Could crypto be the oligarchs’ way out of sanctions?

February 27, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on February 27th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Anonymous. Global. Flexible. The effect of sanctions against the Russian oligarchs risks falling flat — thanks to the double-edged sword of the crypto world.

“If the Russians decide — and I’m sure they already are — to avoid using any currency other than crypto, they can effectively avoid all sanctions.”

The statement came from Ross S Delston, a money laundering expert, commenting on the sanctions US President Joe Biden presented on Thursday. Biden also singled out the people around Vladimir Putin as targets:

“We’re adding names from the Russian elite and their families to the sanctions list. These are people who have personally profited from the Kremlin’s policies — and they should feel the pain too.”

The question is whether this particular elite actually will.

The Russian oligarchs are in many ways the perfect users of cryptocurrency — transactions are anonymous, fast and global. With relative ease they can sidestep the banking system’s money-laundering controls, or in this case, direct sanctions. You’d be hard pressed to think of a better way to hide the origin of your money and fund an international lifestyle.

The problem is well known. Most recently, in October last year, the US Treasury Department warned about the risks and described it like this: “Technological innovations such as digital currencies […] potentially reduce the effectiveness of American sanctions. The technology offers these actors the opportunity to hold and move assets outside of the traditional dollar-based financial system.” The report also showed the possibility for individuals, as well as states and other groupings, to use these methods at scale.

The report’s big shortcoming was a clear plan for how to solve the problem. More coordination between states was proposed, along with hiring people with cryptocurrency expertise. Now, less than six months later, you can assume the solution is still a long way off.

Expertise in the field is certainly plentiful — but on the criminal side. Even without direct state involvement, multi-billion-dollar sums already flow through these systems. Around SEK 130 billion was swindled there in 2021.

Eastern Europe plays a lead role. For one, money laundering from criminal activity in the region is growing sharply. Second, analytics firm Chainalysis, which tracks transactions on blockchains, showed in a 2021 report that 75 percent of the money flows on so-called darknets — a part of the internet that is often encrypted and anonymous — came from a single marketplace, Hydra. What’s particularly interesting about Hydra is its language: it is only available in Russian.

For Russian oligarchs, finding local expertise that can facilitate transfers of enormous sums should therefore not be especially hard. Hydra is a highly sophisticated marketplace that has built its own logistics system to deliver drugs and other products without using existing postal systems. The business can best be described as a large enterprise. Between July 2019 and June 2020, $1.2 billion — over SEK 11 billion — was sent from Hydra to Eastern Europe. That makes it one of the largest crypto exchanges in the region.

Cryptocurrency isn’t the solution to every sanctioned person’s or state’s troubles, however. Russia is a major exporter of oil, and the global oil price is listed in US dollars. That means avoiding the currency entirely is difficult.

With new analysis tools, transactions are also more traceable than many users may have thought. In a noted case in the US, a couple tried to launder SEK 42 billion in cryptocurrency but were identified using new systems that worked through thousands of transactions designed to frustrate tracing. The flows may be anonymous, but, as the US case showed, they are also traceable. And when the cryptocurrency eventually has to be converted to ordinary currency, the risk of being identified rises — no matter how rich you are.

Amazon’s hidden business — worth more than many countries’ GDP

February 25, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on February 25th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

What has revenues of SEK 290 billion, grows 32 percent a year and is almost invisible to its users? Amazon’s advertising business, which has grown bigger than Twitter, Snapchat and Pinterest — combined. And Amazon isn’t alone in hiding billion-dollar side projects.

When Google renamed itself Alphabet in 2015, management needed a new way to explain its business to the stock market.

They made it easy on themselves.

Alphabet would consist of two parts: one that grouped all of Google’s products, and one that held absolutely everything else. The latter was called “Other bets”. A few years later, YouTube was also promoted to its own line in the financial reporting.

Inside “Other bets” you find, for example, Waymo, which works on self-driving cars, and health tech company Verily. The total revenue for “Other bets” came in at around SEK 7 billion in 2021. A sizeable sum for most companies in the world. But compared with Alphabet’s other revenues, it’s close to a rounding error — only around 0.3 percent of the total. And even though the costs for the segment are considerably higher, it still gives the company a degree of freedom for new ventures, since investor attention is mostly on the larger numbers.

Hiding billion-dollar businesses isn’t something you do alone.

