Ted Audio Collective It's recording guys.
I see it. Oh my God.
I thought I would never see that red button.
Hi everyone, you're listening to After Hours.
I'm Youngmi and I'm here with Felix and mi here.
Guys, we're on. We're taping.
And it took us only eight hours to connect.
But we did it. That's the important thing.
So for our listeners, we're finding that sometimes the logistics associated with getting the three of us in the same location to tape a podcast can be quite difficult.
So we are taping this remotely.
And, you know, there's some technology kinks that we had to work out, but we did.
Five hours later. Indeed.
Yeah. Okay. So we brought topics in to talk about, right?
I would love for you to tell me what you think about Huawei, the Chinese telecoms company.
Oh, that's a good topic.
And I also want us to talk about Facebook.
They came out with their earnings this week and I wanted to get your take.
That sounds great. Excellent.
Okay. Felix. Yes. Huawei.
Super interesting company.
It will be fair to say the pride of China at this point.
So Huawei is a ninety billion dollar company.
How half of its business is with network carriers.
So think T -Mobile, AT &T and so on.
Forty percent of its business is a consumer business.
So these are handset as good and many people would say better than anything you can buy from Apple.
Now Huawei is controversial for a number of reasons.
Most recently they were in the press because the U .S.
government brought criminal charges against them.
Charges related to stealing technology from T -Mobile when they had the collaboration a couple of years back.
Charges also because the claim was that they undermine Iran sanctions.
All of this is really super interesting because we're now right at the point in time where carriers start rolling out 5G technology.
Really important in the context of how long will it take you to download a particular video on your phone.
But also really important in the context of the Internet of Things.
Millions and millions of devices will be connected to a super fast network.
The more general claim against Huawei and I think the concern is that the Chinese government will use this particular company to build a backdoor into the technology.
And then spy basically on everyone and everything that is going on on the planet.
So lots of controversy, lots of very different views.
What's your what's your take?
So I just want to add one quick thing about this, which is it also now has taken this personal turn where the CFO, who's the daughter of the CEO has been arrested in Canada.
And then on top of that, there's been a retaliatory move by China arresting a few Canadian executives.
So this is no longer just a situation between companies.
People's lives are being impacted and it's getting kind of scary.
And she might be extradited to the U .S.
Exactly right. So, Yemi, what do you think?
Well, this is a complicated one.
I mean, I think Felix, your point about moving to 5G is a really significant one.
A big chunk of the world is essentially focused on rebuilding the plumbing that controls the Internet.
I mean, the race is on.
We're rewiring the entire world with this new Internet called 5G that's going to work in a very different way.
And so the stakes are really very high here.
What's fascinating about the charges that have been levied against Huawei is that they actually have nothing directly to do with the big fear.
The big fear is that if you let Huawei in to build huge parts of your 5G network, they're going to be hidden back doors in this system that will enable the Chinese government to spy.
But as of this point, there's no smoking gun.
In other words, the fear is entirely theoretical at this point.
But on the other hand, that doesn't mean that they're not legitimate.
And I think that's what makes this complicated.
And I think this particular dispute is given everyone pause because, you know, on the one hand, there's no evidence.
On the other hand, it's not crazy to take a step back and think, huh, is it really smart for us to partner up with Huawei to build all of this technology, which, by the way, is not only going to connect things like our refrigerators and our cell phones and our Xboxes, but parts of our national security
apparatus as well. I think this is what is given the whole world pause.
On the evidence point, young me, I actually don't know what we know, right?
I don't think any of us knows what we know, meaning there's no public evidence.
But the U .S. government has been really worried about this for about 10 years now, and this has gone back in time.
So I guess the way I think about this story is that this is about state -sponsored capitalism and that Chinese model coming into clash with the rest of the world.
And the question is, does that model persist in a world where these companies, which is not like Alibaba and other big Chinese companies, which are fundamentally domestic, as they push themselves outside, can they retain that model of close links to the state and state sponsorship?
And to me, I think that's the real clash.
It is the clash of like different forms of capitalism, state -sponsored capitalism, which is what I think fundamentally China has pursued, because Huawei has succeeded, let's not forget, with a lot of state support.
