In this class, I talk about the role of the state as a key factor in certain industries and countries. This tends to be a fuzzy, uncomfortable aspect when it comes to analysis. But it is fairly common for government to act as both policeman and player. And it can often be easy to predict.

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Welcome welcome everybody. My name is Jeff Towson and this is Tech Strategy and the question for today What can Huawei teach tick-tock about the role of the state? And we’ll also talk about some network effects but really wanted to talk about I guess kind of the big news in tech of the year, which is the ban of tick-tock within India and maybe in Australia and maybe in the United States and the similarly big politically oriented news of Huawei being banned in the UK and several other countries and the tech ban underneath that. So the kind of running theme here is how the role of the state, which is politics, is impacting some of these companies and sort of the frameworks I use to take that apart and how I think about it. And I have some decent frameworks for this. I haven’t been surprised yet. Well, a couple little surprises, but I think most of this was pretty much in the trajectory of what I thought was possible. So pat myself on the back a little bit for that. But that’ll be the idea for today, sort of the role of the state and how to think about that. And then depending on time, we’ll do a little bit more on network effects, because that’s an area I wanna dig into a little bit more. Okay. And first, For those of you who are members, as you are probably aware, I’ve been sending out a couple emails in the last week with basically homework assignments. I sort of did struggle with this for a long time. I’ve been talking to several of you over the last week or so getting advice, feedback, about look, it’s one thing for me to talk and hopefully that’s valuable. But you need to be active and you need to be active in a consistent way where you’re making an effort. So this is an attempt to do that. And the other feedback I got, which was just people are getting lost in the content, too many ideas, too many companies, it’s just easy to get lost in it. So I have put out a chart, which is basically the six levels, which contain 25, 26 learning goals. And I will basically push you through these emails, these assignment emails twice a week for what you should be doing every day, well, usually twice a week, I’ll ask you to do something, such that you are consistently moving up from level one to level two, level three. So you won’t have to think about what should I be doing to move forward. I will basically tell you. So I have decided to become a nagging teacher who lives in your inbox. So I’ll show up there every couple days and say, look. If you’re in level two, this is what you need to do right now. For the weekend or during the week, usually once or twice a week. If you’re in level three, this is what I think you should do. You should read this and you should write two paragraphs. So I will just keep giving you, here’s what you should do, here’s what you should do, here’s what you should do. And hopefully you will do them. And if you get busy, that’s okay, you know, but you can count on me just sort of popping up in your inbox, nagging you. Here’s what you should do to stay on core. So you will systematically move up level by level by level. That’s kind of my go-to mechanism I’ve decided. So we’ll see, I think that’s gonna work a lot better. But anyways, you’ve started to get those in the last week, you’ll get two more this week and so on and so on. For those of you who are not members, not subscribers, please I encourage you to sign up and do that. You can do it over at jefftowson.com. There’s a free 30 day trial. So try it out, see how you do and then. Go forward, hopefully. Most people seem to be giving pretty solid feedback. A lot of good stuff, hey, that annoys me, I don’t like this. But I think we’re definitely sort of moving forward in terms of making this better and better over the last months. So we’ll see. Anyways, let’s get into the content. Now in the last couple days, I went on Chinese state TV CGTM, which I go on from time to time. And it was probably my worst episode. Partly because my audio kept cutting out and I did the ultimate faux pas where in the middle of a question I basically just had to say, look, the audio is out, I can’t hear anything. Which news anchors don’t like that. But I literally couldn’t hear anything and I was sitting staring at a camera in a dark room and I was pretty sure I was live. So anyways, it was not my proudest moment but… I actually do like Chinese state TV, CGTN. I do some of these Bloomberg and other things as well, which are more Western-based and sort of private. But CGTN is obviously state media. And I don’t really have a problem with that. A lot of people think that’s an issue. As long as someone’s not editing what I’m saying, or not being, you know, they’re gonna have an opinion, fine. I think most news organizations do have an opinion. And if it’s not a ridiculous opinion, if it’s relatively within the means of discussion and they’re not editing what I say, I don’t have a problem with that. I mean, I’ll say what I think and they’ll like it or they won’t like it and that’s fine. So I did do that and that was interesting, but the subject was about the UK ban of Huawei, which just came down a couple of days ago. And that’s big news. I mean, there’s no way around it. That is big news. Huawei is out of the UK. And that makes a fairly long list of countries they are out of. The US, Japan, Australia, UK, I think mostly India at this point, although I have to keep my eyes on that. It seems to change a little bit here and there. everyone pretty much thinks Canada and New Zealand are going to go as well. Which would basically, you know, all eyes would then pretty much turn to Germany. And that would be, you know, these are the major markets of the world for telco. Yeah, you can do well and Huawei does really well in places like Indonesia and Russia, Turkey, Saudi Arabia. But I mean, if you’re looking at dollar spent, North America, Europe, Japan, those are the big dollars. I mean, there’s no way around it. So that was a big, big deal. And that is a sea change from the way this discussion was playing out one year ago, when basically the arguments were exactly the same. There was a big debate about Huawei and UK last year. The arguments were pretty much the same. It was like, hey, is it a national security thing or not? hey, it’s cheaper, hey, we have cybersecurity. It was pretty much the same thing. So the only question is, look, what changed between then and now? And I would argue it’s the topic for today’s class, which is the role of the state, the perception of the state changed. There was an external effect. It was the external landscape that shifted, but what British Telecom is saying and what Huawei is saying is pretty much the same. So it wasn’t about the companies, it was about everything outside of the companies changed fairly significantly in the last really six months. So that’s the topic for today is the role of the state. And I’ll give you my so what, and I’ll give you some frameworks on it, but my so what is, I actually think Huawei has done very, very well in managing the increasing political, politicization of their industry. I think they’ve actually as a management team and a company have done excellent work. Doesn’t mean they’re gonna win, but I think they’ve actually done a very, very good job as a management team facing this situation. And the converse is I think