Facebook Marketplace is reported to be the world’s second-largest marketplace by active users. It sits as a discreet tab in the app and is rarely touched on in owner Meta’s communications. But by user count, it exceeds companies like American eBay and Chinese Taobao. That’s an achievement most other companies would likely want to make a big deal of — instead it sits hidden as an asset that neither lawmakers nor the market keep a close eye on.

The unchallenged number one among marketplaces, though, is Amazon. And they hold the biggest secret in this category.

For many years, Amazon has reported multi-billion-dollar revenues in a category simply labeled “Other”. Out of that category, they have now for the first time broken out SEK 292 billion for 2021 in a new segment named “Advertising services” — in other words, the company’s ad sales. To get a sense of the size: “Advertising services” would be Sweden’s second-largest company by revenue.

Those who’ve used Amazon to buy products may not have even registered that the site or the app has ads. But the model is, to a large degree, identical to the one Google uses — namely, search ads. Since Amazon has many third-party sellers offering products on the platform, there’s a constant fight over who shows up at the top of the search results. To make sure their own products get enough visibility, sellers buy ads from Amazon. When the product is then sold, Amazon gets paid a second time.

The ad volume also hints at the enormous number of visitors Amazon has. Search advertising is an established category, but the challenge tends to be having enough traffic for it to matter. Compare that with a company like Microsoft (which owns the search engine Bing): it had just over SEK 90 billion in ad revenue in 2021. The corresponding figure for image search engine Pinterest was around SEK 24 billion. The world’s second-largest search engine, YouTube (owned by Alphabet), admittedly has several different ad formats, but measured by total ad sales, Amazon is still larger.

The tech giants’ main businesses are so enormous they easily overshadow everything else. But the numbers make a previously unknown picture clear: Amazon isn’t just one of the world’s largest e-commerce companies — it’s also one of the world’s largest advertising companies. And they’ve become so through individual projects and initiatives that have made them far bigger than the competition.

When trying to grasp the scale of the tech giants’ influence, this is worth keeping in mind: their side projects are worth more than many countries’ GDP. Suddenly the idea of regulating them feels a lot less controversial.

The heist of the century: a married couple laundered SEK 42 billion

February 17, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on February 17th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

A rapper and a startup entrepreneur are suspected of laundering SEK 42 billion in cryptocurrency. The case is a problem for a crypto world that is trying to shake off its association with organized crime.

New York, January 5th, 2022. A group of criminal investigators is holding a search warrant. They knock on the door of an apartment in lower Manhattan. On the inside is a married couple — a Russian-American entrepreneur, and a writer and part-time rapper. The two are suspects in one of the largest cryptocurrency money-laundering cases ever, worth the equivalent of SEK 42 billion.

While the investigators search the apartment, the couple offers to leave. But first they want to take the cat. As the woman lies down on the floor to coax it out from under the bed, she also grabs her phone and tries frantically to lock it. On the phone, most likely, is information she doesn’t want the authorities to find.

In total, more than 50 other electronic devices are seized, along with around SEK 370,000 in cash, and two books whose pages had been cut out by hand so they could serve as secret hiding places. If that sounds like it is straight out of a movie, others agree — Netflix has already commissioned a documentary about the rather improbable couple’s attempt to launder billions.

Beneath the spectacular surface is an interesting lesson. Cryptocurrencies have often been associated with organized crime because the anonymity and absence of official institutions have made it easy to move money without getting caught. But even if something is anonymous, it can still be traceable. Unlike cash, the flow of money here can be followed relatively clearly, because every transaction is recorded in a blockchain — a kind of digital ledger that underpins cryptocurrencies. You don’t see who owns the money, but you do see where it goes.

In a 20-page document, an investigator at the IRS, the US tax authority, explains how they managed to identify the couple. Through flow charts and detailed technical explanations, a complex picture is painted of how fictitious people and companies were used, and how thousands of small transactions were carried out to make the trail harder to follow.

The IRS investigators were able to track the money through thousands of transactions — all the way from the initial theft in 2016 to the last account that held the cryptocurrency.

