketing operations, which make up the bulk of Facebook’s 10m advertisers, but also for most big global brands. Even Chinese sellers are spending hundreds of millions of dollars on Facebook, says Brian Wieser of GroupM, which places ads on behalf of brands. Although Facebook’s apps are banned in China, Chinese merchants can plug their wares to Western consumers thanks to firms such as Wish, an American online marketplace that helps arrange ads, payment and shipping.No commercial brakesCovid-19 has turbocharged Facebook’s machine. Confined to home, the average American user spent nearly 35 minutes per day on Blue and Instagram in 2020, according to eMarketer, two minutes more than the year before. That adds up to thousands of additional years of collective attention. While some firms went belly-up or cut advertising spending amid last year’s recession, others were created: 6.6m in America alone since the start of the pandemic. Many want a slice of that extra attention. These days it is unimaginable to run an online consumer business without targeted ads, notes Mark Shmulik of Bernstein, a broker, just as it was once unthinkable to run a business without a bricks-and-mortar shop. A bigger share of such firms’ budgets will be spent on Facebook and its fellow ad-tech giant Google, says Mr Shmulik. Some admen are calling it “the new rent”.Facebook has added more than 2m renters since the start of the pandemic. It is almost certain to add more of them as economies reopen and digital ads, which already make up 60% of overall ad spending in America, keep chipping away at TV and other traditional media. The impact of Apple’s new tracking opt-out, which four in five iPhone users have already embraced, according to Flurry, a data firm, will not be clear until the next round of quarterly results in October, observes Mark Mahaney of Evercore ISI, an investment bank. But even if this makes Facebook’s targeting a bit less effective, it will still be at least as good as its competitors’, he predicts. And although on July 23rd American trustbusters got another three weeks to refile a lawsuit against Facebook, which had been thrown out last month for lack of evidence, they will struggle to prove that the company is a social-networking monopolist under current competition law. For all the anti-tech bluster in Washington, DC, this is unlikely to change as long as Congress remains polarised.The bigger threat to Facebook’s continued success, which has long preoccupied Mark Zuckerberg, its co-founder and chief executive, is that virtual masses finally tire of its apps and move elsewhere, pulling advertisers with them. Over the past two years a new generation of social media has emerged that could do just that. Although Facebook’s share of American digital advertising has continued to grow in recent years, its global social-media advertising has been edging down since 2016. The challengers range from specialists such as Clubhouse and Discord, two audio-chat services, to Snapchat and TikTok, which take on Blue and especially Instagram more directly. TikTok fans in America now spend more than 21 hours a month on the video app, compared with less than 18 hours that users spend on Blue, according to App Annie, a market-research firm.In the past, Facebook might have snapped up smaller rivals, as it did with Instagram. With trustbusters looking over its shoulder, it is instead placing a number of big bets. The first is on the “creator economy”, which lets people make money from digital works such as videos or newsletters. This is an extension of its ad business, but one where it has fallen behind new rivals. TikTok and YouTube, in particular, have been better at attracting creators who keep users glued to their smartphone screens. In April Facebook announced that it was developing new audio features, including Clubhouse-like chat rooms in which listeners can tip performers. In June it launched Bulletin, a newsletter-hosting service that is similar to Substack, which popularised the genre. The following month Mr Zuckerberg vowed to shower creators on Blue and Instagram with $1bn by the end of next year (without specifying what form these payments would take).Facebook’s second wager looks beyond advertising to e-commerce. It already hosts 1.2m online shops on Blue and Instagram. That puts it in the same league as Shopify, a fast-growing rival to Amazon, which has 1.7m. A month ago Facebook launched a new way to lets buyers try on clothes virtually. It also plans to link its “Shops” offering with Marketplace, its existing peer-to-peer trading service, and WhatsApp, which Facebook wants to turn into a vehicle for chat-based “conversational commerce”, the latest trend in online shopping. Later this year it would like to phase in a version of Diem, its controversial cryptocurrency (formerly known as Libra), that would beef up its payments infrastructure.For now Facebook has waived seller fees but they could add a few billion dollars to its turnover as soon as next year. Besides bringing in non-advertising revenues, an e-commerce business would also help the company with its tracking problem. If shoppers spend more time and leave more data on its platform the inability to follow them across the rest of the web becomes less important. Mr Shmulik expects the e-commerce landscape to fragment into such walled gardens, each combing shopping and advertising, and operated by a tech giant.Meta-morphosisMr Zuckerberg’s grandest gamble concerns the metaverse. When he spent $2bn in 2014 to buy Oculus, a maker of virtual-reality (VR) gear, many thought he was buying himself a toy. But in recent years Facebook has made further VR-related acquisitions, most recently BigBox VR, the developer of “Population: One”, a shooter game similar to “Fortnite”. This gives Facebook control of a hardware platform for VR and its sibling, “augmented reality” (AR), which serves users digital information as they survey the real world through smart spectacles and the like.And as with e-commerce, part of Facebook’s rationale could be to create strategic sovereignty, by lessening its dependence on the whims of hardware-makers