And I think that clash is kind of coming to a head.
And my instinct is, and I say this cautiously because I don't know, but my instinct is China has to rethink that and has to see if they want globally successful companies, they're going to have to change that model in some ways, because I don't see it persisting.
Two elements of what you said, I find particularly interesting, sort of this, what's the right response in a context where there's no evidence?
Is it good enough for some government to claim?
What if a government claims something about US products tomorrow, and if that's the standard, oh my God, we will live in hell.
Because there are 50 ,000 reasons why governments don't like imports from elsewhere.
And if it's this little evidence, I think I'd be very worried.
And in particular, in a context, think about what Huawei has done to already respond to these allegations.
So both in the UK and in Germany, where Huawei is a really important provider of telecoms equipment, they have allowed the national governments to build independent labs.
And so the job of the labs is to independently verify that there's nothing that's not quite kosher about the software itself.
Now, there have been tensions, I think, in the UK in particular.
But I think you couldn't say that Huawei is not a type of company that has really been trying very hard to overcome at least sort of a perception that the moment you're a Chinese company, you're semi -doomed.
And this, I think, frankly, is the Chinese perception of this.
The moment a Chinese company is successful, the US will shut it down.
Well, but just to be clear, it is in a national security space, at least to some degree, it's in a national security space, right?
We wouldn't be doing this with a white box manufacturer.
We wouldn't be doing this in those other settings.
Yes. All I wanted to remind you is, remember the name Edward Snowden?
If there is a government that has been spying on both its people, and if you believe the 2013 evidence for a long time on Chinese networks, it's the US government.
The only firm evidence that we have that massive spying is going on with the help of telecommunications is for the US government.
So it's a little - That's right.
There's so many interesting nuggets embedded in what you just said.
The first being, what a dangerous precedent it is.
If we start to go down a path where we say, without any evidence, we're going to start to impose sanctions or bans against companies, even if we don't have proof.
I mean, that is such a dangerous precedent.
The second point I make is, you know, I've been traveling through Asia and Europe, and I was speaking to one telecom executive, who kind of laughed and said to me, you know, it's a little bit of a choice, and that is, who would you rather want spying on you, China or the US?
And he was making a joke about Snowden, and he said, look, the way this technology is being built right now, it is almost impossible to do 100 % due diligence on this technology.
And that's not just true for Chinese technology, but that's true for competitive technology as well.
And so I think this speaks to trust and credibility.
On the one hand, what hurts China is that they have a history of breaking rules.
Now, the flip side to that is we currently have a president who has been known to engage in personal vendetta or to punish China because he doesn't like China or whatever.
And so I guess what I'm trying to say is, I think it's interesting to consider if we had a different president.
And in that circumstance, if we were making this claim, then I think a lot of people would take it much more at face value, knowing that we wouldn't just recklessly say these things.
But because it's happening in the middle of this trade war, and it's happening in the context of all of this really volatile language that's being thrown around with respect to China, then I think that changes the calculus a little bit.
I think this is so interesting to think about.
In politics, I think to a first approximation, the world is zero sum.
And President Trump in particular, everything is for him just zero sum.
If we see China being successful, it must mean that the US is in trouble, almost without any sort of reflection.
And then, of course, from business and from trade, we know the exact opposite is true.
So the part that worries me the most is we're now taking the logic from politics and we're superimposing it on the business world.
It's all, oh, my God, China is getting richer.
You're building global companies now.
That must mean we're on the defensive.
And so in that sense, I'm struck I have a number of former students who work very closely with the US government.
And they would all describe the sea change going from just being amazed by the fact that China was able to lift hundreds of millions of people out of poverty to now China bashing in a way that was even five, six years ago was almost unthinkable.
Yes. So I think this story is going to be this is the story to watch as a harbinger of things to come on this political economy front.
What I worry about is a longer term in the systemic risk in making China a big enemy.
I think it's just huge.
And there are two dimensions to this.
The first is economic.
I don't think people have really thought through the extent of which a China slowdown will affect growth around the globe.
