Klarna’s Results — a Warning to Every Swedish Tech CEO

May 24, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on May 24th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Klarna’s quarterly report and announcement of layoffs isn’t just a rude awakening for one of Sweden’s new flagship companies. The message — despite all the flowery language — will send a chill through every leader and owner of a Swedish tech company.

A good way to understand how a company is doing is to study the euphemisms that turn up in its quarterly report. The document, originally meant to bring clarity about how a company is performing, is often a masterpiece of creative and embellishing prose. Look at Klarna’s latest report for the first quarter of this year and you’ll find a few candidates in that category.

The highest inflation in 30 years and a war in Europe is described as “we acknowledge the global macroeconomic shifts and the headwinds affecting consumers’ daily lives”. The quotes are our translations from English. But doesn’t it sound poetic?

Keep reading and you’ll see that Klarna “has once again tightened its lending parameters to reflect this changing market context”. That sounds considerably better than the numbers, which show that credit losses rose to SEK 1.1 billion during the quarter.

Klarna is by no means alone in this, but when storms roll in across the tech industry it’s natural to look at its leaders for an indication of where things are headed. A quarterly report becomes particularly interesting. And it doesn’t look like the storm is ending anytime soon. Klarna’s loss grew to SEK 2.5 billion, compared with SEK 650 million in the same quarter last year.

Losing money as a tech company has almost been standard practice in recent years. As long as growth was strong, the market tolerated large losses. That era can now be considered over. For companies that have taken on a heavy cost base — or have fundamental problems with their business model — it can be very hard to pivot quickly enough. Yesterday, Klarna announced it would cut 10 percent of its workforce. The week before, the online doctor service Kry did the same. There will be more news of this kind.

Late-stage tech companies now face a complicated balancing act.

There were, however, glimpses of light. Amid the tech chill, the delivery company Budbee raised SEK 400 million in new capital from existing owners like Kinnevik and H&M. The major shareholders clearly believe in a continued strong rise in e-commerce.

If we see more deals of this kind, they’re likely to come from similar lead investors with strong balance sheets or to involve preference shares, which would guarantee investors get their money back before everyone else. As one Swedish VC put it: “I live in a world where every issue is done with preference shares unless the opposite is proven”. Venture capital without so much venture, in other words.

Late-stage tech companies now face a complicated balancing act. The metrics investors will evaluate them on have shifted very quickly. There’s talk of many planned investments dragging out, and even more that won’t happen at all. And if you’ve planned your fundraising poorly, it can be very hard to pivot to this new reality in time. If investments do happen, the terms are likely worse than they would have been six months ago. It’s difficult to navigate, to say the least.

The largest private companies look at — and are affected by — the stock market. When it falls, they fall too. And the smaller companies in turn look at those larger than themselves. The market drop has already cut Klarna’s valuation by 30 percent — a loss of roughly $15 billion. When Klarna now wants to cut staff and warns of tougher times ahead, there isn’t a Swedish startup CEO who won’t read this and think twice. And they’ll see through the pretty phrasing in the quarterly report too.

“Klarna is well positioned to support consumers in managing their cash flow,” you can read. That may well be true. A more interesting question is who will support Klarna’s own cash flow. It has fallen from SEK 7.6 billion to minus SEK 7.3 billion — in a year.

The Tech Hangover Is Here — Now the Layoffs Begin

May 18, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on May 18th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

The tech crash on the stock market is creating domino effects throughout the startup ecosystem. The hangover from the last few years of sky-high valuations is here — and the first wave of layoffs in Sweden has started.

The market sell-off in tech came fast and it was brutal. Zoom, Sinch, Peloton and Truecaller have all lost more than 40 percent of their market cap since the start of the year. Even giants like Apple, Google and Microsoft have shed roughly 20 percent. The hedge fund Tiger Global lost SEK 170 billion on its holdings — in the first quarter alone.

To understand what this means for tech companies, you have to look at how the ecosystem behind them works. When venture capitalists invest in startups, they classify their investments as “rounds”. It used to start with a “seed round” — the first money put into a company. You plant a seed that may grow into a real business. After that came Series A, B, C, and so on. Eventually, depending on how the company developed, you might reach the letter combination IPO — initial public offering.