TikTok has done almost everything wrong. So that’s kind of the point of the day is what can TikTok learn from Huawei about the role of the state? And this is not unexpected because You know, telecommunications has long had a political aspect. If you’re going to sell to a carrier in Kenya or Germany or Italy or the U.S., you know, the government has always been involved to a certain degree. So there, I think they are much wiser about how to deal with markets that have a political nature than say a media company or a web app, a mobile app that I think doesn’t have a good understanding of how you negotiate that. So. When I look at this question, I wrote a book about this. Well, me and Jonathan Wetzel, who is sort of my co-professor, co-author, he’s the sort of senior hand of McKinsey China, who was one of their core staff, who really opened their office in China in 1994. So he’s about as seasoned a veteran as you will meet when it comes to China business. I mean, he, you know. McKinsey is a very good place to learn a lot because you see so many companies so quickly and you see so much proprietary analysis. It’s like drinking from a fire hose. So if you’ve been drinking from the fire hose of China business since 1994, I mean, he is basically like the encyclopedia of China business. He can tell you everything. Like you wanna know what Sino Peck was doing in 1998. He knows exactly what they were doing. Like it’s crazy how much he knows. So we wrote a couple books, one of them was called the One Hour China book, which did quite well for a book, which is not saying much. It’s actually pretty easy to do well as a book. And then we wrote a second one called the One Hour China Consumer book, which I still think was the best thing I’ve written. And pretty much nobody read that one. Like it was, it did all right. It hit the bestseller lifts for a little while, but it pretty much disappeared from the consciousness, which is really frustrating because I thought it was great. But you know, I’ve found that pretty much anything I find really useful and fascinating doesn’t sell. It seems to be the rule of my writing, so I’m not sure what that means. Anyways, we wrote a book and we really looked at this question of, okay, consumer China, we think consumer China was about three big factors that you have to get your brain around. If you want to know why Alibaba, let’s say… Carlsberg Beer, the MBA, KFC, any of these companies that have done well on the consumer side of China, you generally have to get a solid answer to three questions, three factors. And one was the consumer picture. Do people like this or do they not? And our main point was stop thinking about China as the world’s largest consumer market. Think about it as the world’s most complicated consumer market. It is just dramatically more complicated than any other market I know of. It’s complicated and just it’s big. So you gotta get the consumer picture figured out. Why do Chinese consumers love fried chicken? Which they absolutely do, but they don’t like tacos at all. And Yum China actually owns the franchise for Taco Bell and KFC China, which is interesting. So that would be factor one. Factor two would be the competition aspect. And my standard question was, does this company have a competitive advantage? which as you have probably figured out by now is my go-to core, if I’m gonna leave my mark in the world that’s gonna be in the area of competitive advantage and Michael Porter meets Jack Ma. And we wrote a lot about that, how do you think about competitive advantage? Factor two, you’ve gotta get an answer on that one. And then factor three was the one where I thought we really did some, I think original work which was the role of the state. If you’re gonna look at a China business, you have to get an answer to the question of what is the role of the state in this business. If you don’t get a clear answer to all three of those questions, you probably don’t know what’s going on. And sometimes you can’t get a clear answer. Sometimes it’s fuzzy. But sometimes you can. And if you answer those three questions, we had a little diagram we called the consumer pyramid, which I’m putting in the notes here. It’s not in the iTunes notes, but it’s on the webpage, which is basically a pyramid that shows a vertical line and a horizontal line and one, two, three, four, five quadrants. And based on your answer to those three questions, you place this business in one of five quadrants and it kind of tells you what you’re thinking about. Operational marathon, the state carnival, giants and dwarfs, giants, dordens and the state and winner take it all. That was kind of our five quadrants. But it’s really that last question that gives people problems. Usually like you meet very good analysts and executives who are very good at thinking about the nature of their business. This is how we sell beer. And then when they go to China, they realize the role of the state matters and they don’t know how to think about it. It becomes just sort of this fuzzy thing. And analysts definitely have a problem with this. They just view it as some sort of fuzzy risk that they can’t really tease apart the way they can, the business aspects. Well, if you come out of China, which I do, And if you come out of healthcare, which I also do, that’s kind of my background. Both of those situations, the state politics are a huge part of both of them. So I’ve always kind of been comfortable with this. Like if you’re doing healthcare in the United States, it is political from top to bottom. I mean, all the economics, all the players, all the regs, all the clinical decisions, there is a political regulatory aspect. The economics of healthcare are usually politically created, not business or market created. So you get very good at those questions. Well, China is very much the same depending what you’re looking at. If you’re looking at restaurants, not very political at all, not really. Much less political than say healthcare in the United States. But if you’re looking at other sectors like food. You know most of the food in China is run by state-owned enterprises and if you’re looking at telecommunications can be very political And that is not just a China thing most countries have a spectrum The US is very political in certain sectors. So is Germany. So is the UK. So is Japan And it’s generally just you have to know where you are on the spectrum get a solid answer to that question So if you look at the chart I put in the notes, I basically have the pyramid and the why vertical has a question and it says is the state an active force in this business and if it’s yes You go to the right and if it’s no you go to the left side of the pyramid and that tells you what you’re dealing with But I put sort of four sub bullet points, which was question number one are Strategic not commercial SOE’s direct competitors. That would be question one We do see State-owned enterprises in China, but we see them in other countries as well Saudi Arabia the UAE Dubai A lot of countries have state-owned enterprises the BBC, you could argue that’s a part. Just because it’s state-owned doesn’t always mean what people think it means. A lot of SOEs are purely acting like commercial entities. Most of the beer companies of China, Beijing, but they don’t act like state owned. There’s no strategic interest by the government. They basically operate like commercial entities, more or less. So you wanna look at like, are you dealing with a business where the SOEs are strategic, not commercial, and they are direct competitors? And similarly, you can have companies that are not state owned enterprises that