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Can’t Touch This! America FANG v. China BATX

The Economist magazine has considered four measures of Chinese corporate unfairness, using data from Morgan Stanley and Bloomberg. The first is the weight of China in the foreign sales that American firms bring in. It stands at 15%; if it was in line with China’s share of world GDP, it would be 20%. This shortfall amounts to a small 1% of American firms’ global sales (both foreign and domestic). America Inc is similarly underweight in the rest of Asia, but there is much less fighting talk about South Korea or Japan.

The second test is whether there is parity in the commercial relationship. Firms based in China make sales to America almost exclusively through goods exports, which were worth $506bn last year. American companies make their sales to China both through exports and through their subsidiaries there, which together delivered about $450bn-500bn in revenue. Again, there is not much of a gap. American firms’ aggregate market share in China, of 6%, is almost double Chinese firms’ share in America, based on the sales of all listed firms.

The third yardstick is whether American firms underperform other multinationals and local firms. In some cases failure is not China-specific. Walmart has had a tough time in China, but has also struggled in Brazil and Britain. Uber sold out to a competitor in China, but has done the same in South-East Asia. American consumer and industrial blue chips are typically of a similar scale in China to their nearest rivals. Thus the sales of Boeing and Airbus, Nike and Adidas, and General Electric and Siemens are all broadly in line with each other. Where America has a comparative advantage—tech—it leads (Facebook, Amazon, Netflix, Google (FANG)). Over half of USA Inc’s sales in China are from tech firms, led by Apple, Intel and Qualcomm. Overall, American firms outperform. For the top 50 that reveal data, sales in China have risen at a compound annual rate of 12% since 2012. That is higher than local firms (9%) and European ones (5%).

The final measure is whether American firms are shut out of some sectors. This is important as China shifts towards services and as the smartphone market, a goldmine, matures. The answer is clearly “yes”. Alphabet, Facebook and Netflix are nowhere, and Wall Street firms are all but excluded from the mainland. Chinese firms, however, can make a similar complaint. The market share of all foreign firms (incuding China’s Baidu, Alibaba,Tencent and Xiaomi popularly called BATX) in Silicon Valley’s software and internet activities, and on Wall Street, is probably below 20%. America’s national-security rules, thickets of regulation, lobbying culture and political climate make it inconceivable that a Chinese firm could play a big role in the internet or in finance there.

Far-sighted bosses know their stance on China must reflect a balanced assessment, not a delusional vision of globalisation in which anything less than a triumph is considered a travesty. But their voices are being drowned out. The shift of the business establishment to hawkishness on China has probably emboldened the White House and also led the Treasury and Department of Commerce to be more combative. Most big firms are blasé about tariffs; they can pass on the cost to clients. Few export lots to China. But soon China will run out of American imports to subject to retaliatory tariffs; in a tit-for-tar war, beating up American firms’ Chinese subsidiaries is a logical next step. USA Inc’s Sino-strop would then end up enabling the opposite of what it wants.

Excerpts from Raging Against Beijing, Economist,  June 30, 2018, at 58

It’s the Democracy, Stupid

Cambridge Analytica, the UK political consultancy at the centre of Facebook’s election manipulation scandal, ran the campaigns of President Uhuru Kenyatta in the 2013 and 2017 Kenyan elections, according to video secretly recorded and broadcast by Britain’s Channel 4 News.

