fortune--2020-07-21--Why Nextdoor’s CEO hopes users will talk about Black Lives Matter on the platform

Good morning, Broadsheet readers! State Sen. Nikema Williams will replace the late John Lewis on the Georgia ballot, preemie births are down during lockdown, and Nextdoor’s Sarah Friar talks about responding to racism on the platform. Have a thoughtful Tuesday.
-Won’t you be my neighbor? Fortune’s latest Leadership Next podcast features Sarah Friar, CEO of Nextdoor, the app for connecting with your neighbors. It’s a great interview by our colleague Ellen McGirt, and given the way the pandemic has most of us living a newly hyperlocal lifestyle—and in many cases, getting to know and leaning on our neighbors with fresh intensity—it’s a particularly interesting moment to hear from Friar.
Ideally, all is friendly and, well, neighborly on the platform, but in reality that’s not always how it goes. Ellen asks Friar about Black people’s experience on Nextdoor and the CEO acknowledges that the company has “definitely seen examples where Black neighbors have not felt welcome.” In response, Friar says Nextdoor is focused on making changes to the product to try to foster more empathetic dialogue—including a “Kindness Reminder” that kicks in before someone posts a potentially hurtful or offensive comment.
Of course, tech fixes can only go so far, so the biggest thing Nextdoor can do is remove such content—and the people who post it—from the platform. Friar says the company is more willing to go there: “Unequivocally, there is no place for racism on Nextdoor,” she says.
Having grown up in Northern Ireland during The Troubles (and having lived for a time in post-apartheid South Africa as the Truth and Reconciliation Commission did its work), Friar brings a global perspective to the issue. Nextdoor tries to discourage conversation about national politics, and that policy led moderators to remove posts in support of Black Lives Matter, which Friar has said was “our fault.” But the CEO now says that Black Lives Matter “is a local conversation.” When it comes to systematic racism, the company has acknowledged that “we need to want to talk about it, be able to talk about it and be able to talk about it in a constructive way.”
Finally, it’s also worth listening to hear how Friar has managed to get more women onto the company’s board and management team. (One tip: let your reports know you are evaluating them based on their ability to diversify their teams. “People will react if they know what they’re going to be graded against,” she says.)
Listen to the full podcast here.
Kristen Bellstrom
kristen.bellstrom@fortune.com
@kayelbee
Today’s Broadsheet was curated by Emma Hinchliffe.
ALSO IN THE HEADLINES
- Georgia's 5th. Georgia Democrats chose their party's chair, state Sen. Nikema Williams, as their pick to replace the late Rep. John Lewis on the November ballot. Williams was the first Black woman to lead Georgia's Democratic Party and, nominated to represent heavily-Democratic Atlanta, is likely to head to Congress. (Her opponent will be Republican Angela Stanton-King.) Atlanta Journal-Constitution
- Stopping the stop 🛑. When Rep. Maxine Waters saw police pulling over a Black man, she got out of her car to find out what was happening. "They say they're going to give me a ticket—that's OK as long as I watch them," Waters said to a bystander recording the incident. The Root
- Dangerous opinions. U.S. District Judge Esther Salas is overseeing a lawsuit against Deutsche Bank over its relationship to Jeffrey Epstein; when a gunman showed up at her home and killed her son on Sunday, that was the first case that those trying to figure out what happened pointed out. But the suspect in the shooting is Roy Den Hollander, an "anti-feminist" lawyer who had argued a case before Salas and published a long trail of misogynist viewpoints. He is believed to have died by suicide after the shooting. CNN
- Banking on a nomination. The Senate Banking Committee is expected to approve Judy Shelton's nomination to a seat on the Federal Reserve's Board of Governors today, sending the choice to the Senate. Shelton has been widely criticized for her views on a gold standard and flip-flopping on interest rates. Some Republicans initially opposed her nomination but have now joined their colleagues in backing her. New York Times
IN CASE YOU MISSED IT
- Why they strike. Eight workers told Fortune why they participated in yesterday's Strike for Black Lives. "As Black women, we fight so hard to take care of our families," said Deatric Edie, who works three jobs at McDonald’s, Papa John’s, and Wendy’s. "It’s very important to me because I want to be heard, and I want others’ voices to be heard." Fortune
- Walled off. While federal officers patrolled Portland, a group of women organized a "Wall of Moms" to protect protesters from the officers. The mothers chanted "Feds stay clear! Moms are here!" BuzzFeed
- Premature research. During coronavirus lockdowns, some doctors began noticing a lower-than-usual number of premature births, especially for babies born very early. They don't know exactly why yet, but their research could be key to better understanding the causes of early labor. New York Times
-A grown-up deal. Yara Shahidi, the 20-year-old star of Black-ish and Grown-ish, along with her mother Keri Shahidi signed an overall deal with ABC Studios to develop "scripted and alternative television projects." Their new production company is 7th Sun; Shahidi is the youngest producer at ABC. Deadline
ON MY RADAR
Two women sue Fox News, claiming misconduct by Ed Henry and others New York Times
How Sarah Cooper trumped Donald Trump—without saying a word Vanity Fair
Women officers can't reform policing. No one can Bitch Media
PARTING WORDS
"Ugh, what’s this guy doing here? Get him out of here. He’s ruining the vibe."
-Andy Samberg on watching a rare male character appear during the film Portrait of a Lady on Fire and understanding "how when [men] show up it can really change things"


fortune--2020-07-21--No one tried to protect the U.K.’s Brexit referendum from Russian interference, long-awaited report