are very state controlled, like communications, media, certain types of construction. You know, there’s a whole bunch actually. Some retail can be that way, some commercial development, pharmaceuticals, you know, there’s a lot of banks. I mean, there’s a lot of things that can be not SOEs that in China and other places are, you know, effectively extensions of the objectives of the state. And I did sort of use the word state instead of government because that’s not always the same thing. So question number two. Are regulations against the industry developing or certain types of companies? A lot of times what happens is you just see regulations stacked against foreign ownership in certain areas. You can’t be a foreigner and buy 50% of Citibank, foreigner to the United States. I mean, it’s not allowed. You have to get special permission. The US government does not want foreigners, foreign governments, foreign companies owning more than I think it’s 10% is the current level of US banks. They just don’t want it. So I mean, the government has a position on that. And it can be specific to an industry, it can be specific to a type of ownership, it can be specific to certain companies, which it can. So you wanna see if they look, do they have a position that they’re enforcing it through regulations on this? The flip side to that is, are the regulations actively fueling the development or types of companies? Often in China, what we see is, when the state is an active force, it can really… stymie certain industries like funeral business and state hospitals in China are pretty much, I mean they haven’t really developed in 20 years. I mean you want to know what 1980 looked like in China? Go to into a state hospital. I mean it’s they haven’t changed very much. But the flip side can also be true if it’s a proactive we want this sector to develop. Things can happen very, very quickly. So when the government of China in particular puts its muscle behind, we want to have sports be a major industry by 2025, which the State Council announced, it can take off very, very quickly. If they want to build highways, highways get built very fast. When they put their back behind solar power and wind about 20 years ago, you know, within a handful of years, we saw some Chinese solar companies become the biggest companies in the world in just a handful of years. Now, often that can lead to a crash and burn afterwards, but it can be a big phenomenon in both directions. Question number four, are state-related assets or capabilities decisive in competition? This is actually something I think people don’t pay enough attention to. Oftentimes, it’s not like you’re helping, it’s just like state assets and various other resources help one group versus another. Like if you’re a foreign bank in China, one of your biggest problems in life will be opening branches up until recently, because you had to get permits to open every single branch in every single city and they just didn’t happen. So it wasn’t like anyone was saying, we don’t want these banks to grow. You just waited forever. Meanwhile, ICBC and Bank of China were rolling out like crazy. So it just can sort of, you know, you can just sit at the toll booth forever. waiting for permission to go forward. Meanwhile, your competitor who maybe the state prefers is in the carpool lane and just zipping up the left next to you. So oftentimes there’s stuff like that, there’s contracts the state will give. Who does the government of Shanghai buy its cars from? Well, they buy it from state-owned joint ventures. This was a lot of that contracting, bank loans capabilities. taxes, things like that, permitting, licensing, visas. I mean, there’s a lot of ways the resources of the government can help certain industries or certain players versus others. That’s actually kind of a huge deal in China. And I’m talking about China, but a lot of this is very common in a lot of countries. I used to work in the Middle East a lot, and it was very similar to this. It wasn’t different. It was just a lot simpler and less sophisticated. But the… you go into the oil industry or the energy industry or the Middle East, you’re talking about Saudi Aramco, SAVIC, the mineral companies. I mean, they were all SOEs. So, I mean, you saw similar, Saudi Airlines was another one, things like that. So anyways, you kind of just gotta have a way of taking apart and getting your brain around. Not necessarily every little regulation. That’s just gonna be confusing. You just wanna answer the question, look, is the state an active force in this business and which way are they pointing? And if they’re pointing that direction and it’s against you, you know, generally don’t do it. But you gotta be aware if it’s an issue. And then even if the regulations aren’t here today, you can pretty much be sure they’re coming. Okay, so what’s the point of that for our discussion today? And the slides in there and I’ll put some stuff in there. But let’s say we’re looking at technology come, well let’s say we’re looking at China. You know, on the, where are the political interests? Where is the role of the state? Where is it an active force? Where does it have interests? And this could be China, but we could also easily say Indonesia or India. What about something like bank ownership? I think most countries definitely don’t want a large portion of their banking sector owned by foreigners. They want it to be domestically owned because there’s a lot of risk there. Lot of reasons for this. So that doesn’t surprise anybody that that’s the way it is in China and the US and other places. Well, that has implications if you wanna jump in and do payments business and you wanna do payments between Indonesia and… India and the Philippines, of which there’s a lot of that going on. Well, OK, you’re going to be in a heavily political situation and the state is going to have interests. And that’s just the nature of the business. Everybody knows that, right? That’s not surprising to anybody. What I think has happened here is a couple areas related to tech, people, I think maybe not people. There was just an underestimation of how inherently political this is, like something like TikTok. Media and culture are inherently political. They always are. They have been forever. If, I don’t know, the French government owned the New York Times, people in the US would have a problem with it. Not just the government, people would have a problem with it. because it has a lot of influence on culture, it has a lot of influence on the political system. You know, it’s very natural that major media outlets, whether television or newspaper, radio stations, have very specific rules on ownership, and sometimes it relates to foreign ownership, but a lot of times there’s always been rules in the United States about how much of how many newspapers and radio stations you could own. You know, there were very strict rules. You couldn’t own all of these newspapers because it skewed the system and there were limits on ownership of broadcast networks and things like that. That’s always been the case in media. And if you become influential as a media source, you’re definitely gonna become very sensitive politically and culturally, such as, you know, can you show nudity on television in Indonesia? Of course not, absolutely not. Can you show it on France? Well, I think you can. I haven’t checked, but I’m pretty sure you can. US is kind of an evolving standard. There’s nudity, there’s cursing, there’s violence. There’s having political advertisements versus not having political advertisements. There’s religious sensibilities, there’s cultural sensibilities. Every