But it quickly got messier than that. As competition intensified, venture capital wanted to get into the best companies earlier, and a new round appeared — “pre-seed”. On top of that, valuations in every other round kept climbing. An investment that used to count as big enough for a Series A might, in some cases, now arrive at seed.

Inflation hit the startup world early. But it’s only now it’s starting to bite, in combination with rising interest rates.

The big tech drop on public markets has forced a new, tougher environment for raising capital. It’s most visible among so-called cloud and SaaS companies (software-as-a-service), service businesses that sell via subscription. The Bessemer Cloud Index tracks how listed companies in this category are valued, and the curve shows a massive fall. One way to value these companies is to multiply their revenue to get a company value. In May last year, the median company traded at 14.38 times revenue. The equivalent figure this May is 6.46. Prices, in other words, have more than halved in a year.

The halving spreads to private companies too. The result of a tougher public market is increased pressure on later-stage startups — around Series B/C and up. Because they’re closer to either an IPO or a sale, public-market comparables become more relevant.

If you’ve taken in money at very high private valuations — as several large Swedish startups have — you can quickly find yourself in a bind.

They can’t go public, because the market climate isn’t favourable.

They can’t raise more money at a higher valuation than the previous round, because no one wants to invest on 2020–2021 valuations.

They can’t keep spending on unrestrained growth, because the money will run out.

So what do you do?

One option is to do what the digital clinic Kry has done and tighten the belt. On Tuesday, the company announced it would lay off around 100 people, about 10 percent of its workforce. “We need to react to the market dynamics and we need to be more careful with our capital,” CEO Johannes Schildt wrote in a memo. Getting to profitability faster is one way to absorb the shock.

Another option is to raise new money, but at a lower valuation than before. This creates additional dilution for existing shareholders, and so it’s not a popular one. Venture capitalists in Stockholm say many rounds are dragging on right now, and that valuations for later-stage companies have almost halved compared to a year ago.

The consequences of a lower valuation can also hit the employees of these companies. Many startups today have various option programs that let staff share in the company’s success as shareholders themselves. Options count as part of total compensation, alongside salary and other benefits. As long as valuations only went up, this has been very lucrative for many in the startup world. But at lower company valuations, the options may be worthless, and a large chunk of employees’ compensation disappears. The possibility of an option ending up worthless is, of course, part of how they’re designed — but many younger employees are experiencing this for the first time.

Over the past few years, a growing number of companies have reached unicorn status — a valuation above one billion dollars. It has been seen as a proof point and a milestone on the way to becoming a giant. After the tech crash, these unicorns are now wondering whether the valuation was worth what it may end up costing them.

A high valuation can turn into a yoke you have to bear. A weaker investment climate will force many companies to cut hard, to extend the runway before they need more money. But a turnaround takes time and can be expensive. If your timing has been unlucky, the cash cushion may be thin and there may be too little time to make big changes. Then cuts alone aren’t enough. Some unicorns probably won’t survive at all.

Facebook Copies TikTok — and Abandons News

May 13, 2022
by Björn Jeffery
SvD Näringsliv

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

Meta’s new content strategy draws its inspiration from Chinese competitor TikTok. Instead of friends, news and conversation, Facebook’s parent company is now aiming at video and entertainment.

In a dark, church-like building on the prestigious campus of Georgetown University, a large crowd of curious listeners had gathered to hear what was described as “the second act of social media.” Mark Zuckerberg, Facebook’s CEO, stepped up to the podium with a big smile on his face.

It was autumn 2019 and Zuckerberg was heading into a new American election season. He had made up his mind not to get caught in the same crossfire he had three years earlier. Back then, Donald Trump had become president, and many were asking what role Facebook and its algorithms had played in the process.

“We’ve recently clarified our policies,” said Zuckerberg, as so often before. This time the topic was the ability to see politicians and opinion shapers in their original form, to make sure they were presented accurately.

Big words, given the volume of problems the company has had with moderation and the spread of disinformation. What he did not know at the time was that the world was about to enter a polarised era defined by a pandemic. When lockdowns and vaccinations came up for discussion, it didn’t quite turn into the open and civil conversation about the world that the Facebook chief had been hoping for.

To use Zuckerberg’s own terminology, you can describe the first act of social media as friends talking to each other online. The Facebook feed consisted of friends checking in at places and posting status updates. The second act was a bigger — and politically charged — conversation about news and current events. Links were shared and spread eagerly, and more and more material that you hadn’t explicitly followed began showing up in your feed.