In the end, the couple seems to have been uncovered because of what is a common critique of cryptocurrencies — there still isn’t that much to do with them. So at some point the currency had to be moved to marketplaces where it could be swapped for something more useful, like regular money. The couple used bitcoin ATMs, bought digital artworks (so-called NFTs), and invested in physical gold in order to put the cryptocurrency to use. But some of these transactions required some form of ID, such as registering a driver’s license. That is how the IRS investigators were able to trace the money through thousands of transactions — all the way from the initial theft in 2016 to the final account. That the couple was behind the original theft has not been proven.

To curb this kind of crime, a new type of analysis firm is emerging. Companies like Chainalysis and Ciphertrace (recently acquired by Mastercard) map the relationships between flows of cryptocurrency on different blockchains — something that can make laundering harder. The need is enormous. In a combination of hacker attacks and more ordinary fraud, one estimate suggested that over SEK 130 billion was stolen using cryptocurrency in 2021, according to Chainalysis. The real number, it should be said, is probably much higher.

The suspicions against the couple — which have attracted wide media attention, the theft being called the heist of the century — are a problem for both the crypto and the finance world, both trying to clean themselves up from associations with the darker side of society. New processes and tools have allowed several high-profile cases to be investigated, and much of the stolen money recovered. Large players like Mastercard realize that they need the latest analytical tools to avoid becoming a tool for money laundering, which in the end is a question worth many billions.

A problem like this can ripple outward — even in the more traditional US finance industry, there are now over 15 exchange-traded funds that invest in bitcoin.

During last weekend’s Super Bowl in the US, many crypto exchanges bought expensive TV ads trying to attract retail investors. But if you don’t feel your assets are safe, the ad spend may well be wasted. A problem like this can ripple outward — even in the more traditional US finance industry, there are now over 15 exchange-traded funds that invest in bitcoin.

The example from New York shows, though, that there is a good way to go when it comes to security and trust. It wasn’t drug cartels that laundered billions in this case, but an entrepreneur with a background from the storied startup accelerator Y Combinator. His wife wrote columns in the business magazine Forbes — and rapped in her spare time. If this media-savvy middle-class couple almost got away with a billion-dollar crime, how many more are going on right now?

Microsoft’s gaming deal is a threat to Apple

February 3, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on February 3rd, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

After Microsoft’s and Sony’s billion-dollar gaming deals, attention turns to the quietest gaming giant of all — Apple. Now the tech company may be forced to change its strategy to keep up.

In the tech world, the strongest position is often the one you don’t see. It might be being taken for granted, the way a web search is now just called “googling”. It might be the hidden infrastructure running the internet, like Amazon’s cloud service AWS, with its 32 percent market share. Or it can mean not even being seen as a player in a market where you are actually one of the leaders.

This is what CEO Satya Nadella hinted at when he framed Microsoft’s acquisition of Activision Blizzard for more than SEK 600 billion — the largest deal in gaming history. In the presentation that followed, where he gave the background to the transaction, there was a very telling sentence:

“Today, we face strong global competition from companies that generate more revenue from gaming distribution than we do from our share of game sales and subscriptions.”

Nadella named no names, but the target was clear — Apple.

The company is rarely counted among the gaming giants, since it does not make any games. But in the most recent quarter alone, Apple had revenue from its “services” segment of nearly $20 billion. Most of that is commission on app sales in the App Store, and the majority of those dollars comes from games.

There is no doubt, in other words, that gaming is important to Apple. But the reverse is also true — Apple is enormously important to the gaming world. Together with Google Play, the store for Android phones, the two tech giants effectively have a duopoly over anyone who wants to reach mobile gamers. If you want to distribute your game through the App Store, you also have to pay 15 or 30 percent of the revenue to Apple. The high-profile Epic Games lawsuit is essentially about exactly that.

Microsoft’s mega-deal — and Sony’s acquisition this week of the game studio Bungie for SEK 33 billion — could be the start of something bigger that shifts this balance of power. Microsoft and Sony already own their respective consoles, Xbox and PlayStation, but the new acquisitions are mainly about software. The companies want to expand their subscription businesses, where players pay monthly, moving away from the sale of individual titles. The assumption is that players will follow the best titles, and in some cases access them on any hardware. The subscriptions also go around Apple’s store. The dynamic echoes when Netflix swept in and took over the video market from iTunes, which sold and rented movies and TV series one at a time. Apple does not want to repeat that mistake.