country has these. So if you’re a significant media outlet, of course you’re gonna be in the center of politics and culture. And TikTok appears to not have been aware of that. that it was obviously gonna be that way, depending how successful. Mark Zuckerberg absolutely knows he lives in that world. Another one I think people are not sort of saying about this same idea is web services, Amazon. Google, Microsoft, the idea that we’re going to put our data and company operations in the cloud. It’s very obvious that Chinese state-owned enterprises are not going to be able to run their companies off Amazon Web Services out of the United States. The data is going to have to be domestically held. It’s probably going to have to run through certain domestically owned companies. They don’t want those operations shifted overseas. And I think most countries will move that. So this whole AWS versus Amazon versus… Ali cloud versus Tencent that is obviously going to have political considerations We know what the US is going to look like we know what China is going to look like Because the six major web players three of them are the US three of them are China, but we don’t know what Indonesia is going to choose So that’s kind of kind of be an interesting area to watch So data and I think popular media like a tick-tock a YouTube we’re clearly going to be political from in a major way and TikTok just appears not to have seen that coming or it’s acting like that was not always gonna be the case, which I found a little surprising. Now in contrast, I think Huawei was one very much used to the idea that it has to deal with the government in its carrier business, not the smartphones. You know, when it sells this equipment that people build their networks on. I think they’ve always known that they have to deal with the government in a lot of countries. And I think they were also very much aware that telecommunications networks had gone from somewhat political to incredibly political because the technology has gone from being something, oh, here we put in our network and we can make phone calls to each other. Oh, that’s nice. That’s 1995. And then, oh, we can make phone calls and we can send data to each other. That’s 2005. But now we’re not talking about… phone lines and mobile phones. We’re talking about networks that connect absolutely everything to absolutely everything else. Your phone, to your business, to the bank, to the street, to the car, to the car’s navigation system, to the smart sensors and the street lights. I mean, IOT plus smart devices plus phones plus smart homes plus smart cars plus autonomous vehicles plus autonomous buses and trains. Everything is becoming connected to everything through these networks, of which 5G is a big step forward, particularly in transportation. And it’s becoming not just ubiquitous in connectivity, but it’s becoming incredibly smart because once these things are connected, they tie to the cloud. Everyone’s building out the algorithms and the cloud and the big data. And, you know, the connectivity is fast enough now that you can run these things that way. So the networks are starting to become more autonomous and AI infused. So we’re looking at a world where everything, maybe not everything, but a whole lot of stuff, banks, transportation systems, national security, the roads, healthcare systems, everything is going to be built on smart networks as sort of the core infrastructure going forward. So their world went from being somewhat political to incredibly political and very sensitive for every country. And that’s just the nature of the technology. And so suddenly selling into the UK, which they were able to do in 2005 and 2006, you know, they’ve been in the UK for about, I think, 13 years now. It wasn’t as sensitive as it is now. And that’s just the way it worked out. And I think they’re aware of this and they played their hand exceptionally well and still came up short. Now, why are they so good? Okay, let’s talk about Huawei and let’s talk about TikTok. Well, I’m gonna talk about them because today is a little bit of me just talking at you because there’s kind of been some big events that have happened. Why was Huawei so good? Starting really the beginning of 2019, you saw them just change a lot of their behavior. Several months prior to this, the US had basically cut off ZTE, the other Chinese telco maker, much, much smaller, from a lot of core components because of their behavior according to the US government. And that was pretty devastating. It almost shut down and ended the company. Obviously, Huawei had to see that. You saw a significant change in their behavior late 2018, 2019. The first thing they did, which I think was really cool, and I give him credit for, is they basically abandoned 20, well it would have been 30 years at that point, 30 years of more or less not talking to the press very much. I mean, Ren Zhengfei, the founder, that guy hadn’t given an interview in 20 years. I mean, I remember he gave his first interview, I think it was New Zealand or Australia, to foreign press, like in 2015. I remember when I read about it, and I was like, oh my God, he gave an interview. That guy has never talked to the press, and yet they just flipped the script, and starting in 2019, in 2019 the number I heard was they brought 2,000 reporters out to campus in Shenzhen, just to show them around and basically look, ask questions. Now obviously they have an interest, but I’ve dealt with them and I’ve visited their campus, and they’re pretty straightforward. They’re like, what do you wanna know? And you can pretty much ask them anything, and some things they’ll say, look, we can’t really say that, but they’re also not like, pushing an agenda or a party line, they’re just like, look, what do you wanna know? You know, and they’re trying to be transparent in this, you know, as much as you can as a business. And, you know, they brought out Ren Zhengfei and they put that guy, he was doing interview after interview after interview, there was cafe with Ren and you could do all this stuff. And, you know, that’s, and if they had problems, which I like. They were open about it. They didn’t hide their problems, which is what most management does. When they got pounded in mid-2019 with the first entity ban, which was late May, that was a huge blow when Trump basically cut them off from quite a few important things, including Android and semiconductors, although they got around that a little bit for a while. They didn’t hide it. They basically came out and said, we just got smashed. They said, look, we’re fighting for our survival. Our supply chain had holes punched into it. Two of the holes went right through our engine block, which was Android and semiconductors. And five weeks after they got hit with that, they had a press conference for their half-year financial results, which they had never done before. They’d always released their half-year financial results in July. They’d been doing that for like 10 years. But they had never had a press conference mid-year, and they had a press conference five years, five weeks after they got hit. and basically just took questions and said, look, yeah, we got hammered, we got hit. You know, that’s what you want. When companies have, I mean, how often do companies say stuff like that? Like, we have major problems and we’re not sure what to do. I mean, when’s the last time you heard a company say something like that to its, you know, well, they don’t have shareholders, so they have owners, employees that own shares. But, you know, I thought that was great. And, you know, that’s the most you can do. And