Despite phenomenal long-term share price performance, Big Tech has been besieged from all sides – governments and regulators have been forced to increase scrutiny, investors are questioning the future economic consequences, while consumers question the FANGs’ social licence to operate. In response to the major issues faced by Big Tech, Sickly Tech, a report by Eoin Murray, Head of Investment at Hermes Investment Management, raises deep questions about Big Tech’s future, the risks for investors, and outlines the necessary steps to drive reform.
Even the market ruckus earlier this year failed to derail the trajectory of the Big Tech leaders. Instead, the market witnessed dramatic outperformance by Big Tech and the FANGs (Facebook, Amazon, Apple, Netflix and Google), which benefit from the ongoing growth in internet commerce. Indeed, if the FANGs (plus Nvidia and Microsoft) are stripped out, the S&P 500 has fallen over the year to date – such is the influence of their phenomenal momentum. Even from a global perspective, the FANGs are a vital positive story, with global markets overall having fallen slightly in 2018.
However, according to the report, concerns over data privacy have cast a shadow over the strong returns. The report highlights the Cambridge Analytica (CA) scandal as illustrative of the potential vulnerability of the FANGs. CA obtained data from 50m+ Facebook users and quite possibly used it for political purposes. What seems beyond doubt is that it used this information without either Facebook’s knowledge or consent.
Eoin Murray, Head of Investment at Hermes Investment Management says: “Facebook claims this technically wasn’t a data breach, but it does bring into light the sophisticated algorithms used to target adverts – and similar tools in use at other Big Tech providers. It has not yet become clear exactly what CA did with all the data, but the public reaction thus far is largely one of incredulity that Facebook could fail to understand that the data could be used in dangerous ways.”
Stewards of responsibility
What is increasingly obvious, is investors need to think more deeply about FANG stocks and question their standards of responsibility.
Murray continues: “They are an important part of US and global business, and influence the fortunes of a vast ecosystem of companies. They dominate consumer growth, technical innovation and economic trends. Furthermore, they influence our communication, are pre-eminent in logistics, and are looking to burgeon into new industries, including healthcare and insurance. However, the question is: are they are responsible stewards of the power they control?”
There are serious questions around accountability and this has been played out clearly in the realm of publishing. Companies such as Facebook and Google are disseminating content, but without the same checks and balances as conventional publishers. This has led to well-publicised issues around fake news and the promotion of rogue content, such as terrorist or paedophile activity.
In June 2017, the European Union fined Google €2.42bn after finding the technology giant abused its internet search monopoly, promoting its own shopping service at the expense of other price comparison sites. It was the biggest competition fine to date from the European Commission, and according to the report, Big Tech could not necessarily be trusted.
The dominance of data
From shopping records to political affiliation – the prize for Big Tech is data. European policymakers have been worried enough to bring in the new General Data Protection Regulation (GDPR), which represents a robust set of requirements guarding personal data.
“This pushed Facebook to publish privacy principles for the first time and to roll out educational videos helping users understand and exert some control over who has access to their information. Moreover, Big Tech has the backing of a powerful lobby looking to limit future reform. While it is less powerful in Europe, the US Federal Communication Commission’s decision to roll back ‘net neutrality’ rules demonstrates the power of this lobby,” says Murray.
Moreover, FANG stocks are increasingly monopolistic in their individual spheres and Amazon’s dominance has been implicated in the failure of high street rivals.
Murray continues: “US antitrust policy is clear: If a company brings clear consumer benefits, it can be as big and powerful as it wants. In the short-term, Amazon is pushing down prices and giving consumers choice, but will it have the incentive to do so if its monopoly builds? There are questions over whether antitrust legislation is fit for purpose in the digital age.”
Poor engagement with shareholders
According to the report, shareholders can play an important role in holding companies to account, but only if a company needs to listen to them.
Murray says:“In many cases, big technology companies don’t need additional capital. They have vast cash flows and cash mountains large enough to support whatever innovation (or corporate acquisition) they choose to pursue. Many of these companies have multi-class share structures that make it harder for shareholders to call company management and boards to account, as voting control is concentrated around the founder.”
