Apple’s Masterstroke Is Systematically Crushing Its Rivals

October 28, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on October 28th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Apple’s privacy strategy is a masterstroke that is systematically crushing rival tech giants. But behind the scenes, the motives are less noble.

Rarely has an aggressive business strategy been framed so elegantly as Apple’s “privacy is a fundamental human right.”

It sounds consumer-friendly and principled. But the practical consequence of that sentence is currently erasing billions in revenue at Apple’s competitors.

The abbreviation ATT — App Tracking Transparency — is what it all comes down to. Through a change to Apple’s operating system earlier this year, the company made it effectively impossible for other businesses to track which of their ads actually work.

This was all done, so the story goes, to protect users’ privacy from being tracked in inappropriate ways.

Many iPhone users have by now grown accustomed to saying yes or no when a newly downloaded app asks whether it can track them.

Fair enough. But among the motivations there were also less noble considerations. It was an indirect attack — on Meta (Facebook), Snap, and YouTube (owned by Alphabet).

The mobile gaming industry and e-commerce companies saw an immediate effect. They scaled back and redirected their ad spending to other platforms, hitting the companies mentioned above, who are the ones selling the ads.

Last week, Alphabet (Google), Meta (Facebook), Microsoft, Apple and Amazon all reported their quarterly results. These companies are often referred to collectively in this column — and elsewhere — as “tech giants.”

Scale is one thing they share, but their businesses and revenue models have always been quite different. And it is the companies with a particular kind of advertising at the core of their model that Apple’s strategy has hit hardest.

YouTube, for example, reported falling revenue for the first time ever — something several analysts attribute directly to Apple’s ATT.

For Meta, it was even worse. The stock fell almost 25 percent — to its lowest level since 2016 — after reporting results that fell short of market expectations.

CEO Mark Zuckerberg tried to explain the situation: “There are macroeconomic headwinds. There’s a lot of competition. There are advertising challenges — especially those coming from Apple.”

Back in February, Zuckerberg had said that Apple’s change would cost Meta $10 billion (around 108 billion kronor) in lost revenue during 2022.

What do these companies’ ads have to do with Apple? They are displayed on Apple’s hardware. And iPhone users are, in general, more sought-after in the advertising market — they spend more money on average than Android users. Billions are spent every month to reach precisely these users. A challenge that has now become significantly harder and more expensive.

Given the heightened tension, you might assume Apple has some principled objection to advertising. Not so.

Apple’s own advertising revenues are already estimated at around 44 billion kronor annually — a figure that, according to Bloomberg, is set to grow to over 110 billion.

On top of that, Apple expanded its own ad network this week. The App Store now carries more ads than ever before, and under headings like “our favourites for children” you could find direct ads for casinos.

Apple was forced to pause some of those ads the very next day, after developers complained. Targeted digital advertising is harder to get right than most people realise.

One might assume it is the global macroeconomic environment — war in Ukraine, rising interest rates, inflation — that is causing ad-dependent companies to lose revenue. The picture is more complicated.

Amazon — a far larger player in the advertising market than most people realise — posted advertising revenues of over 100 billion kronor in its third quarter. That is more than Twitter, Snapchat and Pinterest generate from advertising combined. And more importantly, that figure grew 25 percent compared to the previous year.

The same trend can be seen at advertising conglomerate WPP, one of the world’s largest buyers of ad space. They reported growth in advertising and raised their growth targets for the year. The overall advertising market appears to be doing quite well. Apple’s own ad revenues are growing.

But those who have been subjected to Apple’s rule change are going through a baptism of fire.

Apple introduced itself to the world with an ad called “1984” — a reference to George Orwell’s novel. Looking at how the company is behaving now, they seem to have drawn more inspiration from his other book, Animal Farm. All advertising is equal, but some advertising is more equal than others.

TikTok’s Content Moderators Are Having Nightmares About Their Work

October 25, 2022
by Björn Jeffery
SvD Näringsliv

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

TikTok’s algorithm has been praised as the best in the world at selecting content. But the hardest decisions are made by people who watch thousands of disturbing clips every day — for a wage of around one hundred kronor a day.