I think that’s the most you can expect. So I give them a lot of credit for that. The other thing is they did, they went out, I mean, the foundation of their business is the long-term contracts with international carriers. Huawei cannot be Huawei if they’re only in China on the carrier side because telecommunications equipment for the carrier business is an international game. You have to get international scale. You have to be 30, 40% of the whole world. There are no regional telco equipment giants and there’s no country. Telco, it’s a global game. So they had to keep their international carriers. They didn’t wanna shrink back to being a regional player like ZTE. And they spent a lot of time meeting with their carriers around the world all last year. And I checked in November-ish and it looks like they had retained their contracts and were signing new ones. So they held their customers. And that has a lot to do with perception. Do they trust you or not? You have to meet with them. They opened security centers in Europe, like where they would open these government run centers, like this is your center, everything data-wise will go through here, it’s under your control. I mean, they’re just trying to reassure. And that those were all good moves. They kept their contracts and then to some extent, they patched most of their supply chain very quickly, at least on the telco, the carrier side. The smartphones got hit pretty hard with Android and they kind of got hit. on their European business especially, but they did really well in ramping up their China sales to compensate for that. It was actually impressive, they ramped up to 42 or 43% of China smartphone sales, which is crazy. So I basically looked at the end of the year and I said, look, I think they handled this as well as any management team I’ve seen. And they took a big hit, no doubt about it. Okay, fine. And then, so we get into 2020 and then… then things got a lot worse. I mean, there’s no way around it. Like when Trump expanded the entity list ban to include TSMC, you know, the 50% of the world’s semiconductors, the advanced semiconductors come out of there. When they effectively got cut off from that, that was a major blow, where suddenly all of your equipment may not be able to have the latest semiconductors and capabilities, which puts you at a tech disadvantage. And there’s not an easy way to replicate that. There’s no easy way to get around that. You’ve got to start, you know, you look at Samsung, you look at Korea, you hope to create an alternative supply chain. You try and build your own foundries in China, which they’re doing, but that could take years and it may never catch up to TSMZ. That was a major hit. And it was a gangster move by the U S government. I mean, this was a, a weaponization of the supply chain. They weren’t saying you as an American company cannot sell to these people, which they’ve done before. They were saying you as a Taiwan based company who has bought equipment from us, you can no longer use our equipment to make your products and sell them to people we don’t want you to. I mean, they basically extended their control extra-territorially, which is, I mean, it’s a gangster move and it worked. I mean, it may not work forever. Nobody’s ever forget they did it, but it was a big move and it really did create, one, it was a big move in their supply chain and also it created a lot of uncertainty with global carriers of are you still gonna have top of the line equipment three to four years from now if you don’t have access to the leading edge chips? So it creates uncertainty with their carriers, which is a big problem. Anyways, and then. So that’s two hits on the supply side. And then they get hit with the UK ban following Japan, India. I think it’s India, I have to check. Australia. I mean, so they got hit on the customer side, they got hit on the supply side in the last two to three months. And, you know, that’s just the way it works. This is role of the state playing out at a major level. and it’s just something management has to learn to deal with. And my takeaways from this was that telecommunications have become hyper-political, both on the customer side and on the supply side. And I don’t think that’s a temporary thing. I think that’s the nature of this business now. I think one of the consequences of that, I think there’s gonna be two consequences. Number one, I think the age of global telecommunications companies is going to be over. I think we’re going to see regional players because Europe will want certain parts of its supply chain in its network to be out of the West. And China and Asia and Russia will want it to be out of there. So I think this idea that we had three global players competing in this space, I think we’re going to see regional players now. because I don’t know how any of these companies can sell to everybody anymore. It’s too political for that now. So that’s gonna be effect. So I think Telco is not gonna be global anymore. I think it’s gonna be regional. And then the other takeaway I had is I think that the supply chains are gonna be duplicated. That instead of one supply chain for semiconductors and foundries and design and all of this stuff, all the critical components, nobody wants to be dependent on any one player because it can be weaponized, which we’ve just seen. So we’re gonna see duplication, just so nobody’s dependent, which means you’re gonna have two supply chains or three supply chains for everything, which is gonna be a lot less efficient than one global supply chain for semiconductors or whatever. And that’s just the nature of it. Nobody wants to be dependent. And I think that’s kind of where Huawei stands up. So my answer to the question of is the state an active force in… telecommunications and smart networks. And I think it’s hyper political now. And I think that’s the future. And I think there are strategic state owned interests. I think the regulations are gonna actively limit certain players and help others. And I think state related assets capabilities are gonna be decisive in competition. Of my four questions under that, I think it’s yes, yes, yes and yes. All four are yes. So if you’re looking at that chart, I put this under the sector of giants, dwarfs in the state where this industry is gonna be defined by a few major players, a bunch of small players, the giants and the dwarfs, and then the state is gonna be the dominant player in this industry. So think three giants, a bunch of dwarfs, and then one giant state. Those are the players in this industry going forward. Now, I mean, compare that to TikTok. Same question, is the state an active force in media, really influential, powerful media? And that’s what TikTok is, it’s not a social network, it’s a media company, there’s no social network there that matters yet. It’s a major media platform. Of course the state is gonna be interested, of course they’re gonna be an active force. It’s gonna have a lot of cultural aspects, it’s gonna have a lot of political aspects, and I would actually argue it has a bigger problem than traditional media had. And this is because of the concept I talked about previously which I called mismatched and or crippled scale. And I’ll put the link for those of you who don’t remember that there for what that was. I’m gonna go through it again because I like to repeat myself. But it was this idea that, I mean, what’s the difference between a company like TikTok and NBC News? or Facebook or YouTube. And the analogy I’ve used is one is a platform business model where, you know, your job is to connect user groups, in this case content creators, with