such as Apple. The potential prize is large. Sales of Oculus headsets contributed around $1bn to Facebook’s revenues last year. If the technology keeps improving, VR and AR are the obvious next phase of video-gaming, which has grown into an industry with global revenues of $180bn.Mr Zuckerberg’s ambitions do not stop there, however. He doesn’t see the metaverse, which now has its own division within the firm, merely as a place to enjoy games or other immersive entertainment. Instead, he envisages it as a virtual space where people live and work, in keeping with a dream that geeks have harboured since 1992, when the term metaverse was coined by Neal Stephenson, a science-fiction author. In five years’ time, Mr Zuckerberg has said, he would like Facebook no longer to be seen primarily as a social-media company but as a metaverse company.That would make Facebook cool again. It would no doubt also invite more scrutiny from critics worried about the firm’s power. Should users look on course to spend 35 hours a week immersed in its virtual world, rather than 35 minutes a day, this could invite regulation that actually bites. For now, the metaverse is encouraging something Mr Zuckerberg fears more: competition. Others sizing up the field include video-game firms like Roblox and Epic Games, as well as tech giants Apple, which is reportedly planning its own AR glasses, and Microsoft, which already sells AR goggles. If Facebook beats them to metaverse supremacy, it will have plenty to grin about. Otherwise, expect serious grimacing. More

TROUBLE IS BREWING in America. The reopening economy’s hunger for goods from China, and for the containers that carry them, has left importers of coffee, of which the average American guzzles two cups a day, struggling to ship the stuff from Brazil. They are using whatever they can get, says Janine Mansour of Port of New Orleans, where much of America’s raw coffee lands. That includes much bigger boxes, which reach maximum allowed weight before they are full. Importing part-empty containers adds extra costs, Ms Mansour says, and these will ultimately be swallowed by consumers.It isn’t just coffee prices in America that are rising. Transport logjams and paltry harvests in producing regions have conspired with surging demand to stoke food inflation across the smorgasbord. The UN Food and Agriculture Organisation (FAO) expects the value of global food imports to reach nearly $1.9trn this year, up from $1.6trn in 2019 (see chart). In May its index of main soft commodities hit its highest value since 2011, after rising for 12 straight months. Another benchmark index, by S&P Global, a research firm, has risen by 40% since July 2020. On July 22nd the boss of Unilever, the Anglo-Dutch maker of everything from Ben & Jerry’s ice cream to Hellmann’s mayonnaise, said that pricier raw materials have caused his firm’s costs to swell at their fastest pace in a decade.Central bankers warn that the price spikes could feed broader inflation, which is already on the rise in many countries. That would be bad for consumers. But their loss is a gain for the giant firms that source, store and ship foodstuffs on behalf of state buyers and multinational companies. These opaque traders, which possess the networks of silos, railways and vessels, as well as the data and relationships, necessary to redraw supply routes, thrive on volatility. The four biggest—ADM, Bunge, Cargill and Louis Dreyfus, collectively known as the ABCDs—have been adding to their total workforce of 240,000 and ploughing billions of dollars into new businesses that rely less on cycles of feast and famine. Their prospects offer a foretaste of global food markets in decades to come.The ABCDs have been matching buyers and sellers of foodstuffs for more than a century. The youngest of the four, ADM, was founded in 1902. The oldest, Bunge, dates back 84 years before that. In the decades to the early 2010s they thrived on the back of population growth, rising prosperity and accelerating globalisation.Down on the farmThen they began to wilt. A prolonged glut of crops kept prices low and stable, squeezing margins. Smartphones and other technology put real-time data on local conditions and global prices at farmers’ fingertips, reducing the middlemen’s market power. Producers bought storage to ride out price swings, which decreased arbitrage opportunities. Challengers emerged, including Viterra, the agricultural arm of Glencore, a large commodity-trader-turned-miner, and COFCO International (CIL), the overseas trading arm of China’s state-owned food giant. Between 2013 and 2016 the ABCDs’ combined sales plummeted from $351bn to $250bn.The revenues have stayed flat since. But last year was nevertheless a bumper one for the ABCDs, whose combined net profits doubled, to $4.5bn. Analysts expect ADM and Bunge, which are publicly traded and report second-quarter results this week, to do even better in 2021. All four benefit from abruptly changing patterns of demand for crops and of their supply.Start with demand. For one thing, the pandemic has altered diets. When covid-19 began to spread in early 2020, lockdowns and crimped incomes meant that people stopped eating out and started cooking at home. Meat, fish and dairy (for all those lattes) gave way to more vegetables and cheaper packaged foods. As restaurants, canteens and cafés reopen, and wages rise thanks to the economic rebound, the reverse is happening. “A year ago we were trying to get rid of milk,” says Alain Goubau, a farmer in Ontario. “Now we are adding as many cows as we can.” China has been rebuilding its vast hog herd, which an epidemic of swine flu in 2018 had halved in size.This has had a multiplier effect on demand for crops, since more grain is needed to produce an animal calorie than if the plant were consumed directly, says Sebastian Popik of Aqua Capital, an agribusiness buyout firm in Brazil. Alfonso Romero of CIL expects China to buy a record 30m tonnes of corn (maize), one of the world’s most-traded crops, this year, in large part to feed all its new pigs. That is up from 11m tonnes in 2020, which was itself an all-time