Google’s challenger now caught in Putin’s grip

April 1, 2022
by Björn Jeffery
SvD Näringsliv

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

Arkady Volozh could have become Europe’s leading challenger to America’s tech icons. Instead he and his Yandex are isolated together with the rest of Russian industry. A deep dive into the biggest tech giant most people have never heard of.

It was Arkady Volozh’s birthday — February 11th of this year, 2022. He was about to get a nice present: real international recognition as an entrepreneur.

The magazine Wired was coming to do a profile of him and his internet giant Yandex — often described as “the Russian Google”.

They were going to meet in Tel Aviv, where Yandex has a research and development office. Volozh and the journalist talked on the phone to sort out the logistics. Volozh was in a good mood and offered to take Wired on some sightseeing on top of the interview.

Less than two weeks later, Russia invaded Ukraine.

The Yandex press contact got in touch to postpone the meeting, to a time when “the situation allows”. The profile ran anyway, but without the interview.

The risk is that the situation may never allow it. Because the tech giant Yandex has once again become a piece in the political game Volozh has tried to avoid his entire career. As the Wired article’s lede put it:

“It took Arkady Volozh 20 years to build Yandex into Russia’s answer to Google, Uber, Spotify, and Amazon rolled into one. It took 20 days for it all to fall apart.”

But let’s take it from the start.

Yandex began as a search program back in 1993. The name is short for “Yet Another Indexer”. Four years later, the company launched its first search engine on the internet — a year before American Google did the same.

The similarities between the two companies are many, and it’s a story that comes up often.

Sergey Brin — one of Google’s two founders — is also Russian, but moved to the US east coast in 1979 as a six-year-old. Volozh stayed in what was then the Soviet Union and met his co-founder, Ilya Segalovich, at university. Together they started a string of internet-related projects before finally landing on the search engine. In September 1997, Yandex could search the whole Russian internet — all 5,000 sites, at the time.

The success attracted interest from abroad too. Volozh and Segalovich secured a $5 million investment from the private equity firm Baring Vostok, founded by the American Michael Calvey. The money allowed the company to keep developing despite modest revenue. Calvey went on to become a well-known investor in Russian internet businesses, with the Swedish-led classifieds site Avito and the e-commerce company Ozon in his portfolio, among others.

The business model was the same then as now — contextual advertising. You search for something and ads appear related to your search results. Today this is standard on the web, but it was a big innovation in 1998. It’s how Google, YouTube, and to some extent Facebook make most of their money today.

By 2003, Yandex’s rise had reached Google in a more formal way, and Sergey Brin and Larry Page flew to Moscow with a large cheque in their pocket. They wanted to buy the company for $100 million. That way they could secure the Russian search market.

Volozh and Segalovich considered the offer but decided in the end to continue on their own. That turned out to be a good move. Google chose to enter Russia on its own later that same year, but would struggle to dominate the Russian market as easily as it had in other countries. A highly unusual development for Google, which holds around 85 percent market share worldwide.

There are two main reasons for Yandex’s success in Russia, and why Google hasn’t managed to catch up there.

The first is that Google — despite Brin’s Russian background — may have underestimated the complexity of the Russian language. Many Russian words can take many different endings depending on the grammar of the sentence, which makes indexing more complicated. On top of that comes the Cyrillic alphabet, which is adapted for Slavic languages.

Yandex understood that even people without a Cyrillic keyboard — including the estimated 20–30 million Russians living outside the country — would want to do searches. To handle this they use something called “CrazyFont”, which can best be described as phonetic Russian, written in the Latin alphabet. You simply write Russian the way it would sound in regular letters, and Yandex interprets it as Cyrillic Russian in the search. An innovation, and an example of Yandex’s inventiveness.

The second reason Yandex has done so well in Russia is more fraught. It concerns the link to the Russian state, and more specifically to Vladimir Putin.

Volozh always tried to keep political questions away from both himself and the company, even when they went against his own values. He’s described by colleagues in the Wired piece as a liberal pragmatist, but one who often went too far to appease the political environment around him.

Co-founder Segalovich, by contrast, was more outspoken. He took part, for example, in the protests against the results of the 2011 parliamentary elections alongside other employees. A former manager at Yandex, Lev Gershenzon, described how Segalovich set the company’s “moral standard”.

The different positions of the co-founders can partly be explained by their roles at the company. Segalovich was CTO — a primarily internal role focused on organisation and product development. Volozh is CEO, which in a Russian context means quite a few political entanglements for a company of this size.

“When good people do business with terrible people, they start trying to understand them. It’s like a disease,” Gershenzon told Wired.