The news channel said it mounted a “sting operation” in which it said had secretly recorded top Cambridge Analytica executives saying they could use bribes, former spies and Ukrainian sex workers to entrap politicians around the world.  The New York Times and the British Observer newspaper reported on Saturday that Cambridge Analytica had acquired private data harvested from more than 50 million Facebook users to support Donald Trump’s 2016 presidential election campaign. Cambridge Analytica and sister company SCL Elections, told Channel 4’s undercover investigative reporting team that his firm secretly stage-managed Kenyatta’s hotly contested campaigns to run the East African nation…

Turnbull of Cambridge Analytica said: “We have rebranded the entire party twice, written the manifesto, done research, analysis, messaging. I think we wrote all the speeches and we staged the whole thing – so just about every element of this candidate,” Turnbull said of his firm’s work for Kenyatta’s political party, known as the National Alliance until 2016, and subsequently as the Jubilee Party…

At a prior meeting, Turnbull of Cambridge Analytica told the reporters: “Our job is to really drop the bucket further down the well than anybody else to understand what are these really deep-seated fears, concerns. “It is no good fighting an election campaign on the facts, because actually it is all about emotion.”  Cambridge Analytica officials were recorded saying they have used a web of shell companies to disguise their activities in elections in Mexico, Malaysia and Brazil, among various countries where they have worked to sway election outcomes.

Excerpts from Cambridge Analytica stage-managed Kenyan president’s campaigns – UK TV, Reuters, Mar. 19, 2018

Who Owns the Internet Pipes

The ships that lay electronic cables across the ocean floor look like cargo vessels with a giant fishing reel on one end. They move ponderously across the open water, lowering insulated wire into shallow trenches in the seabed as they go. This low-tech process hasn’t changed much since 1866, when the SS Great Eastern laid the first reliable trans-Atlantic telegraph cable, capable of transmitting eight words per minute. These days, the cables are made of optical fiber, can carry 100 terabits of data or more in a second, and aren’t owned only by telephone companies.

Among the newcomers are a few of the world’s leading internet companies, which have concluded that, given the cost of renting bandwidth, they may as well make their own connections. Facebook and Microsoft have joined with Spanish broadband provider Telefónica to lay a private trans-Atlantic fiber cable known as Marea. The three companies will divide up the cable’s eight fiber strands, with Facebook and Microsoft each getting two. The project, slated to be completed by the end of 2017, marks the first time Facebook has taken an active role in building a cable, rather than investing in existing projects or routing data through pipes controlled by traditional carriers. Marea will be Microsoft’s second private cable; a trans-Pacific one is scheduled to come online in 2017.

In June 2016, Google said it had finished a data pipeline running from Oregon to Taiwan, and it has at least two more coming: one from the U.S. to Brazil; the other, a joint project with Facebook, will connect Los Angeles and Hong Kong. Amazon.com made its first cable investment in May, announcing plans for a link between Australia and New Zealand and the U.S. Worldwide, 33 cable projects worth an estimated $8.1 billion are scheduled to be online by 2018, according to TeleGeography. That’s up from $1.6 billion worth of cables in the previous three years. And bandwidth demand is expected to double every two years. ..

Cables are just one way to increase the supply of bandwidth and cut costs, says Chetan Sharma, an analyst and telecom consultant. Facebook is also working on satellites, lasers, and drones to deliver internet access to remote places, and Google has experimented with hot air balloons. So far, undersea cables remain the best option for crossing oceans—they’re cheaper, far more reliable, and largely unregulated. The United Nations treats ocean cables in much the same manner as boat traffic, meaning companies can lay and repair cables in international waters pretty much wherever they please, provided they don’t damage existing ones.So Silicon Valley will continue to pour money into technology pioneered in the telegraph era. “It’s about taking control of our destiny,” says Mark Russinovich, chief technology officer for Microsoft’s cloud services division, Azure. “We’re nowhere near being built out.”