No one tried to protect the U.K.’s Brexit referendum from Russian interference, long-awaited report shows

The coronavirus pandemic is dramatically changing the way Americans eat

Many in the U.K. were hoping that a key parliamentary report into Russian influence and disinformation would finally settle the question of whether Russia interfered in the Brexit referendum or not. After all, given Russia’s desire to weaken the EU, it had every motive to do so.
Sadly, the report—belatedly published Tuesday by Parliament’s intelligence and security committee—does not do that. It could not, because nobody in the government and intelligence services gave the lawmakers on the committee any assessment of Russian attempts at interfering in the referendum.
The committee reported that nobody in the government or British intelligence was watching out for Russian interference when the 2016 referendum took place, and nobody bothered to try spotting it after the fact.
And the government of Prime Minister Boris Johnson—one of the leading advocates of Brexit, and the U.K.’s former foreign secretary—is still refusing to conduct an inquiry.
“The U.K. is clearly a target for Russia’s disinformation campaigns and political influence operations,” the committee’s report read. “However…It has been surprisingly difficult to establish who has responsibility for what. Overall, the issue of defending the U.K.’s democratic processes and discourse has appeared to be something of a ‘hot potato,’ with no one organization recognizing itself as having an overall lead.”
The committee also said MI5—the U.K.’s domestic intelligence service—had given it “just six lines of text” when asked if there was any secret intelligence to back up widespread public reports about the use of Russian disinformation channels and “bots” and “trolls” to influence the referendum in favor of Britain’s exit from the EU.
The report has been ready for publication since last October, but Johnson blocked its release until well after the November general election, which saw him elected with a thumping majority.
Reading the report, it is not hard to see why he delayed its release. It notes that credible reports of Russian interference in British politics date back to at least 2014, when a Scottish independence referendum took place, but it was only after Russia’s 2016 hack on the U.S. Democratic National Committee that the U.K. government “belatedly realized the level of threat which Russia could pose in this area,” the report said.
“It appears that the [British] Intelligence Community did learn lessons from the U.S. experience, and [the government] recognized the Russian threat to the U.K.’s democratic processes and political discourse,” the report read. “Had the relevant parts of the Intelligence Community conducted a similar threat assessment prior to the referendum, it is inconceivable that they would not have reached the same conclusion as to Russian intent, which might then have led them to take action to protect the process.
“We have not been provided with any post-referendum assessment of Russian attempts at interference,” the committee complained in the report. “This situation is in stark contrast to the U.S. handling of allegations of Russian interference in the 2016 presidential election, where an intelligence community assessment was produced within two months of the vote, with an unclassified summary being made public.
“Whilst the issues at stake in the EU referendum campaign are less clear-cut, it is nonetheless the Committee’s view that the U.K. Intelligence Community should produce an analogous assessment of potential Russian interference in the EU referendum and that an unclassified summary of it be published.”
So, is that going to happen? No.
According to the government’s response to the report, “a retrospective assessment of the EU referendum is not necessary.”
The government did react a little more warmly (if vaguely) to the committee’s recommendation of a new “protocol” with social media companies such as Facebook, which would “ensure that they take covert hostile state use of their platforms seriously, and have clear timescales within which they commit to removing such material.”
“The Government’s relationship with the social media companies continues to evolve. In the context of the COVID-19 response, we are learning valuable lessons which will be applied to our future approach to countering disinformation and other forms of online manipulation,” the government said in its response.
“While the Government welcomes the actions taken by social media companies thus far, including the cooperation they have shown in tackling these issues together, there still issues to be addressed.”


fortune--2020-07-22--Swedish epidemiologist says COVID-19 immunity likely lasts six months—even without antibodies

Subprime lending giant CardWorks offers a glimpse into consumers ’ wallets—and some surprising clues about the economy

