Our EMEA Associate Bill Mew looks back at some of the big tech dramas of 2022 and offers a few predictions for the year ahead.
Alan Cox once said: “I figure lots of predictions is best. People will forget the ones I get wrong and marvel over the rest.” Unfortunately the reality is that rather than marvel at predictions, however visionary, they tend to take them for granted, while things that you get wrong can be repeatedly ridiculed for years to come. It is therefore a thankless task, but here goes, starting in this blog with my review of 2022 and then in the next blog offering my predictions for 2023.
Two major news stories in the business and technology world really stood out last year – Twitter and Crypto – as examples of the exceptionally volatile year we had.
Inflation, Redundancies and Twits
The war in Ukraine led to spikes in oil and food prices which in turn led to a sharp rise in inflation. Some may have seen it all coming and profited from it all, but I doubt that many did. The tech sector has seen a massive sell off and fall in the value of tech stocks as there has been a widesprred re-evaluation of even the largest tech giants. For smaller tech firms and startups, the impact has been even more harsh. Across the tech sector we have seen widespreadredundancies as firms have sought to adjust to the new reality.
This been particularly visible at Twitter. Many may have thought (as I did) that Elon somewhat overbid for Twitter in the first place, but he was after all the richest man in the world so could afford it. The saga that followed, however, exposed the fact that even the greatest entrepreneurs or engineers cannot be brilliant at everything.
Mounting inflation and falling tech stocks made Musk’s bid for Twitter look even more overpriced. While other pundits suggested that Musk would be able to walk away from the deal, even if this meant employing the million dollar exit clause to do so, I was scpetical that the Twitter board or Delaware Chancery Court would allow him to do so.
Unfortunately, in his efforts to wriggle out of the deal, Musk bad mouthed Twitter to such an extent that he scared its advertisers away. Thus when he was finally made to follow through on the deal, he found that the platform’s ad revenue (along with its credibility) had been destroyed.
Having already holed Twitter below the waterline, his bombastic style (carrying a sink into the firm’s offices to suggest that his takeover needed to ‘sink in’) and his botched efforts to find new revenue sources (undermining the value and authenticity of blue check marks by selling them without any vetting) made things so much worse.
At the time of the acquisition, I explained in interviews on the BBC and elsewhere that content moderation is not cheap or easy to do. Unfortunately, a large part of the $45bn funding for the deal had been $13bn of corporate debt for a company that was probably then only worth about $13bn. Thus, immediately after the deal, with its debt almost equal to its value, the company was effectively worthless – resulting in a loss on day one of about £30bn, making it one of the worst deals in history. On top of this the cost of servicing the debt far outweighed Twitter’s cash flow, meaning that it required additional support just to keep it aloat.
The irony is that online advertising revenue is directly related to the trust that exists in any platform, which is itself directly correlated with how effective content moderation is. 4Chan and 8Chan have no content moderation, almost no advertising and thus no value.
Having bad-mouthed Twitter and scared away most of its advertisers, Musk needed content moderation more than ever which required budget and staff, neither of which the newly debt-burdened Twitter could now afford. As both were cut dramatically, rather than leading to cost savings and a return to profit, it undermined any means of effective moderation which was the only chance that Twitter had of attracting back its advertisers. Twitter has therefore now entered a death spiral in which Musk claims it is facing potential bankruptcy.
On top of this, shareholders in Tesla started complaining bitterly that Twitter was too much of a distraction for Musk, just as his Midas touch started to be questioned. Tesla shares fell too.
Almost in parallel, the crypto bubble burst. In theory, cryptocurrencies offered a regulation-free hedge against traditional asset classes that were costly and over-regulated. In reality however, investors that were exposed to falling share prices responded by liquidating their crypto assets. This meant that cryptocurrencies, far from being a hedge, fell in response to the market tightening and did so even more quickly than other asset classes. The fall was sufficient to then expose the highly leveraged positions that many crypto investors were in.
Why this was a surprise to anyone is possibly the biggest surprise at all. Back in May 2021, Musk himself, a long term promoter of crypto currencies, announced that Tesla would no longer be accepting digital payments, and then in June the Chinese authorities started a crack down on crypto transactions and crypto mining, before finally declaring all crypto transactions illegal in September.
The wheels really started falling off though in June 2022 when Celsius Network, a major US cryptocurrency lending company, froze withdrawals and transfers, citing “extreme” conditions and Binance, one of the world’s largest cryptocurrency exchanges, paused bitcoin withdrawals.
Crime was also rife. Some of it was subtle such as market manipulation which was common with such unregulated assets. People at times ‘Pumped and Dumped’ crypto currencies to profit from their rise and at other times they ‘Pooped and Scooped’ them to profit from their fall. However there was far more blatant criminality as well, with hackers stealing $625 million from the Ronin Network in March 2022, Wormhole Bridge losing $325 million in February, Nomad Bridge losing $190 million, Beanstalk Farms losing $182 million, Wintermute losing $162 million, Mango Markets losing $114 million and BNB Chain losing $100 Million.
And it was not just the cybersecurity controls that were exposed. In November 2022 cryptocurrency exchange FTX went bust after its rival Binance pulled out of a deal to buy it. The fall of FTX exposed massive failures in fiduciary controls, with the exchange having an $8 billion hole in its books as former-Billionaire Sam Bankman-Fried (known as SBF) had lent client funds from FTX (his exchange) to Alameda Research (his trading firm).
So, what can we expect in 2023. In my next blog I will offer a few predictions for the year ahead.