Philippa Kaur

The highest-grossing film of the year so far, “Top Gun: Maverick”, took $1bn in its first month. The biggest game, “Call of Duty: Modern Warfare II”, took the same amount in just ten days. Spurred on by the pandemic, which saw video-game spending increase by nearly a quarter in 2020, the games industry will be worth more than $170bn this year in worldwide revenues, some five times as much as the global box office.Gaming’s ballooning value is attracting the attention of regulators. In January Microsoft, which makes the Xbox console, agreed to buy Activision-Blizzard, the publisher of titles including the “Call of Duty” franchise, for $69bn. It is the biggest acquisition in Microsoft’s history and by far the biggest in that of the games industry. Regulators from 16 territories have investigated the deal. In the past two months Britain’s Competition and Markets Authority (CMA) and the European Commission have scrutinised it in detail; America’s Federal Trade Commission (FTC) is expected to make a decision imminently. If any of those three mega-regulators says no, it could be game over.Trustbusters’ immediate concern is the console market. For two decades Sony and Nintendo have had the upper hand in the “console wars”, even as supply-chain problems have inhibited sales of Sony’s latest PlayStation (see chart). Nonetheless, Sony worries that gamers might desert the PlayStation if Microsoft made “Call of Duty” exclusive to Xbox. Some 45% of PlayStation owners play the game, according to MIDiA Research, a data firm.Sony’s complaint seems a bit rich. “None of the console players are in a position to preach on exclusivity,” says George Jijiashvili of Omdia, a research company, who notes that Sony has kept PlayStation games such as “Uncharted” and “God of War” off the Xbox. Microsoft in any case says that keeping “Call of Duty” on the PlayStation, where it rakes in hundreds of millions of dollars a year, is “a commercial imperative for…the economics of the transaction”. Earlier this month it offered Sony a ten-year deal to keep “Call of Duty” on the platform. Phil Spencer, who runs the Xbox business, later told the Verge, an online publication, More

WHICH firms have emerged as the winners from the chaos of the past three years? Perhaps the most unusual period for business in a generation began in the spring of 2020, when lockdowns brought parts of production to a standstill. A deep but brief recession was followed by a frantic recovery. Then came inflation. A world economy already in the grip of a high-speed cycle is now experiencing the fastest increase in interest rates since the 1980s. Graham Secker of Morgan Stanley, a bank, argues that the policy response to covid-19 has shocked the economy out of secular stagnation—the slow-growth, low-inflation malaise preceding the pandemic—and marks a new era.It should be no surprise that the business environment has changed profoundly. To take stock of this we have examined which American industries and firms have performed best over the past three years, based on stockmarket performance. The headline is that market leadership has flipped dramatically. The digital hares have given ground to old-economy tortoises. Big tech is no longer running away with the race. Firms once derided as obsolete and sluggish suddenly look vital again.We have chosen January 1st 2020 as the starting date for our analysis. Since then, the S&P 500 index of leading American shares has risen by 25%. The best-performing industry sector is energy, followed by Information Technology (IT). Health care has done well, as might be expected during a public-health crisis: the second-best-performing company in the S&P 500 is Moderna, a leading vaccine-maker, whose share price is up by no less than 800%.Industrial companies have kept pace with the index, as have consumer staples. Firms that serve discretionary parts of consumer spending, hurt by inflation, have lagged behind. The worst-performing sectors are real estate, banks and communication services (see chart 1). And at the very bottom of the performance league are cruise-liner firms, such as Carnival, that have seen their debts soar and their shares drop like an anchor towards the ocean floor. Measuring performance by share prices has its flaws. It is hard to look at the roller-coaster stock price of Tesla (up by 556%) without being mindful of the influence of investor fads and shifts in risk appetite. But over time, business success is embedded in market prices. It also helps to understand how investors’ perceptions have shifted over time. To capture this we have split the period into three stages. The stay-at-home phase, the reopening phase, and now the inflationary stage.The signature investments of the pre-pandemic era of secular stagnation were asset-light companies: principally software firms, which benefit from network effects, but also branded-goods companies. Firms based on ideas and information were favoured over ones that relied on physical capital. The trade was to buy “bits” and sell “atoms”. The first part of the