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Tech crashes Hollywood's party
Your five-minute guide to what's happening in tech this Monday, from Elon Musk's disdain for Facebook to the rise of ransomware.
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Good morning! This Monday, the Trump administration is ready to spend on quantum and AI, Nevada has a new plan for its caucuses, and Bill Gates goes shopping.
People Are Talking
Huawei's North American CSO Andy Purdy got a chilly reception at the Suits & Spooks security conference in D.C. Starting with this line from conference organizer Jeffrey Carr:
- "I think there is legitimate anger toward you personally and the company because you are a U.S. citizen and have a background in U.S. government, and now you're working for the enemy."
Tech companies must help pay for societal problems they cause, a Seattle housing lobbyist told Protocol's Lauren Hepler:
- "Homelessness used to be a sign of urban decline. Now it's a sign of urban success."
Elon Musk tweeted his disdain for the big blue app:
- "#DeleteFacebook It's lame"
There's no way we're going back to the moon in 2024, according to retired ISS commander Leroy Chiao:
- "They've set things up so that there's a somewhat believable story that if the money shows up, they can do it if everything goes perfectly. But we know from history that that doesn't usually happen."
Rebekah Neumann was a driving force behind WeWork, says an anonymous former exec:
- "Adam was sort of wayward before, a failed entrepreneur slash party boy. Whatever it was she saw in him was incredibly productive. Arguably, she harnessed it to such a degree that it went too far."
The Big Story
The White House doubles down on AI, quantum
The Trump administration is set to announce its 2021 budget on Monday, and will reportedly include a huge bump in spending for artificial intelligence and quantum research, according to Reuters.
- The budget will earmark nearly $2 billion for AI research by 2022, up from $973 million today.
- It also includes $860 million in "quantum information sciences" spending within the next two years, double the 2020 number.
- The budget is also expected to include a windfall for the National Science Foundation, "for AI-related grants and interdisciplinary research institutes, rising to more than $850 million."
U.S. CTO Michael Kratsios, without confirming the exact figures, said in a statement that the budget will "ensure America continues to lead the world in critical technologies like AI and quantum. America's economic strength and national security depend on it." The Trump administration has repeatedly expressed that it will do whatever it takes to keep up with China on AI, quantum, 5G, and any other technology that smells like the future.
- At the same time, Reuters reported the White House will propose a cut in overall federal R&D spending: $142.2 billion, down from the Congress-approved $155.9 billion in 2020.
- Last year, the administration cited "security of the American people" and "American leadership in the industries of the future" as its top two R&D priorities. Expect something similar this year.
Oscars
Tech crashes Hollywood's party
"Jeff Bezos is here!" Chris Rock said early on at the Oscars. "He's got cash. When he writes a check, the bank bounces." The crowd laughed, Bezos smile-grimaced, and Rock kept going. When he asked Steve Martin if he had anything to add, Martin just said no. "I like getting my packages on time." Smart guy, that Steve Martin.
The Oscars has become an annual assessment of whether tech (and Netflix in particular) is truly eating Hollywood. But this year, tech was omnipresent.
- Rock blamed Twitter for the Oscars' ongoing hostlessness … which of course sparked a big debate on Twitter.
- Taika Waititi, the director of "Jojo Rabbit" and "Thor: Ragnarok," took issue with Mac keyboards: "They are impossible to write on — they've gotten worse. It makes me want to go back to PCs."
- Samsung teased its not-yet-announced foldable phone with a couple of ads in the show.
- In addition, I saw ads from Google, Adobe, Quibi, Verizon, more Quibi, Microsoft, Apple, Quibi we get it already, Comcast, Facebook, and I swear Quibi I'm gonna lose my mind. And I bet I missed some! The overall message was clear: Some tech companies build tools, some make content, but they all want the creative class to love them.
- Netflix was nominated for 24 Oscars but won just two: for best supporting actress (Laura Dern in "Marriage Story"), and best documentary feature ("American Factory"). It had two Best Picture nominees, but lost to the night's big winner, "Parasite."