Excerpt from Bet you Own Broadband, Bloomberg, Oct. 20, 2016

America Inc. and its Moat

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Warren Buffett, the 21st century’s best-known investor, extols firms that have a “moat” around them—a barrier that offers stability and pricing power.One way American firms have improved their moats in recent times is through creeping consolidation. The Economist has divided the economy into 900-odd sectors covered by America’s five-yearly economic census. Two-thirds of them became more concentrated between 1997 and 2012 (see charts 2 and 3). The weighted average share of the top four firms in each sector has risen from 26% to 32%…

These data make it possible to distinguish between sectors of the economy that are fragmented, concentrated or oligopolistic, and to look at how revenues have fared in each case. Revenues in fragmented industries—those in which the biggest four firms together control less than a third of the market—dropped from 72% of the total in 1997 to 58% in 2012. Concentrated industries, in which the top four firms control between a third and two-thirds of the market, have seen their share of revenues rise from 24% to 33%. And just under a tenth of the activity takes place in industries in which the top four firms control two-thirds or more of sales. This oligopolistic corner of the economy includes niche concerns—dog food, batteries and coffins—but also telecoms, pharmacies and credit cards.

The ability of big firms to influence and navigate an ever-expanding rule book may explain why the rate of small-company creation in America is close to its lowest mark since the 1970s … Small firms normally lack both the working capital needed to deal with red tape and long court cases, and the lobbying power that would bend rules to their purposes….

Another factor that may have made profits stickier is the growing clout of giant institutional shareholders such as BlackRock, State Street and Capital Group. Together they own 10-20% of most American companies, including ones that compete with each other. Claims that they rig things seem far-fetched, particularly since many of these funds are index trackers; their decisions as to what to buy and sell are made for them. But they may well set the tone, for example by demanding that chief executives remain disciplined about pricing and restraining investment in new capacity. The overall effect could mute competition.

The cable television industry has become more tightly controlled, and many Americans rely on a monopoly provider; prices have risen at twice the rate of inflation over the past five years. Consolidation in one of Mr Buffett’s favourite industries, railroads, has seen freight prices rise by 40% in real terms and returns on capital almost double since 2004. The proposed merger of Dow Chemical and DuPont, announced last December, illustrates the trend to concentration. //

Roughly another quarter of abnormal profits comes from the health-care industry, where a cohort of pharmaceutical and medical-equipment firms make aggregate returns on capital of 20-50%. The industry is riddled with special interests and is governed by patent rules that allow firms temporary monopolies on innovative new drugs and inventions. Much of health-care purchasing in America is ultimately controlled by insurance firms. Four of the largest, Anthem, Cigna, Aetna and Humana, are planning to merge into two larger firms.

The rest of the abnormal profits are to be found in the technology sector, where firms such as Google and Facebook enjoy market shares of 40% or more

But many of these arguments can be spun the other way. Alphabet, Facebook and Amazon are not being valued by investors as if they are high risk, but as if their market shares are sustainable and their network effects and accumulation of data will eventually allow them to reap monopoly-style profits. (Alphabet is now among the biggest lobbyists of any firm, spending $17m last year.)…

Perhaps antitrust regulators will act, forcing profits down. The relevant responsibilities are mostly divided between the Department of Justice (DoJ) and the Federal Trade Commission (FTC), although some …[But]Lots of important subjects are beyond their purview. They cannot consider whether the length and security of patents is excessive in an age when intellectual property is so important. They may not dwell deeply on whether the business model of large technology platforms such as Google has a long-term dependence on the monopoly rents that could come from its vast and irreproducible stash of data. They can only touch upon whether outlandishly large institutional shareholders with positions in almost all firms can implicitly guide them not to compete head on; or on why small firms seem to be struggling. Their purpose is to police illegal conduct, not reimagine the world. They lack scope.

Nowhere has the alternative approach been articulated. It would aim to unleash a burst of competition to shake up the comfortable incumbents of America Inc. It would involve a serious effort to remove the red tape and occupational-licensing schemes that strangle small businesses and deter new entrants. It would examine a loosening of the rules that give too much protection to some intellectual-property rights. It would involve more active, albeit cruder, antitrust actions. It would start a more serious conversation about whether it makes sense to have most of the country’s data in the hands of a few very large firms. It would revisit the entire issue of corporate lobbying, which has become a key mechanism by which incumbent firms protect themselves.