pandemic amplified these trends. The stay-at-home phase lasted until November 8th 2020, the day before the test results of the Pfizer vaccine were announced. The big winners were tech, consumer discretionary (Amazon rose by 79%) and communication services (Netflix was up by 59%). The losers were real estate, banks and energy. There is little mystery to this. Stuck indoors, people relied on software and deliveries. Offices were barely occupied; there was little driving or air travel (bad for oil firms). And banks were hit by lower interest rates and fears of defaults.In the next, reopening phase, leadership shifted. Energy was the big winner, followed by financials (buoyed by optimism and rising asset prices), tech and real estate. Inflation emerged as a theme, but at that stage was seen as a symptom of growth and not yet as a threat to it. In the third phase, which began at the turn of this year, the Federal Reserve has pivoted from being relaxed about inflation to being spooked by it. Expectations of interest-rate increases have risen and the stockmarket has slumped. All sectors except energy have been crushed. Among the worst hit have been the winners of the first phase: tech, consumer discretionary and communication services. The time-horizon of investors has shortened. The share prices of businesses whose earnings power is projected furthest into the future, notably tech, have been trashed. Atoms are now back in favour. Three long yearsIf you look over the entire three-year period the best-performing industries are energy and IT: respectively the archetypes of the “value” style of investing and its antithesis, “growth”. The sequencing of their performance has been in mirror image. Energy—particularly oil firms, such as ExxonMobil and Chevron—had a terrible 2020 followed by two bumper years. Oil has gained back more than it lost.Technology firms had two blowout years before a reckoning in 2022. But there is plenty of dispersion. Within the big-tech category of the very largest firms there are big gaps in performance: shares of Meta, the owner of Facebook, have lost almost half of their value even as Apple’s shares have soared (see chart 2). The share price of Nvidia, a chip designer, is up by 177%, even as those of Intel, a chip pioneer from an earlier age, slumped.Which of the trends of the past three years will persist and which will prove more transitory? Tech is running into structural problems. The firms that grew rapidly in the 2010s, such as Amazon and Netflix, are now maturing businesses. The tech giants compete more vigorously with each other. Now that they are so big, if demand in their particular market is dented, they cannot avoid the pain. The original attraction was that tech firms were capital-light. Once a digital platform is set up, adding more customers does not add much to costs as it would for a traditional firm. “Amazon got to 5% of US retail sales much faster, and using much less capital, than it took Walmart to get to 5% of US retail sales,” says Robert Buckland of Citigroup, a bank. Yet it has become more apparent that big tech relies on atoms as well as bits. Mr Buckland notes that Amazon’s capital budget next year is more than twice as large as ExxonMobil’s. Meta has already spent a small fortune on establishing a virtual-reality platform, of which investors have taken a dim view. Netflix’s margins have been squeezed by the higher spending on content. It follows that the ability to marshal capital and use it efficiently is likely to become a key differentiation for performance in the new era of higher rates. Oil companies used to be notorious for blowing profits on exploration. But pressure from shareholders to improve returns on capital invested and the stigma associated with new investment in fossil fuels has raised the bar for deploying capital. These days it is big tech that blows cashflows on capital spending. Whether mature tech companies can find more discipline will determine whether they can perform better. More broadly, the increased cost of funding will give a lift to established firms across the economy. When capital is abundant, almost any venture can get funding. Tesla’s boss, Elon Musk, exploited the period of bountiful capital and investor patience to build an electric-vehicle powerhouse that poses a mortal threat to General Motors and Ford. Now that capital is much scarcer, a would-be Tesla would not get such generous backing, tilting the scales towards companies that can generate cash from legacy investments. Incumbents can feel less threatened by potential disruptors. The upshot of all of this is the hare that is technology, while by no means lame, is not as pacy as it had once seemed. Meanwhile the old-economy tortoises have emerged from their shells with a surprising spring in their step. Still, the strangest business cycle in living memory is not over yet. Expect more surprises. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