If China really slows down dramatically as a result of us deciding they are a very big enemy and forcing them into a more contentious position vis -a -vis the rest of the world, people have no idea how interconnected our global supply chain is and what this means for economies around the world.
But the second is the geopolitical dimension, because what you're doing is you are making other countries choose sides.
And some countries will choose the US and some countries will choose China and you will end up starting a new Cold War.
The truth is economic linkages dramatically reduce the incentive for countries to fight each other.
They just do. Economic linkages promote stability.
And this is what makes me very nervous about the path that we're going down.
And Huawei is actually a beautiful example of that.
The quality of Huawei's products today would be completely unthinkable without the very intense, very close collaboration between Huawei and Intel and Huawei and IBM.
What's going to be the next round?
Already today, Huawei is far less dependent on US manufactured chips.
If we pursue this view of seeing China as our enemy, maybe in the short run it'll impose some cost on China.
In the medium term, it'll just mean that these Chinese companies will be completely independent of US -based or US -influenced suppliers.
Fair enough. And we'll split the world.
Fair enough. Well, I mean, there are real issues with the behavior of the companies too.
Right? I mean, we can't neglect that.
I mean, I don't think it is true.
I think everything that you're seeing is right.
But there's been a lot of piracy of ideas.
There's been a lot of intellectual property problems.
There's been a lot of problems.
And so we can't just say some version of boys will be boys.
I mean, I don't think that we can say that.
So one big difference is the main allegation out of the US is now that what China is doing time after time after time is that it's trading market access against access to IP.
And that somehow that's not right.
And we shouldn't allow to do this.
And you can't trade access to markets against something that you want.
And then what do we do?
We impose Iranian sanctions.
How do we get the world to follow?
Oh, we say, look, if you want to do business with Iran, of course, totally your decision, except you don't get access to the US financial system and you don't get access to the US market for doing the exact same thing.
Mehir, I do think you make a good point though, in that you can't turn a blind eye to it either.
And it is real. I mean, the threat is real.
The mistrust is there.
And so there has to be a way to push back on China without completely driving them in.
And so in my view, you need to think about what are the mechanisms that you can begin to use to minimize the distrust?
Are there ways that you could give security experts the ability to inspect the equipment?
Can you demand changes in the governance structures of the companies?
In other words, there are softer touch things that you can begin to do to address the concerns that you have without burning the bridge down completely.
What a fabulous topic for After Hours.
And I think it's also the kind of story that we're just going to revisit again and again, because it's just the beginning of something.
Okay, guys. I want to talk about Facebook now.
They had their earnings report this week.
Revenue and profit beat expectations.
$17 billion in revenue.
Amazing. Revenue up.
30 % profits grew 60%.
What makes it even more remarkable is that you could argue they just came off the worst year they've ever had reputationally.
So let me start there.
What did you think?
What were your biggest takeaways?
So I'm going to put my cards on the table right up front, which is I'm a little bit of a hater.
I've deleted my Facebook account.
You know, so I'm just putting them on the table, just so you understand that.
So I confess, young me, I looked kind of carefully at the results.
And I thought people missed the story, which is you're right, the headline numbers were great.
But look a little more deeply.
The concern has been that got triggered in second quarter of last year, is that actually the economic model is broken.
And there's signs of that.
So just I'll give you a couple of examples.
Yes, revenues grew crazy.
30%. But you know, even things like gross margin, right?
Like the cost of sales went up by five points.
And in fact, that net profit number came out of a big tax benefit.
So if you look under the covers a little bit here, their cost of sales are increasing, which is exactly to the point of does the price they can command in the advertising world different.
And then second, the rest of their cost structure, if they get talked about and thought of as a publisher, then their cost structure swells.
And as it is swelling in Europe in part.
And then finally, their capex doubled.
And that has to do with increased demands that people are placing on them.
So I don't want to be a hater.
But it does feel to me like this was a misunderstood story.
Okay, how about you feel?
So what's really funny is, I looked at the numbers also, and I'm drawing the opposite conclusion.
So let me say a few things.
So I do think that the stable number of users is astounding.