Technology companies’ aggressive tax planning arrangements are increasingly concerning. Many technology companies have structured their financial arrangements to avoid domestic taxation in countries in which they operate. For example, Amazon paid just €16.5m in tax on European revenues of €21.6bn reported through Luxembourg in 2016.
So what are the risks for investors?
While Big Tech has seen significant share price growth, sustainability issues pose a risk to its ability to grow revenues, profitability and – ultimately – its ability to operate effectively in a societal context.
The report outlines three major risks:
Increasing regulatory intervention
UK Prime Minister Theresa May acknowledged in September that Facebook and other tech companies had made progress in their efforts to tackle these issues, but added that they still needed to go “further and faster”. In particular, the speed at which terrorist-related material should be erased has been a contentious issue and signals the potential for intervention.
Advertisers are sensitive. Wary of their reputation by association, advertisers do not want their products associated with rogue content. Ultimately, businesses such as Facebook or Amazon are dependent on consumer engagement. If they become disillusioned, or switch off, their business model will struggle.
This is a tail risk: low probability but with high potential impact. For the time being, most of these companies have not engaged in the type of anti-competitive behaviour that would bring them to the attention of antitrust legislation. However, there are signs of more aggression. Amazon named one campaign to approach small publishers “The Gazelle Project,” designed to target them “the way a cheetah would a sickly gazelle.”
Positive change in Big Tech can be achieved by collaborative action between companies, government and asset managers and outlines areas where progress needs to be made.
- Checks and balances
The fortunes of many of these companies are wrapped up with those of their charismatic founders, who may or may not have political ambitions, but have philanthropic ambitions. For many companies, this is the main check to their power and ambition. But is it enough? After all, this still rests with one person. Given the prevalence of data, it doesn’t seem unreasonable to charge Big Tech with acting as an information fiduciary
- Digital Geneva Convention or Tech Magna Carta
It took until 2015 for the UN to follow Microsoft’s suggestion that existing international law applies to cyberspace. Microsoft, among others, has proposed a Digital Geneva Convention. Under their proposals, there would be ample scope for the involvement of all stakeholders, whether government, individual citizens or Big Tech. Agreement on a basic set of principles is an obvious first step.
- Engagement with governments
These companies are increasingly recognising that they need to engage with governments and tax authorities to prevent a more onerous and intrusive clampdown. Googleagreed a deal with British tax authorities in 2016 to pay £130m in back taxes and promised to bear a greater tax burden in future. However, countries may continue to arbitrage tax laws, so an international agreement may be difficult.
- Changing business models
Apple and IBM recently launched public relations efforts to demonstrate their responsible use of data. Apple’s new privacy website shows features that differentiate it from, say, Google – algorithms that work at the level of individual devices rather than in the cloud. There is increasing mileage in being seen to use data responsibly.
- Role of asset managers
As asset managers and asset owners, it is not good enough to simply place Big Tech on a banned list of companies unless they reform – asset managers’ role as stewards of capital must be to engage with those companies directly in order to help change their modus operandi, earn their social licence, and to seek the help of government in reclaiming ownership of our data.
Shareholders have the ability to reinforce the need to manage personal data more carefully, to be cognisant of the unintended effects on democracy, and to call into question the societal propriety of social media.
Murray states: “Existing share structures with dominant founders make this challenging, but careful, well-structured engagement on these difficult, but vital issues, should be able to make a difference.
“It has been easy to see Big Tech as a one-way bet with a uni-directional positive societal impact, but sustainability considerations are its Achilles Heel and present an only recently acknowledged risk to investors. As it becomes an increasingly important component part of the US indices, investors need to consider whether these companies are adequately addressing governance and myriad other considerations.”
Exclusive: Portugal sees green hydrogen output by end-2022, $12 billion in investment lined up
By Sergio Goncalves
LISBON (Reuters) – Portugal will start producing green hydrogen by the end of 2022 and already has private investment worth around 10 billion euros ($12 billion) lined up for eight projects that are expected to move forward, Environment Minister Joao Matos Fernandes said.