“On the whole we are pretty happy with the deal,” says Stefan Wolf, boss of Gesamtmetall, the metal-engineering industry’s employers’ association, about an agreement on pay struck on November 18th for workers in the state of Baden-Wurttemberg. IG Metall, Germany’s mightiest trade union, had asked for a hefty annual pay increase of 8%. Bosses managed to buy time by granting them an increase of 8.5% spread over two years. That deal was mirrored by Volkswagen and IG Metall when they struck a deal on November 23rd.The agreement is likely to be adopted by most if not all 3.9m workers and their employers in the country’s metal-bending companies and influence wage deals in other industries in Germany and neighbouring countries. Pay rises are now set until September 2024, giving employers much-needed certainty about at least one important aspect of their input costs. “It’s on the high side, but bearable,” states Holger Schmieding, chief economist of Berenberg, a German private bank. Workers will receive a 5.2% pay increase in June next year and a 3.3% raise in May 2024 and two tax-free bonus payments of €1,500 ($1,550). This is hardly keeping pace with inflation, which reached an annual rate of 11.6% in October in Germany, but looks generous considering the numerous other headwinds faced by businesses including an energy crisis, supply-chain bottlenecks and a looming recession. The deal offers reassurance that Germany’s social partnership between bosses and workers is alive and well. It comes at a time when the country’s economic model is being called into question by sky-high energy prices and an increasingly testy relationship with China, Germany’s biggest trading partner. Collective “tariff” agreements (the periodic deals that set wage levels for each industry) help to keep relations between bosses and workers harmonious. It came as a surprise to some pundits, who had previously also forecast a “hot autumn” of violent strikes and walkouts, but with a few isolated exceptions workers haven’t downed tools.The cost of keeping workers happy is nonetheless being borne elsewhere. “The model is working so well because the government is spending tens of billions to ease the burden of sky-high inflation for workers,” says Philippa More

Few jobs are guaranteed to turn hair grey faster than running operations for a multinational business in China. Diplomatic spats and consumer boycotts are hazards of the job. A zero-covid policy that causes intermittent local lockdowns, such as the one that recently began in the southern city of Guangzhou, has disrupted supply chains and made the country inhospitable to foreign managers. A fractious workforce is adding to the woes. On November 23rd a riot erupted over pay and working conditions at the main factory that makes Apple’s iPhones in China. In a survey by the European Chamber of Commerce in China, 60% of members reported that the business environment has become more challenging.Listen to this story. Enjoy more audio and podcasts on More

It’s not just Twitter. The pink slips are piling up at some of the biggest names in tech. Mark Zuckerberg, the founder of Meta, is eliminating more than 11,000 roles, around 13% of the social-media company’s workforce. On November 22nd HP announced up to 6,000 job losses, which would be around 10% of the IT firm’s staff. Amazon’s boss, Andy Jassy, has warned of more cuts next year, on top of those already unveiled in the retailer’s devices and books businesses. Stripe revealed that 14% of the staff at the digital-payments firm were being let go. Snap and Shopify announced their own rounds of lay-offs earlier in the summer. Listen to this story. Enjoy more audio and podcasts on More

The flight, a 90km sub-orbital jaunt, was over in minutes. But for India the rocket launched by Skyroot Aerospace on November 18th, the first by a private company in the country, was a moonshot. Numerous other flights in the coming months will signal an industry ready for take-off.Listen to this story. Enjoy more audio and podcasts on More

You have to hand it to Sir Elton John. Not only is he the only musician ever to have top-ten hit singles in Britain for six decades in a row. He is also a rare septuagenarian megastar who knows how to bow out in style. On November 20th at a relatively tender 75 years old, he performed what he said would be his last ever concert in America at Dodger Stadium in Los Angeles. One of the showstoppers was “Goodbye Yellow Brick Road”, the theme song for graceful retirements. If only Disney, who live-streamed the event on Disney+, had been listening.It wasn’t, because shortly before the performance started, a bombshell landed. Its hospitality tent at the stadium was convulsed by the news that Robert (Bob) Iger, the Walt Disney Company’s own Rocket Man, was coming out of semi-retirement, aged 71, to retake control of the firm he left only 11 months previously, leaving Bob Chapek, his handpicked successor, out on his ear. It was startling. It shouldn’t have been. After all, as Jeffrey Cole, a communications expert at USC Annenberg puts it, “Disney has had a 40-year succession problem”. During his decade-and-a-half as CEO, Mr Iger postponed his retirement