There is plenty to suggest we are now moving into the third act of social media. It resembles video entertainment more than it does political debate, and takes another step away from being the meeting place for friends.

You can already start to see the changes taking place.

Facebook parent company Meta’s biggest cloud is called TikTok. The Chinese video app has become a global supersuccess by being the best in the world at presenting content it believes the user will watch. It isn’t necessarily the videos you think you want, but what is tuned to what you will actually end up consuming — even if that can be harmful, as SvD has reported previously.

On TikTok you don’t need a single friend to get relevant content served up. Instead you scroll through full-screen video and the algorithm gradually learns what works for you in particular.

Meta’s counter-move is obvious. The company is currently testing full-screen video on Instagram. Its users are already spending 20 percent of their time on the video feature Reels, which is in large part a TikTok clone. With increased emphasis on video, the photo app is coming to look more and more like its Chinese competitor.

But the shift can be found elsewhere too. At Meta’s most recent quarterly report, Mark Zuckerberg explained the change that was about to happen across all of the company’s products:

“Overall, I’m not just thinking about the artificial intelligence we are building as a recommendation system, but as an engine for discovering the most interesting content people have shared across all our systems.”

Anyone who has shared something interesting could end up in your feed. A familiar content strategy.

This third act of social media, then, looks set to become more entertaining and lighter in tone than the previous one. That would make the content easier to moderate than the news — of varying quality and truthfulness — that was spread and served as the basis for the earlier content strategy. Meta is also rumoured to be reducing and reshaping the partnerships it currently has with media companies.

The question has been sharpened by the war in Ukraine. There, Meta has had to adapt its content rules to function in the new context. On top of that, new European legislation is just around the corner, and the big platforms will need to take greater responsibility for content. Living up to that can be time-consuming, cumbersome and expensive.

Zuckerberg spoke about helping to shape the public conversation. Now it looks more like he is backing out of it entirely. But sidestepping the complexity of political questions is probably attractive, after years of missteps.

A Crypto Crash That Could Trigger a Financial Tsunami

May 13, 2022
by Björn Jeffery
SvD Näringsliv

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

An attack on a cryptocurrency has wiped out hundreds of billions of kronor — almost overnight. The crash lays bare the financial risks that cryptocurrencies were supposed to prevent. Now a crypto crash could send serious waves through the rest of the market.

Have you heard of stablecoins? As the name implies, the idea is that stablecoins should bring stability to cryptocurrency markets — markets that are often viewed as highly volatile.

The idea is easy to grasp. You exchange a dollar for a stablecoin, and then use that to more easily trade other cryptocurrencies. The value is guaranteed by the money you swapped them for to begin with. Simple! At least in theory.

The problem is that these stablecoins are not always as stable as they first appear. Over the past few days, a stablecoin called TerraUSD — and the cryptocurrency Luna that was directly tied to it — have fallen 73 and 99 percent respectively. Hundreds of billions of kronor in market value have gone up in smoke on those two alone. And other stablecoins that have been heavily questioned before, like Tether, have wobbled too.

TerraUSD was a so-called algorithmic stablecoin. It lacked a 1:1 link to a conventional currency, but via financial algorithms the price was meant to tie TerraUSD to Luna so that the value always stayed constant. If one went up, the other was supposed to follow.

What triggered the fall appears to have been a very complex and sophisticated attack. The attacker understood the technical limitations well, and had a billion dollars to play with in order to pull it off. Through a series of technical manoeuvres and the use of derivatives, they managed to sink an entire ecosystem — and profit handsomely in the process. Rumours spread quickly that the hedge fund Citadel Securities and Blackrock were behind the attack, something both have strongly denied.

The timing is, to put it mildly, poor. Cryptocurrencies have broadly plunged in value recently, as the market has sought out safer asset classes.

It would be easy to dismiss what has happened as an internal matter for those speculating in cryptocurrencies — the ones who play the game ought to cope with the consequences.

But there is something familiar about how this played out. Advanced financial products that the ordinary retail investor can’t reasonably understand or trade in have sunk an entire industry before — and dragged everyone down with them.

The financial crisis of 2008 was also shaped by complex derivatives and asset classes. The fallout hit far more people than those who knew, or traded, the so-called credit default swaps and collateralised debt obligations. That was where the problems began — and they ended with mass layoffs in the largest global financial crisis in modern times.