So the number of daily average users is completely stable in the United States, it's growing very slowly in Europe.
And it's growing at a healthy clip.
So where does the softness in revenue come from?
So gross margins go down from 88 to 83%.
Part of that has to do with softness and pricing.
And I think the softness in pricing has two sources.
One is prices in Asia are lower, the mix is changing.
And then stories, the other big revelation in the results has lower ad prices and the traditional formats.
And then the last point I think what you made, which is really important is, so what happens to opex going forward, given all the privacy and reputational concerns, and the company said, for the coming year, there's an $11 billion increase in opex.
That's about 40 ,000 hires.
I think a good fraction of them will be in sort of the regulation, privacy, data, control kind of area.
And then probably a good number of those will be in an area that that's related to new products and new services.
So that's a mixed picture.
But given expectations, I think these results are fabulous.
I think it's funny, because so I have a third point of view.
When I looked at the results, I saw both good and bad, but mostly what I saw was a company in transition.
Yeah, rapid, rapid transition.
Three things really jumped out at me.
The first thing that jumped out at me was both of you guys noted the softness and prices, in part because users are shifting to stories.
This is a really big deal from feeds to stories.
Facebook just has less experience in monetizing stories.
And so that number is going to change over time.
But what you're seeing there is transition, transition in their model.
The second thing that jumped out at me was expenses rising faster than revenue.
And when I looked at that number, I am looking at all of the investments they're making in privacy, security, better network integrity.
So in essentially what you see there is an investment in building what you would hope is a more robust higher integrity platform.
The third thing that really jumped at me was the extent to which there are still to this day, pieces of their platform that are completely under monetized.
And this is, depending how you think about it, this is kind of the scary piece of it.
One of the things that they noted is that going forward, they're essentially integrating their platforms on the back end.
So by platforms, I mean WhatsApp, Instagram, Messenger, Facebook, all of this stuff, the back end is going to be integrated, which means that, you know, if you're on Instagram, you'll be able to directly send a message to someone from Facebook.
And when you think about WhatsApp, and you think about Instagram, those are completely under monetized right now.
And what I saw there is a company that is really poising itself to go after that piece of the platform.
Right. I take your point, which is it's about the under monetization of those apps going forward, they're going to figure it out.
But that to me says, wait a second, what's happening to the main app?
And then do the same monetization possible as you exist in those.
And maybe they do. But I don't think the last 10 years of monetization is going to be the same as the next 10 years on those apps.
And then the thing I want to say, young, I've been thinking a lot about your prediction for 2019 about Amazon and advertising.
And I think the implications of I know this goes way back, young, but I've been thinking about that prediction.
And I think once that happens, and that kicks in, and Amazon becomes a really big player in the advertising market.
I think that is another piece of this puzzle, which we don't yet know how that shakes out.
So it's interesting, particularly Instagram.
So one of my other predictions was that Instagram was going to get increasingly clogged with advertising this year.
And even in the past couple months, you can see that happening.
And so I think the manner in which they monetize on Instagram, it won't look the same as Facebook, because it's a different experience.
But you see the experimentation happening very, very aggressively.
By the way, I don't think it's mutually exclusive to call yourself a hater of Facebook, but to also think my God, this is a freight train, when to feel uncomfortable with what you see happening.
This back end integration thing is a really big deal.
But look, you know, one of the things that's interesting about the timing of these results is that it comes on the heels of yet another controversy involving Facebook.
So apparently, Facebook was paying people $20 a month to install a research app on the phone so that they could research how you use your phone.
But the app violated Apple's Terms of Service.
Once Apple found out about it, they sanctioned Facebook.
What do you think about that?
I mean, I thought this was terrifying in many ways.
The first thing is that people were willing to sell for 20 bucks, every piece of data that they have, including encrypted messages is kind of stunning.
But it was a sign of the fact that the mentality in Facebook hasn't changed, given what has happened over the last 12 months.
And they're willing to push the boundary in a way that is disturbing.
And that was the other lesson I took away from the story.
I fear a little for my reputation, because I come off as that big Facebook fan here.
But I think they did beautifully.
And exactly the way it should be done.