high.Another boost to demand comes from high oil prices, which make energy crops look like an attractive alternative. The more crops are turned into fuel, the less is left in the food system. The volume of American soyabean oil used to produce energy could rise by 39% between 2020 and 2022, according to the US Department of Agriculture (USDA). Brazil’s production of ethanol from corn shot up by more than half last year and is forecast to increase by another quarter in 2021.Even as demand for crops has surged, a confluence of factors has conspired to squeeze global supply. Droughts in North and South America have curtailed output. Brazil’s winter-wheat harvest is down by a fifth—and that fifth was meant for export. Besides the container shortage that affects specialty crops such as coffee, the grounding of commercial flights is stranding fresh fruit and vegetables. Rising bulk-shipping rates, up by 150% this year, are adding to the squeeze. Part of that is the result of rising oil prices, which also increase the cost of petroleum-derived fertiliser and other chemicals, and of running farm equipment (which is itself more expensive to buy as farmers take advantage of high crop prices and cheap credit to invest in new tractors and other kit).This cocktail of forces is buoying global wholesale prices. Soyabeans and corn are, respectively, 56% and 68% more expensive than a year ago. This has filtered through to consumer prices: the cost of a home-grilled cheeseburger is up by 11 cents from 2019, says the USDA. The uncertainty and shrinking stockpiles are creating volatility. IFPRI, a think-tank in Washington, DC, has had corn on high “excess price variability” alert for nearly four months. Wheat and coffee prices have been volatile, too.Big traders are enjoying the ride. Higher prices give the ABCDs more margin to play with. Bigger volumes, as farmers sell more to lock in the high rates, let them recoup fixed costs more quickly. And more volatility makes it possible to exploit price discrepancies across time and space. Despite a recent dip, the share prices of ADM and Bunge are still up by a third since 2019. Rumours of Bunge’s takeover by rivals, which swirled in 2018 as it embarked on a painful restructuring, have quietened. Dreyfus, the most troubled of the four, has been steadied by market conditions (and a cash injection by Abu Dhabi’s sovereign-wealth fund, which bought a 45% stake in the family-owned business). Cargill has not reported its annual profit for last year but was headed for record earnings after the first three quarters of 2020.In the short run conditions for the traders look clement. Demand is likely to stay strong. Analysis by Josef Schmidhuber and Bing Qiao of the FAO suggests global agricultural trade volumes will grow by double digits every quarter in 2021. Although prices have softened a bit in the past two months, thanks to better-than-expected planting forecasts in big regions and the near-completion of China’s hog splurge, they are much higher than before the pandemic.They will probably stay that way until at least next year, reckons Carlos Mera of Rabobank, a Dutch lender. Mr Popik says that the food businesses in Aqua Capital’s portfolio, which export to 45 countries, must now finance two months of stock instead of the usual one. This implies that it will take time to iron out supply-chain wrinkles. And meteorologists place a high probability on another La Niña—a weather event of the sort that caused droughts in late 2020 and early 2021—before the end the year.Crop rotationTo deal with their longer-term structural challenges, the ABCDs are diversifying. All of ADM’s recent capital spending has gone into less cyclical and more lucrative businesses such as flavouring, colouring and other ingredients for fast food, fizzy drinks or vitamin supplements, says Seth Goldstein of Morningstar, a research firm. In the first quarter of this year its nutrition-ingredients units generated $154m in operating profit on revenues of $1.6bn. That is about 8% of its total, and growing fast. ADM expects this business to expand twice as fast as its core business, which tends to track global GDP.Bunge has sold dozens of mills, elevators and other assets to invest in plant-protein and edible-oil factories. Cargill now derives most of its profits from animal feed and animal protein. Its food-production facilities include a fish farm in Norway, a poultry farm in the Philippines and cultured-protein factories in America and Israel. It has become one of America’s largest meat processors, as well as a big investor in venture-capital funds focused on food and life sciences. Dreyfus has invested in Leong Hup International, one of South-East Asia’s biggest integrated producers of poultry, eggs and livestock feed.As the traders become ever larger producers of foodstuffs and consumers of crops in their own right, they may come to prize stability a bit more. But probably not too much. They are not about to stop trading. As the populations of Asia and Africa grow bigger and richer, the middlemen will be called upon to supply them with crops from surplus countries, says Jos Boeren, a former Bunge executive now at Stafford Capital, an investment firm. The policies of big hoarders such as China, India and Russia look ever more unpredictable and their stocks less transparent. Climate change will ensure mismatches between supply and demand of foodstuffs. With six centuries of experience between them, the ABCDs will be evening out soft-commodity cycles well into the future. More

IN 2016 TOKYO’S then governor, Masuzoe Yoichi, predicted that the Olympics the Japanese capital was to host in 2020 would “leave a hydrogen society as its legacy”, just as the 1964 Tokyo games left the Shinkansen bullet trains. Later that year Mr Masuzoe resigned over an expenses scandal. But as Tokyo prepares for the pandemic-delayed opening ceremony on July 23rd his dream lives on.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

