Philippa Kaur

IS APPLE’S ONLINE store for smartphone apps akin to a private club, where the firm can set the rules no matter what, even if this means it can exclude people it does not like and overcharge the rest? Or is the app store more like a town market square, meaning among other things that any firm is allowed to do business there?The devilish details of antitrust law aside, this is the main question before a judge in California in a trial that started on May 3rd. It will be a battle royal between Epic Games, the maker of Fortnite, a popular online video game, and Apple, the world’s most valuable tech firm. Epic accuses Apple of having abused its dominance when it kicked Fortnite off the app store last year after Epic tried to offer a separate payment system. Apple counters that Epic is just trying to avoid paying its commission rate of up to 30% and free ride on the tech giant’s inventions.An Epic win would up-end the economics of smartphone apps. Epic, and others, would probably be allowed to use their own payment systems in iPhone apps and perhaps even offer alternative app stores. Both would put pressure on the profitability of Apple’s services business, of which the app store is a large part—estimates put its margins at well above 70%.Yet legal experts expect Apple to prevail: antitrust precedent is stacked against Epic and the judge has voiced scepticism about the firm’s position. Even if she indeed sides with Apple, however, the victory may well turn out to be a setback. It would add further fuel to a debate among regulators around the world: how durably to rein in the biggest tech firms, which are increasingly seen not just as powerful platforms, but as gatekeepers for growing parts of the economy.Gatekeepers are as old as the economy itself. Toll bridges qualify, as do railways and even nationwide supermarket chains such as Walmart. Nor are they necessarily bad. Without Apple’s largely effective policing of its platform, the app business would be much smaller: users would have to worry much more about scams and system crashes. And allowing rival app stores, which Epic wants, may increase competition, but risks causing security problems.Digital gatekeepers come with drawbacks, too, says Tommaso Valletti of Imperial College in London. For starters, they never seem to stop growing, as last week’s round of blockbuster financial results again shows, although pandemic-induced digital demand also played a big role (see chart). Gatekeepers benefit from strong network effects which mean that size begets size. As the economy becomes more digitised, they can also move more easily into adjacent markets than their analogue brethren.The bigger problem is, however, that digital gatekeepers are not the benevolent dictators they pretend to be. To protect its commission (or “take rate”) of up to 30%, Apple forces app developers to use its payment system and prohibits any links to their websites, where they might offer a better deal. This is the core complaint in another case against the iPhone-maker, brought by Spotify, an audio-streaming service, and taken up by the European Commission on April 30th. Apple’s rule book is also getting hellishly complex and seems arbitrarily enforced. “Every developer can tell a horror story,” says Benedict Evans, who publishes a widely read tech newsletter.In its defence, Apple argues that it is well within its rights: it built the app store and, crucially, is not a monopoly. If developers do not like the rules, they can go to Android’s Play Store or create an app that runs in a browser. Not so, counter the firm’s critics. Any developer that wants to make good money needs to be in the App Store. As for consumers, switching from an iPhone to an Android device is in most cases tricky. And in America the iPhone is now dominant, boasting a market share of nearly two-thirds.Such back and forth about the “relevant market” and other wonkish concepts is at the centre of most antitrust cases. In Epic’s suit against Apple, predicts William Kovacic of George Washington University, this will be enlightening: arguments have to be made in public over a few weeks. But most other cases drag on for ever. And once a verdict is finally reached and a remedy is found, it is often too late, as the European Commission in particular has found in recent years. It has convicted Alphabet, Google’s parent company, three times, imposed fines of more than €8bn ($10bn) and demanded far-reaching remedies—only to see that not much has changed. Although European Android users are now asked to pick their default search engine on a “choice screen”, Google’s market share has hardly budged.Understandably, the commission is now trying to go down another path. Proposed in December, its Digital Markets Act (DMA) avoids lengthy debates about such things as the “relevant market” by explicitly defining a gatekeeper: firms that have annual revenues in the EU of at least €6.5bn in the past three financial years and have at least 45m users in at least three member states. Any company that meets these criteria