Cryptocurrencies may have crossed over into the broader financial market. As Bloomberg columnist Matt Levine puts it: “If you had asked regular people two weeks ago how their lives would be affected if the price of some digital pictures of apes and algorithmic stablecoins crashed, I think most of them would have said it wouldn’t affect them at all.” A reasonable answer, of course. But it is probably no longer that simple.

An exchange-traded fund in Switzerland, tied to the Luna mentioned above, fell 99 percent on Thursday. It was available to buy on ordinary trading venues.

The situation today is that bitcoin is traded on purpose-built, entirely regulated exchanges, but also indirectly through its own exchange-traded funds. On top of that there are specific listed companies whose only business is to hold bitcoin. And in addition to all this, there are private individuals and institutions that have taken out loans to buy cryptocurrency, and that sometimes use cryptocurrency as collateral to buy more.

All of these actors are part of the broader financial market. Should the market for cryptocurrencies crash altogether, it could send ripples far beyond the traders themselves.

The Market Exhales — But the Boom Is Over

May 5, 2022
by Björn Jeffery
SvD Näringsliv

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

As the US central bank raises its benchmark rate, it may mark the end of the current tech boom. This spring has already delivered the largest drop since 2008.

“Finally, it’s over.”

That was the tone in October 2008 after the tech-heavy Nasdaq crashed 17.4 percent for the month. The fall came after investment bank Lehman Brothers went bankrupt and the world economy shook. It was the largest monthly drop on the US Nasdaq Composite in 20 years.

The second largest drop was more undramatic, almost quiet.

It happened last month, in April 2022.

In total, the Nasdaq Composite fell 13 percent, dragging the year-to-date figure down to minus 21 percent — the worst start to a new year in Nasdaq’s history. The broader Dow Jones Industrial Average (DJIA) and S&P 500 indexes were also down 9 and 13 percent respectively on a year-to-date basis.

What has happened to the tech companies?

Unlike 2008, it is not a single thing driving this, but several causes coinciding. Here are four factors putting pressure on tech companies right now:

Fear of interest rates

Yesterday, Fed chair Jerome Powell finally announced that the benchmark US rate would be raised by 0.5 percentage points — the sharpest hike since the year 2000. More hikes of the same size are expected this year. The changes were expected, and largely already priced in. But Powell’s decision not to raise rates by 0.75 percentage points did trigger a small sigh of relief in the markets.

For tech companies, this means competition for capital is increasing further. The yield on 10-year US Treasuries had its biggest monthly jump in April since December 2009. After Powell’s speech it rose again, and now sits at nearly 3 percent. If you can get that kind of return on what is considered all but risk-free paper, more capital will be allocated there. That comes in part at the expense of tech companies, as the tap of risk-willing capital is slowly being turned off.

The post-pandemic effect

Several tech companies saw an enormous boom during the pandemic, when many digital services saw their usage multiply. Few companies symbolise this more than the video service Zoom. The stock soared by several hundred percent during the pandemic and peaked in October 2020. Since then it has gone downhill. Looking back one year, Zoom has lost more than 67 percent of its market cap.

Despite the slide, the company is in all material respects stronger today, with both revenue and earnings higher than a year ago. But the market no longer views players that benefited from remote work and digital transition with the same confidence. Better results are therefore no guarantee of a higher stock price — at least not compared to pandemic highs.

Growth companies get re-rated

The positive sentiment towards growth stocks over recent years has now flipped, and that is hitting many tech companies hard. There is a general move toward risk aversion, probably influenced by an anxious global backdrop. In particular, the relatively recent IPOs that prioritised growth over profitability have been hit especially hard. Companies like Amplitude (analytics, down 68 percent year to date), Okta (identity management, down 47 percent year to date) and UiPath (automation, down 57 percent year to date) are all examples of this trend.

The pull from big tech is gone

At the start of the year, the smaller tech companies were dragged into the chill while the biggest giants held up. Because companies like Apple, Microsoft and Google are so disproportionately large in many funds, their success could mask the struggles of the smaller names. That time appears to be over, and even the very largest have fallen this year.

Worst among the giants is Meta, Facebook’s parent company, which has lost 34 percent of its market cap since the start of the year. Netflix has fallen so much — over 65 percent year to date — that it is no longer considered a tech giant. The previous acronym FAANG (Facebook, Apple, Amazon, Netflix, Google) has now been rebranded as MAMAA (Meta, Apple, Microsoft, Amazon, Alphabet).