WHEN OFFICE workers were sent home in the spring of 2020, managers suddenly faced a new challenge: how to supervise teams that were working remotely. While employees are now gradually heading back to their desks, a much greater share will work from home at least occasionally than before the pandemic. A new book, “Leading at a Distance”, by James Citrin and Darleen Derosa of Spencer Stuart, an executive-search firm, attempts to provide some practical tips for managers dealing with staff whom they do not see face to face.The authors are not in the gloomy camp that believes remote working is a disaster. They think it can be just as effective as face-to-face work. They point out that the ability to hire people who can work anywhere means that businesses will find it easier to develop more diverse workforces. A study by McKinsey, a consultancy, found that 70% of companies thought remote hiring would help in this respect.The book offers some useful advice. For starters, keep virtual teams small. The upper threshold seems to be around a dozen. A study found that 37% of low-performing teams had 13 or more members, compared with just 24% of high-performing teams. In addition, the best-performing teams tended to be drawn from one department, such as marketing, rather than from across the firm.The trickiest part of the manager’s job is building rapport. It is easy for remote workers to feel isolated so supervisors should be in regular contact. But it is a tricky line to walk. There is a difference between checking in to see if someone needs support and constantly monitoring their progress. If team members feel they are being nagged, they will conclude their superiors don’t trust them.Much communication will be by email, which has its advantages. It is easily shared, can be read several times to aid comprehension and can be referred to long after it is sent. But email also introduces the risk that nuance is lost. The authors cite studies showing that emails perceived to be neutral in tone by the sender are seen as negative by the recipient; and recipients consider neutral those perceived by the sender to be positive.Mr Citrin and Ms Derosa also warn of the dangers of virtual meetings. Just because it is possible to schedule one does not mean it is necessary or wise to do so. Poorly run meetings do not just waste time, they jeopardise the ability to meet deadlines, adding to workers’ stress. Long meetings should have breaks, which the manager should take responsibility for enforcing. And any meeting should be 20 or 50 minutes long, rather than 30 minutes or an hour, to allow for a gap between sessions in an hourly schedule.At times, the authors’ advice becomes a little generic. Virtual meetings should have one of four objectives, they argue: to solve problems, make decisions, to gain support or build relationships. Sadly, in Bartleby’s experience, an inventive manager could describe almost all meetings as conforming to at least one of these criteria. Later in the book, they describe the most important characteristics for virtual leaders as including “strong communications and interpersonal skills, initiative, flexibility and the ability to learn and adapt”. Surely these are useful attributes for all leaders, whether operating remotely or not?And some of the suggestions seem distinctly offbeat. As part of team-building, the authors propose that colleagues display pictures on their bookshelves or give a tour of the kitchen and tell the stories behind the items within it. Much as Bartleby would love to hear about Bagehot’s egg whisk or Schumpeter’s salad spinner, he hopes this idea does not catch on at The Economist. The same goes for the suggestion that virtual festive parties would be enlivened by having staff dress up, with a vote on the best outfit, or for colleagues to submit videos of their children or pets. Pet videos should be confined to YouTube.A few things must change when people work remotely. But not everything does. Managers will need to make a more determined effort to keep in contact with their staff but those who are good at listening, and who can empathise with how their team members are coping, should still be able to flourish. If, as most people expect, a hybrid model emerges with remote working a couple of days a week, there will be plenty of scope for interaction when managers and team members are both present. What office life doesn’t need is gimmicks. Work colleagues do not need to be treated like game-show contestants.This article appeared in the Business section of the print edition under the headline “How to lead from afar” More

FOREIGN INTERNET firms have a rough time in China. To stop the spread of ideas it deems dangerous, the Communist Party blocked YouTube’s video-sharing site, Facebook’s social network and Twitter’s microblog in 2009. A year later Google abruptly shut its Chinese search engine after a dispute with censors. Chinese who want to access Western social media must do so via virtual private networks, which is finicky and can be illegal.One exception to this heavy-handed rule is LinkedIn. China’s government tolerates the professional network, perhaps because most people use it to hunt for jobs and business contacts, not talk about democracy. The number of LinkedIn’s Chinese users has grown rapidly since Microsoft purchased it in 2016, to 53m. They make up around 7% of LinkedIn’s global total, up from 1.4% in 2014. Microsoft does not disclose how much China contributes to LinkedIn’s revenues, which reached $8bn in 2020. Still, the software giant can tout it as a rare Western social-networking win in a market of nearly 1bn netizens.But operating in a dictatorship presents awkward choices for a platform designed for the exchange of ideas, as well as business cards. To comply with China’s laws, LinkedIn must limit what users can post. Since March, when China’s cyberspace regulator criticised its lax controls, it seems to have stepped up those efforts. Many users have received notices that their profiles and activities are not displayed in China. One academic based in Taiwan, J. Michael Cole, recently discovered that his profile was blocked there. LinkedIn indicated the presence of sensitive content in the “publications” section of his profile but did not elaborate further. Mr Cole believes it may