Luis, a 28-year-old Colombian student using a pseudonym, spoke to The Bureau of Investigative Journalism about the kind of content he has to watch as part of his job. Luis is a content moderator for TikTok, reviewing material uploaded to the platform. Several people interviewed by the TBIJ describe having developed nightmares and psychological problems from the work. To hit the targets set, moderators must watch between 900 and 1,000 videos per day. Pay for this is around 2,800 kronor a month — barely above the Colombian minimum wage.

Much of TikTok’s success is attributed to its algorithms — the software that determines which content is shown to each individual user. It is personalised, so each person gets the content the algorithm thinks they will watch. But that should not be confused with content they actually want. There are countless examples of users being served material they dislike, yet end up watching anyway — something SvD documented in an investigation last year, which focused on eating disorders. That is far from the only example.

With sophisticated algorithms, you might expect this kind of offensive material to be filtered out automatically. But the internal systems designed to do that are far from adequate. Human moderators are needed to fill the gap, manually reviewing disturbing videos.

There is another reason the system works this way: it is cheaper. Roy Carthy, head of marketing at moderation company L1ght, told TBIJ that competing with those low wages simply isn’t possible. For TikTok, solving this problem technically is not profitable.

The situation is familiar. A few years ago, news site The Verge reported how Facebook moderators were developing symptoms resembling PTSD — post-traumatic stress disorder — without being entitled to any support from the companies purchasing their services. Both Facebook and TikTok use subcontractors in low-wage countries for this work, increasing the distance and reducing visibility into exactly how it is conducted and what is done to support the workers.

Another worker, named Alvaro in the TBIJ report, says “you have to work like a computer. Say nothing, don’t lie down, don’t go to the bathroom, don’t make a cup of coffee, nothing.” He describes the home environment that many moderators work in, where they are also monitored by video cameras by TikTok’s subcontractor. Bonuses are paid based on the number of videos watched. Alvaro received a written warning after watching only 700 videos in one shift.

Once again, we are confronted with the priorities of large tech companies. That people upload inappropriate or outright illegal content is not the platform’s fault — individual users are responsible for that. But when platforms create the infrastructure for it, you can be certain of what will follow. No one can reasonably claim to be surprised by the outcome.

As a user, you can sometimes marvel at how good free services are. How can all this content — entertainment, information, culture — be delivered to your phone at no cost? But there is almost always a price. It is just that someone else is the one paying it.

Ark Kapital: Tailored Financing for Startups

October 23, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on October 23rd, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

What happens when venture capital dries up for software companies? A new industry of alternative financing emerges. Ark Kapital is one of them.

It might seem like a return to an older era. How did companies get funded before venture capitalists started investing our pension savings? Often, with loans.

Getting a bank loan when you had a factory and wanted to build another was relatively straightforward. Startups today don’t have that luxury. The risk is too high and companies are usually at too early a stage for banks to feel comfortable lending.

As venture capital becomes more cautious, a new type of player is emerging — lenders who use companies’ own business data to secure their credit decisions.

Ark Kapital connects directly to customers’ internal systems to assess risk and need. It is essentially the opposite of the big banks’ somewhat rigid model — a system built explicitly for fast-growing software companies.

Because many startups are so-called SaaS companies — offering software as a service — it is easier to forecast how their revenues will develop. With predictive models, you can also calculate what effect additional capital might have on the business.

Ark Kapital is part of a new wave of fintech companies beginning to emerge. Startups as a customer category have grown large enough that dedicated services are now being built on their terms. The established players are left standing still, at risk of missing this new wave of customers entirely.

Business model: Providing loans to software companies — a customer category that has historically struggled to get this kind of support from major banks. Founders: Henrik Landgren, Oliver Hildebrandt, Axel Bruzelius. Notable figure: Has raised 3.3 billion kronor in investment capital.

Moonpay Wants to Become the PayPal of Crypto

October 23, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on October 23rd, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

The PayPal of crypto — that is what Moonpay is trying to become. Whether they succeed or fail will say a great deal about how the wider crypto market develops.