This to me is a model for the future.
Let's think about two things that happened here.
The first one is, for the first time, Facebook acknowledged that Oh, your data is your data.
And if we want to use your data, we will actually have to pay you.
And then the second thing about this that I really loved is because the app was not exclusively, but lots of young people use it.
If someone who was not of age wanted to use it, you had to get parental consent.
And without parental consent, you could not actually get access to the application.
So both of these ideas strike me as exactly right.
The idea that if you want to use my data, be my guest, but I decide when I share and when I don't share and you better compensate me.
And frankly, if you look at my text messages, there's nothing worth 20 bucks.
So if I had to trade, if I had to trade 20 dollars, you're gonna sign up.
Oh, yeah, I would I would have signed up for this in a.
So let me just make sure I get this right.
Felix, that somehow getting a bunch of teenagers who have no idea what consent means to sign up for a $20 a month program is a good thing.
I mean, that to me is the big difference here.
Google every day vacuums all the data you have today ever compensate you.
That is not the same thing as an 18 year old kid who's being told, give me all your data for 20 bucks a month.
And who has no idea what that even means?
I don't think. Well, so if then it's the job of the parents to explain to the kid or the young adult what it means and why you could be concerned and why maybe it's totally okay.
So this along with the Chinese social credit thing, I feel like I love it.
But I feel like you're coming from like totally different points of view.
I just share your sense.
This is terrifying, right?
What do you think? Yeah, for a lot of kids, you know, if they think about what they do in their phones, the games they play and silly text messages they send, and then they say to parents, Hey, I can use 20 bucks a month.
If I let Facebook monitor this stuff, it's really not a big deal.
It's just not a big deal at all.
Now, is that true of every single kid out there?
No, but for a lot of kids, that's the case.
By the way, I think there's no question that Facebook has demonstrated that it is capable of being extraordinarily careless with our data, reckless with our data.
And so there's a reason why nobody trusts Facebook right now.
But what I am saying is I do think when these incidents crop up, we need to be a little take a breath and be able to sort of separate the ones that are truly alarming from the ones that maybe aren't quite so alarming.
To your point, every incident is of the same magnitude, but this is exactly the thing, young me, which is this is just a manifestation of this larger problem about the way they think about this stuff.
And then I take your point, Felix, which is it's good to be better about young people, consent and paying people, but this just to me goes to the core question about Facebook, which is, is there underlying economic model of monetizing the data of people on their network?
One that is sustainable in this world.
And to me, as I learn more, I just get more and more uncomfortable.
So Felix, are you sanguine about the expansion of the Facebook empire?
So I think he's downright excited.
So do I care about Facebook integration?
I mean, it matters greatly from the company's perspective, I don't think of my phone as a place where I should conduct private business.
That's a function of rage.
Sorry, I didn't mean to say that.
Well, it was my birthday yesterday.
So it was like, Oh my God, I feel like we should celebrate it.
So now I feel bad about coming down.
But I think look, for more and more people, it is the only device that they use to conduct business period, private, personal, everything.
I mean, professional.
Okay, we are running out of time.
But I have to ask you, what do you think Facebook is going to look like in three years?
If you look at their past acquisition strategy, it is just astonishing how they anticipated the value of WhatsApp.
It's astonishing how they anticipated the importance of Instagram.
And I think the single biggest question for me about Facebook is, can you one more time anticipate what that next thing is?
In social media, you have these waves and every generation has its own product, its own services that it likes.
And the big Facebook question is, will it grow old with everyone here?
Or will it actually be able to maintain the momentum that it currently has?
What about you? I mean, I don't think the world tends to change so so dramatically as we think it might, I think it's going to look a lot like it does today.
I don't see them being displaced in the short run.
I just think that the economic model is going to change.
The growth is flat.
And then the economics are bad.
What's your take? I think in three years, Facebook is going to be the most maligned and relied upon network in the world.
I really do. I think the amount of resentment people feel toward it will only go up.
Meanwhile, it will be more relied upon than ever.
It's similar to how we malign.
I don't know, Comcast, and yet everyone still uses it.