The otherwise neutral Volozh had, out of necessity, started getting closer and closer to the Russian state.

Business continued to go well, though. Yandex had launched its music service — a sort of Russian version of Spotify — and was heading toward its next big milestone: an IPO in New York in May 2011. On the first day of trading on Nasdaq the stock went up 55 percent, which the New York Times described as a possible sign of a bubble in the tech sector. The bubble largely failed to materialise, but further down in the same article there was a more accurate analysis of what the future would reveal.

“The company faces significant political risk […] tight state control of political news may intensify as internet use grows.”

Segalovich was diagnosed with stomach cancer in 2012 and died the following year, just 48 years old. Volozh took the news hard, and the absence of his co-founder would go on to complicate his job further. With Segalovich — the man who embodied the company’s “moral standard” — gone, Volozh was left alone to face an ever-growing political pressure in the years that followed.

This time, with a more personal sender.

In Bloomberg, journalist Leonid Bershidsky wrote:

“With a few words, Russian president Vladimir Putin crashed Russia’s best internet stock.”

Putin had spoken specifically about Yandex at a media congress. The Russian president was, according to Bloomberg, blunt:

“When it comes to Yandex, it’s not as simple. When they started, they were under too much pressure to have a lot of Americans and Europeans in their controlling bodies — remember that? They’re partly registered abroad, not just for tax reasons, but for other reasons too.”

The stock fell 16 percent in a day.

But worse — Yandex had become a political cudgel in the increasingly frosty relations between East and West. Russia had annexed Crimea a month earlier, and the world was tense. Yandex was now seen by the Kremlin as an example of how Americans exerted influence through Russian companies.

The restrictions piled up in the years that followed.

The Kremlin passed a new law limiting which news could be distributed by internet services. The law essentially forced Yandex’s algorithms to act as a censorship tool, hiding news that didn’t suit the regime.

Then Putin followed up on what he had warned about at the media congress.

Yandex was too important to be controlled by foreign forces, as the argument went. To ensure the company wouldn’t act in a way that would harm Russian “national interests”, a foundation was put in place with the power to dismiss management. Putin had, in practice, given himself a veto over Yandex’s future.

The settlement was a dispiriting outcome of lengthy negotiations between the company and the Russian state. Yandex’s international ambitions and foreign ownership had created a barely tenable situation.

Volozh himself, as described by the Financial Times, emailed his staff after the decision to try to explain the outcome.

“We needed to find a decision that would satisfy three parties. Keep management of the company in our hands, reassure foreign investors about Yandex’s business potential, and defend national interests.”

A difficult balancing act, to put it mildly. Especially for a company with 18,000 employees, which makes them Russia’s largest internet company.

Alongside the politics, Yandex has developed like any Western tech giant. The comparison with Google is inescapable here too, when you look at the long list of projects within the company.

They have a ride-hailing service, a food delivery business, cloud services, a smart speaker with a voice assistant, a streaming music platform, self-driving cars, a payments arm, a news aggregator, and more.

In many ways Yandex is the European tech giant no one talks about. Russia is their primary market, but they have some operations across 20 countries in total, including Norway, Finland, and France. They are not currently in Sweden.

In the US, Google dominates, and in China Baidu holds the equivalent position. In the eastern part of Europe we have Yandex. Hamstrung by circumstance, but more innovative and technically superior to most.

The outlook ahead is fairly bleak. For Volozh, for Yandex, and for Russian internet users in general.

Last summer Russia tested disconnecting itself from the internet with the help of several telecom companies. Instead they used their own Russian internet called “Runet”. In such a scenario, you need to make your sites available on Runet for Russians to be able to reach them. And to do that, you’d likely have to follow the local rules for media and internet companies. Given that Meta — the parent of Facebook and Instagram — was recently labelled an “extremist organisation”, you can assume that Western participation on such a Runet will be very limited.

There, in the middle, among the locally state-controlled tech giants VK and Odnoklassniki, we will likely find Yandex once again. A company with international ambitions, talent, and ability — but stuck in the Russian political system and forced to bend to it. And whose pragmatism may be seen by posterity as cowardice and complicity in Russia’s many transgressions. Rather than the neutral line Volozh perhaps once intended.

What other choice does Arkady Volozh have? When Wired called him up, Yandex’s market cap was $16 billion, nearly SEK 150 billion. Eighty-five percent of the stock trading was done by Americans. Today the stock is suspended and the share price is effectively dead. Yandex and Volozh have not yet been hit by sanctions in connection with the invasion of Ukraine, but it seems to be getting closer.