viewers. But you’re not creating the content yourself. I mean, the New York Times and NBC News and all of these and Hollywood, they have to hire writers and directors and create shows and film them and put them out. They’re a traditional pipeline business. But YouTube and TikTok, they’re platforms. They don’t create any of that content themselves. They just enable content creators to create and then they put that on and they connect it with viewers. And depending on what type of platform you are, this can be more professionally generated content or user generated content. So something like Twitter is heavily dependent on professionally generated content. Regular users might put up comments, but it’s really usually the journalists posting their articles there that everyone talks about. And Facebook is kind of the same. I mean, Facebook is basically a news media site that doesn’t create any news or media itself. It’s just where everyone else shares it. And then in addition, it’s personal information, photos and things like that. So, the analogy I’ve used is a traditional pipeline company is a house you built for yourself. A platform company like this is a castle the rest of the village builds for you. You know, Facebook doesn’t have to create any of its own content, but it’s the largest media company in the world, obviously. Okay, and TikTok is the same. Why TikTok, one of the reasons it was so successful is because they focused on user-generated content and making it as easy as possible for anyone to become a content creator, which helps you get the platform off the ground. It helps you get your network effect going. but it also gives you a very, very wide spectrum of user generated content, which enables you to do personalization and customization a lot better. That’s another topic. You know, the difference between being a viewer and a content creator on TikTok is basically turning your phone around. I mean, you’re looking at the phone washing, then you turn it around and you press record, and now you’re a content creator, and that’s it. I mean, they made it very, very easily, and they focused on shareability and things like that. And then they used AI very, very well in terms of matching. So you can get customized feed and as well as to sort of tell users what kind of content they should make that will be the most viral. Anyway, so that was their idea. Now the problem with this is something I’ve talked about before, which is this idea of curation versus censorship versus customization. And people get these mixed up all the time. Anytime you are putting a lot of content out, really any type of supply, you have to curate the supply to ensure a minimum level of quality. My standard example is if you’re starting a dating site and a bunch of dudes go on there and start putting up inappropriate photos, that is a very low quality, let’s call it supply, and all the women get out of there in minutes. Like it happens really fast. So, you know, these dating sites, they will do a lot of curation, which is why, you know, They wanna check you out and check your profile and check your photos, because without that minimum level of quality on the supply, the whole platform doesn’t work. If you go to the supermarket and half the apples are rotten, you don’t go back to that supermarket. Well, this whole idea, so every business does this, but when you’re doing it on a platform where you’re not creating the content yourself, where users are creating the content, it becomes much, much harder to curate. because you’re not in control anymore. That’s the beauty of being a regular business is you control everything because you’re making the car. You’re stocking the shelves. But if you’re a platform business model, you can scale beautifully, the village builds your castle for you. The problem is you don’t have that much control. They can put up crazy stuff and all you can do is react and set rules and hope they don’t. So it’s very hard to curate certain types of content in particular. If… People are putting up YouTube videos, by the millions, I mean, millions of hours all the time are going up. How can YouTube possibly check all of that? How can you curate that content to a minimum level of accepted quality? And what’s even worse is what is considered acceptable quality in content is a political and cultural question that’s different in Indonesia than China. than India, than the United States. So it’s a judgment call that has to be done market by market. And this is why I call it mismatched or crippled scale. When you have one side of your business that scales beautifully, like creating content and posting it, which TikTok does and YouTube do, but the other part of your business, the curation and quality control, it doesn’t scale. So it’s like… You have an engine that goes really, really fast, but you have these tiny wheels on the car. Part of your business is amazingly powerful, but the other part isn’t. You’ve got a mismatch in scale, in your ability to scale, one part of your business versus another. And so this idea of look, content is gonna be sensitive if you are a major media platform. Oh, and we see this other place. Alibaba always has problems with fraud. They scale up tons of transaction, but it’s hard to check the fraud. It’s hard to check. fake goods being posted. We see this in a lot of businesses. It’s even harder in content because it’s a judgment call on what is acceptable. And there is no good mechanism for curating content at massive scale, which is what YouTube has to do. And Facebook has to do, and TikTok has to do. I mean, what can you do? You can have AI run. AI can’t watch a video and know what it’s seeing because AI can’t think. It can’t make a judgment call. AI can scan text and pull out words a little bit and maybe it can do AI, you can do computer vision on photos and videos to, you know, that’s a naked body, some things, but it doesn’t work very well for that. And so, you know, you can have user reviews, which people do vote up, vote down, report this, and you try and get your users to do that. That doesn’t work very well either because a lot of this becomes politically weaponized where you… you review bomb certain things, if you wanna kill a video, a bunch of people get together and they vote it down and it gets pulled. There’s a lot of that behavior going on, trying to game the algorithm. And then you can have content moderators, which is really just censors, where Facebook hires 10, 20, 30,000 of these people and they just look at the flack videos and have to make a call, this one’s okay, this one’s not okay. And people don’t like that either. Because it’s like, wait, I’m an American making a video of why I like or don’t like this politician, and it got deleted by an algorithm that forwarded it to some dude in Sri Lanka who suddenly has the authority to tell me what I can and can’t say. Wait, what? Most of these content moderators are in other countries, so that doesn’t work. None of these work. And this is why Mark Zuckerberg basically gets in trouble every month. And so does YouTube, and so do a lot of these things forever. Because if stuff is going up on the site that is very low quality or considered inappropriate, like let’s say nudity or violence, he’s gonna get yelled at, why is this up? This is unacceptable, which basically means, look, you’re not curating enough. If he does too much and he starts flagging videos, then people say, oh, you’re censoring me. So by the nature of what he does, this mass media vehicle that scales beautifully on production, but not on curation. He’s basically going to get in trouble every month till the end of