Philippa Kaur

IN THE PANICKY initial days of India’s covid-19 lockdown, the country could count on one venerable institution. Tata, a 152-year-old conglomerate, bought millions of dollars’ worth of medical supplies for clinics and hospitals. Its shut businesses did not lay off a single worker. A new subsidiary was conjured up to develop a one-hour coronavirus test using gene-editing technology, which was approved last month. Each of these was a feat in its own right. Collectively, they look remarkable.
That is what Indians have come to expect from Tata since its founding in 1868. The group’s holding company, Tata Sons, and the seven charities which today own 66% of its shares, have been a pillar of India’s philanthropy, donating $156m last financial year, as well as its industry. The group thrived by helping India through its challenges, accruing businesses as it went.

Legend has it that Jamsetji Tata, the group’s progenitor, who died in 1904, built the magnificent Taj Mahal hotel after being denied a room at one of Bombay’s existing establishments because he was an Indian, not a European. Today Indian Hotels, which owns the Taj Mahal, is South Asia’s biggest chain. Less apocryphally, Tata Power and Tata Steel were founded to cope with India’s chronic electricity shortages and the paucity of heavy industry. It is a similar story for Tata Chemicals (from soda ash to hybrid seeds), Tata Motors (cars and lorries) and Tata Consumer Products (tea to turmeric). Tata Consultancy Services (TCS), India’s leading information-technology firm, was born in 1968 to manage payroll and inventory for Tata’s burgeoning portfolio of businesses.
The Tata name thus pervades all aspects of Indian life. An outside appraisal cited by Tata Sons values the brand, for the use of which the parent charges affiliates a royalty, at $20bn. That makes it Tata Sons’ second-most-valuable asset behind only its $89bn stake in TCS. But the lattice of business, do-goodery and trust, all wrapped up in a beloved brand, now faces problems of its own, from inside its corporate structure and from stiffer competition beyond it.
Start with the structure. Because for much of its history capital was in short supply in India, Tata Sons holds only partial stakes in big affiliates. In the 1980s the parent company reportedly let executives create an affiliate, Titan, to take on the state wristwatch monopoly on the condition that they could find funding themselves (which they did). During another scramble for money in the volatile 1920s the roots were planted for what has turned into the group’s biggest headache of late.
The details are fuzzy. But a loan secured at the time has evolved into an equity stake held by the Shapoorji Pallonji Group—a name that, like Tata’s, resonates in India Inc. SP Group, as it is known for short, built many of Mumbai’s landmark buildings, including the central railway station and the old reserve (central) bank. Its controlling Mistry family is, like the Tatas, drawn from old Bombay’s Parsi elite. Close ties between the clans (including by marriage) meant that when a Tata wanted to offload a stake, the Mistrys were seen as friendly buyers. Today SP Group holds 18.4% of Tata Sons.

In 2012 Ratan Tata, the current patriarch, stepped down as chairman of Tata Sons. He installed Cyrus Mistry, who then headed SP Group, as his successor. Mr Tata owed the Mistrys a debt of gratitude from early in his tenure, when Mistry money helped ward off hostile bidders for Tata businesses as India opened up its economy in the 1990s, after the interventionist decades of the Licence Raj. But he left behind a mixed legacy, having used readier access to capital in the roaring 2000s, when India’s economy looked on course for China-like growth, to bankroll a shopping spree. In 2007 he bought Britain’s Corus Steel for $12bn. A year later he paid $2.3bn for Jaguar Land Rover (JLR), an iconic British carmaker. He splurged millions on telecoms networks, power generation and chic hotels, including the Pierre in New York.
Many deals proved to be duds. Tata Steel is losing money. JLR has struggled to carve out a niche in the premium car market. A vast coal-fired power project in the state of Gujarat, begun in 2006 with government encouragement, has generated mostly losses. All this has fuelled a bonfire of value destruction. Since 2007 the market capitalisation of Tata Steel (into which Corus was folded) has gone from $14.5bn to $5.4bn; Tata Motors has declined from $7.3bn to $5.7bn; Tata Power from $7.4bn to $2.3bn; and Indian Hotels from $2.4 to $1.5bn. Today nearly 90% of Tata Sons’ worth is tied up in its lucrative stake in TCS, India’s second-most-valuable company (see chart 1).