Yandex’s deputy CEO Tigran Khudaverdyan was forced to step down directly when he personally appeared on the EU’s sanctions list. In the UK too, as The Guardian has reported, voices are now being raised that the whole company should be included and its operations limited there. The idea that Yandex would return to normal in the coming months, perhaps years, is hard to imagine.

Tigran Khudaverdyan commented on the company’s stance on the invasion in a Facebook post on March 2nd:

“War is monstrous,” he wrote.

“Today, many demand that the company immediately climb onto the tank and loudly announce its position,” he continued, but explained that they did not intend to do so, citing employee safety and the need to keep their services running.

“What we are defending now is not a business. It is services that people living in the country need, like electricity or running water. Search has to search. Taxis have to run, goods and food have to be delivered. Infrastructure has to function. For these reasons, we cannot climb onto the tank.”

What Arkady Volozh himself thinks, Wired never got to find out. The last planned interview on March 11th was cancelled twelve minutes before it was due to start.

Volozh has personally lost billions in recent weeks. Outside of Russia he could have become another Sergey Brin. Now he is on his way to becoming one of the most successful European internet entrepreneurs we’ve ever had — but one nobody knows about.

Brussels strikes back at the tech giants

March 25, 2022
by Björn Jeffery
SvD Näringsliv

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

A smorgasbord of new legislation for the tech giants has now been voted through in the EU. But trying to micromanage with regulation can lead to unintended consequences.

“Never, ever underestimate the European Parliament!”

That was a triumphant and self-assured Andreas Schwab presenting the Digital Markets Act (DMA), the new European law for tech companies. On Thursday evening, the European Council, the European Commission, and the European Parliament finished negotiating the proposal, which is expected to pass in October of this year.

The line that followed, however, revealed a bit of self-criticism.

“It has taken seven years, but now we’re here.”

Schwab is a German member of the European Parliament, and the person who led the negotiations from their side. The seven years he mentions refer to the last major competition question concerning digital companies in the EU, when in 2014 they wanted to separate Google’s search business from the rest of the company. That can be seen as a kind of starting gun for what we’re seeing today.

Timing is central here. The question is whether the law arrives too late to have the intended effect.

The DMA aims to regulate the biggest tech companies in the market — and they are the ones who have benefited most from the unregulated environment of recent years. Now that legislation is trying to get at them, it needs a long list of criteria to hit the right targets — without limiting competition from new entrants.

There are formal requirements around market cap, revenue, and user numbers — but regardless of the figures, this is legislation aimed at regulating companies like Apple, Google, Amazon, and Meta (formerly Facebook). So it’s primarily American companies that are affected. The law itself doesn’t specify the companies’ nationality, but Europe doesn’t have many tech companies that can qualify here.

Collectively, the tech giants in question are called “gatekeepers” — those who keep others out. The competition, in this case.

In practice, the law means, among other things, that messaging services like WhatsApp and Apple’s iMessage will need to be able to talk to each other. A bit like SMS, which works regardless of which phone brand you have.

Other parts of the law concern app stores and their payment systems — an issue Apple has pushed back on very hard. When the law takes effect, they will no longer be able to force users and developers to use the platform’s own payment systems. Other parts of the legislative package cover various data and competition questions.

You can think of the DMA as a smorgasbord of all the big questions that have come up about tech companies in recent years. Instead of tailoring a law to fix a single problem, here you have a whole package covering a range of issues — but only for a handful of tech giants. The stated purpose is to correct a distorted competitive landscape in the European market.

It’s hard not to also see it as a power play, where the tech giants won the first rounds because of the lack of regulation. That particular point is now being addressed, and the EU is soon in a position to hit back. That’s a chance the decision-makers in Brussels will probably want to take.

Unsurprisingly, the tech giants are not overly fond of the DMA. Meta’s policy chief, and former UK deputy prime minister, Nick Clegg, says there’s a risk of “creating fossils” for how digital services are used and developed.

At the same time, some of the tech giants will likely benefit from parts of the legislation, even if the purpose is the direct opposite. Apple’s iMessage is rarely seen as a social network, but in practice works as one among close friends. That segment has been notoriously hard for Meta — Facebook’s owner — to crack. If the law now forces Apple to open up iMessage, Facebook could stand as a big winner.

The example shows how hard it is to legislate digital services with precision. But now, for the first time, there is at least a toolbox of legislation to work with. The next problem will be making sure the laws are actually followed.

YouTube is a tough dilemma for Putin

March 23, 2022
by Björn Jeffery
SvD Näringsliv

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

After Russia classified Facebook and Instagram as “extremists”, YouTube is likely the next target. The popular video service has served as a platform for the few independent journalists left in the country — but it has also been an important tool for Russian disinformation.