will have to follow a set of strict rules. Among many other things, barring app developers from linking to their own website would be prohibited, as would be efforts by gatekeepers to give their own offerings a leg up (which Apple stands accused of doing with its music-streaming service).Although they think along similar lines, regulators in other countries are not as convinced a thick rule book will do the trick. Britain, for instance, is likely to go for more flexibility, paired with a strong regulatory agency, called the Digital Markets Unit (DMU). In America the Federal Trade Commission could become a DMU, although Congress may yet turn growing bipartisan tech hostility into action and pass a DMA-like law.It will still take several years before this is settled, but it would come as a surprise if digital gatekeepers, like many of their analogue predecessors, do not end up regulated in some way. Even if it wins its fight with Epic, Apple may want to start changing some of its policies. This may be good business anyway, Bill Gurley, a noted venture capitalist in Silicon Valley, has long argued. Maximising the take rate may backfire because it tends to weaken a platform, he wrote a few years back in a blog post. “There is a big difference between what you can extract versus what you should extract.” More

THE ANNUAL shareholders’ meeting of Berkshire Hathaway has been dubbed “Woodstock for capitalists”, so large is the throng it usually attracts. For the second year running, though, thanks to covid-19, the groupies have been denied their close-up love-in with Warren Buffett. The event on May 1st was online only, with Mr Buffett joined on screen by his longtime sidekick and fellow nonagenarian, Charlie Munger—a headline act that makes the Rolling Stones look like striplings. Nevertheless, Warren and Charlie outdid Mick and Keith for stamina, taking more than three hours of questions, covering everything from Berkshire’s first-quarter results, announced earlier that day, to the ways in which its subsidiaries do and don’t resemble children.Mr Buffett has long held the stage as the world’s most celebrated investor, having turned a troubled textile firm purchased in the mid-1960s into a $630bn conglomerate spanning everything from railways and real estate to insurance and ice-cream parlours. Berkshire, which is essentially made up of two halves—a collection of owned or controlled businesses employing 360,000 people, and a $300bn portfolio of minority stakes in blue chips—has done long-term investors proud. Over the 56 years of Mr Buffett’s stewardship its stock has enjoyed a compounded annual gain of 20%, double that of the S&P 500 index (including dividends).Berkshire’s more recent record looks less stellar, however—leaving some wondering if the company, like the Rolling Stones, is trading on its back catalogue, its greatest hits a thing of the distant past. That prompts another concern. At 90, Mr Buffett is still sharp and seemingly in good health. But no one lives forever. A change of front man, when it comes, will be a test of the endurance of Berkshire’s unique culture and its quirky (some would say anachronistic) governance.It will also test whether the sprawling group can remain in one piece at a time when conglomerates are out of fashion. Berkshire has long enjoyed a sort of corporate exceptionalism, thanks to the halo over Mr Buffett. With disquiet growing over so-so returns, poor disclosure and more, that benefit of the doubt looks threatened.You got the silverStart with the financial performance. Operating profit—the number Mr Buffett urges shareholders to focus on—fell by 9% in 2020, to $22bn, after a flat 2019 (though it rebounded in the latest quarter, up 20% year on year). Berkshire’s shares badly underperformed the S&P 500 index in both years. Over the past ten years, its per-share market value has handily beaten the index just twice, while lagging far behind it four times. In truth, Berkshire’s performance relative to the S&P has been slipping for decades (see chart 1).This loss of oomph is partly explained by the law of large numbers; the bigger Berkshire grows, the harder it is for any single successful investment to move the needle. Another factor is the dwindling of a past advantage. Berkshire has long used the float (premiums not paid out as claims) from its giant insurer, Geico, to funnel low-cost capital to its other operations. But these days capital is cheap for everyone.Some wounds have been self-inflicted, however. Big bets on Occidental Petroleum and Kraft Heinz soured quickly. The consumer-goods giant, of which Berkshire owns 26.6%, is weighed down by $28bn of debt and bloated goodwill after a mispriced merger in 2015. Mr Buffett has admitted to overpaying for Precision Castparts, an industrial-parts maker that Berkshire bought in 2016, which subsequently triggered an $11bn write-down. Some of his timing has looks awry, too. Having built a big position in American airline stocks, Berkshire bulked up on more at the start of 2020, but lost its nerve as the pandemic