In 2016 Mr Mistry was ousted as chairman, apparently at the urging of Mr Tata, who did not think he was doing a good job. The Mumbai rumour mill has it that the two fell out because Mr Tata declined to loosen his grip through the controlling trusts. (Mr Tata’s views on this matter are not known.) Whoever is right, Tata Sons handed the top job to Natarajan Chandrasekaran, TCS’s able boss, to right the ship. Mr Chandrasekaran continued Mr Mistry’s clean-up, writing off investments in a telecoms operation, cutting steel capacity, recapitalising subsidiaries and selling some loss-making assets, including a chain of car dealerships.
That is not the end of it for Mr Chandrasekaran. Out of Tata Sons’ 15 big publicly listed affiliates, only five have returns on capital of over 10%. The debts of four subsidiaries, including Tata Motors and Tata Steel, exceed their equity—by more than twice in the case of Tata Power (see chart 2). Although Tata Sons holds minority stakes in many divisions, markets and bankers appear to assume that it stands entirely behind all its operating companies, in effect taking on full risk for partial reward.

Even if Mr Chandrasekaran’s restructuring plan succeeds, another problem looms in the form of increased competition. Tata’s corporate structure makes it hard for its various arms to collaborate—by linking its hotels, airlines (Tata Sons holds stakes in two) and a coffee-shop joint-venture with Starbucks, say. That could increase efficiency and help fend off global rivals that offer appealing products. The alternative to the Taj Mahal is no longer some fusty Mumbai lodge but the Four Seasons. Tata Motors must take on not just the rickety Hindustan Ambassador but BMW.
In more ordinary times, Tata could tap a reservoir of goodwill, plus returns from TCS, to tackle these challenges patiently. But India’s growing financial strains, exacerbated by covid-19, have opened up fissures. SP Group, whose real-estate investments have been particularly hard-hit, is struggling to roll over debts. A default on its obligations to a small listed subsidiary, Sterling and Wilson Solar, raised concerns about SP Group’s overall debt, estimated at $4.1bn. In response to the cash crunch it reached an agreement with Brookfield, a Canadian private-equity firm, for capital. Collateral included the Mistrys’ shares in Tata Sons. Tata Sons sued to block the transaction, arguing it was not permitted under the shareholding agreements. India’s Supreme Court has suspended the deal until a hearing on October 28th.
Tata’s options are unappealing. SP Group has offered to take direct stakes in subsidiaries in proportion to its overall holdings. But that would dilute Tata Sons’ stakes just as Mr Chandrasekaran is trying to consolidate control by increasing holdings. For the same reason he is reluctant to buy the SP stake outright with money from a sale of assets—the price of which would anyway be depressed by the downturn. Tata Sons’ 30-odd direct holdings, including a financial-services arm, a home-builder and a biotech firm, are worth perhaps $6bn all told. But most are tricky to value at the best of times—which these are not. And Mr Chandrasekaran is understandably loth to reduce its ownership of TCS, and the accompanying juicy dividend.
A third option is to raise fresh capital. For all its problems, Tata’s portfolio of assets may look attractive to a private-equity giant or a sovereign-wealth fund. But outside investors may demand things unbecoming of Tata Sons, like redundancies or divestments. It may be the price for preserving an Indian icon. ■

This article appeared in the Business section of the print edition under the headline “Endangered species” More

FITTINGLY, THE legal deathmatch is happening online. On September 28th a court in California heard arguments, via video call, in a case that pits Apple against Epic Games, the maker of “Fortnite”, a hit video game. At issue is whether the tight control Apple exerts over the software that can run on its smartphones amounts to a monopolistic abuse of power. The verdict, when it comes, may determine what other digital marketplaces can and cannot do.
Epic is not the first to challenge Apple’s software practices (see table). But it is the most serious yet. It started in August, when Epic offered “Fortnite” players who use iPhones 20% off in-game purchases if they paid Epic directly rather than through Apple’s App Store, which takes a 30% cut on most transactions made in iPhone apps. This violated the App Store’s terms; “Fortnite” was duly booted from the platform. Expecting this, Epic responded with the lawsuit (and a cheeky PR campaign).

The virtual hearing concerned the narrow question of whether Epic could force Apple to return “Fortnite” to the App Store while the case rumbles on. But it offered a preview of both sides’ arguments.