Sweden’s top health authority says people who have had the novel coronavirus are likely to be immune for at least six months after being infected, whether they’ve developed antibodies or not.
In new guidance published on Tuesday, the Swedish Public Health Agency said it’s now considered safe for individuals who’ve been infected to come into contact with people in high-risk groups.
“We don’t see cases of people falling ill twice from Covid-19,” state epidemiologist Anders Tegnell said during a press conference in Stockholm. “Hence, our assessment is that if you do get Covid-19 you are immune, even if you don’t develop antibodies.”
But the agency also said that people deemed to be immune can still act as carriers of the virus in society, and must therefore continue to observe social distancing and hygiene guidelines.
The antibody response to Covid-19 is being closely studied by scientists around the world for indications of how long-lasting immunity may be. While there’s little evidence to suggest reinfections are occurring, health experts have yet to pin down exactly how long immunity might last.
A recent study from King’s College London showed that the level of antibodies may drop to a degree that makes them undetectable as soon as three months after infection. However, the body also mounts other forms of immunity responses, including from so-called T-cells, which appear to play an important role in protecting against reinfection with Covid-19.
Research from Sweden’s Karolinska Institutet has indicated that about twice as many people infected by Covid-19 have developed a T-cell mediated immunity response as those who have a detectable level of antibodies.
“The risk of being reinfected and of transmitting the disease to other people is probably very close to zero,” Tegnell said. “Therefore, we think that you can meet other people, even if they are in a high-risk group.”
A Vaccine
Tegnell said he expects a vaccine to be ready for distribution in Sweden “sometime during the first half of 2021,” barring setbacks in the development process.
AstraZeneca Plc has signed an agreement to supply up to 400 million doses to European countries from the end of 2020. The company’s joint efforts with the University of Oxford to develop a vaccine showed promising results this week. But Tegnell said that “anything else would have been a disaster for AstraZeneca.”
Tegnell remains a controversial figure for his decision to advise against imposing a proper lockdown in Sweden. The country currently has one of the highest death rates in the world, measured per 100,000, according to data compiled by Johns Hopkins University.
But there are also signs that the contagion rate in Sweden is slowing, and Tegnell insists his strategy will ultimately be proven a success. That’s as he comes under attack from academics and scientists in his own country, who say he has mishandled the crisis.
What the CDC Says on Immunity
The U.S. Centers for Disease Control and Prevention currently recommends that people who have recovered from Covid-19 should follow quarantine recommendations if they are identified as a contact of a new case when more than 3 months have passed since the onset of the disease.
On Tuesday, Tegnell said Sweden “probably” has achieved a fairly high rate of immunity, which he predicts will protect his country from new outbreaks.
“The upshot is that the epidemic is now slowing down very drastically, in a way that I think few of us would have thought a few weeks ago,” he said. “I am very happy about that. It makes it easier for health care services, and we have fewer fatalities.”


fortune--2020-07-22--Subprime lending giant CardWorks offers a glimpse into consumers’ wallets—and some surprising clues

Subprime lending giant CardWorks offers a glimpse into consumers’ wallets—and some surprising clues about the economy

Swedish epidemiologist says COVID-19 immunity likely lasts six months—even without antibodies