have something to do with references to books he has written about Taiwan, which China claims as part of its territory.Mr Cole’s experience points to a conundrum for LinkedIn. Like other social media tolerated by Beijing, it must not allow certain words to appear on its service. But the rules are fuzzy, even for large internet platforms. If LinkedIn has received a list from regulators, or come up with an internal one, it does not divulge it. Liu Dongshu, a scholar of China’s internet politics at City University of Hong Kong, thinks LinkedIn probably does not have such a list but instead censors some content that China’s government may potentially find objectionable on a case-to-case basis to avoid trouble. This leaves LinkedIn users in a position not dissimilar to that of the social network itself: with no explicit rules on what they can and cannot post in China, they are, like Mr Cole, left guessing. That, in turn, can lead to self-censorship.LinkedIn says that it has an “obligation to respect the laws that apply to us, including adhering to Chinese government regulations”. When asked by The Economist to cite the regulations that force it to block user profiles, LinkedIn’s spokeswoman did not respond. Microsoft did not respond to a request for comment.All foreign firms face difficult trade-offs in China, which is both a vast market and an autocracy. Those with large Chinese operations tend to fall in line. Apple, which both makes and sells lots of iPhones in China, has removed sensitive programs from its Chinese app store. Companies with less exposure to China can take the high road. Facebook, Google and Twitter have reportedly threatened to pull out of Hong Kong, on which the Communist Party has recently tightened its grip.Microsoft sits somewhere in the middle. China has been a source of grief for the company: from pirated Windows and Office software to raids on its offices by antitrust regulators. On July 19th America and several allies blamed China for a big hack of Microsoft’s Exchange email service. At the same time, many Chinese do pay for its original wares—and Microsoft would no doubt like more of them to do so. It does not break out its Chinese sales but last year its president said they contributed less than 2% to global revenues. If that share is to grow, self-censorship on LinkedIn may be the price. ■This article appeared in the Business section of the print edition under the headline “LinkedOut” More

ANTITRUST USED to be as American as apple pie. The Boston Tea Party was, in part, a protest against the monopoly of the British East India Company. The word itself stems from the trusts, such as Standard Oil, that lorded it over the American economy in the 19th century. For stretches of the 20th it became America’s charter not just for free enterprise, but for political freedom. Contrast this with China, a Communist dictatorship whose AntiMonopoly Law, introduced in 2008, has more often than not been used only to cudgel foreign firms. In such hands, it is easy to dismiss trustbusting as Orwellian gobbledygook.And yet suddenly antitrust in China has come to life in the way police internal affairs have done thanks to the British cop show “Line of Duty”: as a source of unending fear and fascination, carried out by agencies with impenetrable acronyms and a keenness for Stasi-like dawn raids. In short order, it has transformed the country’s erstwhile tech giants into simpering poodles.The onslaught marks the rise of a new sort of regulatory authoritarianism. Both America and China have similar qualms about the influence of their big technology firms. But since President Xi Jinping gave the nod to his trustbusting warriors last autumn, China has leapfrogged America in the speed, scope and severity of its antitrust efforts, giving new impetus to the word “techlash”. For those frustrated at the power of the tech giants in America, China offers a masterclass in how to cut them down to size. If only, that is, America could emulate it.Start with speed, the Communist Party’s biggest edge over America’s democratic ditherers. When overweening tech barons treat politicians like patsies, don’t invite them to mind-numbing congressional hearings. Force them to keep a low profile for a while, as China did with Jack Ma, co-founder of Alibaba, China’s biggest e-commerce firm, who also founded its fintech stablemate, Ant Group. In no time, the billionaire class got the message. It took just over six months after the humbling of Mr Ma for the founders of two other Chinese tech giants, Pinduoduo and ByteDance, to announce they were retreating from public life. It also took less than four months of antitrust investigation for Alibaba to be clobbered with a $2.8bn fine in April. By contrast, a trial date for Google, sued last October by America’s Department of Justice (DoJ) and 11 states for alleged monopolistic abuse by its search business, will not come before 2023. Yawn.Next, scope. Don’t let pesky courts stand in your way, as they do in America. Throw the book at mischief-makers using whatever tools a one-party system affords you. As Angela Zhang puts it in “Chinese Antitrust Exceptionalism”, a book written before the latest tech crackdown, Chinese regulation of monopolies starts with agencies jostling for power and influence. Their recent rampage has been supercharged by modified laws in an array of subjects. They have slapped fines on firms for crimes ranging from online price discrimination to merchant abuse and irregularities in tech merger deals. The recent crackdown on Didi, a ride-hailing giant, days after its initial public offering in New York, focuses on concerns encompassing data security and spying.Do not expect Didi, or the alleged monopolists, to seek protection from the courts. In China trustbusters are almost never subject to judicial checks and balances. Chinese agencies, writes Ms Zhang, handle “investigation, prosecution and adjudication”. In other words, they are police, judge and jury rolled into one. In America the reverse is true. In June an American judge threw out a six-month-old lawsuit by the Federal Trade Commission (FTC), America’s