Epic contends that Apple’s “walled garden”—in which iPhone software can only be downloaded via the App Store—stifles competition. In 2018 Epic launched its own PC games store, where it charges a 12% commission. Shortly after, Steam, the dominant store, dropped its cut from 30% to 20% for top-selling games. Tim Sweeney (pictured), Epic’s feisty boss, argues that Apple’s restrictions make it impossible to try something similar on iPhones.
Apple retorts that those who dislike its rules have plenty of alternatives. “Fortnite” is available on desktop PCs, games consoles and smartphones that run on Android, a rival operating system made by Google. In a statement, Apple accused Epic of forcing its hand and “putting customers in the middle of their fight”. It has counter-sued Epic for breaching its App Store contract.

Mark Patterson, an antitrust expert at Fordham University, sees parallels with Microsoft’s run-in with trustbusters in 2001. The software giant’s bundling of its web browser with its Windows operating system was eventually found to be anticompetitive. Apple exerts more power over iPhones than Microsoft did over Windows PCs, Mr Patterson says. But its share of the market for mobile operating systems is smaller than Microsoft’s was in desktops.
[embedded content]
The Epic case may hinge on how the court defines the relevant market, says David Hoppe of Gamma Law, a firm of technology lawyers in San Francisco. In Apple’s eyes the App Store is part of a broader universe of digital platforms in which it can reasonably claim not to be a monopolist. Epic takes a narrower view, arguing iPhones are a market unto themselves.
Most lawyers think Apple had the better of the initial exchanges. The judge, Yvonne Gonzalez Rogers, seemed unconvinced by Apple’s attempts to stop Epic from updating the iPhone version of the software behind “Fortnite”, which is licensed to other games developers. But her strongest words were reserved for Epic, which she admonished for inviting trouble.
The case looks likely to go to a jury trial next year. Given the lack of clear precedent, potential ramifications for the tech industry and the likelihood that the losing party will appeal, the dispute may end up in the Supreme Court. In the meantime, Apple is facing other pressure. Epic is being cheered on by fellow members of the “Coalition for App Fairness”, which include Spotify, a music-streaming service, and Match Group, owner of Tinder and other dating apps. In June, at Spotify’s urging, the EU opened an antitrust probe into the App Store. The same month David Cicilline, an American congressman who chairs a committee that examines antitrust issues, described Apple’s fees as “highway robbery” and lamented the lack of “real competition” on iPhones.
While it battles Epic in the courts, Apple may tweak its rules to placate some developers. It has done so on occasion in the past, for instance exempting Amazon from the 30% commission on in-app purchases for its Prime Video streaming app. On September 25th, following criticism from Facebook, Apple announced a temporary waiver on the 30% fee on in-app purchases for companies that had been forced by the covid-19 pandemic to switch to online-only events.
Such concessions may be as far as Apple will go, at least willingly. When Steve Jobs launched the App Store in 2008, he didn’t think it would ever make much money. He was wrong. Although the company does not break out the platform’s financial results, it probably makes up the bulk of its services business, which account for nearly 20% of revenues—and rising (see chart)—as iPhone sales slow. Seeing what a promising profit engine it has turned into, Apple’s late boss would doubtless have fought tooth and nail to hang on to it. More

IF YOU WANT to understand the agreement between TikTok, a Chinese-owned video-sharing service, and Oracle, which sells corporate software (see article), it is useful to think of Schrödinger’s cat. Like the hypothetical feline of quantum mechanics, simultaneously alive and dead, the deal seems to be in two states at once—one hunky-dory to Beijing but fatally flawed to Washington, the other vice versa.
Take the question of who owns TikTok Global, the new company to be spun out of ByteDance, TikTok’s Chinese owner, to give the data of American users a secure home in America. ByteDance insists that it will hold 80% of the new entity. The Americans say they will control a majority stake. Oracle and Walmart, a supermarket titan which has joined in, will own only 20% of TikTik Global between them. But American venture-capitalists already own 41% of ByteDance. Apply the right maths and both the Chinese parent and the Americans own more than 50% of TikTok Global, which the deal values at $60bn and which is supposed to go public within a year.