The company does have its own gaming subscription, Apple Arcade, but it relies on licensing games from other developers. As gaming consolidates under competitors, there is a risk that the best titles will no longer be available to Apple — neither for licensing to Arcade, nor for distribution via the App Store. That would lead to billions in lost revenue. Apple suddenly starting to buy a bunch of its own game developers is not particularly likely given how the company usually does deals, but the revenue is important enough that it could force Apple to change its otherwise very clear acquisition strategy.

In the newsletter “Power On”, Bloomberg journalist Mark Gurman has gone through Apple’s various acquisitions. He notes that Apple likes to buy companies when they add one of two things: a single hardware component (like the company Authentec, which became the Touch ID fingerprint reader) or software (like Beddit, which became the sleep tracking on Apple Watch). The priority, in other words, is buying development time rather than new brands or products.

But there is one big exception — the acquisition of Beats Music and Beats Electronics in 2014. The streaming service Beats was renamed Apple Music, but the Beats headphones kept both their brand and their identity. Getting quickly into music streaming was strategically important. And as Apple now faces a similar fork in the road in gaming, it is possible that it needs to think about acquisitions that look more like Beats in structure.

Where, in that case, should Apple look? If the checklist includes a strong brand, a history of integrated hardware and software, and a gold mine of content and characters to build from, all the arrows should point in one direction.

Nintendo.

It would be a deal that has the potential to top Activision Blizzard in size. The Japanese game company Nintendo has a market cap of just over SEK 530 billion today. With a solid premium to get the deal done, we’d probably land well above the SEK 600 billion Microsoft spent. A high price, but Apple can afford it. The company sits on a war chest of over SEK 1,800 billion and hasn’t made a big acquisition in many years.

It would be an unusual, but not impossible, deal. The gaming market today is so important that it demands larger and bolder bets. Microsoft has already made one. Will Apple follow?

Why TikTok, Zuckerberg’s nightmare, might also be his rescue

February 3, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on February 3rd, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Meta’s stock collapsed after Mark Zuckerberg singled out TikTok as one of the main reasons company growth is weaker than expected. At the same time, the Chinese app may be the answer to one of his hardest problems.

Under pressure and slightly stumbling, Mark Zuckerberg, CEO of Meta (formerly Facebook), tried to explain why the company’s forecasts for the future no longer looked as rosy as before. The company is facing, he described, a possible paradigm shift within social networks.

“This really isn’t the first time we’ve gone through a big format shift,” Zuckerberg assured the analyst community.

That squares with the history. The shift from computer to mobile was one such moment, and Facebook handled it well — through the Instagram acquisition, but also through a successful move of both ads and users. Today Meta is primarily a mobile company.

But then came the words that revealed the situation is different this time around.

“What is somewhat unique here is that TikTok as a competitor is already so large, and they continue to grow quickly from a big user base.”

What followed was a collapse in the stock.

The shift from computer to mobile was driven primarily by user behavior and the rise of smartphones. This time, it’s a competitor — TikTok — driving the change in social networks. That is a threat Meta hasn’t had to handle in this way before. And it seems to have unsettled the company.

TikTok is a reminder that even the most established market leaders sometimes get competition from an unexpected direction.

And it can happen fast.

In 2017, the Chinese company ByteDance acquired what was described as a “lip-sync app” called Musical.ly. The following year, it was merged with a new, similar app called TikTok. That also became the brand that was launched around the world, with the exception of its home market China, where the equivalent is called Douyin. After huge ad investments, TikTok became the most downloaded app in the world in 2021.

TikTok is therefore a big headache for Mark Zuckerberg, since he is both trying to convince the market of the metaverse as a future vision and keep his existing business running. A metaverse that earns real money is not something we’ll see for several years — hundreds of billions are to be invested before it can even begin to be realized. And most new initiatives from the company — except Instagram Reels, a TikTok clone — have struggled to get traction. Does anyone remember Facebook Dating, which launched in Sweden in 2020?

But there is one area where TikTok might actually be something of Mark Zuckerberg’s rescue — handling antitrust law. The fact that TikTok is a Chinese app that operates, and now dominates, an American market is one of the US tech giants’ primary counterarguments against the political pressure they are facing. Should foreign companies be allowed to operate freely in the US while their American counterparts have specific laws to follow?

