Stripe Gets Into Lending, Microsoft Avoids the Big Tech Backlash, and Manufacturers Cut Spending

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FINANCE

Stripe wants to lend money to its business customers: “The San Francisco-based company launched Stripe Capital on Thursday. The service will start in the US and will make loans to businesses that are already Stripe customers, as well as merchants selling on services like Shopify that use Stripe to process payments. Stripe will use the data it has on customers to help determine loan eligibility and terms. …

“Stripe Capital will start out by focusing on loans of about $10,000 to $20,000, according to Stripe Co-Founder John Collison. Much like Jack Dorsey’s payments firm Square Inc., which has its own lending service called Square Capital, Stripe has access to a wide swath of data on its customers. ‘We can constantly be looking at the businesses on Stripe, their cash flow, how they are growing, and who can be productively underwritten for a loan,’ Collison said. Tech companies have become an increasingly popular lending source in recent years. After the 2008 financial crisis, traditional banks pulled back on small business loans, prompting many companies to look elsewhere for capital. Almost a third of loan applicants turned to online lenders in 2018, up from 24 percent in 2017 and 19 percent in 2016, according to a Federal Reserve survey.”

Jack Dorsey expects crypto to transform Square: “As cryptocurrency becomes more widely used, Square will transition to providing a broader range of ‘internet services’ rather than just financial technology, co-founder Jack Dorsey predicted. In an Aug. 5 interview with The Australian Financial Review, Dorsey detailed how he believes the emerging asset class will shape his company’s development. Rather than focusing on money transmission or payments, as at present, the firm will likely begin to develop services ‘like hardware, analytics and payroll and lending,’ Dorsey said. Square integrated bitcoin in 2018, when its Cash App began selling the cryptocurrency to users. This service generated over $190 million in revenue over the first two quarters of this year, yielding shy of $3 million in gross profit.”

THE ECONOMY

American manufacturers are cutting their investments in factories and people: “These companies are buying fewer machines for their factory floors and shortening shifts. The knock-on effect means lower sales for those suppliers and less pay for workers, contributing to slower US economic growth. ‘You have a cloud of dust out there, and you are trying to see clearly through it,’ said Paul Reitz, chief executive of heavy-duty tire maker Titan International Inc. ‘It’s tough to do.’ Mr. Reitz recently delayed buying new machinery for some of Titan’s six US factories. He said sales could be flat or negative this year, down from the 10 percent annual growth he expected heading into 2019. He is considering reducing shifts or laying off workers. …

“Some manufacturers see benefits from rising tariffs. Wenger Manufacturing Inc., which makes equipment for producing breakfast cereals and meat substitutes, is getting more orders from customers in countries like Australia and New Zealand that are selling products in China without paying tariffs, said Dennis Funk, a vice president of the Sabetha, Kan., company. Other companies aren’t changing course as the trade winds shift. ‘We don’t update our forecast on a tweet-by-tweet basis,’ David Burney, financial chief for manufacturer and defense contractor Astronics Corp., told analysts in August.”

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STARTUPS

From equipment automation to data collection and analysis, technology is transforming American farms: “Of all the out-of-the-box products a Silicon Valley tech startup could offer, Bear Flag Robotics may be delivering the most unexpected: plowed fields. The company is developing autonomous tractors, a goal that equipment companies like Case IH, John Deere and Kubota are chasing as well. But the business model of Bear Flag, based in Sunnyvale, Calif., has a twist—it does not build the tractors. Instead, it adapts the sensors and actuators needed for driverless plowing to existing tractors produced by major manufacturers. … ‘Autonomous operation will be a service in agriculture before it’s a product,’ said Igino Cafiero, Bear Flag’s chief executive … The need for driverless farming equipment is intensifying, Mr. Cafiero said, because of a crushing labor shortage, which drives up wages and worker mobility. Tractors equipped with Bear Flag technology are able to work fields around the clock, without a driver, using sensors similar to those in autonomous road vehicles under development: lidar, radar and digital video.”

Pivoting from being a digital content agency, studio216 has become mixed reality startup Altoura: “The company sells enterprise software that creates a ‘digital twin’ of various physical environments. For example, real estate customers use Altoura to create mock-ups of properties that can be shown during a live VoIP call with multiple people at once. Other use cases include retailers that want to train employees about how to sell various products inside a store or how to handle different customer profiles. It’s similar to how Walmart is using virtual reality technology to hire new managers. Another Altoura customer uses the software to train pilots in a ‘digital twin’ of a 737 cockpit.”

Digital freight startup Loadsmart has an online platform that “enables users to get quotes, book trucks, and track their freight from pickup to delivery. Loadsmart is leveraging data and machine learning to build artificial intelligence processes into the complex freight cycle, allowing shippers to book a truck in seconds and providing instant and targeted loads to carriers. … ‘The free-flow model moves the industry from container-specific to container-agnostic. It means that truck drivers will be given the best container available when they arrive at the port, having pre-agreed with a specific mileage band trip,’ said Ricardo Salgado, CEO and co-founder of Loadsmart. ‘As a result, we project that truck drivers will be able to reduce their time to get in and out of the port by at least 25 percent. At the same time, we estimate that port operators will be able to reduce container shuffles by at least 50 percent, which is a huge efficiency gain.’”