What about TikTok’s technology? Beijing says that ByteDance’s eerily accurate recommendation engine is not for export. Security hawks in America want to ensure no data are diverted and the algorithm is not used to spread misinformation. So the source code will stay in China but Oracle will have access to it. How this will work in practice is about as clear as Schrödinger’s equation is to non-physicists.
In normal times everyone would resolve the ambiguities at the negotiating table. But times aren’t normal, especially in America. Ahead of November’s election, President Donald Trump prizes ambiguity. He wants to bash China but not irk America’s 100m users of TikTok, which he has threatened to ban (along with WeChat, a messaging app owned by another Chinese tech giant). A federal body that examines foreign investments in America looks ready to approve the Oracle deal, obviating a Department of Commerce edict banning Americans from doing business with TikTok from September 27th (a federal judge this week blocked the WeChat ban on free-speech grounds). Predictably, mostly positive noises from Washington have provoked angry ones in China, where state media have denounced the deal. Observe Schrödinger’s cat close enough and it ends up either dead or alive, after all. ■
This article appeared in the Business section of the print edition under the headline “The principals’ uncertainty” More

“ROCK AND roller cola wars, I can’t take it any more!” cried Billy Joel in his chart-topping song from 1989, “We didn’t start the fire”. He had had enough of the intense marketing battle between America’s fizzy-drinks behemoths. As the underdog, PepsiCo had stunned its bigger rival, Coca-Cola, by signing Michael Jackson, the era’s biggest musical star, to promote its brand in a record-setting $5m deal.
The cola wars became a cultural phenomenon. Credit for that goes to Donald Kendall, PepsiCo’s legendary former boss, who died on September 19th aged 99. A gifted salesman, he rose quickly through the ranks from his start on the bottling line to become the firm’s top sales and marketing executive at the tender age of 35. Seven years later he was named CEO. In 1974 he injected a dose of fizzy capitalism into the Soviet Union, which allowed Pepsi to become the first Western product to be legally sold behind the iron curtain. By the time he stepped down as boss in 1986, PepsiCo’s sales had shot up nearly 40-fold, to $7.6bn. His legacy continues to shape the industry.

Mr Kendall offered a mix of strategic vision, principled leadership and marketing flair. Two years after taking charge he acquired Frito-Lay, a leading purveyor of snacks, giving PepsiCo an advantage from diversification that persists to this day. PepsiCo’s revenues last year of $67bn dwarfed Coca-Cola’s $37bn in sales. Decades before Black Lives Matter he named African-Americans to top jobs, making PepsiCo the first big American firm to do so—staring down racists including the Ku Klux Klan, which organised a boycott.
[embedded content]
But his masterstroke was the all-out marketing blitz against Coca-Cola, long the global market leader in non-alcoholic beverages. The two firms had competed for decades, but they mostly fought low-grade battles. Mr Kendall changed that, by forcing both companies into an advertising arms race. In 1975 Coca-Cola spent around $25m on advertising and PepsiCo some $18m. By 1985 those figures had shot up to $72m and $57m, respectively. In 1995 Pepsi outspent Coke by $112m to $82m.

This was a risky gambit for both cola rivals. But it paid off in two ways. First, it helped fizzy drinks win a greater “share of throat” (a term coined by Roberto Goizueta, a former boss of Coca-Cola, who died in 1997). They went from 12.4% of American beverage consumption in 1970 to 22.4% in 1985. And though Coca-Cola maintained its lead in that period, with over a third of the market, PepsiCo’s share shot up from 20% to a peak of over 30% in the 1990s. Last year carbonated-drinks sales totalled $77bn in America, and over $312bn globally. Coca-Cola and PepsiCo remain dominant.
The second way that the cola wars benefited both companies was by turning them into “the world’s best marketers”, observes Kaumil Gajrawala of Credit Suisse, a bank. Today a decades-long obsession with cut-price volume growth has been replaced by a focus on revenues and profits.
PepsiCo in particular has relinquished some of the soft-drinks market, where its share has fallen back down to a quarter (see chart 1). But its marketing magic continues to sparkle, even if it is deployed to sell less sugary alternatives such as bottled water, coffee and energy drinks to health-conscious consumers. And over the past 40 years PepsiCo has returned nearly a third more to shareholders than Coca-Cola has (see chart 2).

