Philippa Kaur

IN THE DAYS before Thanksgiving two top contenders emerged to take over Simon & Schuster, the fifth-biggest English-language book publisher by revenues, from ViacomCBS, an American media group. On November 25th Bertelsmann gained the upper hand. With an offer of $2.2bn the German parent of Penguin Random House (PRH), the number one by a Tolstoyan margin, outbid News Corp, Rupert Murdoch’s media group that counts HarperCollins, ranked third, in its catalogue of assets.

A merger with Simon & Schuster would give PRH almost one-third of English-language book sales (see chart). That is more than double the market share of its closest rival, Hachette Livre, owned by Lagardère, an ailing French conglomerate. (Vivendi, a French group that is Lagardère’s biggest shareholder, also briefly vied for Simon & Schuster.) In America the merged biblio-behemoth would control 70% of the market for literary fiction.

Authors and agents worry that the enlarged PRH may become ever more dominant in distribution—and that market concentration could lead to an excessive focus on bestsellers such Michelle Obama’s memoir of her time as America’s first lady (which was published by a PRH subsidiary) at the expense of niche titles that are no less worthy. Robert Thomson, News Corp’s boss, is certain, for his part, that the Bertelsmann deal will alert trustbusters. Earlier this year America’s Department of Justice thwarted a merger of Cengage and McGraw-Hill, two publishers of educational books. Any delay would be bad news for ViacomCBS, which needs the money badly for investments in video-streaming, where it lags behind rivals such as Netflix, Disney or AT&T, a telecoms giant that owns HBO.
Thomas Rabe, Bertelsmann’s boss, says he is confident that regulators in America and other countries will bless the deal. They rarely block mergers that only reduce the number of big players from five to four. The last big union, Bertelsmann’s takeover in 2013 of Penguin, did not fall foul of antitrust guardians. Moreover, the leading five have lost market share in recent years to smaller rivals, not to mention Amazon, which these days not only sells books (as well as just about everything else) but also publishes them.
That still leaves the question of whether the deal is a good one for Bertelsmann. The price was heftier than even ViacomCBS expected. Covid-19 initially hurt book sales, as it did other discretionary spending. “The first five weeks [of the pandemic] were very tough,” admits Brian Murray, chief executive of HarperCollins.
But with their pantries full, self-isolators turned to fiction for escapism and edification. “People are always predicting the decline of book publishing, but it has actually been very resilient,” says David Steinberger, chief executive of Arcadia Publishing, a publisher of history books.

And Simon & Schuster is a prestigious prize. It was originally set up in 1924 to publish crosswords, but went on to represent Ernest Hemingway, Scott Fitzgerald and Tom Wolfe. This year it made waves with the publication of “Rage”, a ferocious account of Donald Trump’s White House by Bob Woodward, a far-famed journalist, as well as a tell-all memoir by the president’s psychologist niece.
Nabbing Simon & Schuster is Bertelsmann’s second coup in the space of a week. On November 17th American and Canadian readers snapped up a record 890,000 copies of a new memoir by Mrs Obama’s husband, also published by a RPH subsidiary, in 24 hours. More

THIS MONTH Britain’s National Exhibition Centre (NEC), the country’s largest events venue, was due to host shows including Motorcycle Live, Simply Christmas and Cake International. Yet instead of being filled with bikes, toys and confectionery, the space has been fitted with 380 hospital beds. Covid-19 has wiped out the planned exhibitions, tipped the NEC’s management company into restructuring and caused the government to turn one of its halls into an emergency field hospital.
Social-distancing rules have forced all businesses to think hard about how to keep their customers safely apart. But for events companies the rules pose a particular problem, for these firms’ purpose is to bring people together. Trade shows and conferences lose their value if attendees cannot mingle. Concerts are no fun alone. And the excitement of a goal, slam dunk or home run is not the same without thousands of fans roaring their support. While stockmarkets have mostly recouped their losses since January, the market capitalisation of listed “crowds businesses” identified by The Economist has collapsed from $254bn to $142bn.