Crypto company Moonpay made a splashy entrance into the startup world when it raised one of the largest investment rounds ever for a young company — $555 million, around six billion kronor. The idea: to let people buy cryptocurrency and NFTs using ordinary credit cards.

The concept might not sound especially radical, but anyone who has tried to buy and sell cryptocurrency knows it is anything but simple. Moonpay is trying to be the bridge that makes it possible to both acquire and use cryptocurrency.

Actually being able to spend your bitcoin on something is also an unsolved problem. For the sector to achieve a real breakthrough, cryptocurrency needs to become normalised and usable in ordinary shops. That is what makes Moonpay worth watching — they are a telling indicator of how that development is going.

Will it become a new payment method for the masses? Or will we look back on it as a technical experiment that went off the rails?

Business model: Enable people to buy cryptocurrency and NFTs using ordinary credit cards. Notable figure: Raised six billion kronor to become the PayPal of cryptocurrency.

Netflix Launches Ads in Bridgerton and Stranger Things

October 19, 2022
by Björn Jeffery
SvD Näringsliv

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

In an increasingly squeezed streaming market, Netflix is launching a cheaper, ad-supported tier. But the company may need more radical change to stay competitive.

That was the mood back in April, when Netflix announced it had lost subscribers for the first time in ten years. The stock dropped more than 25 percent immediately. The share price has stayed under pressure, with the company down nearly 60 percent since the start of the year. Markets were therefore watching closely when Netflix presented its quarterly results on Monday evening, eager to see how the company was holding up amid roaring inflation and an approaching recession.

The feeling was something like a comeback. In a letter to shareholders, Netflix now says “we believe we’re on a path to re-accelerating growth.” The company added more than twice as many new subscribers as the market had expected, and the share price surged in after-hours trading. Revenue was slightly lower than the previous quarter, however — so the key factor was really the low expectations set earlier in the year, rather than a clear-cut turnaround.

Much of the way forward will hinge on the new ad-supported tier Netflix is launching in November. The aim is to attract new customers at lower prices — not to push existing subscribers to downgrade. The launch covers twelve countries, though Sweden is not on the list yet.

The ad-supported model is borrowed from Netflix’s closest competitor, the American streaming service Hulu. Hulu offers two types of subscription — one with ads, one without. The latter costs roughly twice as much, but it is actually the ad-supported tier that generates more revenue for Hulu overall. This is an income stream Netflix cannot afford to ignore, even if they held out for as long as they could before looking at advertising solutions.

Looking at the competitive landscape, Hulu sits at the centre of that too — even for the Swedish market, despite the service not being available here. The reason: Hulu is owned by Disney. They hold a majority stake and will be required to buy the remaining 33 percent from telecoms giant Comcast in January 2024. The deal came about after Disney bought 21st Century Fox for $71.3 billion at the end of 2017, gaining a majority of Hulu in the process but negotiating the right to buy out Comcast later. That moment is just over a year away. At that point, Disney will own three separate streaming platforms — Hulu, Disney+, and the sports service ESPN+.

Does that sound complicated? It is. Which suggests more mergers and consolidation to come. You only need to look at deals already agreed to see where this is heading.

Discovery and Warner Media — owner of HBO and CNN, among others — are currently in the middle of a merger that has led to mass layoffs and internal confusion. The resulting company also has two streaming services of its own: Discovery+ and HBO Max. One of the smaller players, Paramount+, is considering merging with the film service Showtime.

So there will be fewer owners of streaming services. And that will likely mean fewer — but larger — platforms competing with each other.

This is Netflix’s core challenge. From being seen as a tech giant, they have shrunk so much on the stock market that they could plausibly be a takeover target themselves.

Big players like Apple and Amazon still treat streaming as a small component of a much larger business. Apple doesn’t need to make money on TV shows as long as people keep buying iPhones. Amazon is happy if streaming brings in more Prime members. As one example, Amazon completed its acquisition of film studio MGM for $8.5 billion this spring — barely a third of what Amazon pulls in annually from Prime subscriptions alone.