four times, elevating and nixing potential successors. His predecessor, Michael Eisner, expensively jettisoned possible replacements twice during his 21-year reign, before finally settling on Mr Iger. Disney’s board has now given Mr Iger two years—a deadline unlikely to be set in stone—to have another go at finding a suitable heir. Succession problems are not unique to Disney. In fact they plague corporate America, especially when departing CEOs achieve near mythical status—besides Mr Iger, recall GE’s Jack Welch and Howard Schultz, Starbucks’ barista-in-chief. Some high-profile CEOs cling onto power for so long that their firms appear to grow old with them: exhibit a is FedEx, the delivery firm whose founder Fred Smith stepped down as boss in June after 49 years. There is a probationary air to some imperial handovers. Andy Jassy may have done all the right things to become boss of Amazon, but there is little doubt Jeff Bezos, the founder, would swoop back in if the e-commerce giant got into trouble. Then there are the leaders who have made their firms so iconoclastic they are almost irreplaceable: think of Berkshire Hathaway’s investment genius, Warren Buffett, or Elon Musk and his impossible-to-emulate greatest show on earth. What makes it so hard to fill such oversized shoes? One clue comes from Mr Iger himself. It is hubris. In his memoir, “The Ride of a Lifetime”, published in 2019, he acknowledges that all CEOs like to think that they are irreplaceable. Yet good leadership, he adds, demands the opposite. It is about bringing on a successor, identifying skills they need to develop and being honest with them when they are not ready for the next step. That is true. Yet what he doesn’t admit is that grooming a replacement is psychologically tough. It brings leaders face-to-face with their own mortality. It brings up the vexing question of legacy. Tellingly, Mr Iger writes almost mournfully about the day in 2005 when Mr Eisner left Disney for the last time with no board seat, no consulting role—not even a farewell lunch thrown by his colleagues. “Now he was driving away knowing that his era was over,” he wrote. “It’s one of those moments, I imagine, when it’s hard to know exactly who you are without this attachment and title and role that has defined you for so long.” With such a bleak perception of corporate afterlife, it’s no wonder Mr Iger was loth to let go.In theory, that’s where strong, independent board members should have come in. It’s their job to handle succession planning. While the CEO has a responsibility to nurture layers of talent within the firm, it’s up to the board to examine internal and external candidates and decide on a replacement. In practice, however, A-list bosses often dominate their boards. In Disney’s case, the directors went as far as elevating Mr Iger to chairman in 2012 after his masterful acquisitions of Pixar and Marvel, two animated-film studios, sealed his status as monarch of the Magic Kingdom. When Mr Chapek took over as CEO in 2020, the board continued in Mr Iger’s thrall. He remained executive chairman until the end of last year, reportedly still calling the shots in ways that undermined his successor’s authority. In June, under Susan Arnold, a new chairman, the board unanimously extended Mr Chapek’s contract, though by then his credibility was virtually shot. Five months later, the board sacked him. It could barely disguise its delight at having its more-beloved Bob back. For all such corporate-governance fiascos, some comebacks work. Mr Iger’s might. Jeffrey Sonnenfeld of the Yale School of Management likens his return to that of second-world-war generals such as Douglas MacArthur or George Patton, motivated more by restoring Disney’s lustre than by personal ambition. The day after taking back control at Burbank, Mr Iger swiftly set out to dismantle the centralising strategy orchestrated by Mr Chapek, putting decision-making back in the hands of Disney’s creators. Mr Sonnenfeld believes the returning boss already has “excellent” replacement candidates up his sleeve. If he does, he will be able to rectify the biggest mistake in a mostly blemish-free career. When are you gonna come down? Some high-profile successions work, too, most notably the transition at Apple, maker of the iPhone, from the late Steve Jobs to Tim Cook, and, indeed, Mr Iger’s follow-on from Mr Eisner. In both cases, the new bosses succeeded first by not trashing their predecessors’ legacies and second by articulating a strong vision for the future. Yet ultimately the most important thing may have been that their long-serving bosses, however celebrated, had by then left the stage. Long-standing financiers such as Jamie Dimon of JPMorgan Chase and Larry Fink of BlackRock; moguls, such as Rupert Murdoch, of News Corp; all should take note. Listen to Sir Elton’s ode to life after superstardom—and learn. ■ More