He told Reuters in a telephone interview there were also several “pre-contracts for the purchase and assembly of electrolysers” to produce the zero-carbon fuel made by electrolysis out of water using renewable wind and solar energy.
Such hydrogen is more expensive to extract than the heavily polluting conventional method of using heat and chemical reactions to release hydrogen from coal or natural gas, known as brown and grey hydrogen respectively.
Hydrogen is now mostly used in the oil refining industry and to produce ammonia fertilisers, but sectors such as steelmaking, transportation and chemicals are beginning to develop large-scale hydrogen applications to gradually replace fossil fuels as countries try to reduce pollution.
The European Commission has mapped out a plan to scale up green hydrogen projects across polluting sectors to meet a net zero emissions goal by 2050 and become a leader in a market analysts expect to be worth $1.2 trillion by that date.
“By the end of 2022, there will certainly be green hydrogen production in Portugal,” Matos Fernandes said. “Green hydrogen will, over time, allow Portugal to completely change its paradigm and become an energy exporting country.”
He said seven groups had submitted applications under Europe’s IPCEI scheme for common-interest projects to make part of a planned export-oriented “hydrogen cluster” near the port of Sines, from where hydrogen could be shipped to Rotterdam. Total investment there is estimated at some 7 billion euros.
A consortium including Portugal’s main utility EDP, oil company Galp, world’s largest wind turbine maker Vestas, among others, is behind one of the projects.
In Estarreja in north Portugal, local firm Bondalti Chemicals aims to invest 2.4 billion euros in a hydrogen plant.
Altogether, these envisage an installed capacity of over 1,000 megawatts (MW).
Matos Fernandes said Portugal was also negotiating with Spain the construction of a pipeline for renewable gases, including hydrogen, from Sines to France, crossing Spain.
Spain and Portugal also want to develop an ambitious cross-border lithium project taking advantage of the geographical proximity of their lithium deposits and aiming to cover the entire value chain from mining to refining, cell and battery manufacturing to battery recycling, he said.
Portugal is already a large producer of low-grade lithium mainly for the ceramics industry, but is preparing to make higher-grade metal used in electric car batteries.
A much-awaited licensing tender for lithium-bearing areas that has been delayed by the COVID-19 pandemic should take place by the year-end, Matos Fernandes said.
He promised the tender would address environmental concerns by local communities and there would be no lithium mining “at any cost”.
The minister also said Portugal would use its six-month presidency of the Council of the European Union to finalise a landmark law that would make the bloc’s climate targets irreversible and speed up emissions cuts this decade, expecting it to be approved in the first half of 2021.
(Reporting by Sergio Goncalves; Editing by Andrei Khalip and David Evans)
Under fire in EU, AstraZeneca CEO says ‘hopefully’ will meet vaccine supply goals
BRUSSELS (Reuters) – AstraZeneca boss Pascal Soriot said on Thursday he hoped to meet the European Union’s expectations on the number of COVID-19 vaccines the company can deliver to the bloc in the second quarter, after big cuts in the first three months of the year.
The Anglo-Swedish drugmaker has been under fire in the EU for its delayed supplies of shots to the 27-nation bloc, which ordered 300 million doses by the end of June.
“We are working 24/7 to improve delivery and hopefully catch up to the expectations for Q2,” Soriot told EU lawmakers in a public hearing.
Under its contract with the EU, the company has committed to delivering 180 million doses in the second quarter.
Soriot did not mention the 180 million target, but said he was confident the company will be able to increase production in the second quarter using factories outside the EU that had no production problems, including in the United States.
He confirmed the company was trying to get 40 million doses of the COVID-19 vaccine to the EU by the end of March, which is less than half the amount it promised for the quarter in its contract.
The EU, which has fallen far behind the United States and former member Britain in vaccinating its public, has repeatedly urged the firm to deliver more.