Even the lawmakers themselves have noticed this complexity. In a podcast interview with The New York Times, Lina Khan, head of the FTC, asked the question herself of how to handle different regulations for companies operating in the same market. But she didn’t have a good answer. Perhaps TikTok — and the fear of a China-dominated internet — is exactly what Zuckerberg needs, after all, to get a little breathing room.

New patents reveal Zuckerberg’s plans for the metaverse

February 1, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on February 1st, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Mark Zuckerberg is spending hundreds of billions of kronor to build the next generation of Facebook — what is now called the metaverse. A set of new patents reveals how it is meant to pay itself back.

On a trade-show floor in Barcelona, a confident Mark Zuckerberg walks through the crowd in a gray t-shirt and jeans. He looks relaxed for the CEO of a company whose market cap, even then, in 2016, was around $300 billion (today the number is roughly three times higher). Right there, in that moment, the seed of what would become the next generation of Facebook was arguably planted. Nobody quite noticed.

The moment was captured on camera and got plenty of attention, but not because of Zuckerberg’s light step. What made the image interesting — or dystopian, depending on how you see it — is the background.

Facebook’s partner Samsung was holding a launch event for a new phone, and anyone who preordered it got free VR goggles. So as Zuckerberg walks toward the stage to talk about the future of virtual reality — and indirectly about his own company’s future — he passes a sea of seated people, each wearing a VR screen in front of their face. It looks strange, to say the least. Is this the future?

Looking at Meta, formerly Facebook, and its investments today, it at least appears to be. Ahead of the quarterly report out on Wednesday, the company has for the first time broken out this new segment in terms of revenue and costs. The business area is called “Reality Labs” and includes both hardware and software related to virtual reality and augmented reality (AR).

The difference — which may not be obvious to everyone — is that virtual reality is a fully virtual world you step into. Augmented reality is a digital layer on top of the real world, where digital objects are placed in a view seen through a camera, phone, or pair of glasses.

This is what is supposed to create the much-talked-about metaverse. No launch date has been announced yet, and so far the area consists mainly of Oculus, Meta’s VR division, which came from an acquisition back in 2014. But more is on the way. And the business model will likely look different from how Oculus makes money today, which is through the sale of hardware and software.

The shift became clear when the Financial Times recently went through hundreds of Meta patent applications and found both systems for reading facial expressions and new ways of presenting ads. Judging from the patents, the company wants to build the metaverse as an animated 3D environment for socializing, working, and gaming — but one that still revolves around serving ads in time and space. One of the patents is a system for personalized ads in augmented reality based on how users interact in social networks.

Meta’s policy chief — and former UK deputy prime minister — Nick Clegg has described the company’s metaverse business model as “commerce-driven”, which another patent fleshes out, since it describes something resembling a virtual store. But what is on the shelves and available for purchase is essentially sponsored — in a simplified way, much like in real-world grocery stores. It is no accident which ketchup gets the best placement. The difference in the metaverse is that each person only sees the specific virtual goods the companies want them to see — in real time.

Taken together, the patents show that Zuckerberg’s vision is mostly an extension of the company he already runs today. Connect people digitally, make sure they spend as much time there as possible, and serve them ads. The more data you can collect, the more accurate the ads. The more people on the platform, the more money you make. That the metaverse is in 3D and looks like a game is almost beside the point. The underlying idea is the same one that drives Facebook, WhatsApp, and Instagram today.

What the 3D world does enable, though, is more data — and data of a different kind. VR goggles can capture facial expressions, and therefore pick up a type of emotional signal that is otherwise hard to measure. If you wrinkle your nose in front of your phone screen today, nobody notices. In a VR headset, that becomes a data point. And data — that is what sells ads, in Zuckerberg’s metaverse.

Microsoft’s big bet: building a Netflix for games

January 19, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on January 19th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Microsoft says it is doing the largest gaming deal in history to take on Facebook. But the real story points somewhere else — toward Netflix, and a gaming world on the brink of a revolution.

“Culture eats strategy for breakfast.”

Satya Nadella, CEO of Microsoft, quoted the legendary thinker Peter Drucker in his memoir about reshaping the Seattle tech giant. Apparently the line — that corporate culture beats strategy — is one of his personal favorites, and something he returns to often.

Tuesday’s deal, however, suggests almost the opposite. Nadella picked strategy over culture. He was willing to look past the criticism directed at Activision Blizzard’s top leadership, three dozen firings, and 700 reports of misconduct in order to get closer to his vision for a new Microsoft. The deal is worth more than SEK 600 billion — the largest in the company’s history.