No one in America better understands the risks and rewards of financing America’s wage-earning consumers—the folks locked out of traditional banking but hungry for credit—than Don Berman. The CEO of CardWorks, America’s second-biggest subprime credit card lender, tells Fortune that his customers learned plenty about the benefits of prudence from the financial crisis, and believe it or not, they’re in better shape than before the pandemic struck. Berman is no Pollyanna; he warns that we won’t see the full picture until the waves of government support run out. Still, his best bet is that the low-income consumers who lose their jobs first, but then get hired back fastest, will on a relative basis actually outperform middle-class borrowers through the crisis.
Analysts and money managers are a lot more pessimistic. And their doubts recently helped scotch a big merger deal for CardWorks that would have brought Berman over $1 billion.
When Ally Financial, the nation’s leading auto lender, announced that it was purchasing CardWorks for $2.65 billion on Feb. 18, Wall Street hated the deal. Ally’s shares slid 11.5% that day to their lowest level since 2014. That the announcement caused such backlash is somewhat surprising, given that jobs were plentiful, and low-income borrowers were making their payments most reliably, and suffering the fewest defaults, in decades.
But investors fretted that Ally was paying a big price at the peak of an unusually strong credit cycle. When the inevitable recession arrived, the skeptics worried, subprime borrowers would revert from their unusually terrific payments record to the normal level of much higher delinquencies. Then the coronavirus crisis pummeled the outlook for all consumer credit, but especially for the low-income folks hardest hit by unemployment, making the merger look even more like a loser and sharpening the descent in Ally’s stock.
The second-largest pending financial services merger of 2020, behind only Morgan Stanley’s $13 billion acquisition of eTrade, soon fell victim to the pandemic. On June 24, Ally issued a press release declaring that it had “mutually agreed” with CardWorks to scuttle the union. Jeffrey J. Brown, Ally’s CEO, provided no details on the reason for the breakup, stating only, “Given the unprecedented market conditions resulting from the COVID-19 global pandemic, Don Berman and I…believe it’s in the best interests of our customers and stakeholders to terminate the agreement.” Wall Street cheered the breakup, boosting Ally’s shares that day by 12%.
The companies’ decision to walk, in and of itself, raised a red alert for money managers that specialize in backing low-income lenders. They reckoned that the cancellation was a bellwether for a meltdown in subprime. As one prominent investor who has prospered by betting on the sector told me on background: “My theory is that abandoning the deal showed that there would be all kinds of problems coming in consumer finance.” He also noted that the key metric for subprime is unemployment, and that “when you have a hiccup in unemployment, you have problems.” He went on to say that to nix the deal, both sides must have seen far worse times ahead than even the scale of delinquencies the markets were expecting.
It was the death of the Ally-CardWorks merger that confirmed his worst fears: “I thought there might be a soft landing up until the CardWorks deal got canceled.”
On July 9 I spoke to Don Berman to get his firsthand view of how America’s wage earners will weather the crisis. I asked Berman if he and Ally had scotched the merger because of severe problems brewing in his portfolio. Berman dismissed that notion with a single word: “Hogwash.”
Born in the Bronx
Berman provided a brief profile of CardWorks and its borrowers, and his own story growing up in what he calls a “subprime family in the Bronx.” Berman’s father owned modest restaurants, and his mother was a schoolteacher. “We lived in a five-story walkup,” he recalls. “I shared a bedroom with my brother until I was 15.” Berman made the freshman basketball team at the University of Maryland. But when he came home for Thanksgiving that year and told his mom, she ended his hoop dreams for good. “Paying for college was a real stretch,” he says. “My mother was the only person allowed to call me Donald. She told me, ‘Donald, you have a choice. You either keep going to college and study, or leave college and play basketball.’ The message was clear–––if I played freshman year, she’d stop paying my tuition.” The strapping six-footer sports a clean-shaven Mr. Clean dome that he keeps barren using a Gillette razor every morning.
Postcollege he quit his job running sales and marketing for a credit card processor to found CardWorks in 1987. From 2016 to 2019, in a great market where the pool of subprime customers kept growing, lifting total balances, while delinquencies stayed extremely low, Berman grew revenues 30%, to nearly $1.1 billion, and pretax profits 46%, to $343 million. Today, CardWorks remains privately held, and Berman holds the majority of the shares.
Although CardWorks also finances boats and trailers, and processes payments for merchants and banks, the bulk of its business by far is credit cards. “Big banks have to worry about trading, real estate lending, and 10 other sectors,” he told me. “Our business is very monoline. We worry mainly about one kind of risk, for credit card loans.”
CardWorks provides financing through its captive lender, Merrick Bank. It boasts almost 4 million credit card accounts. “We’re in the top 20 of all credit card companies,” says Berman. But he’s a giant in his field: In subprime, CardWorks’ $3.8 billion in balances ranks second only to Capital One’s. Of course, default rates are a lot higher in subprime than prime. CardWorks charges customers a range of between 17.9% and 29.9%; its average rate is 23.3% on balances. Those high rates cover the nonpayments, which run 10% to 12%, versus 3% to 5% for prime customers.
The typical CardWorks customer is a wage earner making $15 to $20 an hour, contributing to a total family income of $45,000 to $65,000 a year. Their average credit scores are 630, about the average for subprime borrowers. These aren’t the folks who bank at JPMorgan Chase or Wells Fargo. Yet, says Berman, their slender means forces these families to be in some ways more careful with their finances than high earners. “Subprime consumers live their entire lives in their own recession,” he notes. “They have no excess disposable income. Eighty percent of our borrowers are renters, not homeowners, where it’s practically the reverse for the middle class and up.”