Twitter’s Costs Could Be Musk’s Biggest Headache

April 28, 2022
by Björn Jeffery
SvD Näringsliv

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

After 15 years, Jack Dorsey is handing Twitter over to Elon Musk. Both men claim they have no financial stake in the service, and that they simply want to make the world better. The company’s history and near future suggest otherwise.

It took less than two weeks for one of the world’s most influential companies to change hands. From one billionaire to another.

Twitter is still, until the deal closes sometime before the end of the year, listed on the New York Stock Exchange. But regardless of the ownership structure, it has long been seen as co-founder Jack Dorsey’s company — even after he was pushed out of the CEO role by the activist fund Elliott Management at the end of 2021.

If you take him at his word, he would have preferred that nobody owned Twitter at all.

“In principle, I don’t believe anyone should own or run Twitter. It wants to be a public good at a protocol level, not a company,” he said in a tweet after news of the deal broke.

Those are big words from someone who has become extraordinarily rich from the opposite.

Anyone who knows Twitter’s history also knows that the company has, actively and for a long time, pursued the opposite of openness — including during the years Dorsey himself was CEO.

As early as 2012 you could see the conflict between building an open ecosystem for developers and building a sustainable business model. Twitter restricted its API — a way for other developers to build products on top of Twitter — to only support the company’s own priorities. In 2018 Dorsey closed off the ability for developers to build alternative ways of accessing the service on the same terms that Twitter itself used. The result was a consolidation of power that put Twitter’s needs first, at the expense of everyone around it.

What had first been likened to an open town square where anyone could speak freely began to look more and more like a private campus.

If we turn to Elon Musk, he has also painted noble motives around his interest in Twitter. At the TED conference in Vancouver earlier this year he said that “having a public platform that is maximally trusted and broadly inclusive is extremely important to the future of civilisation. I don’t care about the economics at all.”

That may be so — Elon Musk is, after all, the richest person in the world according to Forbes. But entirely indifferent to the money behind it, he cannot really be.

A large part of the Twitter deal is financed by various loans totalling $25.5 billion, roughly SEK 250 billion. Interest rates are in a range of a base rate plus 3 to 10 percent. Assuming 5 percent as a rough calculation, the annual cost of the loans is higher than Twitter’s entire 2021 result. Add in a rising interest rate environment and the costs could become a real headache.

Elon Musk has a high net worth, but he is unlikely to want to sell shares in either Tesla or SpaceX to pay interest on the loans. So Musk’s stated ambitions of strengthening free speech are hard to disentangle from the economics of the company. He can of course raise revenue or cut costs to change the calculus, but this won’t be charity. At least not in the short term.

There are, however, other forces in the world pushing for the kind of public benefit that Dorsey and Musk claim to want — but coming from a very different angle.

Lawmakers within the EU reached agreement earlier this week on the DSA, the Digital Services Act. Among other things, the DSA requires companies like Twitter to explain how their algorithms decide what material is shown to users. On Tuesday EU Commissioner Thierry Breton commented drily on the looming deal:

“Elon, there are rules. You are welcome, but these are our rules. It is not your rules that will apply here.”

In principle, the transparency part should not be a problem for Musk — he has said he plans to do exactly the same thing. He wants everyone to be able to see how Twitter’s recommendations are made. But at a guess, he is not going to be quite as enthusiastic about the part of the DSA that requires platforms to prevent the spread of disinformation. Content moderation is a central part of Musk’s critique of Twitter today.

Lawmakers have — belatedly — started to catch up with the tech giants. The stated goal is to make the internet safer. A form of social improvement through technology, if you like. If Musk’s intentions are genuine, it should be possible to find common ground on some of this. But a safe bet is that he thinks there is a difference between making those decisions himself and being forced to by legislation.

Elon Musk Buys Twitter — Five Questions and Answers

April 25, 2022
by Björn Jeffery
SvD Näringsliv

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

Elon Musk is taking Twitter private in a historic deal worth SEK 430 billion. SvD’s tech analyst Björn Jeffery answers five questions about why the Tesla boss is so interested in Twitter — and what happens to the competitors now.

Why does Elon Musk want to buy Twitter?