time. It’s the nature of his job or until they figure out how to solve that scaling problem. Okay. That’s the nature of this. So when TikTok says we’re going to go into India or Indonesia or the U S as a foreign company, not necessarily just a Chinese company, it could be any country, foreign country. It could be a Saudi company going into France. It could be a French company going into Saudi. It doesn’t matter. You are immediately gonna deal with all of these issues and people are gonna have a problem if they don’t know you. So they have the same media problem that every media company has. They just have it at scale. So all of these problems that TikTok is getting into, it’s almost analogous to the telco situation with Huawei. Huawei went from a political, business, telecommunications, to a hyper political business, where it’s very sensitive infrastructure. It’s pretty much the same thing with TikTok and YouTube. They have gone from being relatively sensitive media outlets to being hyper sensitive, hyper political media outlets because of the pure scale of them. They’ve become more political than most media outlets have ever been. Not just because you’re censoring because it’s so big, but you’re censoring people’s comments and their own videos. And people don’t like that. So, I mean, they are sort of a hyper-political version of media the same way Huawei is a hyper-political version of what used to be considered telecommunications. And against this totally predictable situation, I thought they just did everything wrong. Instead of being transparent like Huawei, interview, interview, interview. I mean, they did hundreds of these interviews. Their headquarters was silent. They don’t do interviews. The founder who is the guy in charge is anyone that’s all anyone wants to know about is the guy in charge Who’s making these decisions? Well, it’s Jiang Yimin. The guy never does interviews. He’s hiding. He’s just hidden. So there’s some guy Nobody knows in China who is censoring and doing these political and culturally sensitive issues in in Texas really? No, I mean, you had to do the Huawei strategies. Get out front. For better or for worse, be as transparent as you possibly can be about who you are. And even if they don’t understand your business, maybe they know you. And a lot of this is personal. I’ve said for a long time, if Jack Ma took over TikTok, I think a lot of these problems would go away because he’s actually fairly liked and people generally think he’s an okay guy. Everywhere and if he goes on TV in the US and says look we took these videos down. This is why we did it I tend to think people would be like, okay that that guy seems like a pretty decent, dude You know and maybe it wouldn’t work out but it’s the best card you have to play It’s the only card you have to play They should have been doing what Huawei was doing for the last two years out to campus interview interview interview and hopefully people get Comfortable with you being in this situation and in this position of authority So that would be one. I thought they did the inverse of what Huawei did. Number two, they did some sort of Faco legal moves where they said, well, our offices are based in Silicon Valley and our data is stored there. Nobody bought that, give me a break. You can move data with one email, that doesn’t mean anything. So they did these legalese, and Australia TikTok just put an ad in the paper a couple of days ago, a full page ad in the newspaper in Australia. and number three on the bottom, it says, we are independent. And I’m like, dude, no, you’re not. You’re owned by the parent company. That’s ridiculous. There’s nothing wrong with being owned, but you can’t say you’re not owned by ByteDance. You’re owned by ByteDance. They own you. It’s not even ownership. You’re a direct business division. So these sort of comments are just like, really? I mean, that’s not helping the whole trust issue when you’re doing stuff like that. And then my favorite one is they’ve been putting out a couple… what I would call legalese dodgy word games, where they, the Kevin Mayer, who’s the new CEO of TikTok, American guy who is from Disney, just hired him away from Disney like two months ago. So he’s having a heck of a year. You know, they put out this statement and it was the same statement basically that came out of TikTok Australia and TikTok India, where they basically said, We have never transferred data, I’m paraphrasing, this is not an exact quote. We have never transferred data to the Chinese government and would not do so if asked. So that sounds like a strong statement. It’s not really a strong statement because look at the wording. They very specifically use the phrase, if asked. I would not give that guy my money if he asked me. Well, that’s different that did he order you? It sounds like you’re refusing an order, but that’s not what they’re actually saying. And every one of their press releases uses one of two phrases. It either says, if asked, or we have never received a request and we would not comply with a request. That’s not an exact quote. Again, it’s a, the government, whether it’s China or France or the UK, they’re not gonna request and they’re not gonna ask. It’s gonna be an order. And you kind of dodge the question of would you refuse an order? But it sounds like they would. But if you look at the language, they always use the phrase requested. or asked. So that’s kind of some dodgy word. But no, I actually think it’s honest. They’re actually being very, very honest. If we were asked, we would say no, which is the proper legal answer. But they are kind of dodging the main question. But yeah, what if the, let’s say, what if the British government orders you to turn over the data? Would you do it? Well, we would not do it if asked. I’m not saying if they asked, I’m saying if they ordered you and they showed up with a warrant, are you gonna defy the warrant? Because we know Tim Cook of Apple has done that. He has refused the, was it the FBI, for some data requests and he went to court. So anyways, that stuff doesn’t help. So anyways, they got banned in India, but that was not really specific to them. That was a blanket ban across 50 plus Chinese apps. So that wasn’t specific to them. But a lot of people think there’s gonna be a ban of some kind coming to TikTok in the US where people are not gonna say you can’t have free speech, but we can’t have foreign ownership of a major media platform beyond, let’s say 10%. Which would not be surprising. There’s a lot of rules like that. So anyways, today was a bit of a, today wasn’t really a normal class. This is just me talking about stuff and rambling on a bit. I’m sorry about that. But I mean, I thought there were so many significant political events in the last two months. These are major. We haven’t seen anything this big politically impacting tech in years. I mean, there’s been three of them now. There’s been the India ban of TikTok with the possible ban in Australia and the US. That is a major political move in tech. There was the UK ban of Huawei last week, and then there was Trump’s expanded entity list ban a month or two ago. I mean, those were all seismic shocks to the system. And that’s kind of why I wanted to bring up this idea for today of, you know, what is the role of the state? And that is the concept for today. This is gonna go under one of the learning goals, is to start to tease out, and I’ll lay out over time, some more… sort of complete frameworks for thinking about how do you assess the role of the state in a business, in a tech business? And a lot of the times you don’t get a good answer. It’s like, yeah, it’s