PRICING

A big reason movie theaters have been able to stay in business is that $8 popcorn: “It’s easy to write this all off as simple price-gouging. After all, movie theaters have a captive audience—and once you’re inside, they have a monopoly on every secondary good you choose to purchase. But the pricing of these concessions isn’t as simple as it seems. … When a theater wants to show a film, it must agree to pay the distributor a percentage of all ticket sales. This percentage is higher during the first few weeks of a film and decreases over time, but generally averages out to ~70 percent. So, if a theater sells a movie ticket for $9, its cut is only $2.70—and that’s without accounting for other expenses.

“Theater owners could price tickets higher, but it wouldn’t do them much good since 70 percent of any increase goes straight to the studios. Instead, they think of movies as a loss leader: their primary goal is to get as many people through their doors as possible, even if it means breaking even (or losing money) on the price of admission. In fact, the price of a movie ticket hasn’t gone up much in the last 90 years. In 1929, a ticket was $0.35; today, it’s $9. Adjusted for inflation, that’s a fairly reasonable price increase of 108 percent.”

Retailers store cards are charging considerably more than bank-issued cards: “The LoveLoft store card charges an interest rate of 27.24 percent, according to WalletHub. The average retail credit card purchase APR was 25.81 percent in the second quarter of 2019, WalletHub found. The average APR on a traditional bank-issued credit card is 16.91 percent, according to the Federal Reserve’s data for the same quarter.”

REGULATION

The president of United Mine Workers of America says the coal industry is not back: “Cecil Roberts said at an event in Washington that his message to Trump and others running for president in 2020 is: ‘Coal’s not back. Nobody saved the coal industry.’ He said coal-fired plants are closing all over the country, calling it a ‘harsh reality.’ Trump held a rally in West Virginia in August 2018 where he touted his administration’s proposal to allow states to set their own emissions standards for coal-fueled power plants. He declared at the time, ‘We are back. The coal industry is back.’ The Trump administration’s Affordable Clean Energy rule could result in 1,400 more premature deaths by 2030, according to the Environmental Protection Agency, while the Obama-era plan it will replace would have avoided 3,600 premature deaths due to pollution from coal-fired power plants by that year.”

Perhaps the one thing Democrats and Republicans agree on is the need to do something about Big Tech: “Democrats and Republicans at the federal and state levels are coming together to scrutinize the power of the Silicon Valley giants and, potentially, to rein them in. Letitia James, the Democratic attorney general of New York, announced on Friday that attorneys general in eight states—four Democrats and four Republicans—and the District of Columbia had begun an antitrust investigation of Facebook. Next up for state regulators is Google. A similarly bipartisan group led by eight attorneys general is set to announce on Monday a separate but comparable investigation.”

Microsoft has managed to avoid the Big Tech backlash: “Today, Microsoft has positioned itself as the tech sector’s leading advocate on public policy matters like protecting consumer privacy and establishing ethical guidelines for artificial intelligence. Though it has sued to limit government access to users’ data, Microsoft is seen in capitals around the world as the most government-friendly of the tech companies. ‘It’s in a league of its own,’ said Casper Klynge, a foreign-service officer who is Denmark’s ambassador to the technology industry, based in Silicon Valley. ‘There is self-interest, of course. But Microsoft actively engages with governments on important issues far more than we see from the other big tech companies.’

“Market shifts and the evolution of Microsoft’s business over the years help explain the transformation. It is less a consumer company than its peers. For example, Microsoft’s Bing search engine and LinkedIn professional network sell ads, but the company as a whole is not dependent on online advertising and the harvesting of personal data, unlike Facebook and Google. And while big, Microsoft no longer looms as the threatening bully it was in the personal computer era. The company is a healthy No. 2 in markets like cloud computing (behind Amazon) and video games (behind Sony) rather than a dominant No. 1.”

OXFORD STRATEGIC ADVISORY DEAL OF THE DAY 

Microsoft has acquired Movere, a platform that helps customers plan cloud migrations and continuously optimize, monitor, and analyze IT environments.

SPOTLIGHT 

Morning Report reader Hector Marcia has some advice for the owners of Christian Bookstore which had to change its name from CBD due to some confusion: “Yeah sure, I can imagine the headache and frustration the Christian bookstore felt! But I would suggest to legally suit and challenge the misappropriation of the acronym by that so-called weed industry that has nothing to do with the first. So, I’m asking you all: who was the first to use such business initials?”

And that’s what’s ahead.

Please send comments and suggestions to mattg@oxfordcenter.com and lfeldman@oxfordcenter.com.

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