He says he wants to safeguard free speech, which he feels has taken damage under Twitter’s current guidelines. The company has drawn plenty of criticism for suspending individual accounts and removing information that later turned out to be accurate. By taking the company off the stock market, Musk can more easily make sweeping changes to how the product works, and shape how his new rulebook is enforced.

Will Twitter change now?

Yes, and almost certainly more than it has in several years. But Musk does not appear — as some free-speech advocates seem to believe and hope — to intend to let anyone say absolutely anything. Last week Musk tweeted that “social media policies are good if the most extreme 10 percent on the right and left are equally unhappy.” That suggests there will be rules and guidelines, but that they will likely be different from the ones in place today. He has also said he wants to authenticate every human being behind every Twitter account, which could affect the ability to be anonymous.

Why did it take so long for Twitter’s board to accept the bid?

Several of Twitter’s largest shareholders expressed hesitation when Musk’s bid was presented about two weeks ago. The Saudi prince Alwaleed bin Talal, one of the major shareholders, said the bid “doesn’t come close to the intrinsic value of Twitter given its growth prospects.” Twitter’s board also voted for a so-called “poison pill,” which would activate if any single shareholder crossed 15 percent ownership. The poison pill would let remaining shareholders buy newly issued shares at a lower price, but it was seen by many as a way to buy time rather than something that could stop the deal outright.

Since then there has been feverish activity behind the scenes — both from Musk’s side regarding the financing of the bid, and from the board, which has likely been speaking to all of the major shareholders and bringing in price assessments from experts. In the end they decided that the bid was acceptable and, as Twitter’s chairman Bret Taylor put it, “the best path forward for Twitter’s stockholders.”

How can Elon Musk afford this?

According to Forbes magazine, he is the richest person in the world, which is a decent start. That said, much of his wealth is in shares in companies like Tesla and SpaceX, where he is also CEO. One component of financing this bid is that he is borrowing against some of his shares. Talks are also under way with potential partners that could help fund the deal. Even for a billionaire like Musk, this is a very large transaction to pull off as a private individual. The bid is close to $44 billion, roughly SEK 430 billion, which has to be set against Musk’s estimated net worth of $266 billion — around SEK 2,587 billion.

How does this affect competitors like Facebook and TikTok?

Elon Musk is a magnet for attention, and maybe the buyout — combined with product and policy changes — can give a boost to the slightly numbed existence Twitter has lived in for years. In terms of users and revenue, Twitter is significantly smaller than competitors like Facebook and TikTok, but it has managed to stay relevant through its strong foothold among politicians and media.

Musk himself says he isn’t especially interested in the financial side of Twitter, but it too would likely benefit from the increased attention. Even though he hasn’t built social networks before, Musk is a highly respected entrepreneur and not someone you’d want to have working against you. That applies even if your name is Mark Zuckerberg and you run Meta, Facebook’s parent company. If you can pull off both electric cars and rockets, maybe you can bring Twitter back to life — and create a new heavyweight in social media.

YouTube and TikTok Win as Netflix Falls

April 23, 2022
by Björn Jeffery
SvD Näringsliv

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

CNN’s new streaming service is being shut down after less than a month, and Netflix is losing subscribers for the first time in more than a decade. The boom in streaming services may be coming to an end, and there are several reasons why.

There was nothing wrong with Reed Hastings’ confidence when the Netflix CEO presented his quarterly numbers in October 2016.

“Password sharing is something you have to learn to live with,” Hastings said. “We’re doing just fine as things stand,” he added.

“Narcos” and “Stranger Things” had both been hits, and revenue for the quarter had crossed $2 billion for the first time. The stock soared.

Fast-forward to this past week, just over five years later, and the tone is rather different.

Netflix lost paying subscribers for the first time in more than ten years. A new kind of ad-supported subscription is being evaluated internally. And viewers sharing their passwords is being singled out as one of the biggest culprits behind the struggle to generate more growth.

The stock crashed more than 35 percent and wiped out four years of gains. Is this possibly the end of the streaming boom?

Netflix isn’t the only one having trouble in the market. Competitor HBO Max did announce it had added three million subscribers from the previous quarter, but it also said that its parent company’s new flagship, the streaming service CNN+, would be shut down after just one month.