August 2021. A different political situation than today, but YouTube still regularly landed in the hot seat over the enforcement of its policies. Susan Wojcicki, CEO of YouTube (part of Alphabet, which also owns Google), wrote an op-ed in The Wall Street Journal. She needed to clarify the company’s stance on these issues. What they could — and could not — imagine doing when politicians knocked on their door with requests.

“The rules governing the internet are regularly being updated, from copyright to elections and political campaigns. YouTube is willing to work together with governments to address these and other issues.”

Wojcicki wrote, before adding in the next paragraph that “companies should have the flexibility to develop responsible ways to handle legal, but potentially harmful content”.

The ambition may have been good, but it didn’t get much clearer.

The quotes illustrate, rather, the fine balance the company has tried to manage for many years. They want individual countries to put laws in place that they can follow, but in certain special cases they still don’t want to follow them. The space in between allows flexibility in policy and opens up an inconsistency that can be exploited to the fullest. And one that has helped make YouTube a success story.

This approach may now have reached the end of the road. At least in Russia.

Last week the Russian military was suspended from YouTube for a week after describing the invasion of Ukraine as a “freedom operation”. This was highlighted in an internal document Bloomberg obtained. To mark its displeasure, the Russian leadership raised the suspension directly with YouTube’s top executives.

The context for the objection is important. On Monday, Meta, which is behind services like Facebook and Instagram, was classified as an “extremist organization”, which essentially means they are criminalized. There is no longer any realistic way for them to operate in Russia. So if Russia’s Ministry of Defense reaches out to YouTube with opinions going forward about how the war is portrayed, it’s not hard to imagine a scenario where they, too, are shut down.

Banning YouTube, however, would be a much bigger and more dramatic move than Meta. YouTube reaches 85 percent of Russian internet users and is therefore the largest social network in the country, and the third-largest site overall after Google and the local search engine Yandex. Facebook faces considerably more competition from domestic — and now state-controlled — services like VK and Odnoklassniki. Shutting down YouTube will therefore be noticed much more, which could be controversial and hard to explain to the population.

Popularity seems to be the main reason YouTube has been allowed to operate relatively freely in Russia until now. Critical videos have often been bombarded with negative comments from the Kremlin, but they haven’t been banned outright.

YouTube has also served as an important tool for distributing propaganda and other Kremlin-friendly information to the outside world. Channels like RT and Sputnik have used YouTube’s global reach to go well beyond Russia’s borders. A 2021 research article showed, for example, that seven percent of Swedes regularly consumed the two Russian channels.

YouTube’s success and its approach in Russia have also opened the door to other voices in society. Russian journalist Irina Shikhman described it as Russians “going to YouTube for the truth — or at least a different perspective”. Shikhman herself has used the service to distribute a video about Russia’s handling of covid-19. If YouTube were to shut down completely, access to this alternative news reporting would be choked off.

The war in Ukraine, however, may have made the Russian authorities think again. And if YouTube is shut out of Russia — one of very few independent sources of information goes with it.

Russia is building its own internet — with its own rules

March 9, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on March 9th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

To try to block information and news from other countries, Russia is now taking the same path as China. Through censorship and restrictions, a new internet is being built — disconnected from the rest of the world.

If you looked at Russian app stores a month or so ago, it looked like any other country. A few social networks, a couple of messaging services, some shopping apps on the top charts.

Over the weekend, the picture was different. Eight out of 10 of the most downloaded apps were various kinds of VPN services — tools that anonymize your internet usage and can make it look like you’re browsing from another country. VPNs are often used to bypass restrictions individual countries may have set up on the internet.

The top list shows that anonymity and the search for free information is a very live issue in Russia right now. But while the war in Ukraine has brought it to the front, the trends have been in place much longer.

For several years, the Russian state has laid the groundwork for a possible separation of the internet, called the “splinternet”. The term refers to a division of the internet based on technical as well as political and national interests. The best-known example is in China, where the censorship of certain sites and services is usually referred to as “The Great Firewall of China”.

Russia has now set off down the same path as China. In 2019, a “sovereign internet” law was passed, enabling the Russian regime to disconnect from the internet that the rest of the world uses. The stated reason was to be able to protect itself from hackers and the spread of disinformation, but human rights organizations such as Human Rights Watch have warned that the law allows mass surveillance and describe it as a tool for censorship.

Last summer, Russia carried out a successful test with several telecom companies in which it managed to disconnect itself from the internet at large. During the test, it was instead temporarily replaced by a Russian internet called “Runet”. That could be the starting point for a more closed internet, perhaps without any Western tech companies at all.