Netflix’s quarterly results on Tuesday evening were a step in the right direction. Combined with the new advertising strategy, they could mark a fresh start for the company. But as competitors merge and grow ever larger, Netflix stands alone on the sidelines. Being independent was once a competitive advantage. Now it looks more like a risk.

Not Even Meta Believes in Zuckerberg’s Metaverse

October 12, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on October 12th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

The metaverse bet is costing billions — and prompted Facebook to rename itself Meta. The stakes couldn’t be higher, which came through clearly in the pre-recorded message that opened the company’s big developer conference.

Mark Zuckerberg, Meta’s founder and CEO, had a clear message for viewers as the company’s developer conference kicked off on Tuesday evening Swedish time. The metaverse — the three-dimensional world into which Zuckerberg has poured both his prestige and billions of dollars — deserves your belief.

The shift has permeated the company so completely that they changed their name, from Facebook to Meta. Giving up any time soon is simply not an option.

This also explains the slightly desperate, over-eager tone of the opening pre-recorded presentation. Meta needs this massive bet to pay off, and for that to happen, it needs to convince the world’s developers to start building on its new platforms. That the sales figures for select developers were among the first things mentioned was no coincidence. The message was clear: there is money to be made here.

Launching a new tech ecosystem for developers, companies and consumers is notoriously difficult. When Microsoft tried to launch a new mobile operating system in 2015 — Windows 10 — they spent hundreds of millions just convincing app developers to come on board, on top of billions in development and marketing costs. And that was for an established product category — a smartphone operating system — that everyone understood. It still failed, and the project was shelved just two years later.

What Meta is trying to do now is significantly harder. They need to explain why anyone would want to put on a large helmet-style headset and transform into an animated version of themselves. To make things even more complicated, they also need to build the hardware that makes it possible.

The question is entirely fair. Listening to Zuckerberg and his executives, it is all about creating meetings where you feel more “present” and can more easily “express yourself” — a “social” space where you can meet people, play games and work. The presentation featured Microsoft CEO Satya Nadella, who has this time decided to support someone else’s ecosystem rather than build his own. Soon you will be able to use the Office suite in a three-dimensional world. It is hard to believe that was top of anyone’s wish list, though.

Internal analytics showed that not even Meta’s own employees were using the product they were working on.

Even those closest to the project have started to doubt. Internally at Meta, the big metaverse project has reportedly — according to the New York Times — come to be known by the acronym “MMH”: “Make Mark Happy.” Keeping your boss happy is likely a powerful motivator at many companies, but as a business strategy it tends to leave a great deal to be desired.

In a leaked memo, Meta’s head of metaverse Vishal Shah urged staff to spend more time in the company’s flagship VR product, the game Horizon Worlds. Internal analytics showed that not even the employees working on the product were actually using it. Shah summed up the problem in a simple question to his colleagues: “If we don’t love it, how can we expect our users to love it?”

Second Life — influential but only modestly successful — launched back in 2003. Had it come out today, we would have called it a metaverse too. It was a 3D world where you could meet other people, socialise and take part in cultural projects. In 2007, Sweden even built a virtual Swedish embassy there. In hindsight, the project was simply too early, and the platform never really took off.

Now — almost twenty years later — many inside Meta are asking themselves the same question. Horizon Worlds has reportedly 300,000 monthly active users. Compare that to Facebook’s 2.9 billion and you get a sense of what lies ahead before the metaverse becomes a meaningful part of the business. Mark Zuckerberg is certain it will get there. But he appears to be largely alone in believing that, for now.

A Court Founded in 1792 Made Elon Musk Back Down — Now He’s Buying Twitter

October 5, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on October 5th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

A court founded in 1792 appears to have done something remarkable: made Elon Musk back down. And this before the trial had even begun. It now looks like he will become the owner of Twitter after all.

This sleepy little state, tucked just south of Pennsylvania and New Jersey, has found itself an involuntary centrepiece in the drawn-out battle between billionaire Elon Musk and social media giant Twitter.