fuzzy. But a lot of times you do get a good answer. The TikTok and Huawei situation were pretty predictable. I mean, I was talking about this years ago that I thought this was gonna happen. I didn’t call it explicitly, but I thought it was very likely. And so it wasn’t that much of a surprise. It was clear that telecommunications were gonna become hyper-political. And it was clear that these massive media platforms that can hyper-scale were gonna have a larger and larger impact on culture and politics. And every country was gonna respond to that. Not every country, most major countries would have an issue with that. You can’t put nudity up in Indonesia and not. expect the government to give you a call and say what’s going on on your platform. You cannot have people killed on Was it Facebook where they were live streaming this and not have You know New Zealand government call you up and threaten you with I think they threatened them with arrest If you if you broadcast this stuff in New Zealand, this could be a crime I think was you know, there were predictions that Facebook executives were going to get arrested for this stuff So I thought both of those were sort of clearly gonna become hyper political and the companies, you know, when you’re faced with that, I think Huawei did as good a playbook as you can do. And I think TikTok did the opposite. They kinda did the inverse of what they should have done. And my prediction on them, I mean, I told you my predictions for Telco. I think you will see a alternate supply chains being built, which will make things much more inefficient and less. effective. I think you will see increasing sort of balkanization of a lot of these components where there’ll be more regional players than we’ve seen in the past as opposed to purely global players. On the TikTok side, I think they’re going to have to, I think they can either try and do a Huawei where they just do total transparency, you know, full court press, get to know us. get to know the person in charge, which is all that matters, or more likely, I think they probably have to sell majority share to American investors and become a passive minority owner of this company in the US, which is by the way, exactly how Yahoo acted within China, that they sold Yahoo to Alibaba and they became a passive minority owner of Alibaba and Alibaba.com. And SoftBank has done that play for a long time. And I think, you know, Chinese companies can be passive minority owners of politically sensitive media companies in the United States. I think that’s probably fine. But if they don’t do one of those two plays, I think the likelihood of possibility of a ban is significant. And they just lost, there are two major markets outside of China. The two that mattered are India and the US, and they just lost India. So if they lose the US, their international business just… I mean, it cratered and a lot of their valuation was based on monetization of those platforms over time. Mostly right now, they make their money in China, but their massive growth than user base has been in India, the US, Indonesia, but they haven’t monetized those yet. I mean, most of the revenue is from China still. So that was a big component of their valuation was eventual monetization of international markets. So that is it for today. I guess I’m. One last comment is I actually really like TikTok. I use TikTok all the time. I mean, pretty much every day I’m on TikTok and I think it’s great. I think it’s a great service, it’s great company. Actually, I really like Huawei too. Outside of all these political aspects as a service and a business, I mean, they really make great phones. The high-end Huawei phones are much better than the iPhones or the Samsungs at this point. They’re really outstanding. and their smart devices are great. You know, both companies as business entities are, I think are really, really high quality. It’s just these political factors. They both sort of found themselves in political storms. So I don’t wanna give you the sense of me just banging on them. I actually think both companies are incredibly well run and very, very good at what they do. You know, just the way it is. Okay, the two ideas for today, the two concepts will be in the note, which I want you to remember are, the role of the state, which is something we’re gonna dig into more and more. It’s a bit fuzzier, but it can be important in tech. Definitely it’s important in things like WeChat and payments and communication and things like that. So we’ll get more and more into that. And the other idea from today was mismatched and or crippled scale, which we see this a lot. It’s just kind of an interesting phenomenon. I didn’t get to network effects, I’ll do that next time. I wanna start digging a lot more into network effects, so we’ll do that next week. But that’s it. And… Yeah, things are going really well here. I’m having sort of a great time. I’m teaching this next week, which is fun. For those of you I know, I think several of you are in my class at SEIB, China Europe International Business School in Shanghai. So I’m teaching sort of deal analysis and private equity stuff there, which is my day-to-day stuff. So that’s great, but I’m doing it from here because we’re not having class in person, which is a shame. So I will hopefully see a couple of you on Thursday, Friday. And tomorrow, which is Monday, Monday, Tuesday, I’m giving two days of lectures to a bunch of students out of Italy. And this is kind of fun. There’s a group called ChinaMed, which stands for China Mediterranean. I always thought it was medical. It stands for China Mediterranean. And they started this really clever program based out of the University of Torino obviously Turin, Torino, Northern Italy, sort of up in the industrial side of Italy by the Alps, absolutely beautiful of course, because Italy’s beautiful. And they’re training people in sort of China business. And the way they’re doing that is very clever. I mean, I thought they were just exceptionally smart in the way that they did this. They took masters, sort of foreign affairs and international relations graduates. So people who already understood China and spoke Mandarin. but they’re Italian. And then they basically designed a master’s level program. I think it’s one year, maybe more to learn business. And then you get the masters and then they come out of this program and there are people who are fluent in Mandarin who understand China, the politics, the culture, but also have a basic level of business training. And there’s just a lot of companies in Europe and in Italy and government agencies who need people. who can engage with this side of the world. And so I think they just get snapped up. There’s Ferrari, there’s Lavazza, Coffee, there’s Lamborghini, there’s a lot of fashion companies and they just need people. And I thought it was a very clever program. So I’ve taught there on and off for the last couple years. Plus I like to fly into Italy and give talks. That’s just like an awesome part of the year. So yeah, that’s gonna be great. It’s a really interesting group. Anyways, that’s going to be my week. It’s going to be pretty fun. For this week, for the members, I will be sending you emails to sort of nag you, push you to read an article and, you know, take a stab at a certain question. Keep yourself moving forward. Anyways, you’re going to get two of those from me this week, and I think that’ll kind of be the standard going forward. And for those of you who aren’t members, you know, you know my standard spiel at this point. So I won’t do that anymore. Okay, have a great week, and I will talk to you next week.