Excerpts from Too Much of a Good Thing, Economist, Mar. 26, 2016, at 23

What’s Your Threat Score?

instagram

Among the 38 previously undisclosed companies receiving In-Q-Tel funding, the research focus that stands out is social media mining and surveillance; the portfolio document lists several tech companies pursuing work in this area, including Dataminr, Geofeedia, PATHAR, and TransVoyant….The investments appear to reflect the CIA’s increasing focus on monitoring social media. In September 2015, David Cohen, the CIA’s second-highest ranking official, spoke at length at Cornell University about a litany of challenges stemming from the new media landscape. The Islamic State’s “sophisticated use of Twitter and other social media platforms is a perfect example of the malign use of these technologies,” he said…

The latest round of In-Q-Tel investments comes as the CIA has revamped its outreach to Silicon Valley, establishing a new wing, the Directorate of Digital Innovation…

Dataminr directly licenses a stream of data from Twitter to visualize and quickly spot trends on behalf of law enforcement agencies and hedge funds, among other clients.  Geofeedia collects geotagged social media messages to monitor breaking news events in real time.Geofeedia specializes in collecting geotagged social media messages, from platforms such as Twitter and Instagram, to monitor breaking news events in real time. The company, which counts dozens of local law enforcement agencies as clients, markets its ability to track activist protests on behalf of both corporate interests and police departments.PATHAR mines social media to determine networks of association…

PATHAR’s product, Dunami, is used by the Federal Bureau of Investigation to “mine Twitter, Facebook, Instagram and other social media to determine networks of association, centers of influence and potential signs of radicalization,” according to an investigation by Reveal.

TransVoyant analyzes data points to deliver insights and predictions about global events.  TransVoyant, founded by former Lockheed Martin Vice President Dennis Groseclose, provides a similar service by analyzing multiple data points for so-called decision-makers. The firm touts its ability to monitor Twitter to spot “gang incidents” and threats to journalists. A team from TransVoyant has worked with the U.S. military in Afghanistan to integrate data from satellites, radar, reconnaissance aircraft, and drones….

The recent wave of investments in social media-related companies suggests the CIA has accelerated the drive to make collection of user-generated online data a priority. Alongside its investments in start-ups, In-Q-Tel has also developed a special technology laboratory in Silicon Valley, called Lab41, to provide tools for the intelligence community to connect the dots in large sets of data.  In February, Lab41 published an article exploring the ways in which a Twitter user’s location could be predicted with a degree of certainty through the location of the user’s friends. On Github, an open source website for developers, Lab41 currently has a project to ascertain the “feasibility of using architectures such as Convolutional and Recurrent Neural Networks to classify the positive, negative, or neutral sentiment of Twitter messages towards a specific topic.”

Collecting intelligence on foreign adversaries has potential benefits for counterterrorism, but such CIA-supported surveillance technology is also used for domestic law enforcement and by the private sector to spy on activist groups.

Palantir, one of In-Q-Tel’s earliest investments in the social media analytics realm, was exposed in 2011 by the hacker group LulzSec to be innegotiation for a proposal to track labor union activists and other critics of the U.S. Chamber of Commerce, the largest business lobbying group in Washington. The company, now celebrated as a “tech unicorn” …

Geofeedia, for instance, promotes its research into Greenpeace activists, student demonstrations, minimum wage advocates, and other political movements. Police departments in Oakland, Chicago, Detroit, and other major municipalities havecontracted with Geofeedia, as well as private firms such as the Mall of America and McDonald’s.

Lee Guthman, an executive at Geofeedia, told reporter John Knefel that his company could predict the potential for violence at Black Lives Matter protests just by using the location and sentiment of tweets. Guthman said the technology could gauge sentiment by attaching “positive and negative points” to certain phrases, while measuring “proximity of words to certain words.”

