Philippa Kaur

TO GET A sense of how Hong Kong’s magnates and China’s Communist Party have coexisted, consider Tung Chee-hwa. When his family shipping concern, Orient Overseas Container Line (OOCL), faced bankruptcy in the mid-1980s, a Chinese state-owned bank swooped in to bail it out. Mr Tung became the territory’s chief executive after Britain handed Hong Kong back to China in 1997, until protests pushed him out of office in 2005. In 2017 he cashed out of OOCL through a $6.3bn sale to Cosco, another state-owned giant.Closeness to power has characterised the entrepot’s business elites for decades. The relationship hinged on the “high-land-price policy”, an informal agreement to constrict the supply of land and guarantee high returns for bosses and the state alike. Taxes on property and property developers generated 45% of government revenues between 1970 and 1996 for the colonial authorities. Post-colonial ones benefited from it, too. For the tycoons the arrangement helped transform land holdings into sprawling conglomerates that now touch most aspects of life in the city.The tycoons might have hoped the entente would help them in the pandemic, which has hit their businesses hard. Sun Hung Kai Properties and New World Development, real-estate empires controlled by the Kwok and Cheng families, respectively, saw their profits fall by 25-50% in the last financial year. Hang Lung Properties, another big developer, reported a net loss of $280m. Swire, which controls assets including Cathay Pacific, Hong Kong’s flag-carrier, lost $1.4bn as covid-19 grounded air travel; the airline’s share price hit a 20-year low in August. The shares of Hong Kong Land, the property subsidiary of Jardine Matheson, another family-held empire that includes Mandarin Oriental hotels, have lost 36% of their value since March 2019.Ronnie Chan, Hang Lung’s outspoken chairman, summed up the rapport in his group’s latest annual report: “I see no incentive for Beijing to hurt us.” But Beijing’s incentives appear to be changing. The Communist Party is reducing the tycoons’ influence on the election committees which select the territory’s political leaders, where business clans were allotted strong representation after the handover in 1997. It has tightened its grip on Hong Kong, most recently with a national-security law that is stripping the city of many freedoms and putting its status as a global commercial hub in question. Most important, pro-Beijing business interests are drawing up plans to loosen their grip on land supply, which remains the bedrock of many commercial empires in Hong Kong.Since the handover tycoons have in effect controlled about a quarter of the appointments to the election committee that chooses the territory’s top leader. In a controversial move in March the Chinese government pushed through a sweeping overhaul of the system, stripping the business groups of a tenth of their votes and barring anyone deemed “unpatriotic” from holding office. The 300 new seats that have been added will mainly go to pro-China business patriots.Hong Kong’s government insists the overhaul will make elections fairer. One pro-Beijing businessman says that this assertion—absurd on its face since the changes bar pro-democracy candidates—is an indication of the authorities’ desire to shift the balance of power away from the business lobby.The security crackdown presents a more direct threat to the tycoons’ commercial interests. When Cathay Pacific did not condemn protesters in 2019, Chinese state media said the airline would “pay a painful price”. Cathay staff were later reportedly harassed by Chinese authorities and flights were unnecessarily delayed at mainland airports. Pro-Beijing politicians in Hong Kong and Chinese state media have in recent years lambasted Li Ka-shing, the city’s most famous tycoon, for his ambiguous stance on anti-government protests; in 2019 some circulated an image of the 92-year-old’s face pasted onto the body of a cockroach.Mr Li’s businesses, which span ports, telecoms and much else besides, have escaped chiefly because he has been diversifying his holdings away from Hong Kong and mainland China. Others got Beijing’s message. Swire, Jardine Matheson and many big developers backed the national-security law last year.Perhaps the biggest danger has come in the form of an internal paper circulated in March within the Bauhinia Party, a political group formed in 2020 by mainland-Chinese businessmen. The paper suggests that Hong Kong’s high property prices threaten China’s security, echoing those who attribute the city’s gaping inequality and recent unrest directly to developers’ control over land. It says the central government in Beijing has the right to co-ordinate the supply of land in the city and could create new housing for 200,000 residents over the next five years.One way of accomplishing that would be for the government to