Several of the tech companies, including Google, Meta and Netflix, have all acted since the war began. They’ve suspended or limited the reach of Russian state-controlled media like RT and Sputnik News. But the suspensions don’t affect Russians themselves — they’re aimed at the outside world’s access to the Russian state’s propaganda. Russia has, on one hand, its own ecosystem of social media with services like VK and Odnoklassniki, and on the other hand, strict requirements on how foreign companies can operate. At the end of the week, Facebook was fully blocked from Russia after a period of conflict around the fact-checking done on some links. Through this, citizens’ rights were being violated, Russian authorities said.

The most important — and most interesting — Western actor is YouTube, visited by 85 percent of Russian internet users. YouTube hasn’t been shut down yet, but a Russian legislator sent a letter last week to Alphabet (which owns YouTube and Google) saying they should “immediately stop distributing false political information” about Russia’s actions in Ukraine.

One guess is that YouTube eventually gets forced out of Russia, as the demands on what material can be published may become too hard to uphold. Perhaps that is also what the Russian government wants to happen? The building blocks for an internet controlled by them are already in place.

The tech giants profited from the propaganda — now they want to limit it

February 28, 2022
by Björn Jeffery
SvD Näringsliv

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

The American tech giants want to limit the Russian regime’s message to the outside world. But the success of those propaganda channels has earned the platforms many millions over the years.

A site where you can put up a profile picture, share information about yourself and talk to friends. All of it on a white background with blue accents. News and links shared in a news feed in the middle of the page, and “stories” sitting in round bubbles at the top. Sound familiar?

The site in question is called VK, also known as Vkontakte, and it’s Russia’s largest social network. Ever since its launch in 2006 it has been a Russian copy of Facebook. Its success has been enormous and made VK a power in the country. That’s why it wasn’t particularly surprising when a majority of the company was bought up by state-controlled gas giant Gazprom in late 2021. With over 400 million posts a month, VK has the ability to steer the conversation and the agenda in the country. The company’s CEO, Vladimir Kiriyenko, is one of the individuals around President Vladimir Putin, and one of those hit by sanctions since the war started.

Over the weekend, the prime ministers of neighboring countries Estonia, Latvia, Lithuania and Poland wrote a letter to the CEOs of Twitter, YouTube and Meta (previously Facebook) asking them to suspend certain accounts and limit the spread of what they consider to be disinformation. The American tech giants are now saying they’re limiting the reach and monetization of Russian state media. But because of VK’s popularity, the effect inside Russia is absent. Pausing ads in Russia and Ukraine, the way Twitter is doing, is essentially a swing at nothing.

The issue has come up for the tech giants several times before — and has generated considerable controversy. Nick Clegg, Meta’s policy chief, said this week that Russia has limited Russians’ access to the company’s services because it hasn’t accepted the fact-checking done on some material. YouTube was threatened with being shut down entirely from the country unless it welcomed back two channels that had been suspended for disinformation about covid vaccines.

Using social media to spread its view of the news has been a Russian practice for a long time. The most important of all the channels is YouTube, which was one of the players that over the weekend said it had removed the ability for Russian media to earn money from ads. How effective this will be is debated, as several channels linked to the Russian state continued to be found with ads shortly after.

The biggest of the state-controlled channels on YouTube is RT, previously known as Russia Today. RT, which also exists as a regular TV channel, has invested heavily over many years and built a network of channels with tens of millions of subscribers. Broadcasts are in several languages, including English, Russian, German and Spanish. As early as 2017, American intelligence agencies described RT as the most important propaganda channel for the Kremlin. During the 2016 US presidential election, the channel consistently spread negative news about Hillary Clinton and suggested, for example, that she was in poor health.

When YouTube now limits RT’s ability to make money from its broadcasts, it’s done with full knowledge of its size and influence over many years. French AI expert Guillaume Chaslot claims the company has recommended RT’s channels over 100 billion times through its own algorithms. It is, in other words, YouTube itself that to a large extent created RT’s success on the platform in the first place — and made a lot of money doing so. That they’ve been accused of spreading propaganda has been well known — and accepted — for years.

When individual actors use social media platforms successfully, it creates a complexity for the companies behind them. The restrictions so far are therefore relatively mild. All have chosen not to remove content from their channels.

But removing content the Russian state doesn’t like — that they’ve done before. Last autumn, both Apple and Google removed an app made by supporters of Russian opposition politician Aleksej Navalnyj. So there are more methods in the tech giants’ arsenal — depending on who’s asking.

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.