My favorite Oscars tech story: In 2016, Matthew Cherry tweeted, "Any 3D artists follow me? I got an Oscar worthy short film idea to go with this image. Get at me 😳." In 2017, that tweet became a Kickstarter. On Sunday night, Cherry won the best animated short Oscar for that idea, which became "Hair Love."
A MESSAGE FROM NASDAQ
Reimagining Markets Everywhere
Nasdaq Technology is reshaping the future of global markets by redefining what a marketplace can be.
Election 2020
Caucusing? There's an(other) app for that
After the app-related chaos in Iowa, Democrats in Nevada were left scrambling to find a new way to run their own caucuses. Rather than use Shadow's app, as they'd originally planned, party officials landed on … a different app. Just don't call it that.
- Party officials told the Times, "we are not using something you can download on your phone." Which may just be a technicality: The Nevada Independent reported that Democrats will instead be loading apps onto iPads and running their caucuses that way.
- In a training video viewed by the Independent, a Dem staffer said that the "tool" — they took great pains to avoid calling it an app — will be used to collect and process data.
- As for how results would be transmitted, the feature that became such a problem in Iowa? "We're still working out the details," the staffer said.
- CBS News reported that the app — sorry, the tool — will work offline, and in fact the iPads used at precincts around Nevada won't be connected to the internet at all.
After Iowa, calls for a return to low-tech options were everywhere. How things go in Nevada will help answer a key question: Was Iowa a one-off disaster, or are high-tech elections a bad idea?
COMING UP THIS WEEK
A House panel wants to talk autonomous cars. On Tuesday, an Energy and Commerce subcommittee will hear from trade groups, safety advocates and transit officials as they continue to work on self-driving legislation.
Samsung has a big event in San Francisco on Tuesday. The company will announce that foldable phone — called the Z Flip — it teased during the Oscars, along with the Galaxy S20 and new AirPod-style Galaxy Bud headphones.
Lyft, Cisco, Shopify, Alibaba, Nvidia, Cloudflare and Roku all report earnings this week.
In Other News
- Amazon and Sony are the latest companies to pull out of Mobile World Congress, the annual mobile jamboree to be held in Barcelona next week, for coronavirus-related reasons. LG, Nvidia, Ericsson and others have done the same. The GSMA, which puts on the show, sent a not-terribly-reassuring note to attendees describing the many safety precautions in place for those who do show up.
- TCL captured the U.S. TV market, and now it's gunning for Samsung. Protocol's Janko Roettgers profiles the Chinese company as it takes on its next task: phones.
- A new video is testing content policies on Twitter and Facebook. President Trump shared an edited video of Nancy Pelosi ripping his State of the Union speech, which some are saying was deceptively edited. Twitter and Facebook both have policies about misleadingly edited content, but neither has taken action on the video. Yet.
- Ransomware is on the rise. A security firm told the Times that 205,280 organizations submitted ransomware-affected files last year, up 41% from 2018. In the last quarter of the year, the average price to free those files was $84,116.
- Thank Travis Kalanick for today's buzzword-soup investment: He is backing a startup building "Club Med for Millennials," which was created at Burning Man and is planning to build 3D-printed hotels all over the world. The pitch is a cross between a hostel and a five-star hotel. Whatever that means.
- Google might be in trouble with the EU again. The Financial Times reports that a group of 34 travel companies — including Expedia and TripAdvisor — have complained to the EU's competition commissioner, saying that Google unfairly promotes its own vacation rental search tool.
One More Thing
Bill Gates hits the open water
A couple of years ago, Bill Gates told Ellen Degeneres that his two craziest billionaire purchases were a plane and a Porsche. Fairly tame for the second-richest person in the world! His latest splurge is a little wilder: a $644 million superyacht. The Telegraph reports that the 370-foot ship, which looks like something not even a Bond villain could dream of, powers its luxe amenities and space for 45 people with "two 28-ton vacuum-sealed tanks to store liquid hydrogen at minus 252 Celcius." Given that Gates is an investor in at least one energy startup, and a big proponent of a world without fossil fuels, it's practically a business expense, right?