Some live-events industries are dealing with the crowds problem more easily than others. But as the pandemic grinds on, it looks as if those that have had the hardest time in 2020 will emerge least scathed when things get back to normal—whereas those that have found ways to adapt may find that the temporary fixes cause long-lasting disruption.
Hardest hit has been the exhibitions industry, which makes up just over half of the crowds sector’s market value. According to AMR International, a consultancy, its global revenues will contract by two-thirds this year, to $9bn. The outlook is so uncertain that AMR’s analysts have not hazarded an estimate for next year’s revenues.
Take the colossal trade-fair centre in Hanover, the size of 60 football pitches. It closed in March and has been empty most of the time since. Deutsche Messe, which runs it, expected revenues of €330m ($392m) this year; Andreas Gruchow, a member of its managing board, says it will end up with about €100m, partly from events it has run in China, which has controlled covid-19 better than America or Europe. A few events have been held in Hanover, following new rules mandating masks, a reduced headcount and so on. But exhibitors “expect the whole world to come to Hanover and visit them at their booth”, observes Mr Gruchow; with international travel on hold, the big fairs are not happening.
Event organisers have dabbled online with limited success. Some exhibitions, like Cake International, are best enjoyed in person. And even the liveliest Zoom panels lack the opportunities for networking that justify conferences’ admission price. Exhibitors pay a four- or five-figure fee for a spot in one of Deutsche Messe’s online trade fairs, says Mr Gruchow; for a physical booth at Hanover they would pay up to €300 per square metre, leading to seven-figure bills for the largest exhibitors.

Yet trade fairs’ clunkiness online will protect the industry from disruption. “You can’t ‘Amazon’ the events business,” points out Marcus Diebel of JPMorgan Chase, a bank. He cites this as a reason for long-term optimism about the industry. RELX, owner of Reed Exhibitions, the world’s second-largest exhibitions company by sales, saw its revenues fall by 70% year on year in the first half of 2020, but its share price is down only 6% since January. That of Informa, the largest, has shot up by around 40% this month, as successful late-stage trial of a covid-19 vaccines have been reported. Organisers agree that future events will have more digital elements. But a dire couple of years are likely to give way to something much like the old normal. amr expects revenues to rebound to 78% of last year’s level by 2022.
The opposite is true in sport, another crowd-dependent business. After a pause in the spring, most professional leagues have managed to play on, getting around the lack of spectators in novel ways. FC Seoul populated its stadium with mannequins from a sex-toy supplier (and in the process earned a fine from the South Korean football league for indecency). Others have piped in sound, added cardboard cut-out or CGI spectators or even live-streamed fans’ faces onto screens in the stands, as in WWE wrestling’s new “ThunderDome” in Florida.
Yet the smooth transition disguises disruption that may last. The cost of forgone ticket revenue has been borne unevenly. In the main American leagues teams keep the income from tickets—and the drinks, hot dogs and so on that go with them—whereas leagues get the proceeds of national broadcasting rights. So teams are on the rack. Major League Baseball, with its long season and relatively modest TV deals, is in bigger trouble than the National Football League, which has fewer games and pricier TV rights. The New York Mets, a struggling baseball team that was sold last month, is expected to lose out on nearly $250m in ticket sales this year.
The pandemic has also accelerated changes in how people watch sports at home. The lack of crowds has contributed to a fall in viewership of full games, as fans switch to highlights and new formats. America’s National Basketball Association (NBA) highlights show on Snapchat, a social app, has had 37% more viewers this year, even as TV ratings for the NBA finals fell by 49%. People are spending more time on betting sites and forums like Barstool Sports, says Brandon Ross of LightShed Partners, a media-research firm. “There are millennials and Gen Z-ers who would rather just sit and watch the Barstool personalities pontificate…than watch the games themselves,” he says.
The decline in whole-game viewing bodes ill for the big sports broadcasters. ESPN, owned by Disney, announced this month that it was cutting 500 jobs amid “tremendous disruption in how fans consume sports”. Its chairman, Jimmy Pitaro, said the company would focus on “serving sports fans in a myriad of new ways”; some written and audio content has gone behind its paywall. Lower whole-game audiences will mean lower ad revenues for broadcasters and, ultimately, lower budgets for rights deals, “the overwhelming financial engine for sports”, warns Mr Ross. These trends will persist long after covid-19 is defeated.
A different tune
If the exhibitions industry looks stable and sport is heading for disruption, live music combines both trends. Coronavirus has pulled the plug on concerts. Live Nation, the world’s biggest live-entertainment company, reported this month that its revenues plummeted by 95% in the third quarter, compared with a year ago. CTS Eventim, a European rival, saw its sales slide by 79% in the first nine months of 2020, year on year. Yet, rather like the exhibition organisers, the big music promoters are protected by investors’ faith that mosh pits and muddy festivals are not easily replicable online. Live Nation and CTS’s share prices are down by, respectively, only 10% and 15% since February—not bad for firms that have lost nearly all their revenue.
This suggests that live-music companies can outlive the pandemic. The giants should have no problem. Live Nation has nearly $1bn of cash and the same again in undrawn debt facilities, comfortably enough to see it through to next summer. But many smaller operators will not make it. America’s National Independent Venue Association says that 90% of its 2,900 members expect to close permanently without a bail-out. Live Nation will get a chance to hoover them up, entrenching its dominant position.
That does not mean the live-music industry will escape disruption. Early in the pandemic artists, who these days make more money from touring than recording, performed amateurish streaming concerts from makeshift home studios. Online gigs have since become more professional with the help of companies such as Driift and Dice, which organise elaborate streamed productions. Tickets are much cheaper than those for in-person gigs—entry to an online show later this month by Dua Lipa, a British singer, costs €12.99, about a quarter of the minimum that fans pay to see her in real life. But there is no limit to capacity. And stars can attract fans in locations where they would never tour. bts, a South Korean boy band, did an online concert last month which brought in almost 1m viewers from 191 countries.
There are also glimpses of completely new forms of entertainment. In April Travis Scott, an American rapper, appeared in virtual form in Fortnite, an online video game. Some 28m players attended the free concert in avatar form. Experiences such as these are not replacements for in-person live music. But they are the makings of a sub-industry that will supplement the incomes of stars with global followings. Covid-19 has dealt live music a severe blow in 2020, but the resulting innovation could help the industry come back stronger—if, perhaps, a bit less crowded. More