In less than two weeks, a trial in Delaware was due to begin. It would determine whether Elon Musk was obliged to go through with the agreement he had signed to acquire Twitter for around $44 billion. In short: Musk appeared to have had second thoughts and wanted out. Twitter wanted him to go through with it. The court would have the final say.

It now looks like there will be no trial — though the very last word has not been spoken yet. Yesterday, Elon Musk’s lawyers sent a letter proposing that the original contract be upheld as intended, on the condition that the trial is put on hold indefinitely. In other words: the legal odds of Musk winning appear to have been rather slim.

Musk is used to getting his way, and has never been afraid of controversy — in his personal life or in business. Tesla, of which he is CEO, bought his cousin’s company SolarCity for billions despite widespread criticism. And just days ago, he proposed a peace plan for Russia and Ukraine that was met with both fury and mockery.

In the Twitter case, however, his real opponent was not so much the social media company itself as a state’s entire identity.

Delaware is, in a word, extraordinarily business-friendly. Its population is just over one million. Its registered companies number 1.8 million. In 2021, 93 percent of all IPOs came from companies incorporated there.

Most of those companies have no actual operations in the state — making it, in effect, a kind of American tax haven. Certain fees and taxes must still be paid to take advantage of these benefits. This is lucrative for Delaware, and has become a cornerstone of how the state earns its money.

Central to all of this is that everyone feels comfortable doing business with Delaware-incorporated companies. And this is where the court — the Delaware Court of Chancery, founded in 1792 — comes in. It is one of just three states with a court of this kind, and it differs from others in its more flexible approach to disputes in areas where there is no precise legislation. Corporate matters fall squarely in that category.

Twitter’s argument was straightforward: Musk signed a contract to buy the company. He had to honour it. This brought a fundamental question into the frame — one the Delaware court might be called upon to resolve. Are signed contracts no longer binding? Uncertainty over something this basic could prove fatal to business confidence. Previous cases in the same court have compelled companies to complete deals they tried to walk away from.

Musk’s argument was that the volume of spam and fake accounts was large enough to damage the company, and that he should therefore not be required to complete the deal. But even on that point, the court has precedents around what constitutes “material harm” — how significant the damage must be to matter legally. That threshold is very high: around a 40–50 percent drop in revenue. Musk’s alleged bot problem would not have reached that bar, even if his numbers were right.

It now appears that Musk is being forced to close his multibillion-dollar Twitter deal after all. His legal advisors presumably looked at the full picture and concluded they were likely to lose — if for no other reason than this: Delaware cannot afford to introduce uncertainty into business contracts. The entire state runs on simplicity, clarity, and the fees that come with them.

Elon Musk is stubborn, innovative, and has achieved many apparently impossible things — mass-producing electric cars, building reusable rockets. Funny, then, that it took a court from the eighteenth century to make him give in this time.

Kardashian’s Fine Signals a New Era for Crypto Regulation

October 4, 2022
by Björn Jeffery
SvD Näringsliv

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

Kim Kardashian’s million-dollar fine sends a clear signal to the crypto world: regulation is catching up. And nobody is safe.

Gary Gensler — chairman of the SEC, the US financial regulator — gave a speech at the Aspen Security Forum in Washington DC. Gensler had barely warmed his seat, having spent less than six months in his new role.

He then posed a rhetorical question: what does the SEC have to do with crypto?

Just over a year later, we have our answer: quite a lot. And it is only going to grow.

The Wild West era of cryptocurrency is drawing to a close, and regulators are now making it unmistakably clear that they are back in the game. How else do you interpret fining Kim Kardashian — one of the most famous people on the planet — for improperly promoting a cryptocurrency? Kardashian is neither the first, the last, nor the worst offender in this regard. But the signal value could hardly be greater.

In a slick, slightly tongue-in-cheek video, Gensler walks through how you often cannot tell whether the person promoting a cryptocurrency has been paid to do so, or whether their interests align with yours. So far, nothing especially radical. More interesting is the language used just above the video: the SEC charged Kardashian with peddling a “crypto security” — a crypto-based financial instrument.