While foreseeing tougher times ahead, Berman expresses amazement at how well his customers are faring so far. “What we see from our portfolio’s performance is that our consumer seems to be in better condition today than before the pandemic,” he says. “To a large degree it’s because of actions taken by the government through stimulus checks and unemployment benefits. But it’s about being much more careful as well.”
A different approach to this recession
CardWorks’ borrowers, he observes, are treading far more carefully than in the previous recessions of 2001 and 2008. “Going into those downturns, they were credit needy. They wanted to make sure they had enough credit to live their lives when they lost jobs.” CardWorks measures their hunger for new borrowing by the response rate to its mailings offering new or extra credit. “When the economy was worsening, we’d see response rates double from 3% to 6%,” he says. “If a family had a $1,000 credit line at Merrick, they’d on average have pulled down $650, and that number would rise to $850 or $900, from 65% to as much as 90% utilization.”
But in the COVID-19 crisis, his customers are getting more prudent and less leveraged. “They’re charging less and paying down their balances,” says Berman. “This is also happening on the national level. The latest numbers show people paying down revolving credit balances at the fastest rate in 20 years.” Instead of surging from 3% to 6%, CardWorks’ response rates dropped by half to 1.5%. Customers who in previous recessions raised balances on their credit lines from 65% to 90% are on average lowering their utilization to 62%. “I’ve never seen anything like it in a recession,” he says. “People are being far more judicious than before the crisis.”
Berman attributes that shift in behavior to two factors. First, borrowers learned tough lessons in the values of frugality from the financial crisis. “My average borrower is around 45,” he says. “He or she lived through 2008 and 2009. People came to appreciate the importance of strong FICO scores. Keeping a good credit score ensures that they can get additional credit if they need it, or qualify for a mortgage.” Second, Berman believes that people sheltering in place simply don’t have as many pleasures to swipe their cards for, compared to being out on the street and tempted by movie theaters, stores, and restaurants. “They just can’t spend as much as they usually do,” he says.
What’s left is mainly shopping online. For Berman, the digital experience is much less conducive to impulse buying than roaming boutiques and malls. “My belief is that people are a lot less spontaneous and rash when the merchandise isn’t physically in front of them,” he says. “That’s why there’s so much abandonment in e-commerce. When consumers shop on the Internet, they often get to the checkout page and don’t complete the purchase. There’s no excitement there. It’s tedious versus being in a store.” The upshot is that subprime families are either banking a higher portion of their meager incomes in the lockdown, or conserving their savings far more carefully than in prior recessions.
The unemployment picture
Still, Berman warns that credit losses will be substantial because of the spike in unemployment and that it’s impossible to fully assess the damage until government support runs out. “Based on unemployment, you’d have to be foolish not to increase your loan loss reserves,” he says. “We’re adding a lot to our reserves because the stimulus and benefits will end at some point, and joblessness will settle in the low-double digits.” He says that if the government provides another stimulus package, as he expects, it will take until December or the first quarter of 2021 to gauge how deep the losses will run.
Overall, Berman is what he calls “cautiously optimistic” that subprime will emerge without suffering anything like the deep losses that worried investors believed the Ally bust-up was signaling. In part, he says, this downturn isn’t being caused by a “fundamental weakness” in the economy. “In the Great Recession, we had a housing meltdown. And it was mainly because of defaults by prime, not subprime borrowers. This time it’s not a financially driven recession, it’s a downturn driven by an event, as opposed to a fundamental disruption like the housing crisis.”
He adds that the timeline for recessions is different for subprime workers. “They enter the recession earlier, and exit sooner,” he told me. “These are people making $15 or $20 an hour working in restaurants, hotels, or bars. The first jobs to get cut are entry-level jobs. Those workers get laid off right when business drops, at the start of the downturn. They’re also the first to be rehired when business starts to pick up, and the restaurants, bars and hotels reopen.”
Hence, his borrowers will lose income for a briefer period than salaried workers. “Think about the tens of thousands of salaried people being laid off by the airlines,” he says. “They include pilots making $250,000 a year. They may not return for a couple of years.”
In conclusion, Berman notes that CardWorks suffered significant loan losses in the Great Recession, but those losses didn’t last nearly as long as for prime customers. He expects a replay of the first-in, first-out scenario that cushioned the hit in the Great Recession. For Berman to be proved right, his subprimers can’t stay out of work too long. But unless we’re in for years of elevated unemployment, his prediction that wage earners will get through this relatively unscathed is probably the best bet.
It’s also instructive that Berman and his shareholders had a strong motive to kill the Ally-CardWorks deal, so that its demise may have nothing to do with fears of a crash in subprime credit. Berman and his fellow owners were getting $1.4 billion in cash and $1.3 billion in stock at Ally’s pre-announcement price of $32.85. But the merger agreement contained an escape for CardWorks: If Ally’s price fell by 15% for an extended period, CardWorks could walk with no penalty. By late June Ally’s shares had dropped to around $18, far below that trigger point. The amount that CardWorks’ shareholder, of whom Berman is the largest, would have received shrank almost $600 million from when the deal was announced.
It’s a sign of Berman’s faith in his customers’ prospects, even in these rough times, that he agreed to nix a deal that would have brought him over $1 billion. He’s convinced his borrowers’ fundamental strength, holding jobs that are easier to replace, means that “our portfolio will perform very well as unemployment falls.” To be sure, no one knows the market better, or has better models, than Berman. The question is whether all that expertise can reasonably gauge the future damage from a crisis unlike any other.