spread, quickly dumping its holdings and crystallising a loss of perhaps $3bn-4bn. Within months the sector’s share prices had rebounded. Indeed, the past year has given the lie to the received wisdom that Mr Buffett thrives in adversity. That was certainly true during the financial crisis of 2007-09, when Berkshire acted as an investor of last resort, striking highly lucrative deals to bail out GE and Goldman Sachs; the GE investment yielded a 50% return, most of it within three years. This time, though, with market liquidity less constrained, Berkshire has had less opportunity to pounce. Nor has it been able to find an acquisition that is both good value and big enough to move that needle. Identifying “elephants” on which it could spend a sizeable part of its $145bn cash pile has become a parlour game in investment circles. When covid-19 first struck, many thought Mr Buffett would be spoilt for choice. But buoyant stockmarkets mean fewer bargains for value investors like him to snaffle up. And Mr Buffett eschews corporate auctions because they often involve paying big premiums.Another turn-off is increased competition from private equity and SPACs. Berkshire’s biggest deal of 2020 was more bolt-on than blockbuster: the $10bn purchase of a gas-pipeline operator by its utility, Berkshire Hathaway Energy (BHE). That was less than half of what Berkshire spent over the year on buying back its own shares. (It has sharply increased buybacks over the past two years in response to calls for it to deploy more unspent capital, though the non-payment of a dividend remains a sacred cow.)Perhaps the clearest sign that Berkshire may have lost its touch when it comes to finding attractive targets was the rapid in-and-out of Bill Ackman. The star hedge-fund manager, a lifelong Buffett fan, built a $1bn position in Berkshire in 2019 but had fully sold out by mid-2020, apparently after concluding he could find overlooked gems more effectively himself.Berkshire has also taken flak for largely missing out on the tech boom of the past decade owing to Mr Buffett’s preference for mature businesses. There is one glaring exception, though: its 5.4% stake in Apple, which has produced a whopping $90bn gain over five years. Moreover, the economic pendulum may be swinging back towards the sort of industrial firms he favours: they should benefit from trillions of federal dollars earmarked for infrastructure upgrades as the economy recovers from the pandemic. BNSF, Berkshire’s railway network, can expect to profit as more heavy stuff needs shifting around for all these projects.Some investors have grown increasingly vocal in pressing Berkshire to eke out more from its main divisions. Mr Buffett has described BNSF as one of the conglomerate’s four “jewels”, along with Geico, BHE and the Apple stake. But when Mr Ackman crunched the numbers in 2019, he found the railway’s operating margins to be five percentage points below the average of its peers. Geico has many virtues, including making a profit on its underwriting most years (unlike many rivals, which rely on investment gains to offset underwriting losses). But its margins, and its use of analytics, lag behind those of an arch-rival, Progressive.Shine a lightThe answer, says one large investor, is for Mr Buffett to be more hands-on with subsidiaries. That, though, would go against the grain of the idiosyncratic management structure and governance long in place. Division bosses are given almost total autonomy; it is not unheard of for them to go months without speaking to Mr Buffett. Berkshire’s head office is tiny, with just 26 people; subsidiaries have their own legal, accounting and human-resources departments. They report to head office, but it reports little to the outside world. Berkshire does not hold analyst calls or investor days. It gives out scant financial information beyond mandatory filings, says Meyer Shields, an analyst with KBW (who has long been shut out of Berkshire’s annual conclave because of his sceptical views).Mr Buffett is proud of being different. Whereas other big companies have moved to a command-and-control approach, Berkshire’s remains rooted in trust: he trusts the divisions to get on with it, and shareholders are expected to trust that he will make more right calls than wrong ones. This approach is increasingly at odds with corporate trends. At this year’s AGM, Berkshire faced shareholder proposals on its skimpy climate-risk disclosure and diversity policies (though both were defeated). It is also under fire over executive pay, which at Berkshire is heavily weighted to base salary, owing to Mr Buffett’s long-held suspicion that stock incentives encourage managers to manipulate the share price. Big proxy-advisory firms like ISS have backed some of these criticisms. Some have also taken aim at the board for being too old (four of its 14 members are 90 or over), too entrenched and too close to the boss. Berkshire has become a “very attractive lightning rod”, says Lawrence Cunningham of George Washington University, who has written several books