expropriate farmland held by developers in order to build public housing. Just three large developers—Sun Hung Kai Properties, New World Development and Henderson Land Development, which is controlled by the Lee family—hold about 17.5% of Hong Kong’s total farmland. That puts them at greatest risk should the government take such steps, says David Blennerhassett of Smartkarma, a research firm.Expropriations may violate local law. But laws can be changed, as the imposition of new security and electoral rules show. Such an outcome looks “all too believable”, says Mr Blennerhassett. The tycoons “believed they didn’t have to do anything as long as they didn’t question Beijing,” says Joseph Fan of City University of Hong Kong. Now the Communist Party will not even settle for overt expressions of fealty. It appears intent on extracting value, too. More

ONE OF THE biggest hits of recent years on Discovery’s cable television network is “90 Day Fiancé”, a reality show that follows the fortunes of couples in America on K-1 visas. A condition of the visa is that the pair must marry within three months, or else leave the country. Many of the show’s romances are rocky. But the couples—and riveted viewers—know that, unless they tie the knot in time, deportation awaits.On May 17th Discovery announced that it was to form a marriage of necessity of its own, joining forces with WarnerMedia, which is to be spun off from its owner, AT&T, a telecoms giant. Combined, the two firms will form the world’s second-largest media company by revenue, behind only Disney. Their hope is that this scale will allow them to survive an existential battle for viewers that makes “Godzilla vs. Kong” look like cautious cuddling. The announcement has already caused speculation about further mergers, as panicked media companies seek partners before it is too late. Some may already have missed their moment.At first sight Warner and Discovery make an odd couple. The former specialises in high-quality TV series and films, such as “Game of Thrones” or the Godzilla-Kong saga, whereas Discovery serves up cheap factual fare. Yet their different programming, and the sheer quantity of it, ought to help them appeal to a wider audience. The $19bn that the two companies spent on content last year was more than both Disney and Netflix (see chart). The combined firm will have the biggest share of American cable viewers, its channels accounting for 29% of viewing time last year, according to MoffettNathanson, a research firm, which expects it to use its heft to negotiate better affiliate fees and ad rates. It expects to save $3bn a year in costs.For AT&T, the deal represents an admission that its expensive foray into entertainment has failed. It bought Time Warner in 2016 for $85bn, later changing its name to WarnerMedia. The previous year it had purchased DirecTV, a satellite-television firm, for $67bn, including debt. The idea was to vertically integrate the businesses of content creation and distribution. Yet in February it spun out DirecTV in a deal that valued the firm at just $16bn. By hiving off WarnerMedia it will receive the equivalent of $43bn upfront, in a combination of cash, securities and transferred debt. As well as this, AT&T shareholders will own 71% of the new company, with Discovery’s shareholders getting the rest.The new company is to be run by Discovery’s boss, David Zaslav, leaving no place for Jason Kilar, who was hired a year ago to run WarnerMedia. Mr Kilar, whose background is in technology, had gone all out to push HBO Max, Warner’s streaming service. In January he announced that all of this year’s releases from the Warner Bros studio would be made available for streaming at the same time that they launched in cinemas. Hollywood traditionalists were scandalised; many now feel some satisfaction. “AT&T backstabs its own hatchet man”, ran one headline in Variety, an industry magazine.The shotgun wedding may be awkward, but it is necessary. Competition in streaming, already brutal, is about to become more so. The lockdowns of 2020 provided a captive audience: total media-consumption time increased by 12% between the second and fourth quarters of last year, according to a nine-country survey by MIDiA Research, a firm of analysts. The average American household subscribed to four streaming services. As the world opens up people will spend less time in front of the box. Consumer spending on video media shrank by 2% year on year in the first quarter, according to GroupM, a giant in the business of placing adverts on behalf of clients. In recent weeks Netflix and Disney, the leading streamers, have both missed forecasts for subscriber growth.To compete in this environment, says Michael Nathanson of MoffettNathanson, a streaming service needs four things: scale at home, high-quality content, a flexible balance-sheet to pay for it and, to help spread the costs, the ability