antitrust regulator, against Facebook, arguing that the government never proved that the social network had monopoly power. Round two to the totalitarians.Third, severity. It isn’t the fines tech titans fear most. It is having their business models torn apart, as Ant’s was, as well as the reputational damage; bureaucrats can use state media and populist outrage to wreak havoc on a miscreant’s sales and share price. This year, amid the crackdowns, the value of China’s five biggest internet firms has plummeted by a combined $153bn. In America, despite lawsuits, probes and hearings, the value of Alphabet, Amazon, Apple, Facebook and Microsoft has soared by $1.5trn. As Chinese firms capitulate, American ones fight back, publicly challenging their antagonists, such as Lina Khan, who heads the FTC. Jonathan Kanter, President Joe Biden’s Google-bashing pick to run the DoJ’s antitrust division, can expect similar treatment.Be careful what you wish forPresumably all this would arouse envy among trustbusters in Washington, DC—were “China” not an even dirtier word than “tech” these days. Not only has China taken up the antitrust mantle from its superpower rival. It has done so strategically. It strengthens Mr Xi’s control over potential rivals for popular adulation: the tech billionaires. It gives the central government more oversight of an ocean of digital data. And it encourages self-reliance; the aim is to have a thriving tech scene producing world-beating innovations under the thumb of the Communist Party.But autarky carries its own risks. Already, Chinese tech darlings are cancelling plans to issue shares in America, derailing a gravy train that allowed Chinese firms listed there to reach a market value of nearly $2trn. The techlash also risks stifling the animal spirits that make China a hotbed of innovation. Ironically, at just the moment China is applying water torture to its tech giants, both it and America are seeing a flurry of digital competition, as incumbents invade each other’s turf and are taken on by new challengers. It is a time for encouragement, not crackdowns. Instead of tearing down the tech giants, American trustbusters should strengthen what has always served the country best: free markets, rule of law and due process. That is the one lesson America can teach China. It is the most important lesson of all. ■This article appeared in the Business section of the print edition under the headline “War war v jaw jaw” More

AS LOCKDOWNS LOOMED last year, people scrambled to stock up on home-survival essentials: food, medicine and a Netflix subscription. In the first half of 2020 the streaming company registered 25m new members worldwide, twice as many as had signed up in the same period a year earlier. With viewers hunkering down to see out the pandemic on the sofa, “Outbreak”, a disaster movie from 1995, made Netflix’s top ten.Now as many of the world’s economies are reopening, Netflix’s growth is sputtering. On July 20th the company announced that 1.5m people had signed up in the second quarter of 2021, 85% fewer than a year ago. In America and Canada, where the market is saturated and competitors are multiplying, the total number of subscribers fell by 430,000. Netflix’s share price, which soared by nearly 50% in the first half of 2020, has barely risen in the past year.The stall is unsurprising. Many new members from 2020 simply pulled forward subscriptions they would have made later. It still raises a difficult long-term question for Netflix. The company began by renting DVDs by mail. Its second, stunning act was to invent and dominate subscription video-streaming. Now, as rich markets mature and rivals snap at its heels, growth must come from elsewhere. Netflix’s third season promises exotic new locations and, perhaps, a big plot twist.Season two has a little way to run. Though new subscriptions in America have slowed to a trickle, Netflix has scope to charge viewers more. It makes an industry-leading $14.88 monthly from each American member, more than double the takings of Disney+, its main rival, according to MoffettNathanson, a firm of analysts. Despite this fewer members quit Netflix each month than ditch other streamers, according to Antenna, a data company. Further price hikes could lift Netflix’s domestic revenues by 7% annually for the next few years, reckons MoffettNathanson.The bulk of the growth, however, will come from overseas. Last year, for the first time, more than half of Netflix’s revenues were earned outside America and Canada. By 2025 the share is expected to reach two-thirds. Already nine out of ten new subscribers live abroad (see chart 1).The international game is hard. Most foreigners are poorer, and even the rich ones don’t spend much on TV. The average American home still shells out upwards of $80 a month for cable, so those who “cut the cord” can afford half a dozen streaming services. Europeans are stingier: the average British household spends less than $40 on pay-TV. Netflix has resisted lowering prices, so even in low-income India a standard subscription costs $8.70 a month. Its biggest concession has been to invent a mobile-only plan, now in more than 70 markets. Indians can sign up to this for $2.70.Like the financial barrier, cultural ones are high in show business. Enders Analysis, a research firm, found that programmes made by British broadcasters were richer in local idiom than those commissioned by foreign streamers. “Sex Education”, a Netflix series set in rural England, had fewer than five British references per hour. “Peep Show”, a home-grown hit, had more than 35, from “johnnies” (condoms) to Findus Crispy Pancakes, a national delicacy. Reed Hastings, Netflix’s boss, said in April that the firm was “still figuring things out” in India, where several senior executives have quit and where rivals like Amazon, an e-commerce giant with a streaming business, and Disney+ have made some headway.The international battle is nevertheless one that Netflix is winning. By the end of the year it will have 31m subscribers in Asia, a little more than half as many as Disney+, estimates Media Partners Asia (MPA), a