about Mr Buffett.Mr Buffett has little time for ESG metrics, diversity targets and the like. He has said he doesn’t want his managers to have to spend their time “responding to questionnaires or trying to score better with somebody that is working on that”. A lot of what is considered good governance today doesn’t fit with Berkshire’s heavily decentralised approach.Even if so, pressure for change is growing, and is likely to intensify further once Mr Buffett no longer calls the shots. Berkshire has not disclosed its succession plan, but no one doubts the next CEO will come from within. The favourite is Greg Abel, 58, who oversees the non-insurance operations; his odds shortened on Saturday when Mr Munger, in an apparent slip, said “Greg will keep the culture”. Mr Buffett’s role as chairman is set to go to his son, Howard. His third role, as investment chief, will probably go to one of the group’s two top equity-portfolio managers, Todd Combs and Ted Weschler.Though it will be more diffuse, the post-Buffett leadership is unlikely to be any less dedicated to his way of doing things. All of the contenders are steeped in Buffett-think. “They’ve done all they reasonably can to ensure things stay the same,” says Mr Cunningham.The most forceful efforts to impose change may come from those seeking to break up Berkshire. When he is gone, Mr Buffett conceded last year, “everybody in the world will come around and propose something, and say it’s wonderful for shareholders, and by the way it involves huge fees.” Some on Wall Street would see it as a coup to “release value” by, for instance, splitting the conglomerate into three bits, focused on insurance, industrial assets and consumer businesses.Few doubt that Berkshire trades at less than the sum of its parts. But even the sceptical Mr Shields thinks the discount is only around 5% Others think it may rise above 10% once its leader departs. Mr Buffett insists that a well-run conglomerate has enduring advantages. One is not being associated with a given industry, meaning it feels less pressure to maintain the status quo—“if horses had controlled investment decisions, there would have been no auto industry,” as he once put it.A crunchier benefit relates to tax: Berkshire can move capital between businesses or into new ventures without incurring any. And taxable income at one subsidiary can help generate tax credits at another. Mr Buffett has claimed this gives BHE a “major advantage” over rivals in developing wind and solar projects.On with the showHow vulnerable to centrifugal forces Berkshire proves to be will depend more than anything else on the composition of its shareholder base. Currently, it affords protection. The typical large American listed company is mostly owned by institutional investors. Berkshire is different. Mr Buffett has around 30% of the voting share; another 40% is held by an estimated 1m other individuals, many of them long-term loyalists (with whom he has spoken of having a “special kinship”); the rest is owned by institutions. If a vote were held today, it would overwhelmingly reject a break-up or wrenching strategic shift. Mr Buffett and his retail kinsmen may not form such a powerful block for much longer, however. Many of the loyalists are getting on in years. The children who inherit their shares may show less zeal. Even some of the faithful may sell once the Oracle of Omaha has gone. Moreover, Mr Buffett’s stake will be sold into the market after his death, albeit over more than a decade: he has bequeathed it to various foundations on condition that they sell the shares and spend the proceeds on good causes. Posthumous shifts in the shareholder base are Berkshire’s “Achilles heel”, reckons Mr Cunningham.As a keen student of corporate history, Mr Buffett will doubtless know that James J. Hill, a 19th-century railroad baron who led an operator that would later become part of BNSF, once declared that a company only has “permanent value” when it no longer depends on “the life or labour of any single individual”. Berkshire’s greatest challenges will come only after its grizzled rock star has left the stage.■ More

THE ENGLISH Premier League (EPL), the world’s wealthiest domestic football competition, has just survived a nasty scare. The short-lived European Super League (ESL), launched, vilified and aborted all within a few days in April, would have been disastrous for it, threatening the source of its remarkable ascent: a huge increase in the value of its broadcasting rights. If attention had switched to the midweek ESL, the league would have struggled to command such big fees for its matches; and the windfalls given to the six English teams that were among the 12 ESL founding members would have further weakened the EPL’s power over them. But the ESL’s collapse is not the end of the Premier League’s troubles.Its domestic broadcasting contracts are up for renewal. This used to be a chance to extract even more money from its partners. Yet the broadcasting market has softened so much that the EPLhas for the past few years been in