A MESSAGE FROM NASDAQ
Reimagining Markets Everywhere
Nasdaq Technology is daring to think differently.
A correction to Friday's newsletter: In my write-up of Charles Levinson's story about Facebook's privacy settlement in Illinois, I mischaracterized the results of the lawsuit. In fact, the settlement is being used to argue in favor of a right to sue in privacy laws being debated elsewhere; it did not end any private citizens' right to sue. Sorry for the mistake.
Thoughts, questions, tips? Send them to me, david@protocol.com, or our tips line, tips@protocol.com. Enjoy your Monday, see you tomorrow.
From Your Site Articles
It's not clear what might fall through the cracks if most of the biggest game studios transition away from selling individual games and instead embrace a mix of free-to-play and subscription bundling.
Image: Christopher T. Fong/Protocol
Subscription services have existed in gaming for decades, both for individual games like World of Warcraft and for console platform services like Sony's PlayStation Plus. But a new wave of game subscriptions — Netflix-style, all-you-can-play buffets — have only just begun emerging in the last few years. Now, as these subscriptions are married to nascent but fast-growing cloud gaming services that allow you to stream games to almost any screen, the industry is bracing itself for a potential paradigm shift akin to what happened to television, film and music.
"It's probably the likes of Netflix and Spotify that have ended up pushing us to this point in games," said Craig Chapple, an industry analyst with the firm Sensor Tower. "How many times have you heard, 'When's the Netflix of gaming coming?'" (Netflix, it turns out, is getting into gaming itself, although it's tempered expectations by saying it will focus on mobile games first.)
It's not clear the industry is ready, or that the economics of gaming today can withstand a full-blown switchover to a subscription and streaming-only world. Video games come in many shapes and sizes, and monetize in vastly different ways. One game might cost $4.99, another $69.99. Some are free, while others charge as much as $14.99 a month just to access.
It's unlikely the whole industry would ever shift to subscription bundling because of these factors. But it's also not clear what might fall through the cracks if most of the biggest game studios do transition in some way away from selling individual games and instead embracing a mix of free-to-play and subscription bundling.
"I am reluctant about subscription services. It's worse than in music. The potential risks here are huge," said Rami Ismail, an independent game developer and consultant who co-developed a series of hit games under the label Vlambeer. "The amount of money that goes into a video game compared to an album is relatively large. There are more people working on them, and it takes more time to make them."
Unlike Hollywood or the music industry, which can standardize pricing because the length and presumed value of a single song or movie is more or less agreed upon, the video game industry has resisted distribution models other media adopted more than 10 years ago. Many consumers still buy games on Blu-ray discs sold in shrink-wrapped plastic boxes at brick-and-mortar retail stores.
"We're looking at the same model [as the music industry]," Ismail added. "People aren't going to pay more for the game subscription than they are for the Spotify subscription. I don't think I could meaningfully argue that people play more games than they listen to music."
The perils of subscription gaming
The game industry's slow adoption of new distribution models has helped create an atmosphere of apprehension around subscription services. It's not necessarily because everyone is resisting change, but rather because it seems an almost Herculean task to yank a ship as large as the nearly $200 billion video game business into the future all at once.
"It's very hard to launch a $120 million game on a subscription service charging $9.99 a month," Shawn Layden, a former PlayStation exec in charge of its internal studios, told Gamesindustry.biz this week. Layden's concern is that the kinds of games that are most at home on subscription services — big-budget console games sold for between $60 and $70 nowadays (like the kind Sony still makes) — aren't catering to a large enough customer base to recoup development costs through a subscription service. That's especially true, he said, as the cost of making those AAA games has ballooned in recent years, all while the price has remained in the same $10 range.
A subscription service doesn't necessarily work for all types of games.
Image: Microsoft
"You pencil it out, you're going to have to have 500 million subscribers before you start to recoup your investment. That's why right now you need to take a loss-leading position to try to grow that base," Layden added. "But still, if you have only 250 million consoles out there, you're not going to get to half a billion subscribers. So how do you circle that square? Nobody has figured that out yet."