Over the past five years, Microsoft has grown its market cap by more than 380 percent and rebuilt its position as one of the largest, most important, and most influential companies in tech. Bets on the cloud service Azure, the Xbox console, and turning the Office suite into a subscription have all paid off. Nadella has every reason to be pleased with both the strategy and the share price.

But as every big tech giant is starting to realize, more success also means more scrutiny. Lina Khan, the newly installed head of the US antitrust authority FTC, is an outspoken tech critic and is pushing a legal case to unwind Facebook’s acquisitions of Instagram and WhatsApp — despite those deals being ten and eight years old, respectively.

Microsoft has its own complicated history with antitrust law. The high-profile 2001 case about the Internet Explorer browser and its market dominance ended in a settlement. But it also marked, in some sense, the end of an era for Microsoft.

Nadella does not want to end up there again. Which is why it isn’t enough for him to make Microsoft’s and the gaming industry’s largest acquisition ever — he also needs to package it for the outside world, and for regulators, in the right way. And he does it by positioning himself against Facebook, and its new bet on the metaverse.

“When we think about our vision for what a metaverse can be, we believe there won’t be a single, centralized one. There shouldn’t be.” That was Nadella’s comment in connection with Tuesday’s purchase.

But Activision Blizzard is not a metaverse company. It is a collection of successful game studios behind some of the world’s best-known gaming brands, like World of Warcraft, Call of Duty, and Candy Crush. Sure, they can contribute something to the futuristic three-dimensional world that Facebook, Roblox, and Tencent have all described as the future. But the masterstroke here is framing the acquisition as a way to compete with Mark Zuckerberg’s big bet (the one that also led him to rename Facebook as Meta), rather than what it actually is — a massive consolidation of the biggest media category of our time. If the game studios help out with metaverse ambitions later on, it should probably be treated as a bonus.

Gaming is not new to Microsoft — the company has been active here for over 20 years. It already owns well-known studios like Bethesda, Double Fine, and Sweden’s Mojang, the studio behind Minecraft. In 2019 the gaming division was renamed Xbox Game Studios, which is a useful hint about where the focus lies. The Xbox console, which competes with Sony’s PlayStation and Nintendo, gives a far more plausible explanation for why this deal is happening now.

The answer is Xbox Game Pass. It is a subscription service where players get access to a large library of games for a fixed monthly price. Does the model sound familiar? If gaming continues to head in the same direction as movies and TV series, the big deal is really a step toward becoming a new Netflix — but for games. Owning one of the world’s largest gaming companies is a major move in that direction.

Just like Netflix, the game is to offer the best content. You get there by buying gaming’s equivalent of hit shows and star directors. Microsoft’s game portfolio will now include brands like Diablo, Fallout, and the already-mentioned World of Warcraft and Call of Duty. A better setup for growing on the already 25 million Xbox Game Pass subscribers is hard to imagine.

Nadella has the strategy clearly in front of him — and the confidence to bet more than SEK 600 billion that he is right. If he can just keep the antitrust regulators at bay, he may well manage to reshape Microsoft into something that was almost unthinkable 20 years ago: a bigger and more influential tech company than ever.

Big tech is immune to the sell-off — everyone else is not

January 17, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on January 17th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

The tech sell-off is hitting hard — but not evenly. The very largest companies have entirely different problems. Like Washington, Brussels, and billion-dollar lawsuits.

High inflation, possible rate hikes, and the risk that the US Federal Reserve will start easing off on its asset purchases. That’s been enough to rattle the stock markets on both sides of the Atlantic. And it’s been especially rough for tech stocks.

In Sweden, for example, cloud services company Sinch and the magazine platform Readly have lost over 11 and 15 percent respectively so far this year. In the US we’ve seen drops of more than 15 percent for hyped-up newcomers like UiPath (automation), Braze (communications), and Squarespace (websites and e-commerce).

But the sell-off doesn’t hit everyone equally. The very largest tech companies have served as the locomotive for a big chunk of US market performance for some time now, not just within their own sector. Research from the analysis firm Gavekal shows that since May 2021, half of the gain in the S&P 500 has come from just five stocks: the familiar Apple, Microsoft, Google, Tesla, and chipmaker Nvidia.