TALK ABOUT terrible timing. When the pandemic hit in March, Brian Chesky had just put the finishing touches on the paperwork for Airbnb’s much-awaited public listing. Instead of travelling to New York to ring the opening bell at the Nasdaq stock exchange, he found himself spending days (and nights) on Zoom in his home office in San Francisco, fighting to keep his online holiday-rental marketplace alive. “It was like you are going 100 miles an hour and suddenly have to hit the brakes,” Airbnb’s boss recalls.
This time around Mr Chesky might be luckier. On November 16th Airbnb unveiled its prospectus, putting it on track for an initial public offering (IPO) next month, just as the first doses of the covid-19 vaccine may become available. The IPO could value Airbnb at more than $30bn. The firm’s longer-term prospects are harder to divine.

The vaccine is not the only thing that makes this an opportune time for Airbnb to go public. The window for tech IPOs has not been open this wide since the dotcom bubble 20 years ago. More than 50 tech startups have floated this year, raising a total of $26bn, according to Dealogic, a data provider. Many of Airbnb’s employees want to cash in on the shares they have been awarded before their right to do so expires. And the firm needs money, on top of the $2bn it raised earlier this year to tide it over—hence its decision to scrap earlier plans to list shares directly without drumming up fresh capital.
Mr Chesky has a good recovery story to tell, too. In the painful second quarter the number of nights booked on Airbnb fell to 28m, from 84m a year before. Gross bookings collapsed by two-thirds, to $3.2bn. In the next three months, though, the numbers rebounded, to 62m and $8bn, mainly thanks to what Mr Chesky calls “travel redistribution”. Guests eschewed virus-hit foreign cities, formerly Airbnb’s stronghold, for domestic and rural destinations. Stays less than 500 miles (800km) from home rose by more than 50% this summer.
Mr Chesky has also made Airbnb leaner. Before the pandemic the firm had sunk money into new businesses, including flights and a television studio, to pad revenues ahead of the listing. Since then his motto has been “back to the roots”. He has fired around 1,800 employees, a quarter of the workforce, shut down most of the new activities and radically cut online advertising (more than 90% of guests now book directly on Airbnb’s site). As a result, though the firm lost $916m in the first six months of the year, it turned a net profit of $219m in the third quarter.
Can Airbnb keep this up? Even before the pandemic growth had begun to slow. Once things are back to normal, room for further expansion may be limited, at least in the company’s core market. Bernstein, a research firm, expects annual growth in private rentals to slow to 7-8%, from around 20% in the past few years. And Airbnb’s operating margins lag behind those of its closest rivals, Booking.com and Expedia (which operates VRBO, a site that lists mostly holiday homes).