AS BIG tech companies face a brutal slow-down the hunt is on for new areas of expansion. Amazon, which is now America’s second-biggest business by revenue, is a case in point. In the final quarter of 2022 its sales are expected to expand by just 6.7% year on year. Last week, on November 17th, Andy Jassy, the firm’s chief executive, confirmed that it had begun laying off employees and would continue to do so next year. Mr Jassy said it was the most difficult decision he had made since becoming boss. But he also noted that “big opportunities” lay ahead. One that he highlighted is the largest, most lucrative and hellishly difficult businesses in America: health care.Many tech firms have health care ambitions. Apple tracks wellbeing through the iPhone; Microsoft offers cloud-computing services to health firms and Alphabet sells wearable devices and is pumping money into biotech research. But Amazon is now busy creating the most ambitious offering of them all. Two days before Mr Jassy’s statement, on November 15th, it launched “Amazon Clinic”, an online service operating in 32 states that offers virtual health care for over 20 conditions from acne to allergies. Amazon describes the new service as a virtual storefront that connects users with third-party health providers.The Amazon Clinic launch follows the $3.9bn takeover, announced in July, of One Medical, a primary care provider that offers telehealth services online and runs bricks-and-mortar clinics (the deal has yet to close). It has 790,000 members. The deal was led by Neil Linsday, formerly responsible for Prime, Amazon’s subscription service, who has said health care “is high on the list of experiences that need reinvention”.These latest moves complement existing assets that Amazon has. Its Halo band is a wearable device that monitors the user’s health status, and which went on sale in 2020. In 2018 it bought PillPack, a digital pharmacy that is now part of Amazon Pharmacy, for $753m. Amazon Web Services launched specific cloud services for health care and life science companies in 2021.The move into primary care, jargon for the role of the traditional family doctor, is a big step but has an obvious logic. Walgreens, a pharmacy chain, reckons the industry is worth $1trn a year. Around half of Generation Z and millennial Americans do not have a primary-care doctor and One Medical’s membership has almost doubled since 2019. Amazon Clinic will accept cash for its services, rather than relying on America’s nightmare insurance system to recoup costs.The company is betting that primary care will become more digital. And it is likely that it will seek to integrate these services with other parts of Amazon’s health care offering. Amazon Clinic’s new users can buy drugs from Amazon Pharmacy. Over time the firm could add features to the Halo band that give people reminders to take medicine or set up clinics in branches of Whole Foods, the supermarket chain it acquired in 2017. And it may wrap health care into Prime which now has some 200m members worldwide. “The low-hanging fruit is offering discounts on membership to Prime members”, says Daniel Grosslight of Citigroup, a bank.Amazon’s health push comes with several risks. One is that its own record is far from flawless. It is closing Amazon Care, which it launched to provide health services for its own employees and which expanded to offer some services to outside customers. Haven, a collaboration with Berkshire Hathaway, Warren Buffet’s investment firm, and JPMorgan Chase, a bank, to procure lower cost health care for employees was set up in 2018 but died less than three years later.Another danger is competition. cvs, an American retail pharmacy, reportedly outbid Amazon for Signify Health, a large primary-care provider in September. In October, Walgreens increased its stake in Villagemd with a $5.2bn investment. JPMorgan recently opened primary-care centres of its own. Amazon’s new venture will also be competing with the likes of Ro and Hims & Hers, both tech startups that are dedicated to providing virtual health care.Finally Amazon will have to grapple with regulators. The Federal Trade Commission, a trust-busting agency, is examining the One Medical deal. The takeover and the launch of Amazon clinic will raise questions about who should be allowed to hold sensitive health care data. Amazon has said “we remain focused on the important mission of protecting customers’ health information”. The firm may need to set up hefty firewalls to separate customer information held by clinics from that gathered through other products and services. But satisfying data-privacy concerns could wipe out many of the data-sharing opportunities that Amazon deftly deploys across the rest of its business.Amazon’s attempts at disrupting health care will be subject to intense scrutiny. Nonetheless it should have a positive effect on health care in America. Its experience at keeping customers happy while generating razor-thin margins could improve primary care and force other providers to up their game. It may also prompt other tech giants to do more to disrupt health care themselves. All this may be just the medicine that America’s heath-care system—and Mr Jassy’s tenure as Amazon’s boss—badly need.■ More