In many industries a cosy duopoly retards innovation and harms consumers. The happy outcome of the cola wars has been the exact opposite. As Mr Kendall himself observed, “If there wasn’t a Coca-Cola, we would have had to invent one, and they would have had to invent Pepsi.” ■

This article appeared in the Business section of the print edition under the headline “Fire-starter” More

TO UNDERSTAND WHY it was a shock last month when Berkshire Hathaway invested $6.5bn in five Japanese trading houses that have been around for far longer even than its 90-year-old chairman, go back to a talk Warren Buffett gave to business students in Florida in 1998. As a sprightly sexagenarian with his sleeves rolled up, the Sage of Omaha was at his witty—and wicked—best.
The first question he fielded was about investing in Japan. He replied that the country’s 1% interest rates made it look attractive. Nonetheless, he considered Japanese firms poor bets because of their lousy returns. Low-profit businesses could be worth buying based on what he called the “cigar-butt” approach. “You walk down the street and you look around for a cigar butt someplace. Finally you see one and it is soggy and kind of repulsive, but there is one puff left in it. So you pick it up and the puff is free.” But not even this theory would draw him to Japan Inc, the pride of the country’s post-war revival, he explained. It is hard to think of an analogy more distasteful in a spick-and-span country like Japan.

Some 22 years of rock-bottom interest rates later, Mr Buffett has finally overcome his stogy-phobia. Berkshire’s investment in 5% each of Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo, though small relative to his investment firm’s $140bn mound of cash, was its biggest outside America. It said its stakes could increase to as much as 9.9% over time. But the acquisitions were a head-scratcher. What, if anything, had changed over the past few decades to make the trading houses appealing all of a sudden? Or had Mr Buffett simply succumbed to the temptation of a few cheap puffs because money was burning a hole in his pocket?
At first glance, the acquisitions make it look like he has lost the plot. The trading houses, or sogo shosha, make a mockery of many of the investment principles he has stuck to all his life. He says he likes easy-to-understand businesses like Coca-Cola and Apple. He argues that companies should not just be cheap but have reliable returns—and, ideally, “moats” to keep competitors at a safe distance. On each count the trading houses fail dismally.
[embedded content]
Start with simplicity. In Western eyes no Japanese company is a model of Anglo-American shareholder capitalism. But few seem as far-removed from it as the trading houses. They are shaped by history, which dates back to the 19th-century zaibatsu and post-war keiretsu system of corporate loyalties and cross-shareholdings. In the modern era their business models have twisted and turned. From the 1950s to the 1980s they acted as go-betweens, scouring the world for energy, metals and minerals, helping to underpin Japan’s economic miracle. Then they invested in mines and hydrocarbons to feed the China-led commodities boom before shifting “downstream”, buying everything from convenience stores to cable companies. In the process they accumulated assets faster than they sold them. The results are unwieldy. Mitsubishi peddles everything from coking coal to Kentucky Fried Chicken. Itochu, the most profitable, calls its consumer division the 8th Company, implying it has run out of names after seven other units.

What about returns and value? Undoubtedly, the trading companies are cheap. Of the five, only Itochu trades at a market price higher than the book value of the net assets on its balance-sheet. That is not to say they are a bargain, though. Kikkawa Tatsuya of JPMorgan Chase, a bank, says their low-return legacy assets, which sometimes suffer big write-downs, increase investors’ perception of risk. Their complexity raises their cost of equity, which is higher than for more focused commodities producers, such as ExxonMobil or Rio Tinto.
And then there is the traders’ competitive position. Perhaps Mr Buffett is betting that as a venerated corporate species in Japan, the sogo shosha’s survival is safe. But as individual companies, their returns suggest they have nothing like the moats of other Berkshire stalwarts. If anything, they are each other’s bitterest rivals.
Look below the surface, though, and there may be a method in Mr Buffett’s madness. As he admitted in 1998, his view on Japan could change if managers became “more shareholder responsive”. In recent years they have, even in the trading houses, which once viewed corporate governance with disdain. Zuhair Khan of Union Bancaire Privée, a Swiss bank, says views started to change as a result of shareholder-friendly reforms promoted from about 2014 by Abe Shinzo, who stepped down as prime minister earlier this month. In some trading houses, executives bought large quantities of shares to align their interests with those of other shareholders. Pay became more performance-based. The focus moved from investing to generating cash and beefing up dividends. The pandemic is expected to slow but not derail the trend. Suga Yoshihide, Mr Abe’s successor, looks keen on further measures to empower shareholders, Mr Khan says.
Mr Buffett may see other attractions. He likes energy firms, and all the trading houses, particularly Mitsui and Mitsubishi, have big energy businesses. They stand to benefit from a post-pandemic economic rebound that boosts demand for power. The companies are also wellsprings of talent. Jeremy White of Baker McKenzie, a law firm, says they maintain a tradition of recruiting from the best Japanese universities, and rival investment banks and tech firms as the most prestigious companies to work for. And if anyone can find their way around bewildering corporate organigrams and balance-sheets, it must be the people behind Berkshire Hathaway, America’s biggest financial conglomerate.
Stogy? Or just stodgy?
It is no sure bet. History is littered with fortunes lost to the belief that Japanese firms can become more Anglo-Saxon. If that is the case, Berkshire’s shareholders will rue Mr Buffett’s nonagenarian adventure. If, by contrast, his investments reinforce a view taking root in Japan that shareholders, domestic and foreign, are a constituency worth fighting for, he will deserve a fat Cohiba. ■
This article appeared in the Business section of the print edition under the headline “Lighting up Japan Inc” More