Airbnb’s future also depends on its ability to police its service and meet a growing list of legal requirements across many jurisdictions where it operates. As with other big online firms, renters have found ways to abuse the platform, for instance by using rental properties for parties; in July police in New Jersey broke up a rowdy event with 700 people. As for regulations, the firm says in its prospectus that by October 2019, 70% of its top 200 cities by revenue had imposed restrictions, such as limits on how many days a year residential properties can be rented out.
Mr Chesky’s biggest task, however, will be to work out what Airbnb, now entering its teens, should be when it grows up. He has said he would like to see it evolve like Apple or Disney—firms that have adapted over time and outlived their founders. The pandemic has been a setback for its new lines of business. “Either we keep doing new things as the world changes,” he says, “or we stop doing new things—and we won’t exist in the future.” Even if, occasionally, doing new things means sticking to the old ones. ■
Editor’s note: Some of our covid-19 coverage is free for readers of The Economist Today, our daily newsletter. For more stories and our pandemic tracker, see our hub
This article appeared in the Business section of the print edition under the headline “Public holidays” More

THE NEW “TikTok Treats” menu on Postmates in Los Angeles wins no plaudits for gastronomy. It appeals to carb-loving teens: cloud bread and pancake cereal. But the tie-up with the popular short-video app is another sign that food-delivery firms are coming of age. Among teens and millennials, ordering food online is as ingrained a habit as booking an Airbnb, bingeing on Netflix or hailing an Uber.
Just how hooked consumers are thanks to the pandemic is clear from financial documents filed on November 13th by DoorDash, America’s biggest food-delivery company, ahead of its listing on the New York Stock Exchange next month. From January to September it booked orders worth $16bn, up by 198% year on year, earning revenues of $1.9bn. It ferries grub from 390,000 American restaurants.

The majority of America’s 700,000 or so eateries now distribute via a delivery app, notes Lauren Silberman of Credit Suisse, a bank. The pandemic turbocharged a pre-existing trend for convenience food, as more women work and everybody is short of time. In doing so, it has also rehabilitated one of Silicon Valley’s most derided business models.
Restaurants entered the digital realm two decades ago when Takeaway.com in Europe and Grubhub in America put menus online. Restaurants delivered the food themselves and the middlemen were reliably profitable. By contrast, the new “third-party logistics” firms like DoorDash and Uber Eats (whose ride-hailing parent has also bought Postmates) have to divvy up the bills, which average around $30, three ways. Once drivers and restaurants take their cut not much is left.
Until recently none of these newfangled firms made money, even in emerging markets where labour costs are far lower. Lack of obvious economies of scale or barriers to entry meant several rivals were fighting over market share by offering diners generous discounts—and bleeding red ink in the process. They also faced the prospect of a sharp rise in labour costs. Last year California passed a law that required DoorDash, Uber and other “gig-economy” companies to treat app-based workers as full employees.
On November 3rd Californians voted in favour of a ballot initiative which in effect overturns the law—and may discourage other state legislatures from passing similar ones. The law’s defeat on the tails of the pandemic bonanza has once again whetted investors’ appetite for food delivery. DoorDash is hoping for a valuation of $25bn, up from $16bn in its most recent private-market funding round in June. The offering is already oversubscribed. It is hard to argue with growth rates of 100-200% a year, notes Mark Shmulik of Bernstein, a research firm. DoorDash bulls point to Meituan-Dianping, the biggest such app in China, which turned profitable last year and is now worth a cool $230bn.

The American firm’s numbers contained plenty to chew on. DoorDash is generating cash and is profitable on an adjusted basis. Its in-app ads business offers juicy margins. The company sees itself as the digital hub for the convenience economy, connecting merchants, customers and riders; the word “platform” cropped up 646 times in the filing. It has started delivering groceries and convenience-store items. Its logistics arm sells last-mile delivery to other companies, notably Walmart. Looking ahead, high unemployment amid a continuing pandemic downturn should mean lots of cheap labour.
Other facts are harder to swallow—not least that it has taken covid-19 to make food delivery profitable, and then only marginally so. DoorDash warns that growth will slow as the virus ebbs. The share prices of many listed digital firms that benefited from lockdowns and self-isolating consumers, from Amazon to Zoom, dipped on the news of an effective vaccine. And despite their critics’ defeat in California, gig firms will continue to face accusations of thriving on the back of exploited workers. In this respect, DoorDash has already joined the club of listed tech platforms. ■
Editor’s note: Some of our covid-19 coverage is free for readers of The Economist Today, our daily newsletter. For more stories and our pandemic tracker, see our hub
This article appeared in the Business section of the print edition under the headline “Mouth-watering” More

HOW HAVE America’s retailers coped with covid-19? “We’re still learning,” declared John Furner, who runs Walmart’s vast American operations, on November 17th, as the supermarket giant reported third-quarter results. He is being too modest. Walmart, as well as a handful of other big firms such as Target, its smaller rival, and Home Depot, a DIY Goliath benefiting from housebound home-improvers staring at dingy walls and outdated kitchens, are thriving.
Paul Lejuez of Citigroup, a bank, described the three months to October as “another stellar quarter” for Walmart. Total global revenues increased by 5.2%, year on year, to $135bn. If anything, international sales, which grew by just 1.3%, dragged down strong performance in America, which accounts for the bulk of revenues; Walmart has said it will sell most of its flagging Japanese supermarkets. By contrast, domestic comparable-store sales, a standard industry metric, rose by 6.4%. Home Depot’s quarterly revenues shot up by 23% compared with a year ago, to $33.5bn, keeping up the previous quarter’s pace. Target’s operating profit nearly doubled to $1.9bn.