Layden's math may be a bit of an exaggeration. Microsoft's Xbox Game Pass most likely does not need half a billion subscribers to make it a profitable and sustainable enterprise. But it does need tens of millions, and perhaps even hundreds of millions, to become a true Netflix-for-games platform, one that can recoup investments on all the games Microsoft wants to include on release day, and the many more games from non-Xbox owned studios it will need to pay for to keep people subscribed.
Take-Two President Karl Slatoff expressed similar concerns last fall, saying on an investor call, "We're highly skeptical that subscriptions will be the only way or the primary way that interactive entertainment is distributed." He added that the typical consumption of video games vastly dwarfed how much consumers pay for them, making them a better deal when sold individually than when bundled. "That's because of the way people consume it. And the price point for owning a title, which is very reasonable and very, very low, actually, on a per-hour basis."
Microsoft bought Bethesda Softworks parent company ZeniMax Media last fall for $7.5 billion as part of a strategy to bring more game studios under its wing and release those developers' backlogs and future games on Game Pass. If Microsoft owns the intellectual property, it can release a new title on Game Pass on the same day it's sold for $60 or $70 everywhere else, as it plans to do with upcoming hits like Bethesda Game Studios' Starfield. That's a huge incentive to sign up for Game Pass, and it's a viable strategy because Microsoft earns enough revenue through its other products and services to make up for it.
"Now, Microsoft can say, 'Subscribe to us. We've got all these first-party studios and also third-party studios,'" Chapple said. "Subscription potentially also makes gaming a bit more accessible. You're not forking out that $60 or $70 to play one game. You're forking out a monthly fee that's quite low to access a whole variety of games." But Microsoft will still have to convince many more third-party developers to join Game Pass to keep subscriber numbers growing, and that means compensating them fairly so they keep coming back.
Microsoft declined to answer individual questions for this story, but it did provide Protocol a statement on its stance on subscription gaming and the way it compensates developers who join Game Pass. "We strive to build a platform where our creative partners can find success," a company spokesperson said. "Our model for how we support and compensate developers who participate in Game Pass is designed to be flexible and was built based on partner feedback. This includes options like fees, bonuses based on usage, and more."
The big free-to-play question
Game developers have offset rising development costs over the years through the use of microtransactions, such as loot boxes and the selling of cosmetic items like character skins. In fact, many developers have simply taken the path of least resistance and opted to design their games as entirely free to play, monetizing the experience through in-game purchasing. Those kinds of games — Fortnite, Roblox, Call of Duty: Warzone, to name a few — do not require subscription platforms at all because they are already at everyone's fingertips for free.
"Free-to-play doesn't fit into a subscription," Chapple said. He noted that there could be a world in which subscription services cover the cost of some in-game microtransactions, but that would "destroy the design of the game, and just cap revenue." Genshin Impact and PUBG Mobile didn't need Xbox Game Pass to become some of the highest-grossing games in the world. All they needed were apps on multiple platforms and a free-to-play business model.
It's likely more games in the future are modeled after those free-to-play hits rather than designed to be bundled into a subscription platform. But there will always be an appetite for big-budget console titles like Sony's upcoming sequels to Horizon Zero Dawn and God of War that cannot be given away for free.
The same is true for breakout indie hits like developer Acid Nerve's new action-adventure title Death's Door, which launched exclusively this month on Xbox devices and PC for $19.99. Critically, the deal Acid Nerve and publisher Devolver Digital struck with Microsoft did not include availability on Xbox Game Pass.
"There's always a bag of money somewhere involved that entices people to take that risk with their work. A lot of those deals are what are keeping a lot of beloved studios open right now," Ismail said. "For a lot of developers this is sort of the new reality. We're not in the business of selling to consumers. We're in the business of selling to platforms, and platforms monetize those games and hopefully give a kickback."
Still, Ismail said it's not clear how that translates to subscription services, which risk undervaluing games as consumer products in the same way streaming music and television made it easier for more people to stop buying CDs and DVDs.