Privacy advocates, however, have expressed concern about these sorts of automated judgments.“When you have private companies deciding which algorithms get you a so-called threat score, or make you a person of interest, there’s obviously room for targeting people based on viewpoints or even unlawfully targeting people based on race or religion,” said Lee Rowland, a senior staff attorney with the American Civil Liberties Union.”

Excerpt from Lee Fang, THE CIA IS INVESTING IN FIRMS THAT MINE YOUR TWEETS AND INSTAGRAM PHOTOS, Intercept, Apr. 14, 2016

Internet and Facebook are the Same and No Shame

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And then there’s Free Basics, the two-year-old project Chief Executive Officer Mark Zuckerberg has called an online 911. In about three dozen developing countries so far, Free Basics—also known as Internet.org—includes a stripped-down version of Facebook and a handful of sites that provide news, weather, nearby health-care options, and other info. One or two carriers in a given country offer the package for free at slow speeds, betting that it will help attract new customers who’ll later upgrade to pricier data plans…

Facebook says Free Basics is meant to make the world more open and connected, not to boost the company’s growth….On Dec. 21, 2016,  the Indian government suspended the program, offered in the country by carrier Reliance Communications….

“Who could possibly be against this?”
Opponents, including some journalists and businesspeople, say Free Basics is dangerous because it fundamentally changes the online economy. If companies are allowed to buy preferential treatment from carriers, the Internet is no longer a level playing field, says Vijay Shekhar Sharma, founder of Indian mobile-payment company Paytm....“We don’t see Free Basics as philanthropy. We see it as a land grab, says Pahwa.

[On Feb. 8, 2016, the Telecom Regulatory Authority of India ruled against Facebook’s scheme.]

Adi Narayan, Facebook’s Fight to Be Free, Bloomberg Business Week, Jan. 14, 2016

The Illusion of Privacy: CISPA

medical records

When a coalition of internet activists and web companies scuppered the Hollywood-sponsored Stop Online Piracy Act (SOPA) last year, they warned Congress that future attempts to push through legislation that threatened digital freedoms would be met with a similar response. Now some of them are up in virtual arms again, this time against the Cyber Intelligence Sharing and Protection Act (CISPA)….

Its fans, which include companies such as IBM and Intel, say the bill’s provisions will help America defend itself against attempts by hackers to penetrate vital infrastructure and pinch companies’ intellectual property. CISPA’s critics, which include the Electronic Frontier Foundation, a digital-rights group, and Mozilla, the maker of the Firefox web browser, argue that it could achieve that goal without riding roughshod over privacy laws designed to prevent the government getting its hands on citizens’ private data without proper judicial oversight.

CISPA aims to encourage intelligence-sharing…  [CISPA requires of companies] to be more forthcoming by offering them an exemption from civil and criminal liability when gathering and sharing data about cyber-threats…[T]he bill is vague about what sort of information on cyber-threats can be shared. So in theory everything from e-mails to medical records could end up being shipped to intelligence agencies, even if it is not needed. Harvey Anderson of Mozilla says CISPA “creates a black hole” through which all kinds of data could be sucked in by the government.

The bill does forbid the use by officials of personal information from medical records, tax returns and a list of other documents. But its critics say it would be far better if companies had to excise such data before sharing what is left. They also note that the broad legal protection CISPA offers to firms could be abused by companies keen to cover up mishaps in their handling of customer data. A more carefully worded legal indemnity would stop that happening.

All this has exposed a rift in the internet world. Whereas Mozilla and other firms want CISPA to be overhauled or scrapped, some web firms that helped sink SOPA seem ambivalent. Google claims it has taken no formal position on the draft legislation and is “watching the process closely”. But TechNet, an industry group whose members include the web giant and Facebook, has written to the House Intelligence Committee expressing support for CISPA. If Google and other web companies do have doubts about some of the bill’s provisions, now would be the time for them to sound the alarm.

Cyber-Security, From SOPA to CISPA, Economist, Apr. 20, 2013, at 32