Shining retail stars mask darkness elsewhere in the industry. American shoppers rebounded faster than elsewhere in the rich world (see chart). But retail sales grew by just 0.3% last month, compared with the one before, the slowest in half a year. They softened in most of the 13 categories tracked. As investors swooned over Walmart and Home Depot, Kohl’s, a middling retail chain, reported falling revenues. “The distinction between the haves and the have-nots has gotten even sharper,” says Simeon Gutman of Morgan Stanley, an investment bank.

Mr Gutman points to the successful firms’ superior management of diverse, global supply chains. This allows shoppers to satisfy most of their retail needs in one store—particularly important in a pandemic, when people are keen to limit their outings. Walmart’s customers make fewer trips to the store but spend more whenever they do, he notes.
The star retailers’ biggest edge, though, comes from e-commerce. Walmart in particular upped its e-game just in time to benefit from a pandemic surge in online shopping. A survey of American shoppers by McKinsey, a consultancy, found that kerbside pick-up has nearly doubled from pre-covid levels, and in-store “click and collect” sales have shot up by nearly 50% from last year. Walmart’s digital sales leapt by nearly 80% in the latest quarter, year on year, to $10bn. That is still less than 8% of revenues—but more than in the whole of 2016, according to Morgan Stanley. The fast-approaching holiday shopping season is likely to bring even more online sales than usual, says Mr Gutman.
By doubling down on digital, Walmart is taking on Amazon’s e-emporium. The tech giant is not taking this lying down. On November 17th it launched its long-awaited digital pharmacy. This threatens not just chemists such as Walgreens and CVS but also Walmart, which sells prescription drugs in over 4,000 of its big-box stores. When it comes to e-commerce, Mr Furner’s humility is fully justified. ■

This article appeared in the Business section of the print edition under the headline “Beastly earnings” More

REACH A CERTAIN prominence in public life and you may be invited to become a non-executive director. The most lucrative option is to join the board of a large company. But for social prestige, there is nothing quite like joining the board of a cultural organisation. In Britain, these boards are dominated by “the great and the good”—aristocrats and wealthy businesspeople.
Sir John Tusa, a former BBC executive, has written a guide based on his extensive experience among Britain’s literati and glitterati. “On Board: The Insider’s Guide to Surviving Life in the Boardroom” is a useful primer for any board member. The job, Sir John argues, is not all about free tickets and lavish dinners. “There is no difference between governance on a corporate board and an arts board,” he says. “Sitting on a board, let alone chairing one, is one of the most demanding, complex and taxing activities in the world of public life.”

The book also gives an inside glimpse of the political battles that were fought over the future of venerable institutions such as the British Museum, English National Opera and the National Portrait Gallery. Cultural boards face a constant tension between the need to get funding from the government and the artistic ambitions of their executives, a dilemma made even thornier by the need to repair crumbling or outdated buildings.
Such was the traditional nature of these institutions in the years when Sir John operated that the book is sometimes redolent of the interwar era. He was invited to join the board of the British Museum over lunch at the Garrick, a gentleman’s club founded in 1831. He then discovered that board meetings were held on Saturday mornings because a former Archbishop of Canterbury, when a trustee, had requested the time slot as it allowed him time to write his Sunday sermon in the afternoon.
Perhaps this old-fashioned atmosphere (which has now been changed by bringing in a wider range of trustees) led to some of the difficulties that Sir John describes. Too many appointments were rushed, he says, forgetting the first rule: “If you can’t see the right candidate in front of you, don’t appoint.” One frequent problem he faced was tension between the chairman and chief executive, so he suggested that one-to-one discussions between the two should be part of the appointment process to ensure compatibility. When in their posts, the duo should aim to talk every day.
Even then, the chairman (or woman) must retain a certain air of detachment. The boss’s approach, says the author, can be summed up by the quote: “We are totally on the same side until the day that I have to sack him.” Bad chairmen tend to impose their views, fail to respond to ideas and refuse to alter their approach. Often they place their favourites on the board, creating factions and causing destruction.