Lower-than-expected yields – the amount of vaccine that can be produced from base ingredients – at its factories hurt output in the first three months.
Asked about supplies to Britain, which relies on the same factories used by the EU, Soriot said the former EU member with a population of around 66 million was smaller, and noted that most doses produced in the EU were used to serve the EU which has a population of about 450 million.
Executives from rival drugmakers that have developed or are testing COVID-19 vaccines, including Moderna Inc and CureVac NV were also part of the panel.
But most questions were directed at Soriot amid anger that the company has failed to deliver promised vaccine quantities to the bloc on schedule.
Moderna Chief Executive Officer Stephane Bancel said the company has experienced fluctuations as the U.S. biotech group ramps up output of its COVID-19 vaccine.
He said usually a company would stockpile product ahead of a launch, but it is shipping every dose it makes, leaving it without any spare inventory.
His comments came a day after the company increased its output target for this year and 2022 as it invests in additional manufacturing capacity.
(Reporting by Josephine Mason in London and Francesco Guarascio in Brussels; Editing by Susan Fenton, Bill Berkrot and Keith Weir)
Shift to sun, ski and suburbs gives Airbnb advantage over hotels
By Ankit Ajmera
(Reuters) – Airbnb’s quarterly results are likely to show the pandemic may have helped the home rental company lure leisure travelers away from big hotels during the global travel collapse of 2020.
Weary of being locked up in their homes for months, travelers hit the road and booked homes and cottages on Airbnb, while avoiding flights and downtown hotels, analysts said.
Airbnb accounted for 18% of the total U.S. lodging revenue in 2020, up from 11.5% in 2019, data from hotel analytics provider STR and vacation rental data company AirDNA showed.
It outperformed the hotel industry and online travel agents such as Expedia and Booking.com thanks to its greater offer of ‘sun, ski, and suburban’ rental homes, Cowen & Co analysts said.
(Graphic: Airbnb grabs bigger share of U.S. lodging market in pandemic: https://graphics.reuters.com/AIRBNB-RESULTS/yxmpjxqdopr/chart.png)
For an interactive graphic, click here: https://tmsnrt.rs/3pPbQwH
In 2019, about 90% of Airbnb’s bookings came from leisure travels compared with about 20%-30% for large hotels chains, including Marriott and Hilton, that rely on business travel to grow their profits.
“Unfortunately, the hotel operators do not have as much supply in locations where people are willing to travel,” said Jamie Lane, vice president of research at AirDNA.
Lane said with mass vaccinations later in the year, the share of alternative accommodations including Airbnb will drop before continuing to grow at 2%-3% per year once normal travel patterns return.
(Graphic: Airbnb U.S. sales against top hotels: https://graphics.reuters.com/AIRBNB-RESULTS/gjnpwzkdbvw/chart.png)
For an interactive graphic, click here: https://tmsnrt.rs/3dPKvsd
* The San Francisco-based company is expected to report gross bookings of $23.10 billion in 2020, down from about $38 billion a year earlier, according to the mean estimate of 12 analysts according to Refinitiv; gross bookings are seen rising by 50% in 2021.
* Analysts’ mean estimate for Airbnb’s full-year net loss is $3.52 billion, bigger than a loss of $674.3 million a year earlier. Full-year revenue is expected to drop 32% to $3.27 billion.
WALL STREET SENTIMENT
* Of 34 brokerages, 20 rate Airbnb’s stock “hold”, 12 “buy” or higher and two “sell” or lower
* Wall Street’s median 12-month price target for Airbnb is $156â€‹, about 22% below its last closing price of $200.20.
* The company’s stock has nearly tripled since listing in December
(Graphic: Airbnb’s stock has nearly tripled since debut: https://graphics.reuters.com/AIRBNB-RESULTS/jznpnoqrlvl/chart.png)
For an interactive graphic, click here: https://tmsnrt.rs/3dG2lOd
(Reporting by Ankit Ajmera in Bengaluru; Editing by Sweta Singh and Saumyadeb Chakrabarty)
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