to expand internationally. HBO Max ticked the first two boxes, with a compelling catalogue and a solid presence in America. But AT&T’s sickly balance-sheet has made it hard to keep up with the likes of Netflix in spending on shows. And having chosen to license its content to distributors in other countries, such as Sky in Britain, rather than set up shop there itself, its international footprint is puny. The Discovery deal helps to tackle both of these problems. Warner will no longer be beholden to AT&T’s balance-sheet, although the new firm will start life with hefty debts of its own. And Discovery+ is already up and running in Europe and India. This earns the combined company a place in the top tier of streamers, alongside Netflix, Disney and Amazon, says Mr Nathanson. Amazon is looking to shore up its position, and is reportedly in talks to buy Metro-Goldwyn-Mayer, the studio behind the James Bond films, for $9bn.Where does that leave the rest? Some are scrambling to form mergers of their own. On the same day that the Warner-Discovery deal was announced, two big French broadcasters, TF1 and M6, announced that they would join forces, arguing that together they could better compete with international streamers. Brian Wieser of GroupM expects more consolidation in Europe, highlighting BritBox, owned by Britain’s BBC and ITV, and TVNow, owned by RTL, a European group, as services that will require much bigger investments if they are to be competitive.Of the larger American firms, NBCUniversal, which is owned by Comcast, a cable giant, and last year launched its Peacock streaming service, and ViacomCBS, which recently unveiled its own equivalent, Paramount+, are in a sticky position. Their competing television interests would make it difficult for them to merge. They could buy other media properties that have not already been snapped up, such as AMC Networks, which owns several entertainment channels, or Lionsgate, the studio behind films like “The Hunger Games” and TV shows like “Mad Men”. But none of these assets alone would help a company to leap to global scale. Those that have not already arranged their nuptials may face the corporate equivalent of unceremonious deportation. More

A COUPLE OF years ago Snap, the company behind Snapchat, a social-media app, came close to imitating the feature for which it was then famous: digital photos that self-destruct ten seconds after the recipient views them. Shortly after a headline-grabbing initial public offering in 2017, the firm faced a user revolt triggered by an unpopular redesign, falling rates after it started automatically auctioning ad space and an exodus of executives. Its shares dropped precipitously in value, at one point in late 2018 sinking below $5, less than a fifth of the price they fetched when the firm started trading.Snap has since staged one of the most incredible turnarounds in tech history. When it reported results for the first quarter in April, it pleasantly surprised analysts again, just as it has for the past few quarters. Revenue was up by 66% from a year earlier, at $770m. The number of daily users reached 280m, an addition of more than 50m over the same period. As a result, the firm’s share price has surged by 213% over the past 12 months, to $53. “The pandemic exposed the resilience of the changes we have made,” says Evan Spiegel, Snap’s boss.The comeback is impressive. It also reveals a broader trend: while the Western world’s largest tech companies have had a blowout first quarter, those firms that fall in the category below—call them “tier-two tech”—are growing rapidly, too. And it is not just the additional digital demand generated by the pandemic that is making all boats rise, or the fact that it is easier for smaller firms to grow. Some of these companies appear to be pulling off what sceptics have long considered impossible: thriving in the shadow of the industry’s titans.By any reasonable definition, the universe of sizeable listed tech companies is big. In America it includes hundreds of firms. We have defined “tier-two” firms as those with a market value of no less than $20bn that were incorporated in 2000 or later. That leaves 42 firms worth a combined $2.4trn. They range from e-commerce sites and streaming services to travel firms and vendors of corporate applications.Even before the pandemic this group had added some weight relative to the “GAFAM”, as some now call America’s five tech behemoths (Google and its parent company Alphabet, Apple, Facebook, Amazon and Microsoft). In February 2020 its joint market capitalisation amounted to 22% of the GAFAM’s, up from 14% three years earlier (see chart). But it was during the pandemic that tier-two tech really added heft: at its peak the share reached 35% (although it has fallen to 29%, as investors have become warier of newish tech stocks). This pattern in America of a weightier second tier