Sir John’s advice to chief executives is to tell the board what they are doing, when, how and why—all in order to persuade board members that the boss deserves support. But CEOs should not deluge trustees or directors with paperwork: “If information is power, it must be remembered that too much information is a smokescreen.”
As for board members, Sir John says they should ask questions of the executive, and be careful about accepting the answers too easily. They should also remember that there is no such thing as a stupid question. And it is not their job to develop strategy: “The executive proposes, but the board disposes,” he says.
Trustees should be chosen with a view that one of them is capable of chairing the board in due course. Furthermore, trustees should know why they have been invited to join the board and how they might best contribute to the organisation’s success.
All Sir John’s suggestions seem sensible and most would apply to public companies as well as to arts institutions. The role of non-executive directors has never been well defined. Tiny Rowland, a swashbuckling tycoon, dismissed them as “Christmas tree decorations”—just for show, in other words. Think of the great names that studded the board of Theranos, a blood-test startup, and how they failed to stop its collapse.
Most non-executives do their best but are caught between two stools. They do not know enough to challenge the executives properly. But if they push their questions too far, they will not be reappointed. Above all, trustees and non-executive directors cannot do their job unless the management wants their input. Wise bosses should know their limitations and rely on boards for advice.
This article appeared in the Business section of the print edition under the headline “How to play the board game” More

JOHN STANKEY is an American chief executive from central casting. The 58-year-old has a square jaw, a lanky frame and, as one friend put it, “the world’s deepest voice”. During his 35 years as a telecoms executive, he has been a voracious dealmaker. He helped set Southwestern Bell Corp, one of the Baby Bells spawned by the break-up in 1984 of American Telephone & Telegraph (AT&T), on an M&A blitzkrieg that eventually consumed the original Ma Bell herself. He then helped orchestrate its $176bn push into entertainment, buying DirecTV, America’s largest cable provider, in 2015, and Time Warner, a media colossus, three years later. In July he took over as AT&T’s boss. A self-confessed “Bell-head”, he doesn’t flinch when confronting media moguls. Yet before one constituency he practically cowers: widows, orphans and other investors that depend on AT&T as the world’s second-biggest dividend-payer after Microsoft.
That is a problem not because AT&T cannot afford this year’s anticipated $15bn payout. Despite the travails of covid-19, it easily can. The rub is that it has become a treadmill. This year is the 36th since AT&T was broken up in which it has increased the dividend. Such a legacy may not be strange for a stolid telecoms firm. But with a flighty media business on the side, it is a foolish promise. Moreover, AT&T’s acquisition spree has saddled it with almost $150bn of net debt, even as its two core businesses, mobile telecoms and entertainment, are in the throes of upheaval that requires immense financial flexibility. Instead of revitalising each of them, AT&T has so far done what many “dividend aristocrats” do—try to sell the family silver to make ends meet.

Yet there are indications that Mr Stankey may be prepared to challenge the old ways of thinking. He ought to—even for the sake of those widows and orphans.
He started the job with the odds stacked against him. Not only has the covid-19 pandemic clobbered WarnerMedia, the renamed Time Warner, by disrupting film releases, accelerating the decline of cable TV and reducing advertising spending. He also had to overcome doubts about his leadership abilities first aired last year by Elliott Management, an activist hedge fund, when it took a stake in AT&T. When his former boss, Randall Stephenson, announced his retirement in the midst of the pandemic, it was hard to imagine that an outsider could run a company with a market value of $200bn and a phone book’s worth of problems by Zoom. So Mr Stankey won the contest, despite his role as Mr Stephenson’s lieutenant during years of value destruction. Since then, he has soothed some nerves, taking further acquisitions off the table, promising to repair the balance-sheet and lengthening debt maturities. Yet the share price languishes, as investors wonder if he can sustain the dividend while competing against two fierce rivals, T-Mobile in telecoms and Disney in entertainment.
One big test of his mettle will be an auction next month of wireless spectrum. Mobile, after all, is AT&T’s mainstay, generating as much core earnings, or EBITDA, in a week in the third quarter as WarnerMedia did in a month. Yet T-Mobile, once a distant third in wireless subscriptions, is now running neck-and-neck with AT&T and has its sights on Verizon, the leader. After its merger with Sprint, T-Mobile has also surged ahead of both rivals in the coverage and speed of its fifth-generation (5G) network, adding to its appeal. In order to catch up, AT&T and Verizon will take part in an auction of mid-band 5G spectrum starting on December 8th. Verizon’s balance-sheet is robust enough to bid what some expect to be at least $15bn. AT&T may feel more constrained. Yet those who keep a careful eye on its credit rating think it should splurge, both on spectrum and the fibre networks it lays across America. Davis Hebert of CreditSights, a research firm, calls them the “core tenets” of its business. (How quickly it can sell long-in-the-tooth assets like DirecTV to ease the financial strain is another matter.)
On November 18th Mr Stankey may have shown promising signs of audacity, though, when WarnerMedia announced an unexpected move in support of HBO Max, AT&T’s streaming platform that competes with Disney+, not to mention Netflix. It said it would release “Wonder Woman 1984”, a potential Christmas blockbuster, simultaneously on HBO Max and in American cinemas on December 25th (it will hit cinemas in other countries earlier). That will break a long tradition of releasing films in theatres first to recoup production costs at the box-office, and to support the cinema business. It shows the company may be prepared to cannibalise revenues in one part of the firm—Warner Bros, the film studio—for the greater goal of driving subscribers to its streaming service, which is potentially a bigger long-term source of value. If going all-in on streaming attracts hordes of subscribers, it could reward Mr Stankey’s dogged faith in the marriage of phone and film.