"I have no idea where this is going. I understand how exclusives work and how people make money off exclusives. But with the subscription models, things are obviously new and shifting to a new place," Ismail said. "That's where we're headed, whether we like it or not. On Xbox, people pay $9.95 or $15. How am I going to compete with my $10 game?"
What's fair compensation in a subscription gaming future?
Concern for indie developers has been a focal point of recent discussions around subscription gaming, especially regarding how those services share revenue. One model, an engagement-based revenue-sharing system, is one that might gain traction.
Google Stadia recently implemented it for its Pro subscription tier, offering developers 70% of revenue based on how many days a subscriber signs into the game on Stadia. It's extra revenue for game makers, but it also evokes controversial models like that of Spotify, in which musicians are paid fractions of a penny per stream.
"I feared this day. I warned about this for years and feel no one really took it seriously. Devs being paid based on playtime is the true horror of the subscription-based future — it's the death of creativity, of shorter experiences. I hate this with every fibre of my being," gaming news curator Ryan Brown tweeted on the day of the announcement.
Brown told Protocol he now understands that Stadia Pro also involves other financial incentives brokered directly with Google, and that the revenue a game developer earns isn't solely from the revenue share. But, he said, "I still have very serious concerns regarding monetizing playtime like that. Seems inevitable that'll become the future focus of streaming subscription services."
It should be noted that Stadia Pro is much different than Game Pass, and concerns about its revenue-sharing model do not foretell what Microsoft might implement, though the company did tell Protocol it has "bonuses based on usage." Unlike Game Pass or other cloud offerings, Stadia Pro adds a small number of free games every month and advertises its $9.99 subscription mostly as a way to get discounts on full-price purchases and added benefits like 4K resolution support. In that way it is more similar to platform services like Sony's PlayStation Plus and Microsoft's Xbox Live Gold.
"Our goal while creating Stadia's new 70% revenue-share program was to be as fair as possible, with engagement measured via session days to ensure that different types of game genres weren't adversely impacted," said Alan Joyce, Google Stadia's senior product manager. "For example, if we had merely measured engagement based on total time played, then partners offering narrative-focused RPGs might see drastically more revenue than those with games from pick-up-and-play genres like roguelikes."
Joyce said that "ultimately, no one measure approach is perfect," and the company says it has other methods for generating revenue, like a new affiliate program and a more generous revenue share on full-game purchases.
Still, if the industry does shift toward subscription models en masse, it will likely involve standardized rates, something gaming platforms have resisted and game developers clearly fear. "Even if it's daily, a player might finish [an indie game] in one day or several days. They're not coming back day after day every month. That developer gets a small share of the pie," Chapple said. "It's up to the developer to see if that undervalues their product."
"Platforms right now need to aggressively court developers. At some point they're going to hit a critical mass, and they wouldn't need to do that anymore. At that point, we're at the mercy of the people running those platforms," Ismail said. It's not exactly a rosy future, and he admitted it's not one small developers are being given much of a choice about. But he added the silver lining is that game makers are used to maneuvering such tectonic shifts in the business, and that one way or another, the people who create video games will figure out how to survive.
"Games are woefully unorganized. We don't have the protections that movies or music have," Ismail said. "But we are relatively flexible and pretty adaptive."
The crypto maturity model
Level 1: Open for business
The first step for banks is to train staff so that they understand which cryptocurrency businesses their customers are most likely to interact with and the varying amounts of risk those businesses would introduce.
Crypto-friendly banks can also begin taking on cryptocurrency businesses as clients. Silvergate Bank became one of the first banks to work with cryptocurrency businesses in 2013 and, since then, has onboarded over 900 cryptocurrency businesses as clients. In 2018, the bank rolled out the Silvergate Exchange Network, which allows institutional investors to buy cryptocurrency assets from several different exchanges. The bank's stock price has risen over 1,500% in the last year as bitcoin and other crypto assets have rallied.
Financial institutions are also now able to offer many more products and services to cryptocurrency firms. We've recently seen banks like Citi, JPMorgan Chase and Goldman Sachs offer M&A services and advise on IPOs. Many cryptocurrency businesses now also need foreign exchange services and more robust global settlement mechanisms.