fortune--2020-07-22--LabCorp’s CEO explains COVID-19 test-result delays

This is the web version of CEO Daily. To get it delivered to your inbox, sign up here.
Good morning.
I had an interesting conversation yesterday with Adam Schechter, CEO of LabCorp, who had been informed by a CEO Daily reader of my abysmal 10-day wait for COVID-19 test results. Schechter apologized, and said the company is now getting results out much faster.
My test was July 3, I noted. He had stood on the White House lawn in mid-March and said his company was spending “every second of every day” and was “committed to doing everything possible” to increase testing. What happened?
“Let me explain it to you,” he responded. “The first thing is, irrespective of what I thought we would need, my philosophy has been to build as much capacity as we possibly can to get fastest turnaround, irrespective of cost. We have bought every piece of equipment we could buy. I have even bought used equipment. We are buying every reagent we can buy.”
But the problem, he says, is that his suppliers serve a global market, and face surging demand everywhere. “If I could have gotten more machines and reagents, I would have done it. We could not have built capacity any faster and gotten testing done any faster than we did.”
Schechter says LabCorp was doing two or three thousand tests a week in March, and is now doing 165,000 tests a day. The company’s 14 labs are operating seven days a week–including the July 4 holiday–and three shifts a day. And if one lab gets behind, the tests are rerouted to another lab.
One thing that would help, he says, is if the public had clear guidelines on who needs–and who doesn’t need–to be tested. He thinks it should be 1) people who have symptoms, or 2) people who have been exposed to someone who has symptoms or tested positive. But recently, people have been getting tests because they want to travel, or because they are required to get it for work (sometimes multiple times a week), or myriad other reasons.
In addition to building up capacity as quickly as possible, Schechter says he established two other principles for the company’s efforts from the beginning:
–Everybody would pay the Medicare price, and there would be no up-front, out-of-pocket costs for anybody.
–Nobody would be prioritized over anybody else–regardless of rank, position, money, etc.
The only exception to the third rule is one requested by the CDC, which asked that tests from hospital inpatients be prioritized.
More news below.
Alan Murray
@alansmurray
alan.murray@fortune.com
TOP NEWS
Net-zero coalition
Microsoft, Nike, Starbucks, Mercedes, Maersk and Unilever are among the companies that have formed a new coalition to push for a net zero carbon economy. The aim is to create playbooks for achieving this goal, collaborate on greenifying supply chains, and lobbying policymakers. Microsoft has also made the first investment from its new $1 billion Climate Innovation Fund; $50 million goes to Energy Impact Partners "global platform for innovation of new technologies to transform the world’s energy and transportation systems, the two sectors that account for the majority of greenhouse gas emissions." Marketwatch
Chinese consulate
China claims the U.S. government suddenly ordered it to close its consulate in Houston. The Chinese foreign ministry called the move an "unprecedented escalation" of tensions between the countries that merited "firm countermeasures" if not rolled back. Houston police and firefighters responded to reports of papers being burned in open containers outside the consulate. The consulate will reportedly be evicted Friday afternoon. Fortune
Chinese hackers
The U.S. has indicted two hackers in China who it says targeted American companies involved in coronavirus research, and stole sensitive information from other companies around the world. The indictment says the hackers, Li Xiaoyu and Dong Jiazhi, worked both for personal profit and to further the goals of China's Ministry of State Security. Fortune
Made in Japan
The Japanese government is paying $535 million to get 57 Japanese companies–in areas ranging from auto-parts to mask and medicine production–to open factories in Japan. It is also paying another 30 companies to expand production in Southeast Asia. The subsidy splurge is designed to stop over-reliance on Chinese manufacturing, particularly in sectors that make the sorts of goods that are needed in an emergency. Washington Post
AROUND THE WATER COOLER
TikTok efforts
Fortune's Naomi Xu Elegant looks at six ways TikTok is trying to ward off the potential ban that the Trump administration has floated. The measures range from job-creation promises and straightforward lobbying to the creation of transparency centers and rebukes aimed at Beijing. Fortune
737 Max
Boeing's 737 Max probably won't be back in widespread deployment until early next year, the Wall Street Journal reports, citing U.S. government and industry officials. That's around two months later than was previously expected, thanks to FAA approval procedures, pilot training and maintenance checks. WSJ
Tapestry CEO
Tapestry CEO Jide Zeitlin has abruptly resigned due to unspecified "personal reasons," though reports suggest Tapestry's board was investigating allegations that he posed as a photographer some 13 years ago to lure a woman into a relationship. The fashion chief's departure means there are now just four Black CEOs of Fortune 500 companies. Fortune
Twitter vs. QAnon
Following problems with harassment and misinformation, Twitter is banning thousands of accounts associated with the ludicrous, millenarian QAnon conspiracy theory, which claims senior Democrats are engaged in a Satanic pedophile ring that President Trump was elected to destroy. Twitter has already banned 7,000 accounts and will limit the ability of around 150,000 accounts to circulate QAnon content. Fortune
This edition of CEO Daily was edited by David Meyer.