From Wonder Woman to Superman
It is time for more of such hard choices. Yet the risk is that Mr Stankey feels he has time on his side. He now appears to enjoy Elliott’s support (reports that the asset manager had sold its equity stake do not mean it has thrown in the towel; it may still have a large derivatives position). The rating agencies are patient. Neil Begley of Moody’s says that because of coronavirus and other reasons, it has put big investment-grade firms like AT&T on a “longer leash”. Many remain convinced the dividend is a sacred cow.
That breeds complacency, however. The payout saps AT&T’s financial flexibility just when it needs all the leeway it can find. It encourages defensiveness, when T-Mobile and Disney are, as Roger Entner, a telecoms analyst, puts it, “surrounding it like wolves”. Come what may, one day it will have to cut the dividend—preferably to be complemented with more flexible share buy-backs. If Mr Stankey does that to make the company more nimble, he might emerge a corporate superhero. If it is forced upon him by weak earnings, it will be kryptonite that could cost him his job. ■
This article appeared in the Business section of the print edition under the headline “Wring out those Bells” More

HUNDREDS OF JOBSEEKERS lined up outside a factory gate on a recent autumn morning. Uni-Royal, a Taiwanese maker of electronic components for such brands as Samsung and Toshiba, was looking for extra help at its plant in Kunshan, an hour’s drive west of Shanghai. New factory hands could earn 4,000 yuan ($610) a month, double the local minimum wage. Kunshan is dotted with hundreds of Taiwanese manufacturers like Uni-Royal. More than 100,000 Taiwanese call Kunshan home.
“Little Taipei”, as Kunshan is known, illustrates a broader phenomenon. Exact estimates vary, but as many as 1.2m Taiwanese, or 5% of Taiwan’s population, are reckoned to live in China—many of them business folk. Taiwan Inc has not let fraught political relations with China, which views the island as part of its territory, get in the way of business. Taiwanese companies have invested $190bn in Chinese operations over the past three decades. Foxconn, a giant Taiwanese contract manufacturer of electronics for Apple and other gadget-makers, employs 1m workers in China, more than any other private enterprise in the country.

As the West grows increasingly suspicious of communist China’s rise—a trend that America’s next president, Joe Biden, may slow but not reverse—Beijing seems keener than ever to bolster cross-strait commercial bonds. It sees Taiwanese firms as a source of investment and critical technologies such as computer chips, the export of which to China Washington has tried to curtail. At the same time, corporate Taiwan is cooling on its giant neighbour. Geopolitics is not the only reason.
When China opened up to foreign investment in the 1980s, entrepreneurs from Taiwan were the first foreigners to open their wallets. Enticed by cheap labour and land across the strait, they quickly set up shop in the coastal provinces closest to Taiwan. To this day Jiangsu (which includes Kunshan), Zhejiang, Fujian and Guangdong attract most Taiwanese money (see map). A common language and shared culture helped reduce transaction costs. Foxconn built its first Chinese factory in Shenzhen in 1988. By 2008 around a sixth of China’s stock of inward investment came from Taiwan, making it the biggest foreign investor in China.

Today three of China’s 12 most popular consumer-goods brands by revenue are Taiwanese. Chinese gobble up Master Kong instant noodles, Want Want rice crackers and Uni-President juices. Apple’s three biggest China-based suppliers—Foxconn, Pegatron and Wistron—are all Taiwanese.

