Thursday 30 Nov 2023
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This article first appeared in The Edge Malaysia Weekly on December 26, 2022 - January 1, 2023

TWO of the biggest tech frauds in history bookended 2022. On Jan 3, the first trading day, Elizabeth Holmes, founder of blood testing start-up Theranos Inc, was found guilty on four counts of fraud. Theranos had been  valued at over US$9 billion at the height of the fraud in 2015. As the year drew to a close, Sam Bankman-Fried, founder of crypto exchange FTX  Trading Ltd, was arrested in the Bahamas and is now awaiting extradition to the US. Before its collapse, FTX was valued at US$32 billion (RM141.8 billion).

Ironically, this time last year, the global tech sector was at its pinnacle. Valuations for both listed tech companies as well as private venture capital-backed start-ups were at, or fairly close to, all-time highs as money continued to pour into what was seen as a high-growth sector.

One year on, the sector is reeling. The benchmark S&P Information Technology Sector index is down 28% from the start of the year compared with the 19% drop in the S&P 500 index.

The top five tech giants — iPhone maker Apple Inc, software powerhouse Microsoft Inc,  e-commerce giant Inc, search engine supremo Google’s owner Alphabet Inc and Facebook’s owner Meta Platforms Inc had US$3.8 trillion in market capitalisation wiped out in 2022. Clearly, rising interest rates are pressuring unprofitable tech companies that are unlikely to make money for several years. Risk capital is fleeing and the venture capital-backed start-up sector has had brutal down rounds, or valuations ratcheted down substantially in new funding rounds.

One of tech’s hardest-hit segments has been unprofitable, long-gestation enterprise software stocks. A year ago, investors were happy to pay 20 or 30 times sales for some of these high-flying software stocks. Now, they are demanding to see profits. Twilio Inc, which makes messaging software, has seen its stock plunge 89% from its peak, while Zscaler Inc, which makes cloud security software, is down over 70%. That’s despite private equity (PE) firms having bought out some of the unprofitable software firms this past year. On Dec 12, Thoma Bravo LP teamed up with the Abu Dhabi Investment Authority to acquire Coupa Software Inc for US$8 billion, outbidding Vista Equity Partners, a rival that has also been busy buying distressed software names. But don’t expect a handful of acquisitions from PE firms to lift the valuations of the rest of the software sector anytime soon, though.

For years, tech was the sector that added to employment growth in the US. Software or hardware engineers would join tech firms like Google, Apple and Facebook with hefty sign-on bonuses, stock options and other perks. In recent weeks, almost all of the large tech firms have announced layoffs. Meta, which has been under pressure, has cut spending and recently laid off 11,000 employees, or 13% of its total workforce. Amazon, the US’ second largest employer with 1.2 million staffers, and which added over 200,0000 jobs during the pandemic, last month announced it would lay off 10,000 workers.

Networking gear maker Cisco Systems Inc recently announced it was laying off 4,100 people. Salesforce Inc and Microsoft recently laid off 1,000 staffers each. Twitter Inc has got rid of 75% of its total workforce since early October. But just as some companies are firing, others are still hiring, in particular software engineers with expertise in artificial intelligence.

2022 was also the year of one of the most-talked-about deals — the US$44 billion acquisition of microblogging firm Twitter by the then world’s richest man, Elon Musk. Twitter has taken on US$13 billion in debt as part of the deal. That’s over US$1.5 billion in interest payments in 2023. Meanwhile, its ad revenue has halved in part because of the economic slowdown but also because Twitter is now seen as a more toxic platform that few advertisers want to be associated with. A bigger dent has been made at Musk’s other firm, Tesla Inc, whose stock is down 64% this year. By associating with right-wing Republicans, Musk has antagonised the company’s fan base of liberals in California and New York. Although Musk is expected to step down as Twitter CEO soon, his association with the microblogging site and his growing close ties with the extreme right-wing won’t win him new customers for Tesla at a time when the economy is slowing and new electric vehicle competition from both legacy carmakers and start-ups is coming on stream.

Crypto winter may last a while longer

In the aftermath of Bankman-Fried’s brazen embezzlement of US$8 billion from client accounts in FTX to prop up his own hedge fund Alameda Research, the completely unregulated crypto ecosystem is on regulators’ radar screens as well. In Washington DC these days, you hear two narratives: First, cryptocurrencies and everything around them need to be heavily regulated immediately to prevent another scruffy-haired, T-shirt and shorts-wearing fraud like Bankman-Fried trying to con everyone, from unsuspecting fanatics who love it like a pet rock to politicians who went gaga as he showered them with political donations, to prominent venture capital investors like Sequoia Capital, which invested US$214 million in FTX and posted a glowing 13,000-word profile on Bankman-Fried on its website.

The other narrative is that there is no immediate need to regulate cryptos because regulating them will be akin to “legitimising” cryptos. Bitcoin, the largest, is down 75% from its peak late last year, while some of the lesser “coins” are down more than 90% from their peaks in 2021. Clearly, the selling in cryptos is far from over as pressure mounts on exchanges like Binance, and its Chinese-Canadian founder Changpeng Zhao or CZ, who played a key role in the collapse of FTX. Until the scrutiny of Binance and CZ is over and cryptos have settled to a more realistic price level, giving Bitcoin and other major cryptos a Good Housekeeping Seal of Approval in the form of regulation makes little sense.