fortune--2020-07-22--Tesla earnings: China and the S&P loom large

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Here’s a riddle: What’s a loss, that’s actually a win, but also ultimately a loss?
Tesla is preparing to report second-quarter earnings late Wednesday. While every reporting period can seem make-or-break for the growth-focused electric-car maker, the stakes are both particularly acute, and particularly ambiguous, this time around.
In the big picture, China will absolutely be the focus, with analysts and investors hoping for more insight into Chinese demand for Model 3 sedans produced at Tesla’s Shanghai Gigafactory. According to analysts at JMP Securities, Tesla needs to be on track to ship 2.5 million cars per year by 2025 to justify its current market capitalization of just over $300 billion, compared to the well under 500,000 cars per year it’s selling at current rates. Much of that growth will need to come from China.
In recent quarters, though, Tesla’s reports have included more data on the Shanghai factory’s growing production capacity than on regional sales. That could change tomorrow, or new insights could come during the evening call with executives. But there’s no guarantee we’ll get better data than we’ve already seen from Chinese auto registrations, which has shown huge monthly growth as China’s economy recovers from the coronavirus pandemic and hit a new high of 14,976 for June. That puts China on pace to account for roughly 40% of all Tesla sales going into the second half of the year.
Wednesday could be a banner day for Tesla for an arguably even bigger reason: If Tesla reports a profit for Q2 in generally accepted accounting terms, it will be formally qualified for listing in the S&P 500. That would likely mean a sizable bump in the stock price, on top of what a strong report would normally produce, since inclusion would trigger automatic buying from passive investors including ETFs and indexes.
By the most standard indicator, that looks like a long shot: According to Bloomberg, analyst consensus projects Tesla will report a second-quarter GAAP loss of $285 million. But Tesla has so consistently outperformed analysts’ consensus projection over the past 12 months that at this point the number is becoming hard to take seriously.
As Fortune has reported, the S&P does have the option of adding Tesla to the index even if it misses the profitability benchmark this quarter. There is some expectation among investors that this could happen, suggesting that the current Tesla stock price might dip if it becomes clear that inclusion won’t happen. A spokesperson for S&P told Fortune that the requirement for four quarters of profitability has rarely, if ever, been waived.
Tesla’s S&P 500 status won’t be announced or go into effect on any short or clear timeline. The S&P inclusion committee’s schedule is confidential, though it meets monthly at most. So anything short of clear profitability will likely mean a period of ambiguity of as much as several weeks before S&P officials meet to weigh the decision.
So, to answer the riddle: Tesla could report a GAAP loss that’s still a win against analysts’ dour projections, but also still big enough to call its S&P inclusion into serious doubt. That would likely be a short-term headwind for Tesla stock, adding uncertainty and volatility to an investment that’s already wrapped up in plenty of long-run speculation.


fortune--2020-07-22--6 ways TikTok is countering political scrutiny—and a potential ban—in the U.S.

The Trump administration is considering banning TikTok, the wildly popular short video platform, over national security concerns and TikTok’s alleged vulnerability to Chinese government censorship and data sharing.
TikTok, which is owned by Beijing-based tech firm ByteDance Ltd. and has 30 million monthly active users in the U.S., has denied U.S. claims about its susceptibility to Chinese government influence. But President Donald Trump’s targeting of the app has only increased since he mentioned a potential ban earlier this month; new Trump campaign ads on Facebook this week claimed, “TikTok is spying on you.”
TikTok did not immediately respond to a request for comment for this story.
Growing political scrutiny of TikTok in 2019 had already prompted the app to increase transparency, distance itself from ByteDance, and deny claims that it shares user data with Beijing or complies with its censorship requests. Scrutiny of the app has only accelerated in recent weeks with India’s TikTok ban in late June and the U.S.’s subsequent threat of a ban.
TikTok no doubt has become a flashpoint for the West’s disputes with China. In response, the app has taken six actions that seem aimed at underscoring its commitment to the U.S. and proving its operational independence from its Chinese parent—and from China’s government:
1. U.S. jobs
At the start of 2020, TikTok had 500 full-time staff in the U.S.; that number has since increased to 1,400. On Tuesday, TikTok said it plans to hire 10,000 employees for “good-paying jobs” in the U.S. over the next three years, a long-term commitment to the market that could foster good will in Washington. TikTok has offices in New York City, Silicon Valley, and Los Angeles.
2. Lobbying
A sharp increase in staff isn’t the only way TikTok is expanding its U.S. presence. The company has hired more than 35 lobbyists to advocate on its behalf in Washington to persuade lawmakers that it’s committed to U.S. regulations and not beholden to the Chinese government. TikTok had no lobbying presence in Washington a year ago, according to the New York Times.
3. Transparency centers
TikTok has made other signals of commitment to the U.S. market. In March, the company said it was setting up a “transparency center” in its Los Angeles office to “provide outside experts an opportunity to directly view how our teams at TikTok go about the day-to-day challenging, but critically important, work of moderating content on the platform.”
Even before the threat of a U.S. ban, the company came under fire for allegedly censoring content deemed politically sensitive to the Chinese government, a charge TikTok denies.
TikTok blocked and then unblocked one U.S. user who posted a video criticizing China’s government for its treatment of Uighur ethnic minority people. The company said a “human moderation error” caused the removal of the video.
4. Localization efforts
TikTok has made moves to localize its U.S. business and show the international market that it’s separate from its China-based parent company.
In May it hired former Disney executive Kevin Mayer, who is American, to run TikTok. (Mayer holds dual roles as TikTok’s CEO and ByteDance’s chief operating officer.) TikTok has pointed to Mayer’s U.S. roots when asked about the Chinese government data-sharing allegations.
“TikTok is led by an American CEO, with hundreds of employees and key leaders across safety, security, product, and public policy in the U.S.,” a company spokesperson told CNBC in July.
5. Rebuking Beijing
TikTok also taken cues from U.S.-based Internet giants in responding to political issues related to Beijing. After the Chinese government enacted a controversial national security law in Hong Kong, Google, Facebook, Twitter, and others announced they were halting some operations in the region while they reviewed the law, which grants Hong Kong authorities far-reaching power over Internet data.
TikTok went further, announcing on July 6 that “in light of recent events,” it was withdrawing from Hong Kong entirely. The company didn’t directly name the national security law, but analysts say the decision to pull out of Hong Kong was a direct response to the law and an effort by TikTok to illustrate its distance from Beijing and willingness to take issue with Chinese government data controls.
6. Potential sale
Some U.S.-based ByteDance investors are in talks with ByteDance management to buy a majority stake in TikTok, The Information reported on Tuesday.
Such a sale would make TikTok majority-owned by U.S. shareholders rather than by Beijing-based ByteDance, and potentially could convince U.S. lawmakers that a ban of TikTok isn’t necessary.
Larry Kudlow, a White House economic adviser, said last week that a TikTok spinoff from ByteDance would be better than a ban on the popular app.
“I think TikTok is going to pull out of the holding company, which is China-run, and operate as an independent American company,” Kudlow said, declining to comment on whether U.S. companies could acquire TikTok.
Diversification
Even before the Trump administration publicly leveled the threat of the TikTok ban, the app was looking beyond the U.S. market and its tens of millions of American users.
In November, when U.S. lawmakers escalated their scrutiny of TikTok, ByteDance founder and CEO Zhang Yiming said in an internal staff note that the company needed to “diversify TikTok’s growth,” “increase investment in weaker markets,” and improve its skill in “handling global public affairs,” without specifically mentioning U.S. pressure.
The number of countries where TikTok is facing pressure has grown this year. Outside of the U.S., TikTok was banned in India last month, and some politicians have called for bans in Australia and the U.K.
TikTok has been mulling a global HQ outside of China since late last year to distance itself from its Chinese owner, and it’s reportedly still considering London—its existing hub in Europe—as a base. The ongoing U.K.-China feud, which saw the U.K. recently ban Chinese telecoms equipment maker Huawei from its 5G rollout, had cast doubt on whether TikTok would continue its U.K. expansion plans.
“It’s very clear that ByteDance [is] trying to do as much as [it] can to make TikTok a separate company that operates globally, thinks globally, and does not think and act like a Chinese company,” Dev Lewis, a fellow at Hong Kong–based research think tank Digital Asia Hub, told Fortune earlier this month. Whether its efforts succeed remains to be seen since, as Lewis said, “TikTok will always be caught in the middle” of China’s geopolitical disputes.