According to industry reports, CNN+ is said to have cost $300 million, roughly SEK 2.8 billion, to develop — which would mean a cost of around SEK 95 million per day the service was up and running. The reason for the shutdown was the poor viewership — fewer than 10,000 daily viewers, which has to count as a total flop.

The growth for HBO Max comes partly from expansion into new countries, now a total of 15. Launch offers and the novelty factor make it easier to pull in new users. That is a luxury Netflix no longer has, since it is already present in 190 countries. If anything, it lost 700,000 users when it pulled out of Russia.

For a player as large as Netflix, the question becomes purely mathematical. Even with very low churn in percentage terms (estimated at around 2.4 percent), you still have plenty to replace when you start with 222 million users. The challenge is simply that there aren’t many countries left to grow in.

Confidence in the streaming market and the valuations of these companies have historically reflected near-infinite growth, as ordinary cable TV viewers switched over to streaming. But increased competition among services has made it hard to top up with enough new viewers for all of them. Instead, customers are starting to pick the service based on which show they want to watch at the moment. According to consulting firm Deloitte, 25 percent of American streaming customers have cancelled their service and restarted it again within a year. Loyalty to any individual service is fairly low.

Other clouds on the horizon are shifting consumer behaviours. Reed Hastings’ famous 2017 line about competing with sleep may be a factor, but people probably aren’t sleeping any more now than a couple of years ago. Instead, it is the interest in other kinds of entertainment services, like TikTok, that is surging enormously worldwide.

Consumers aren’t necessarily choosing between TikTok and Netflix — but indirectly, the time you spend on entertainment is limited. And the more of that time you spend on TikTok, the less valuable the other options become.

But really, the problem for the streaming services is not a lack of interest — it is a question of money. Users don’t want to pay for all of the services at once because it becomes too expensive.

That Netflix is weighing an ad-supported tier is, therefore, logical. Because the video service that stands as the biggest winner in this fight is the one that doesn’t charge at all — YouTube. When users are deciding which subscriptions to keep running, YouTube remains as an option alongside all of them. Free, ad-supported — and immune to the battle for subscribers.

Five Things You Need to Know About Netflix’s Stock Crash

April 20, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on April 20th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Netflix shares crashed 35 percent after the company lost subscribers for the first time in more than ten years. SvD’s tech analyst Björn Jeffery breaks down what happened, and the challenges the streaming giant now faces.

What is Netflix’s big problem?

If you have to sum it up in a single word: user growth. Or rather, the absence of it. For the first time in more than a decade, the number of households paying for Netflix is shrinking.

The market had been expecting an increase of 2.7 million new customers. Instead, Netflix lost 200,000. On top of that, the company believes the number will drop again next quarter, which could be the start of a worrying trend. That is what the market reacted so strongly to.

Could my subscription get more expensive?

Yes, it could. And if you are a long-standing Netflix customer, it has already become considerably more expensive in recent years. There have been four price hikes in as many years. The most recent came this spring, which makes the most expensive plan in the US cost $19.99, and SEK 179 in Sweden, compared to $11.99 in September 2017.

Netflix regularly tests the price sensitivity of its customers. But the competitive landscape in streaming makes this question more complex. It is particularly tricky when Netflix is up against companies with different business models than simply selling film and TV subscriptions. Apple TV+ and Amazon Prime, for instance, both cost SEK 59 per month. Apple offering film and series can be viewed as an add-on to its primary business of selling hardware, which lets it be more competitive on price.

Will there be ads in the middle of Bridgerton now?

If you had asked last week, the answer would have been no. This has come up many times before, and Netflix has historically taken a hard line against advertising. But yesterday, CEO Reed Hastings said for the first time that the company was open to testing a cheaper subscription that included ads. That would be an option for viewers willing to tolerate ad breaks in exchange for a lower monthly fee. Hastings said they would look at this kind of subscription over the next year.

Is password sharing a big problem for Netflix?

Yes, at least if you believe the company. Netflix says it has 222 million paying households. But on top of that there are another 100 million households using Netflix by borrowing someone else’s subscription. That suggests the appetite for Netflix content is there. But why pay if you don’t have to?

The question of shared subscriptions came up as early as 2016, when Reed Hastings described it as “something you have to learn to live with.” That generosity was less of a problem when the company was still growing rapidly. Earlier this spring Netflix tested letting customers pay a slightly higher monthly fee in return for sharing their account with friends and family. It is cheaper than having your own subscription, but still increases Netflix’s revenue somewhat. The test has so far been limited to Chile, Peru and Costa Rica, but you could imagine a similar solution in Sweden.