It's like a utility, everyone.
I do think there will be increased regulation, but I think it will be around the edges.
I mean, think about GDPR.
It hasn't slowed down Facebook one bit.
The kind of regulation that would really change the game, which might mean breaking up or something.
I'm very doubtful that we'll see anything like that.
The one little side note is I think when it comes to photography in particular, I think we're going to see people move to a cleaner platform.
In other words, as Instagram gets clogged up, I think when it comes to photography, people are going to be hungry for a cleaner platform.
So it wouldn't surprise me if we see the emergence of a new platform for that particular purpose.
Okay, guys, do you have picks for me this week?
I do. I would like to recommend an application called Cassette.
And this actually has a little bit to do with an activity that the three of us undertake when we write cases.
We go to companies and we talk to executives.
And of course, we record the conversations and then you get a transcript.
And that whole process of recording conversations, recording meetings, and then even if creating the transcript was painless, having the transcript is also not fabulous because there's so much information.
It takes you forever to read the thing again.
And so what Cassette does is it records a conversation.
But what's the most useful thing is while the conversation is going on, you can insert bookmarks.
So for instance, I might have a bookmark for action items.
So I sit in a meeting, I record the meeting every time something comes up that I need to do, I have a red bookmark for an action item.
I have a yellow bookmark for something that I cannot forget.
And you do it in real time or you push a button, you push, you tap your phone.
And it's fabulous because then, of course, what the app does, you can say, Oh, I want all my action items and you print out all your action items or you populate your calendar with the things that you need to do.
That's fantastic. It's a fabulous app.
Highly recommended.
Cassette. Okay. Alright.
What about you, Mihir?
So I have an episode of a show.
So there's a series called Seven Days Out on Netflix.
And the premise of the series is we're going to follow a big event the seven days prior to it to see how people prepare.
The only one I've seen is the one on Eleven Madison Park.
Oh, yes, I heard about that.
Which is a restaurant in New York and they last year, they were at the top of their game, and then they shut down and they renovated and the reopening happens and the seven days prior, the camera crews are there and they're following these people.
And it's such an inspirational thing to watch.
And I watched it with my girls because you see these people, Daniel Hum and Will Ghidara, who are the two main people and this woman who works with them.
The dedication to perfection and to craft is stunning.
It's seen people who are doing something so well at the top of the field.
It's so inspirational.
Right? So it's just a wonderful thing to watch and I can hardly recommend that.
My wife saw that she was astounded how many things were not done in seven days.
You know, it's like the big opening.
There's so much to do in the last seven days.
That's the thing that impressed her the most.
It's really inspirational, but then it all comes together and that's the really inspirational part.
Oh, okay. Seven days out.
Okay. So my recommendation this week, you know how sometimes you walk into a retail setting and you think, this was made for me.
This entire enterprise was designed just specifically for me.
So I go to Japan quite often for business.
And every time I'm in Japan, I stop by Soutaya bookstore.
It's a chain of bookstores and they are among the most beautiful bookstores in the world.
And they sell not only books, but music, beautiful technology, housewares, ceramics.
The architecture is always really uplifting.
There's food, there are places to sit and lounge around.
It just has a beautiful aesthetic about it.
There are a bunch of them throughout Japan.
I often go to the one in Roppongi or near Rockiten headquarters.
There's one. And I gotta tell you, you know, in this country, going to bookstores, particular ones that are chains, you know, like Barnes and Nobles can be such a depressing experience.
So to walk into a space that is so elevated, it's really quite inspiring as well as relaxing.
And it's a way to find just a few minutes of respite on a busy trip.
So I highly, highly recommend it.
It's Soutaya bookstore.
So that's my recommendation.
That is a great recommendation.
You would love Felix, both of you, you would love it.
You would absolutely love it.
I'm telling you, you'll walk in and you'll think this is for us.
This is for hours there, I'm telling you.
After hours field trip.
Exactly. No, it's really, it's really fantastic.
So that's my recommendation this week.
So that's it. The technology held up, even though we're far away from each other.
But thanks everyone for listening.
This is After Hours.
We'll see you next time.