Regulators could require more stringent registration and reporting requirements for companies that want to run exchanges and other crypto transactions. Much of the policy and regulatory discussions in Washington had centred on whether cryptocurrencies should be regulated as commodities or securities. The US Securities and Exchange Commission (SEC) has been adamant that almost all tokens trade like securities, which would put them under the purview of the SEC. The Commodity Futures Trading Commission (CFTC) noted in its own suit on Dec 13 that Bitcoin, Ether and Tether— a stablecoin pegged to the US dollar— are commodities.

I believe the future is in digital currencies. But don’t get me wrong. Although I am sceptical of cryptocurrencies and believe that 99.9% of crypto coins like FTX’s FTT coin could be fraudulent and have no future, I do believe in the underlying blockchain technology. Not only all sorts of funky coins will soon be in the dustbin of history but also the stablecoins that are purportedly linked to certain fiat currencies. Stablecoins based on the US dollar or euro, issued by some crypto billionaire or even a crypto institution make no sense to the respective central banks or indeed to consumers. Witness the collapse last May of Terra Luna and its UST coin. However, I believe that central bank digital currencies (CBDCs) or the cryptocurrency versions of the US dollar, Singapore dollar, ringgit or baht that are issued by the respective central banks will probably be in our future.

We might not see CBDCs soon but certainly over the next 10 years. Why? Because physical currencies are not only expensive but are also difficult to police. CBDCs will give central banks and regulators a way to clamp down on money laundering and enable governments more visibility on many forms of corruption. Imagine there was no hard physical cash and all financial transactions were digital and we only got paid digitally and made our payments only digitally. Every cent you receive or pay out could potentially be traced. While digital currencies will cut down a lot of crime, they will also probably breed new forms of crime and corruption. But the overall impact will probably be positive, not negative, for most societies. If the government could track most of the money going into your wallet, everyone would pay their fair share of taxes and the overall tax rate would be lower, not higher.

Sure, loss of privacy will be a huge concern but once the world embraced Facebook, WhatsApp, Instagram and other social media, no one can really pretend to have any kind of privacy because we gave those apps permission to constantly track us, monetise all our personal data and make fat profits for their owners. Let’s face it, we surrendered our privacy a long time ago by using the social media apps every day. If you still yearn for the sort of privacy that your grandparents’ generation had, blame Mark Zuckerberg and his ilk, not the new digital payments ecosystem or the upcoming CBDCs.

2022 was also the year we found out that the metaverse was a Nothing Burger. About 13 months ago, Zuckerberg bet the farm on the metaverse. It renamed itself Meta Platforms and announced it was ready to spend up to US$100 billion on infrastructure and research and development. A year later, he is having a rethink. He realises that it could take 10 years before we will see a semblance of a metaverse that rakes in meaningful revenues. Under pressure from its shareholders, Meta has started to tone down expectations and implemented job cuts and slashed spending on infrastructure. Meta’s price is down 64% this past year — its biggest single-year loss in history.

The US’ economic nationalism

One big development on the tech front in 2022 has been the aggressive semiconductor export controls targeting China by US President Joe Biden’s administration. Congress passed a new law called Creating Helpful Incentives to Produce Semiconductors Act, or the CHIPS Act. The law facilitates subsidies to US firms to build chip plants on American soil. Several firms including chip foundries like Intel Inc and GlobalFoundries Inc, and memory chip firm Micron Technology Inc are now building plants in the US. Overseas firms like Taiwan Semiconductor Manufacturing, or TSMC, and South Korea’s Samsung Electronics, which already have plants in the US, are adding more foundries.

Washington has banned US and other Western chip firms from exporting higher-end chips to China to stunt its growth, and listed dozens of Chinese firms that will no longer have access to US technology. On Dec 7, the US added 24 companies to its “Entity List” of Chinese firms that have been blacklisted from acquiring sophisticated western technology. So far, China’s response to the hostile moves has been tepid at best. China needs US technology and for now is willing to let Washington decide what technology it will allow. Analysts say that stance may embolden Biden to extend the White House campaign of economic nationalism beyond chip restrictions and domestic manufacturing subsidies.

How far Biden will go and how much pain Beijing can take could be clearer in the first few months of the new year when Washington begins negotiations with TikTok’s Beijing-based parent Bytedance over data privacy. One thing is clear: Bytedance won’t be forced to sell its entire stake in TikTok but it will have to bring all its cloud servers to the US to prevent Beijing from peeking into the personal data of young Americans. TikTok has in the past negotiated with Oracle Corp as a potential cloud services partner. If Oracle wins the TikTok contract, it will become the fourth-largest cloud infrastructure firm in the US behind Amazon, Microsoft and Google. Cloud services remain the fastest growing and most lucrative segment of tech.

In 2023, as interest rates continue to rise, expect to see more “pain” for the tech sector. There will be more scams uncovered, though not on scale of Theranos or FTX. But out of the tech wreckage, we will see new, leaner and meaner start-ups using an array of new tech emerge to start a new cycle of innovation and growth.


Assif Shameen is a technology writer based in North America


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