Does Netflix really need to produce so much expensive original content?

Just buying old series and films was the model Netflix started with. Back then streaming was seen as a small genre the big players didn’t need to worry too much about, and the large film and TV companies were still entirely focused on the traditional market of cinema and TV. Making money by selling to Netflix was viewed as a bonus.

But as Netflix grew, the rights holders became aware of the value of their old catalogues and started raising prices. Then they launched their own streaming services — HBO Max, Paramount+ and Disney+. Netflix has little choice but to produce and finance its own material, since the available catalogue is significantly smaller now than before. And that can get expensive, because you don’t know whether something is a hit until the series has started airing.

Elon Musk Wants to Set His Own Rules at Twitter

April 14, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on April 14th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Elon Musk, the newly minted major shareholder in Twitter, has launched a hostile bid and wants to take the company private. The billionaire says he is doing it to safeguard free speech. The more likely draw is control over the media platform of our age.

Ten days. That is all it took for Elon Musk to go from announcing that he had become Twitter’s single largest shareholder to wanting to be its only one.

In a letter to Bret Taylor, Twitter’s chairman, he writes:

“I invested in Twitter as I believe in its potential to be the platform for free speech around the globe, and I believe free speech is a societal imperative for a functioning democracy.”

Plenty of people would agree with that. And the question of free speech is something Musk has held close for a long time. But the letter goes on:

“However, since making my investment I now realize the company will neither thrive nor serve this societal imperative in its current form. Twitter needs to be transformed as a private company.”

Imagine sitting in on the conversations with Twitter’s board and leadership during those ten days.

First Musk disclosed his share purchase, then he was joining the board, then he was not joining the board, and now this. Musk wants to take Twitter private at a premium of 38 percent over where the stock sat before he revealed he had invested.

True to form, there is an undertone of humour even in the bid itself. The share price he is offering is $54.20 — a wink to the $420 figure he used when he tried to take Tesla private in 2018 with his now-infamous tweet. 420 is also a number often associated with marijuana.

When he said he wanted to take Tesla private, he ended up in a protracted fight with the SEC, the US financial regulator. Now it is in an updated filing to that same agency that we learn about the bid for Twitter.

An accompanying text hints that the company’s leadership has not impressed Musk. Parag Agrawal, who took over as CEO from Jack Dorsey in November last year, has barely had time to settle in before being thrown into the fire.

Musk adds:

“If the deal doesn’t work, given that I don’t have confidence in management nor do I believe I can drive the necessary change in the public market, I would need to reconsider my position as a shareholder.”

Even with the follow-up caveat — “this is not a threat” — it is hard to read it as anything else. If a company’s largest shareholder trashes management and says he might sell his shares if his deal doesn’t go through, there aren’t many other ways to interpret that. Given the stock jumped 25 percent on the news he had bought in, you can only imagine what would happen if he sold out again.

So why is Musk doing this? Like many in the tech world, he seems to feel free speech is under threat. He has voiced scepticism about “cancel culture” and his fight with the SEC is in large part about his own sense of being able to speak — and tweet — freely.

In these contexts the First Amendment is often invoked, the amendment to the US constitution that covers free speech. But it applies to society at large, not to private companies’ websites and apps. There is no law requiring Twitter to let anyone write anything. As owner, of course, you can set your own rules. That must be very tempting for Musk.

Billionaires buying media outlets is hardly unusual either. In 2013 Amazon CEO Jeff Bezos bought the Washington Post, whose slogan is “Democracy dies in darkness.” In February this year crypto billionaire Changpeng Zhao invested $200 million in Forbes magazine.

Twitter is not a media company in the traditional sense, but the similarities are many. It is also one of the few social networks where the founders do not hold controlling shares. An equivalent deal with Facebook or Snap would have been nearly impossible.

The question everyone is asking now is whether the deal happens. Musk has said he is not willing to negotiate. But the price of $54.20 is not especially high given the stock was above $70 less than a year ago. Since then many tech companies have fallen hard, and Twitter has had a difficult start to the year.

What the shareholders and the board need to decide now is perhaps not whether Musk is a good owner of all of the company’s shares — but what happens if he is unwilling to own any of them.