That was precisely what was implied at the Washington DC speech in 2021. Cryptocurrencies should be treated like any other security, and we already have laws that regulate securities. The SEC stands for “Securities and Exchange Commission.” It was always inevitable that they would view this as a security.

Gary Gensler has credibility on these issues. He has taught courses on cryptocurrency at MIT. Within the industry, he has been seen as a guarantor that any new regulation would be workable and realistic — something that cannot always be said when politicians attempt to regulate technology. That said, crypto traders would probably prefer to keep things exactly as they are today — that is, an essentially unregulated market.

There is, however, a great deal that needs regulating. The scale of the problems has grown so large that it can no longer be dismissed as a niche issue. The cryptocurrency Terra, with a market cap worth hundreds of billions of kronor, lost 99 percent of its value in less than a month. The man behind Terra, Do Kwon, is now the subject of an international arrest warrant. Crypto lender Celsius Network went bankrupt last summer with a multi-billion kronor hole in its balance sheet. Just before the bankruptcy — and before customers had their accounts frozen — founder Alex Mashinsky managed to withdraw a large sum for himself. This was done, apparently, only to cover his taxes, according to a spokesperson.

On an almost daily basis, there are reports of people being hacked, technical failures that have wiped out savings, or outright fraud in the crypto space. Failing to take any legal action against this is becoming an embarrassment for regulators. That is the context in which to read Kim Kardashian’s fine — a warning shot of what is to come.

The regulation itself may turn out to be more familiar than many had expected. In another speech a few weeks ago, Gary Gensler said that “nothing in the crypto market is incompatible with securities laws.” This suggests there will be no bespoke regulatory framework for this new industry after all. Its participants may simply have to do what everyone else who deals in securities does — follow the laws that already exist. That could prove painful enough for the many reckless and unscrupulous players in the crypto market.

Viceroy Research’s Truecaller Bet Signals a New Era for Swedish Tech

October 3, 2022
by Björn Jeffery
SvD Näringsliv

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

Viceroy Research’s short bet against Truecaller signals a new era for Swedish tech companies. Financial actors actively looking for opportunities to sink them is the kind of challenge many newcomers have never faced.

A lot can happen in 18 months.

During the spring and summer of 2021 sentiment was still hot and IPOs followed one another in quick succession. Barely a year and a half later we are in the diametrically opposite position. Tech companies have crashed all over the world — in many cases losing well over 50 percent in value.

Now comes the next blow.

Short sellers have started taking positions in Swedish tech companies and are pushing their agenda as activists to drive them down further. When momentum has turned, it is easier than ever to push the price of individual companies lower.

The latest example came last week, when Viceroy Research announced that they had taken a short position in app company Truecaller. On Twitter they described the company as follows:

“Truecaller is a Swedish ad and spyware app powered by a public phonebook that purports to prevent spam (not a joke).”

Not mincing words. In a 29-page document, Viceroy Research goes through what they argue is Truecaller’s breach of GDPR and a long list of other objections. Truecaller has responded to the claims and called them “incorrect and false”.

Frequent readers of the business press may recognise the name Viceroy Research. It is the same firm that last winter accused Ilija Batljan’s real estate company SBB of being “uninvestable”. This has led to a long-running conflict that has probably consumed a great deal of time and energy from both sides. In SBB’s case too, the criticism came at a point when the share price had started to move downward, and it has fallen sharply since.

Tech company Sinch ran into something similar this summer. The firm Ningi Research shorted them while accusing their financial reporting of being misleading by billions. Sinch shortly afterwards changed the way they report, and dismissed their CEO.

Shorting, as is well known, means speculating on falling share prices, something that is hard to do when stocks only go up. As long as the market valued growth highly, plenty of companies had a strong share price regardless of what their fundamentals looked like. Now that the market has turned, earlier lofty valuations add extra fuel for the short sellers.

In several cases it has been enough for them to argue that the company is overvalued. When they then make their case public, it has been an effective way to accelerate the move downward. Something both Truecaller and Sinch have now experienced.

The events show a new kind of challenge and phase for listed tech companies. The fall from the record levels of recent years is high — and there is money to be made on it.