of tech has parallels in China, where a new generation of contenders, including Meituan and Pinduoduo, has come of age to take on the original duopoly of Alibaba and Tencent. One reason for the increase in relative size in America is technological progress, especially the rise of cloud computing. This has allowed firms to specialise and created big markets even for seemingly obscure offerings, which can now be tailored for very particular purposes and offered globally. A good example is Twilio, which is largely unknown to consumers, but is used by most. It provides services for text, voice and video communication to more than 200,000 other firms, from Airbnb, a home-sharing site, to Zendesk, a helpdesk service. After a few years of fast growth, its annual revenue is approaching $2bn and its market capitalisation exceeds $50bn. “If you are a developer, you don’t have to spend a year to understand all the details. You can just plug into our systems,” explains Jeff Lawson, Twilio’s chief executive, “that’s the idea of infrastructure-as-a-service.”The pandemic has given the second tier a further boost. “Covid has been the great digital accelerator,” says Mr Lawson. Demand for his firm’s services, for instance enabling salespeople to communicate electronically with customers, shot up when physical retailers had to move online. Many other second-tier tech firms benefited, too. Zoom, a now near-ubiquitous videoconferencing service, saw its revenue surge to $882m in the latest quarter, nearly five times more than a year earlier. Shopify, an e-commerce platform, was the runner-up: its quarterly revenues more than doubled. Most others grew at least by double digits. They include Snap, but also Pinterest, another social-media firm (78%), and PayPal, a provider of online payments (29%).The techlash has helped, too. Under scrutiny from critics and regulators, the GAFAM mostly shied away from big takeovers (with the notable exception of Microsoft, which recently bought Nuance, which makes speech-recognition and other software, for $16bn and was rumoured to be in talks with Pinterest). This in turn has pushed more tier-two tech companies to go public. Of the 42, no fewer than 13 did so in 2019 and 2020, adding about $600bn to the group’s current collective market capitalisation.The most notable cause for the success of tier-two tech is that these firms are now much better at creating a protected space for themselves to grow within, says Mark Mahaney of Evercore ISI, an investment bank. They not only offer compelling products but have built, in geek speak, “platforms” complete with an “ecosystem” of users and corporate partners on top. These digital edifices are best compared to a marketplace, in which the operator provides basic services that enable buyers and merchants to do business. The setup has the advantage that it often exhibits strong “network effects”: more buyers attract more merchants which attract more buyers and so on. It also makes it harder for one of the GAFAM to replicate rivals’ offerings, as Microsoft has done with Slack, Apple with Spotify and Facebook with Snapchat.Snap is a good example of this shift from product to platform. It was easy for Facebook to copy Snapchat’s hallmark feature, called “Stories”, collections of pictures and videos captured within the past 24 hours. This is why the firm has recast “Stories” as a platform on which hand-curated partners, such as big media companies, can offer original content. Snapchat’s four other main offerings are conceived as platforms, too. For instance, on “Map” users can locate their friends and local hotspots, and on “Camera” tens of thousands of developers offer augmented-reality (AR) lenses—digital filters that users can apply when using their camera. “The investments we made back in 2017 are now paying off,” says Mr Spiegel.Many others in the second tier fall into this category. “Shopify does not compete with Amazon. We are not a retailer. We are a piece of software that powers other brands,” explains Harley Finkelstein, the company’s president. In other words, instead of selling stuff for other firms, the site provides them with tools to set up their own virtual stores, from web hosting to payment, and allows third-party companies to offer additional services, including design and delivery. In the case of PayPal—and similarly Square and Stripe, two other payment providers—the more users these services attract, the more they pull in merchants, which attracts more users. As for Twilio, its corporate customers and developers of more specialised communication applications, such as call-centre software and group texting, boost each other.Unsurprisingly, others are trying to spin up their own “flywheels”, as platforms are also called. Spotify and Twitter want to fulfil this function for “creators”, essentially anyone producing digital works. The first now sees itself as a