INVESTOR WEBINARS are not generally mass entertainment. But some 25,000 people tuned in this month when BP outlined plans to transform its business. Top on the British oil-and-gas giant’s to-do list is raising its wind, solar and biopower capacity from 2.5 gigawatts (GW) last year to 20GW by 2025 and 50GW by 2030, when annual investment in low-carbon energy will reach $5bn or so. BP hopes to become a new kind of energy major. It is not alone.
European electric utilities have lately emerged as the world’s top developers of wind and solar projects outside China (see chart). These offer growth and, in an era of ultra-low interest rates, stable returns thanks to long-term contracts. Concern about climate change means that big, risky drilling projects must offer higher returns to lure investors. Michele Della Vigna of Goldman Sachs, a bank, estimates that the divergent cost of capital for oil and renewables investments implies a price of up to $80 a tonne of carbon dioxide, well above the global average of around $3. As share prices of oil giants such as ExxonMobil have tanked amid the pandemic slump in demand for crude, those of electricity majors, such as Spain’s Iberdrola, Germany’s RWE or Portugal’s EDP, are up this year. That of Orsted, a Danish wind-energy champion, has risen by a third. BP wants in.

A decade ago excess capacity, the financial meltdown and competition from renewables firms imperilled Europe’s traditional power companies. Faced with the falling value of their coal and gas assets, many took the shift to cleaner energy seriously, says Deepa Venkateswaran of Bernstein, a research firm. Orsted has turned itself from an ailing state enterprise into the world’s largest developer of offshore wind. This year RWE and E.ON, another German firm, swapped assets, with E.ON concentrating on grids and RWE on generating clean power. Iberdrola, EDP and Italy’s Enel have invested in wind and solar projects in Europe and beyond.

Now the falling cost of renewables is coinciding with rising ambition to deploy them. Dev Sanyal, who leads BP’s renewables business, sees “very vibrant demand” from America, where states and companies are keener on green than the carbon-cuddling federal government. In Europe, which wants carbon-neutral electricity by 2040, national energy plans require total investment of €825bn ($960bn) over the next decade, Goldman Sachs reckons.
Mr Sanyal says that BP’s trading capabilities and project management will give it an edge in such projects, which offer a rate of return of 8-10% on equity capital invested. But BP’s planned wind and solar capacity in 2025 would be less than half what Enel or Iberdrola will have by then, estimates Bernstein. Henrik Poulsen, Orsted’s outgoing boss, argues that building an offshore wind turbine is not the same as building an oil platform. “We have much more experience and we have stronger procurement,” he contends.
Those with green ambitions can take comfort. Plentiful future demand for renewables ought to leave room for everyone. George Papadimitriou, who runs Enel’s green business in North America, welcomes new, well-capitalised rivals. Having oil and gas companies join in, he says, “confirms that we’re on the right path”. ■
For more coverage of climate change, register for The Climate Issue, our fortnightly newsletter, or visit our climate-change hub

This article appeared in the Business section of the print edition under the headline “The new majors” More