Now China is going out of its way to recruit more businesses from Taiwan. Between 2018 and 2019 the government unveiled no fewer than 25 policies aimed at luring them. Measures include tax credits and, more striking, a special right to bid on lucrative government contracts, from railway construction to “Made in China 2025”, an innovation scheme centred on advanced manufacturing. In May the Chinese authorities released an official directive, signed by five ministries, permitting Taiwanese-owned firms in China to “receive the same treatment as mainland enterprises”. It applies even to sensitive areas like 5G mobile networks, artificial intelligence and the hyperconnected “Internet of Things”. No other foreign firms enjoy similar treatment.
These efforts by Beijing have so far had limited success. Annual investment flows from Taiwan have fallen by more than half since 2015 (see chart). This growing reticence on the part of corporate Taiwan can be explained by three considerations. The first is geopolitical.
China’s goal of discouraging formal independence by strengthening business ties is increasingly transparent to many Taiwanese. Beijing’s special treatment of Taiwanese firms, which are designated as domestic ones in its drive for “indigenous innovation”, only stokes more suspicions. It may have helped Taiwan’s independence-leaning president win re-election in January. Chinese firms, which have been able to invest in Taiwan since 2009, are coming under fire from the island’s regulators, which suspect them of being a fifth column for the Chinese Communist Party. Last month Taobao Taiwan, the local version of Alibaba’s Chinese e-commerce platform, said that it would cease operations.
Trading partners
Geopolitical tussles beyond the Taiwan strait also play a role. Tariffs imposed by America on a long list of Chinese exports have prompted many Taiwanese producers to shift operations out of China. A recent survey by the National Federation of Industries, a trade body in Taiwan, found that four in ten Taiwanese bosses with factories in China said they already have or will “transfer capacity” elsewhere, mainly to South-East Asia. Taiwan’s Giant, the world’s biggest producer of bicycles, has identified Hungary as an alternative production base.
Making life even more difficult for some Taiwanese firms is America’s blacklisting of certain Chinese tech titans. Huawei, a Chinese telecoms champion that is a particular target of American ire, last year accounted for 15% of the revenues of Taiwan Semiconductor Manufacturing Company (TSMC), a huge chipmaker. This month TSMC confirmed it has set aside $3.5bn for a new plant in Arizona.
A second challenge for Taiwanese firms concerns competition. Zhang Yingde, a Taiwanese small-business owner in Shanghai, talks of a “red supply chain” which, Beijing’s directives notwithstanding, continues to favour Chinese bidders. Mr Zhang says he can only hope to get in on the action as a subcontractor. Jerry Huang, the head of Ningbo’s Taiwan Business Association, which represents some 300 Taiwanese manufacturers in the eastern Chinese city, says that none has won a big government contract to date.
Mr Huang does not blame discrimination against Taiwanese firms. He points instead to the capabilities of homegrown Chinese rivals, which are becoming more competitive and innovative. This month Wistron, a Taiwanese assembler for Apple, agreed to sell its factory in Kunshan to Luxshare, a low-cost Chinese competitor. The fact that Wistron was prepared to cede operations to a Chinese rival suggests that technical know-how in electronics assembly is no longer a barrier to entry that Taiwanese outfits feel compelled to guard.
Now that their dominance in manufacturing is fading, Taiwanese firms which want to succeed in China may need to ride on “Taiwan’s soft power”, says Keng Shu of Zhejiang University. This will be easier in services, he reckons, given Taiwan’s global reputation for warm customer service. But unlike manufacturing, where Taiwan enjoyed a first-mover advantage, China’s services industry has no shortage of established players, foreign and domestic.
The third reason for Taiwan Inc’s diminished zeal for China has to do with generational change. Uni-Royal in Kunshan is a case in point. Taiwanese expatriates who dominate its management are nearing retirement. Young Taiwanese are reluctant to take on the often thankless task of running Chinese factories. A common refrain heard from Taiwanese owners across China is that the impending “leadership vacuum” has made them cautious about big outlays.
To attract stripling Taiwanese entrepreneurs, China’s central government has in the past year opened dozens of “cross-strait entrepreneurship incubators” in big cities. These offer perks like free office space, introductions to potential Chinese clients, posh flats at discount rents and a chance to apply for up to 500,000 yuan in seed capital from the government. Weak pitches such as insufficiently differentiated mobile apps need not apply, says Zhu Yan, who operates an incubator in Jiaxing, in Zhejiang province. Still, the bar is lower than Chinese venture-capital firms typically set.
Mr Zhu’s incubator has lured ten Taiwanese startups. But schemes like it will not be enough to allay Taiwanese bosses’ concerns about pricier labour and stiffer competition—let alone about the new great-power rivalry. More likely than not, the golden era of Taiwanese business in China is over. ■
This article appeared in the Business section of the print edition under the headline “Scaling back” More