Banks can tap into a huge opportunity by taking on cryptocurrency businesses as clients, but only if they do it safely. Luckily, risk assessment in cryptocurrency is actually easier than in most other industries due to the inherent transparency of most blockchain-based assets. Unlike with fiat currency, most cryptocurrency transactions are recorded on a public ledger. That means that with the right tools, banks can monitor cryptocurrency businesses' transactions, ensuring every client they take on fits into their desired risk profile.
Banks can tap into a huge opportunity by taking on cryptocurrency businesses as clients, but only if they do it safely.
Level 2: Synthetic cryptocurrency products
Once a financial institution has become comfortable working with cryptocurrency businesses, it may want to help both retail and institutional customers get exposure to cryptocurrency markets. That doesn't mean they have to enable direct trading of cryptocurrency. Instead, they can offer synthetic, cryptocurrency-based investment products that allow customers to capture some of cryptocurrency's upside without setting up custody infrastructure.
Asset management firm BlackRock recently invested in bitcoin futures, a useful way to test the cryptocurrency market and attract potential clients interested in crypto assets. Firms like Grayscale Bitcoin Trust allow investors to trade shares the same way they would any other public asset.
Long considered a possible game changer in the industry, no cryptocurrency ETFs have received SEC approval yet, though Canadian investment firm Purpose Invest recently launched North America's first ever bitcoin ETF. And asset manager VanEck recently launched an alternative ETF that holds shares in cryptocurrency infrastructure providers like exchanges, miners and storage providers.
Level 3: Custodial services
Custodial services represent the biggest chasm for banks to cross in their cryptocurrency journey, and only a few traditional financial institutions have rolled out such offerings.
However, those that have begun work on cryptocurrency custodial services offer a helpful model for others. BNY Mellon announced plans to launch a custodial platform in partnership with Fireblocks, a cryptocurrency custodial services provider, and digital asset custody company Northern Trust and Standard Chartered Bank announced plans to partner on a similar solution called Zodia Custody. Asset manager Fidelity took a different approach, using its early start to build its own custodial platform from scratch.
So far, traditional financial institutions have mostly steered clear of offering custodial services for retail customers, but fintech platforms offer an example of how they might do so. Square launched its cryptocurrency custody solution in 2018 by building its own cryptocurrency custody platform called Subzero, allowing its customers to buy over $4.5 billion worth of cryptocurrency in 2020.
The key lesson: While Square and Fidelity show that it's possible to go it alone, many financial institutions are partnering with companies that already have deep cryptocurrency expertise to launch their custodial services. That allows them to test a radical new offering with fewer resources invested, while also drawing on outside cryptocurrency expertise.
Level 4: Beyond custody
Very few financial institutions have gone beyond custodial services in their adoption of cryptocurrency. Fidelity recently announced plans to provide institutional clients the ability to pledge bitcoin as collateral in DeFi-based loans in partnership with BlockFi.
Payments are another place traditional financial institutions can incorporate cryptocurrency. Visa recently partnered with BlockFi to roll out the first ever credit card to give customers bitcoin rewards on all purchases they make, and has a partnership with Crypto.com to release a debit card that allows customers to use their cryptocurrency holdings for purchases.
Cryptocurrency trading is the next service we expect to see mainstream financial institutions offer. Goldman Sachs has already made some cryptocurrency trading possible for institutional clients through its cryptocurrency trading desk. But with the success of exchanges like Coinbase, we expect financial institutions to offer these services to retail clients as well.
Good times ahead
With cryptocurrency becoming increasingly mainstream, banks are no longer viewing it as money for criminals or looking for ways to ban it. Instead, they're recognizing the ways it can help their customers while driving revenue and trying to incorporate it into their larger strategies.
Want to learn more about how funds move around the cryptocurrency ecosystem? Check out Chainalysis Market Intel for real-time metrics to inform investment decisions and improve your understanding of the industry landscape. Sign up for the Market Intel Report and get our latest data and analysis delivered straight to your inbox every week.
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