consultancy in Singapore. But three-quarters of Disney’s are in India, where it has the rights to the national sporting obsession in the form of the cricket Premier League but generates less than a dollar in revenue per subscriber. By contrast, more than 60% of Netflix’s Asian members are in the rich markets of Australia, Japan and South Korea. MPA expects Netflix’s Asian revenues to reach around $3.2bn this year, compared with Disney+’s $800m.And whereas in America Netflix competes with a dozen or more streamers, in international markets it is rarely up against more than two serious rivals. Once WarnerMedia is spun off from AT&T, its corporate owner, and merged with Discovery, as planned, the international footprint of Warner’s HBO Max will increase. Approval for that deal could be a year away, by which time Netflix will have signed up another 30m or so members. A rumoured partnership between Comcast, a cable company that owns NBCUniversal, and ViacomCBS, another media group, to combine their streaming services internationally could take a while to materialise.Of Netflix’s rivals, only Amazon and Apple, a smartphone-maker with entertainment ambitions, are truly global; each claims to be streaming to audiences in more than 100 countries. But neither has yet matched Netflix’s production chops. Last year Netflix became the biggest commissioner of European content, overtaking the BBC, France TV and Germany’s ZDF, according to Ampere Analysis, another research firm. It has more new TV shows in production than three of its largest rivals combined, and is shooting in regions where Hollywood usually fears to tread. Recent projects include its first Russian original, an “Anna Karenina” remake, and a slate of Korean K-pop-themed shows. “It’s not just a battle for subscribers, it’s a battle for content hegemony,” says Vivek Couto of MPA.On the strength of this international onslaught, Netflix’s overall revenues will grow by about 14% a year until 2025, calculates MoffettNathanson. The firm is raking in an extra $5bn or so each year. This compares favourably with show-business rivals, insiders note.Yet some investors benchmark the company not against the entertainment industry but against big tech. That comparison is less flattering. Share prices of America’s tech giants—Facebook, Amazon, Apple, Google and Microsoft—have continued to appreciate even as the pandemic burns out (see chart 2). And their revenue growth to 2025 is expected to be nearer 20% a year. To match them, Netflix needs to think outside the goggle box—not least because, as Matthew Ball, a media venture-capitalist, puts it, consumers are increasing asking not “What should we watch?”, to which Netflix has become the stock response, but “What should we do?”The answer, for many, is video games. The industry already generates nearly $180bn a year in global revenues and is expanding fast. PwC, a consultancy, estimates that gaming’s share of global entertainment-media revenues has risen from 15% in 2019 to 19% this year. In America, under-25s already rank gaming as their favourite pastime (and place watching TV shows and films last).Mr Hastings has long posited that in the attention economy Netflix competes with “Fortnite”, a popular online multiplayer game, as much as it does with HBO. Until now, though, his firm fought for consumers’ attention with its shows (and, more recently, merchandise sales, live events and podcasts aimed at spurring engagement with its content). Now it is taking the fight directly to the game developers. Under a new gaming boss nabbed from Facebook, Mike Verdu, Netflix plans to offer subscribers video-games on its mobile app within a year. One person with knowledge of the project says the initial investment is a single-digit percentage of Netflix’s $17bn annual content budget, with hopes that this will grow.Other media and tech giants have tried and failed to crack gaming, whose interactive nature requires a different technical infrastructure to passive, one-way video-streaming. Disney has closed its games studio. Google and Amazon have struggled to drum up interest in their respective game-streaming services, Stadia and Luna. It is unclear how Netflix plans to get around Apple’s ban on gaming platforms in its app store. And whereas many hits like “Fortnite” make money through in-game microtransactions (paying for power-ups and so on), Netflix plans to include games as part of its subscription, a model with few successful examples.These difficulties mean that many suspect an acquisition is on the cards. “Games are like pharmaceutical companies—you need to spend years building or buying a pipeline,” says one gaming-industry veteran. Though Netflix has hitherto preferred to grow organically, it has the means to splash out. It generated free cashflow last year and will generate more as its content-spending binge flattens out. Its stable subscription business means it can safely take on debt. America’s biggest game publisher, Activision-Blizzard, has a market capitalisation of around $70bn, making it a “doable” target for Netflix, which is worth $237bn, believes one of the streamer’s investors. Others speculate about a deal with Microsoft, which has both cloud-gaming technology and a games studio.The step from video to games is a big one—too big for a company that has grown cosy in its streaming comfort zone, some former Netflixers believe. “It is now much more of a traditional entertainment company,” laments one, adding that its risk-taking culture works less well at a behemoth with 9,000 employees than it did for a startup with a few hundred people. But that still makes it more nimble than the tech giants, with workforces in the hundreds of thousands and more rigid bureaucracies, notes a shareholder. And the move into gaming may not be as big as the transition from the postal service to the internet, which Netflix pulled off with aplomb. Searching for a cinematic analogy to describe the company, the share-owning optimist settles on a classic from 1953: “The Wild One”. More