For newly listed companies — or for retail investors following tech companies — a set of situations has emerged that we have not seen in many years in the tech world. When the Japanese super-fund SoftBank previously invested in companies, the world’s eyes turned to them. It was seen as a stamp of strength, and often came with high valuations. SoftBank was the investor that set Klarna’s highest valuation to date at $46 billion.

Now the situation is suddenly reversed. When SoftBank recently announced they had sold their stake in Sinch — Sinch’s share price went up instead. The market treated SoftBank as a risk rather than the mark of quality you might have got 18 months earlier.

The challenges are many for tech companies on the stock market right now. The market’s wish for growth has been swapped out for profitability. Share prices are under pressure and have fallen sharply, which makes staff option programmes worthless. And on top of that now come short sellers who profit from pushing this down further. Newcomers on the stock market look set for a rough ride ahead.

Why Gaming Companies Keep Getting Bought Up

September 26, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on September 26th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Billion-dollar deals in the games industry keep coming as the giants fight over the next big shift — games via subscription.

“These days every little game studio has an investment bank working for them.”

Christoph Hartmann, head of Amazon’s games division, sums up the state of the games industry in a simple way.

“I’ve been doing this for 25 years, and the number of game companies I’ve seen compared to what’s left today… […] Who is even still around?”

The question is entirely fair. The games market is in the middle of an enormous consolidation wave that is not yet over. Hence the need for bankers at game studios. There are lots of people calling to see if they want to become part of something bigger.

Just look at these deals from this year alone:

Swedish Embracer has so far made 17 acquisitions — just since February. Looking at the whole market, in the first six months of the year a total of 651 gaming deals worth $107 billion were struck — which is 25 percent more than all the deals in the whole of 2021. Consolidation is accelerating. But why?

There are three plausible reasons.

The first is how Covid affected the games industry at large. More time at home and limited opportunities for other activities benefited gaming companies enormously. Tailwinds in revenue gave game publishers the confidence to spend more on new projects — and to buy each other up. Add historically low interest rates for a long time and you have both cheap financing and unusually strong revenue. It became easy to go big on games — even for players that have traditionally not been particularly active there, such as Amazon.

Interest rates are now rising, but the trend appears to be holding, if you believe the analysts. “We are absolutely not in the final phase of this yet,” says Serkan Toto of analyst firm Kantan Games.

The second reason may be a shifted strategy around risk in game development. Embracer CEO Lars Wingefors described it like this to the Financial Times:

“If you make one game, you have a big business risk. But if you make 200 games, like we do, the business risk is smaller.”

Games — like TV series and films — are heading toward becoming ever more expensive and taking longer to produce. Quality expectations have risen sharply. But like other media, the risk is therefore also high. You can test your way to a certain point, but even a large investment is no guarantee that a game will be a hit. A single game studio can live and die with a single project — and perhaps work for several years on something that is never even released.

Embracer, the best example of a company pursuing this strategy, is betting that the sheer volume of titles released will guarantee a stability that individual studios struggle to create. But for that to work, you have to buy a lot of them. Which they have done.

The third, and probably most important, reason is a change in the business model for games. Big players like Microsoft and Sony are both betting heavily on games via subscription through services like Xbox Live Pass and PlayStation Plus. Even Apple — which has primarily been a platform for other people’s games — has had success with its subscription product, Arcade.

The subscription services have been around for a while but have become a major strategic focus in recent years. It is a big shift from buying games at a single price (common on console or PC) or buying smaller upgrades inside games (common for mobile games). Games often have to be designed differently to work in this new context. On top of that, you continuously need new games to motivate players to keep their subscription.

Like Netflix or HBO — who wants to pay for them if new series and films never come? And one way to guarantee a steady supply of new games is to own your own game studios.

It is not the first time the games industry has come together and grown bigger. Large companies like Electronic Arts and Japanese Square Enix reached their strong positions partly through acquisitions. But shifting your business model at the same time as you try to keep order among many new colleagues around the world — that is a new kind of challenge for the games industry.