commercial retreat, and appears to be facing its stiffest test yet. So much so that this year it has asked the government for permission to abandon the auction process that has proved such a lucrative way of distributing broadcasting rights, in favour of rolling over its existing contracts on the same terms.In 1992, when the EPL was launched, Sky Sports paid £640,000 ($1.1m) for the rights to each of its matches. By 2016 the cost had risen to about £10m. During that time the league’s soaring popularity and Sky’s determination to fight off a series of competitors, most recently BT, drove up the cost of broadcasting rights until they became the biggest source of income for England’s leading clubs. Flush with cash, the clubs were able to compete with European powerhouses for the world’s best players, making the league a stronger commercial proposition and pushing up the value of the rights even higher. UEFA, European football’s governing body, now considers English clubs to be the strongest in the region.But the most recent auction, conducted in early 2018, was a dud. The amount paid by BT and Sky fell by 13% and if an auction were to take place this year—an option the Premier League is keen to avoid—analysts expect a similar fall. A truce between Sky and BT has depressed the price. Before the 2018 auction, the companies announced a content-sharing agreement that enabled subscribers to each service to receive matches bought by the other. Football fans no longer had to pay for both providers to watch every match. According to Jon Mackenzie, the head of content at Analytics FC, a football-data company, it was “the watershed moment”, when “the two companies realised it would be more profitable to collaborate”. Under less competitive pressure today than they were then, and still facing the threat of breakaway competitions, the two companies would probably adopt a similarly disciplined strategy this time.If there is a threat to the Sky-BT duopoly that could have injected more competition into the market, it has long been expected to come from one of the streaming giants. However, this is unlikely to materialise imminently. Amazon is the one technology firm to have bought EPL rights, but its strategy with sports coverage has so far been opportunistic: it has bought small packages that it believes are undervalued. In late 2020 it bought the rights to broadcast in India matches played by the New Zealand cricket team between 2021 and 2026. This seems a strange strategy, but during this period India will tour New Zealand twice. This made the deal a much cheaper way for Amazon to broadcast matches featuring the hugely popular Indian team. Earlier this year the firm also committed $1bn a year to buying rights to NFL matches in the US. Although the sum is huge and it has signed up for a decade, it again opted for a package of less prestigious games and is paying less than the big pay-TV broadcasters.A similar approach can be detected in its involvement with English football. At the 2018 auction it picked up a package of 60 of the less attractive EPL games for a reported £90m, a significantly lower cost-per-game than that paid by Sky or BT. The deal worked for Amazon, whose main purpose was to attract subscriptions to its Prime delivery service, and recorded a big bump in subscribers in the quarter when it broadcast its EPL matches. Yet rights for English football are very expensive compared with other sports events. And the EPL splits its domestic- and overseas-rights auctions, so, in the UK, Amazon’s audience would be limited to its Prime subscribers in the country. Going toe-to-toe with Sky and BT is just not that attractive a proposition.The mood surrounding football-broadcast rights elsewhere in Europe is also cautious. In Germany, the domestic rights auction a year ago resulted in a 5% fall in value. In France, the league began a record rights deal with a new rights partner, Mediapro, a Chinese-Spanish company, in 2020. However, amid the pandemic Mediapro was unable to attract the subscribers it had anticipated and the deal soon collapsed. The rights were retendered and were bought by the previous broadcaster, Canal+, for a song. Clubs in Italy accepted a deal in March worth €2.5bn ($3bn) over three seasons from DAZN, a streaming platform with a burgeoning sports portfolio, rather than a smaller offer from Sky. The current rights deal, which is shared between the two companies, is worth more than €2.9bn. That DAZN has bought rights in Germany and Italy is further evidence that streaming firms see greater value outside England.The subdued market is bad news for the EPL. The league is conscious that its clubs are facing a straitened future, having lost a year of match-day revenue since crowds were banned at the start of the pandemic. It needs to find higher revenue flows to placate its most restless members, like the ESL rebel six. The EPL’s chief executive, Richard Masters, has confirmed that it would like to launch its own streaming service, but that this is likely to focus on overseas subscribers. That