AILEEN LEE, a venture capitalist who founded an investment firm called Cowboy Ventures, coined the term “unicorn” in 2013 to refer to what was then a rare, almost magical species: privately held startups valued at $1bn or more. Any magical attributes aside, today they are commonplace—and becoming ever more so. Consumers, who stand to benefit from an array of novel, often cheap products and services, can expect to enjoy the ride. Investors betting on the unicorn derby should tread more carefully.The world’s unicorn herd is multiplying at a clip that is more rabbit-like. The number of such firms has grown from a dozen eight years ago to more than 750, worth a combined $2.4trn. In the first six months of 2021 technology startups raised nearly $300bn globally, almost as much as in the whole of 2020. That money helped add 136 new unicorns between April and June alone, a quarterly record, according to CB Insights, a data provider (see chart 1). Compared with the same period last year the number of funding rounds above $100m tripled, to 390. A lot of this helped fatten older members of the herd: all but four of the 34 that now boast valuations of $10bn or more have received new investments since the start of 2020.The latest tech darlings are no longer chiefly Uber-esque marketplaces for matching services with consumers. Instead, they offer, or are developing, sophisticated products, often in more niche markets. Some 25% of the funding in the second quarter went to financial-technology firms, with lots also flowing into artificial intelligence, digital health and cybersecurity (see chart 2).The recipients of investors’ largesse are also getting more global. Although American and Chinese startups continue to dominate the fundraising league tables, the share coming from outside the two biggest markets grew from around 25% in 2016 to 40% in the past quarter. In July Flipkart, an Indian e-commerce firm, raised $3.6bn in a round that valued it at $38bn. Grab, vying to be South-East Asia’s answer to China’s super-apps, hopes to go public in New York this year at a valuation of $40bn.The torrent of cash can be explained by two factors. The first is a divestment spree by the startups’ early venture-capital (VC) backers. These stakes command top dollar from investors desperate for exposure to the pandemic-era digitisation wave. Exits, via public listings and acquisitions, more than doubled globally year on year, to a nearly 3,000. The proceeds are flowing back into new VC funds, which have so far this year raised $74bn in America alone, nearing the record $81bn in 2020 in half the time. The venture capitalists cannot spend the dough fast enough. In the three months to June Tiger Global, a particularly aggressive New York investment firm, made 1.3 deals on average every business day .The second reason for soaring valuations is greater competition among investors. Relative newcomers to the tech-investing business, such as pension funds, sovereign-wealth funds and family offices, are encroaching on the private markets that used to be dominated by VC firms from Sand Hill Road in Palo Alto. In the past quarter “non-traditional” investors in America took part in nearly 1,800 deals that together raised $57bn. Many may have been encouraged by the success of earlier forays by dabblers from outside the VC world. Their annual returns from exited investments in a first round of financing have averaged 30% in the past decade, reckons PitchBook, another data firm. That is more than double the 10-15% for veteran VCs.This winning streak could yet end in tears. That is what happened two years ago, when richly valued firms with shaky business models either fizzled after their initial public offerings (like Uber and Lyft, two ride-hailing rivals) or never got that far (WeWork, an office-rental firm whose flotation was shelved after investors got cold feet). Many recently listed unicorns continue to bleed cash. According to The Economist’s calculations, those that went public in 2021 made a cumulative loss of $25bn in their latest financial year.Assessing whether the remaining ones are worth their lofty valuations may be harder than ever. Like their predecessors, they do not disclose financial results. At the same time, extrapolating from the earlier unicorns, which tended to pursue growth at all costs in winner-takes-all markets, offers little help because today’s lot often aim to capture good margins by selling genuinely unique technology. This could be a more sustainable strategy—if the technology works. But it is harder for non-experts to evaluate, especially based on what is often little more than a prototype. Nikola and Lordstown, two electric-vehicle companies that listed in 2020 via reverse mergers with special-purpose acquisition companies (SPACs), are under investigation by American authorities over allegedly exaggerating the viability of their technology.Another risk comes from politics. Authorities around the world are growing warier of letting tech firms get too big or entering regulated markets such as finance or health care. As part of a broader crackdown against big tech firms China’s government recently sabotaged the operations of Didi, by banning its app from Chinese app stores days after the firm’s $68bn initial public offering in New York, ostensibly over misuse of users’ data. Such moves have chilled investors’ appetite for Chinese startups, funding for which has actually declined in the past two quarters. In America the Securities and Exchange Commission is beginning to scrutinise the use of cryptocurrencies. Many crypto-exchanges set investors’ pulses racing in last year’s bitcoin rush. Now the market capitalisation of Coinbase, one of the biggest, has shrunk by half, or $56bn, since a peak after its listing in April.Investors, then, had better beware. For everyone else, the latest unicorn stampede looks like a boon. Because venture investments involve mostly equity and little debt, even flops such as WeWork or cautionary tales like Didi pose little risk to the financial system. So long as venture capital is bankrolling lossmaking startups while they offer subsided services or develop clever new products, consumers have no reason to look the gift horned horse in the mouth. ■ More