The picture that emerges is of a tech sector splitting into two distinct camps that both behave — and get treated — very differently: big tech and everyone else.

The first category holds giants like the ones just mentioned. Mature public companies that still post strong growth, several of them with good profitability. They’ve fallen only a few percent overall. These are companies so established that everyone has to factor in their plans and moves — even non-competitors.

The biggest risk they face isn’t the stock market — it’s politics. In the UK, Meta (formerly Facebook) was sued for around SEK 28 billion for improperly using user data. In the US, a federal judge recently let another lawsuit against Meta from the Federal Trade Commission proceed. The FTC contends Facebook has become a monopoly and is threatening to unwind its acquisitions of Instagram and WhatsApp, which took place in 2012 and 2014 respectively.

The courts will settle the legal question, but the market already treats Meta like a monopoly. The same goes for the other big-tech companies in the category. A mobile market without Apple is unthinkable. Amazon becoming less relevant in US e-commerce is a highly unlikely scenario. And searching online has long been synonymous with “googling”.

In the second category you find the next generation of companies. Smaller, fast-growing firms investing at the expense of profitability. Companies like Bumble (dating), Duolingo (language learning), and Affirm (payments). Often they’ve gone public out of a venture-backed environment where growth is prioritized above everything else.

This is the category that has taken, and is taking, the hardest hit as investors seek less risk in their portfolios. On the US market, this category has gone from being traded at an EV/Sales multiple of 16 times in February 2021 to around 7 times revenue now, according to Goldman Sachs.

How worried tech companies should be about the market may therefore depend, to some extent, on which category they belong to. And for those that haven’t made it public yet, the window may have closed, at least temporarily.

This week, the first IPO of the year, from HR company Justworks, was postponed — with a reference to “current market conditions”.

Apple’s App Store rules are strict — unless you’re China

January 13, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on January 13th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Apple’s strict App Store rules are well known — but for China, the company keeps inventing exceptions. When the Chinese state launches its own cryptocurrency in the app store, expect Apple to bend its own rules once again.

Tim Sweeney, CEO of Epic Games, summed up the much-covered App Store trial in a single sentence: “Apple has complete control of all software on iOS.”

The App Store is owned by Apple, and therefore controlled by Apple. But should it be? By and large, yes — at least according to the recently concluded case. Apple won on nine of ten counts, giving it, in broad strokes, a free hand to keep dictating the terms of its own app store.

That’s exactly why it’s worth looking more closely at how these terms are actually enforced inside Apple’s ecosystem. And more specifically — when they aren’t enforced at all. In China, for instance, the exceptions have been more numerous than anywhere else. The market — one of Apple’s most important — has been one of Tim Cook’s top priorities since he took over as CEO. And to stay on the right side of Chinese authorities, Apple has had to make many departures from rules it holds to firmly elsewhere in the world.

There’s no shortage of examples.

Tencent, one of China’s (and the world’s) largest tech companies, has an app called WeChat. At first glance it looks like an ordinary chat app, but it functions increasingly like an entire mobile operating system of its own. You can talk to friends, pay for services and products — and install fully independent apps, inside WeChat itself. That may not sound particularly controversial, but it cuts against one of the most fundamental principles of the App Store. Or, as Philip Shoemaker, who was responsible for enforcing App Store rules until 2016, told The Telegraph:

“Apple grants WeChat a specific exception that they don’t grant anyone else in the world. It’s basically rule number one — you can’t have an app inside another app. WeChat is the only one allowed to.”

The exceptions go beyond the App Store.

Last summer Apple launched its privacy initiative “Private Relay” — a way to reduce data tracking of individuals. But the change didn’t apply in every country. Neither China, Saudi Arabia, nor Belarus was covered by the new policy.

Pulling apps that don’t suit China is an issue that has even reached Apple’s shareholders. Ahead of the March AGM, a proposal has been filed calling for Apple to give more transparency around apps that have been removed because of government pressure. Since 2017, 55,000 apps have disappeared from the Chinese App Store, according to the proposal. Apple’s board recommends that shareholders vote the proposal down.