it is exploring a private sale of its broadcasting rights is an admission of its weak bargaining position. An auction would be an invitation for Sky and BT to drive down the rights by a similar proportion to that seen elsewhere.The clubs are also being squeezed. Liverpool, which is among the better-run EPL teams, lost £46m in the 2019-20 season, compared with a profit of £42m in the previous year, because of precipitous falls in broadcasting and match-day revenue. The pandemic has ravaged both match-day and broadcasting income two of the clubs’ three income streams (the third being “commercial”—sponsorship, naming rights and so on). Meanwhile the wage bills—mainly for players—keep rising. Liverpool’s has increased by more than 50% in the past three seasons, so that salaries now gobble up two-thirds of total revenue. The EPL average is even higher, at 75%. Without chunky increases in broadcasting income, clubs will have to review the terms they offer to their players. Yet the size of the wage bill is the best predictor of on-field success.The broadcasters, too, have reasons to be concerned. Much of the increase in cost of the rights has been passed on to consumers. An analytics firm, Enders Analysis, has calculated that the cost of a Sky subscription has risen far faster than inflation, to the point where the company believes any further increases could result in lower overall revenue because of cancellations. The launch of a redesigned “super league”, denting the value of the broadcasters’ EPL rights, remains a possibility.Given the uncertainty faced by all parties, the EPL’s hopes of selling its rights privately may be welcomed on all sides. The clubs would continue to receive more in revenue than do their counterparts in Europe, maintaining their clout in the transfer market. The EPL could argue it achieved a better outcome than the Bundesliga or Serie A. And the broadcasters would hold on to their prized asset at a lower cost in real terms. As Claire Enders, the eponymous boss of the analytics firm, points out, for all of the talk of disruption from other broadcasters, streaming platforms and breakaway competitions, football leagues in England, France, Germany and Spain are all using the same providers as they were in 1992. Some fraught relationships are more stable than they look. More

“THE MOST powerful man at Volkswagen.” Ferdinand Dudenhöffer of the Centre for Automotive Research, an influential think-tank, was not referring to Herbert Diess, the German company’s boss. Rather, he reserved that title for Bernd Osterloh.In his 16 years as head of the carmaking group’s works council, which represents workers, Mr Osterloh organised his own roadshows and travelled with his own entourage (including a translator). His press team was bigger than Mr Diess’s. Some investors mistook him for the giant firm’s chief executive and wondered why he did not speak any English.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

IN THE BUCOLIC low-rise surroundings of Norway’s biggest lake, Mjostarnet stands out. At 85 metres tall, this building of flats, offices and a hotel, completed in 2019, is Norway’s third-tallest. It is the highest in the world built of wood. Similar structures have sprung up in other countries. So, in many more places, have wooden additions to existing buildings, which weigh around a fifth of what an equivalent steel-and-concrete one would, and therefore risk less damage to the building below.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

WANDER THROUGH central and east London, and you find traces of the East India Company. In its 274-year history, the rapacious colonial-era trader tore down poor houses, replacing them with sprawling depots to store tea, silk, spices and other exotic wares. Today those same sites are occupied by offices, restaurants and flats. Soon, they could once again be stacked with merchandise. A large plot near the historic East India Docks, which once processed goods from India and China, is being converted to a mix of flats and warehouse space dubbed Orchard Wharf.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

STEELMAKERS HAVE for decades embodied India’s failed plans for prosperity. Post-independence socialism produced many mills but little steel. A partial privatisation in the 1990s created capacity, but also large firms fed by feckless state-backed lending. Many were subsequently exposed as bankrupt. Even well-run private producers stumbled, as Tata Steel did with its disastrous acquisition in 2007 of Corus, a troubled European rival. Demand subsequently declined at home and aggressive Chinese rivals expanded abroad.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

IT IS A tradition of corporate architecture. A company’s top executives get offices on the top floor, often dubbed the C-suite after the “chiefs” who occupy it. The CEO resides in the “corner office”, with the biggest windows and best views. Junior staff suffer a few moments of trepidation when summoned upstairs.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More