home for all sorts of audio content, from songs to podcasts. The other mainly aims to distribute all types of written content, including tweets and newsletters. Zoom, for its part, in October introduced “Zapps” (later wisely renamed “Zoom Apps”), which much like the lenses on Snapchat and the applications on Twilio, is supposed to form a moat which keeps rivals at bay and creates additional demand.Not all this platform building will succeed. The bigger question is whether any of these companies will catch up with the GAFAM anytime soon. If tech history is any guide, they could. In China Meituan and Pinduoduo, two ecommerce platforms, have overtaken Baidu to become the third- and fourth-largest internet firms in China. Only a few years ago Adobe and Salesforce, two providers of corporate applications (which are both too old to be included in our definition of tier-two tech), were still much smaller than Oracle and SAP, leaders in business software, let alone Microsoft. Adobe and Salesforce still have lower revenues, but are growing faster and are now in the same league in terms of market capitalisation. They are currently worth $233bn and $201bn, respectively, whereas the valuations of Oracle and SAP stand at $227bn and $170bn.“S” is the most likely letter to be added to the GAFAM acronym. In its new incarnation, Snap may yet become a serious rival to Facebook. Snapchat is now arguably the closest the West has to a “super-app” (the model is WeChat, the flagship service of Tencent). If it keeps buying biggish companies, meanwhile, Salesforce could one day pull even with Microsoft. And if it continues on its current trajectory long enough, more wares may one day be sold on Shopify’s platform than on Amazon’s.Much has to go right for this to happen. One risk is that the tech sell-off of the past few weeks makes it harder for loss-making firms to raise capital, or maintain the enthusiasm of shareholders for heavy losses in the pursuit of growth: over three-fifths of the second tier are loss-making. The titans will have to become less innovative, the reason Oracle and SAP have seen their leads eroded. Many of the second-tier tech firms will have to be willing to merge. And trustbusters will have to tackle the dominance of the GAFAM. “Unless the regulatory environment really changes, this is going to be the status quo for the foreseeable future,” argues Dan Ives of Wedbush Securities, an investment firm.Instead of waiting for a second-tier firm to catch up, it might be better to settle for a more realistic perspective on the future landscape of tech. It will probably look like a biological ecosystem in which species of all sizes find their niche. Dinosaurs do sometimes die out, but only rarely and mostly through outside intervention. More

Source: Business – economist.com More

EUROPEANS HAVE long assumed that excessive lobbying is only an American problem. But over the past 15 years Brussels has become the world’s second capital of the dark arts after Washington, DC, with Berlin not far behind. Both cities have become infested with new arrivals who are pushier and use more sophisticated techniques than old-fashioned associations such as the Federation of German Industry or BusinessEurope. Weak rules in both places are not designed to cope with the explosion of activity.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

THE LARGE dealership with the distinctive orange logo in Berlin’s Huttenstrasse displays a range of Harley-Davidsons from a spectacular custom machine, “Der Texaner”, to the brand-new LiveWire, an electric bike. Yet the Midwestern motorcycle-maker’s only shop in the German capital is deserted owing to covid-19 rules mandating a time slot and a negative test result, which deters most bikers.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

BETSY HOLDEN was vice-president of strategy and new products at Kraft, a giant food company, when she became pregnant for the second time. “No one has ever done the job with two children,” her male boss worried. “How many children do you have?” Ms Holden asked. “Two,” he replied.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

LAST YEAR was a terrible one for travel of any sort. You would not know it from the way some American chief executives trousered pay. Annual filings show that Larry Culp, boss of GE, whose jet-engine business stalled as aviation nosedived, earned $73m, almost triple his total pay in 2019. Christopher Nassetta, CEO of Hilton, a hotel chain, enjoyed a 161% pay boost, receiving $55.9m. Norwegian Cruise Line, which described 2020 as the hardest year in its history, more than doubled the compensation of its CEO, Frank Del Rio, to $36.4m. All three were among the corporate titans who grandly took cuts in their basic pay and/or bonuses during the pandemic. They pocketed far more than they gave up.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More