Ahead of the Winter Olympics in Beijing comes the next challenge for Apple in China. The Chinese state has just launched a wallet app for the digital currency issued by the Chinese central bank. The idea is that the sports event will act as the launch for this new digital way to pay. That may sound smooth, but a senior official at the British intelligence service also described it as “the ability for a hostile state to surveil transactions”. The anonymity often touted as a benefit of cryptocurrencies risks being stripped right out.

The question now is whether Apple will also make an exception to its rules on cryptocurrencies in apps for China’s sake. Philip Shoemaker’s guess is that it will. Apple has taken a cautious stance on these apps until now, likely because the risk to individual consumers has been judged to be high. But if China’s aim is to build a parallel payment system, this may require yet another revision of the rulebook.

In many ways, Apple’s position has painted the company into a corner. On one hand, the picture of a mobile ecosystem that’s safe and secure is a foundational part of Apple’s self-image and its marketing. On the other, holding on to China as a large and growing market is of the highest possible priority. On top of that come new phenomena in the increasingly important gaming market that have been off-limits so far — so-called play-to-earn, a way to earn cryptocurrency through games. If Apple’s argument is that user privacy is the most important thing of all, it becomes hard to explain why the rules get adjusted as soon as a large and important market complains — or a new and profitable trend shows up.

Why the next Theranos is already being funded

January 4, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on January 4th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

One of Silicon Valley’s most celebrated companies turned out to be a fraud, in the legal sense of the word. But the investors who got taken in will probably fall into the same trap again.

“This is what happens when you work to change things. First they think you’re crazy, then they fight you, and then — all of a sudden — you change the world.”

Dressed in her now-famous black turtleneck and blazer, Elizabeth Holmes, CEO of the American blood-testing company Theranos, tried to explain away a critical article in the Wall Street Journal. She went on CNBC and said she was shocked that the paper had published claims that the company had problems, given that she had sent over thousands of documents she said proved the opposite.

That was 2015. It’s now 2022, and the article turned out to be largely correct. On Monday evening, Elizabeth Holmes was convicted of defrauding her investors. She now faces several years in prison.

What the trial has really been about is where the line sits between a genuine failure and deliberate fraud. That Theranos’s blood-testing machines didn’t work the way they were supposed to — that’s not in dispute. But Holmes had presented both their function, their precision, and her customer contracts in a way the court found to be on the wrong side of the law. She was acquitted on other counts relating to patient fraud, and on several more the jury couldn’t agree at all.

The trial has drawn a massive press corps and huge public interest. Holmes, who once appeared on the cover of a magazine under the headline “The next Steve Jobs”, has likely inspired a fair amount of schadenfreude. The company was valued in the billions and had some of the most prominent investors in the world — among them media mogul Rupert Murdoch and the Walton family, founders of Walmart.

The spectacle hides similarities with plenty of more ordinary companies. The phrase “fake it till you make it” — pretending while you try to catch up with what you’ve promised — is an extremely common philosophy among startups in both Silicon Valley and Sweden. Founders almost always have a big vision of what they want to build.

For a small number of companies, all it takes is time to actually get there, while most others fold or pivot long before. Dressing up what your company can do in front of users, investors, and prospective hires is essentially standard.

Since these exaggerations are so common, you have to ask what the investors actually knew about Theranos before they put money in. Did they even understand how hard the problem was that Holmes was trying to solve? And if so, how close the company really was to a solution? The questions that got asked were partly limited by the fact that Holmes avoided taking money from more specialized venture-capital firms. Instead, she talked to wealthy families whose expertise was limited.

But the real mistake here may have been the fear of missing out on a good deal. There simply isn’t time to find out how much is actually true. Because before you do, the company may have picked other investors instead.

Can a trial like this change how investors approach due diligence? Angela Lee, who teaches venture capital at Columbia Business School, doesn’t think so. “People don’t want to miss a good deal. If anything, I’ve actually seen an even faster timeline for due diligence in recent years”, she told Bloomberg. She also confirmed how common exaggeration and embellishment are among founders: “I would say 15 percent of founders do this every day.”

It’s easy, as they say, to be wise in hindsight. After the Theranos scandal broke, investors came forward to say that they had seen something was off. But every day, half-truths are presented by entrepreneurs at an accelerating pace.

Similar events are therefore likely to happen again. When the fear of missing an investment opportunity is greater than the risk that something doesn’t add up — it’s only a matter of time before we see the next Theranos. If not in court, then at least in bankruptcy.