THREE YEARS after Twitter launched in 2006, Chinese techies created a similar microblogging service in China. Weibo (literally “microblog” in Chinese) boasted an average of 241m daily active users in March, more than Twitter. Like its American cousin, Weibo allows users to follow other users, tweet, retweet and browse a real-time list of trending topics (though it steers clear of politics, out of bounds in its communist homeland). And like Twitter, it relies heavily on advertising revenue.
So as coronavirus-induced uncertainty led advertisers to slash budgets, Weibo saw advertising revenue, which accounts for nearly 90% of sales, plunge. In the first quarter it fell by a fifth year on year, to $275m. Operating profit plummeted by more than half, to $58m. Delayed second-quarter results, due on September 28th, may be less terrible. China was the first to be hit by covid-19 but began to recover just as the West went into lockdown.

But Weibo also confronts a longer-term challenge. Yujun Shao of Westwin, a Shanghai-based digital-marketing firm, notes that for much of the past decade two firms—Weibo and Tencent (which owns WeChat, a messaging service)—sucked in the vast majority of advertising spending on Chinese social media. Today the “big two” are competing for ad yuan with another behemoth, ByteDance, which operates Douyin, an addictive short-video app (as well as TikTok, its global version). Other rising internet stars, such as Pinduoduo, which offers bargain shopping, are also muscling in on the advertising market.

Weibo already boasts more than half a billion registered users in China. But user growth has slowed. To keep advertisers on board, Weibo must therefore boost user engagement. The company understands this. It already sports a richer array of functions than Twitter, for example a popular question-and-answer service in the mould of Quora. It is constantly adding new ones. In 2018 it acquired Yizhibo, in which people live-stream stand-up comedy, moonwalks and other acts for tips. Last year it launched a photo-sharing service akin to Instagram called Oasis. Still, Weibo’s revenues per user have been declining since 2018, and its share price with them (see chart). That is one more feature it has in common with Twitter—but is the opposite of what you would expect from a platform with strong network effects, such as Facebook.■

This article appeared in the Business section of the print edition under the headline “Weibo woes” More

“I AM NOT Scrooge McDuck,” said Oliver Samwer in 2017 when he denied the request of shareholders of Rocket Internet, the startup incubator he co-founded with his two brothers, to use the company’s cash to boost its ailing share price through share buy-backs. Now the way he has handled a planned delisting of Rocket from stock exchanges in Frankfurt and Luxembourg reminds those same shareholders of Walt Disney’s money-hoarding cartoon character. Those who put money into Rocket’s initial public offering (IPO) in 2014 may end up with a hefty loss.
“It is totally legal and totally immoral,” says Michael Kunert of SDK, an association which defends investors’ rights, about the planned delisting of Rocket, expected to be rubber-stamped at the firm’s extraordinary general meeting on September 24th, after The Economist went to press. Rather than using external capital to buy investors out at a premium, the usual way to take a firm private, Mr Samwer has used company cash to buy back €223m ($260m) of its own shares. This pushed his clan’s stake to over 50%. He plans to use another €1bn of Rocket’s cash to buy out minority shareholders at €18.57 a share, the volume-weighted average price in the past six months but down from the IPO price of €42.50.

Mr Kunert reports that Rocket’s minority shareholders complain Mr Samwer is using the coronavirus crisis, which has hit nearly all the firm’s 200-odd startups and brought its market value below that of its cash and liquid assets, to push them out. They say that the price offered by Mr Samwer’s does not take into account Rocket’s €1bn-worth of stakes in unlisted startups such as Traveloka, an Indonesian online-travel firm. Investors are under no obligation to sell their shares, of course. But those who stay put will have little power to affect the course of the firm now that the Samwer brothers control the board with their majority stake. Rocket has stated it will be “better positioned” for long-term development if not listed on a stock exchange.
Why did Rocket not take off? Analysts say the air got thinner as soon as others in Europe got better at aping American e-commerce successes at home and in emerging markets—a business model that Rocket pioneered. Rocket’s successful IPOs, like that of Delivery Hero, an online food-delivery business which recently joined Germany’s DAX 30 blue-chip index, have in recent years given way to smaller technology investments and a handful of real-estate bets. Following last month’s spectacular crash of Wirecard, an online-payments processor accused of huge fraud, Rocket’s bruising re-entry from public markets leaves Germany even more bereft of digital darlings than it already was. ■
This article appeared in the Business section of the print edition under the headline “Coming down to earth” More