fortune--2020-07-22--U.S. ordered China to close Houston consulate over intellectual property concerns

The U.S. said Wednesday that it has ordered China to close its consulate in Houston “to protect American intellectual property” and the private information of Americans.
China strongly condemned the move, the latest in a series of steps by the Trump administration as it ratchets up pressure on the world’s second-largest economy over trade, technology, human rights and security.
Firefighters responded to reports of papers being burned on the consulate grounds Tuesday night but were barred entry, according to Houston news media reports.
The U.S., in a brief statement, did not provide any details on why the consulate in Texas was targeted.
“The United States will not tolerate (China’s) violations of our sovereignty and intimidation of our people, just as we have not tolerated (its) unfair trade practices, theft of American jobs, and other egregious behavior,” said the statement, which was attributed to State Department spokesperson Morgan Ortagus.
The consulate was informed of the decision Tuesday, Chinese foreign ministry spokesperson Wang Wenbin said, calling it “an outrageous and unjustified move that will sabotage relations between the two countries.”
“The unilateral closure of China’s consulate general in Houston within a short period of time is an unprecedented escalation of its recent actions against China,” Wang said at a daily news briefing in Beijing.
He warned of firm countermeasures if the U.S. does not reverse itself. Besides its embassy in Beijing, the U.S. has five consulates in mainland China, according to its website. They are in Shanghai, Guangzhou, Chengdu, Wuhan and Shenyang.
Houston media reports said authorities responded to reports of a fire at the Chinese Consulate. Witnesses said people were burning paper in what appeared to be trash cans, the Houston Chronicle reported, citing police.
Police were told that occupants were given until 4 p.m. Friday to leave the property, the Chronicle said.
Houston police said in a tweet that officers responded to “a meet the firefighter” call at the Chinese Consulate building at 3417 Montrose Blvd. The tweet said smoke was observed in an outdoor courtyard area, and that officers were not allowed to enter the building.
Wang accused the U.S. of opening Chinese diplomatic pouches without permission multiple times, confiscating Chinese items for official use and imposing restrictions on Chinese diplomats in the U.S. last October and again in June. He also said that U.S. diplomats in China engage in infiltration activities.
“If we compare the two, it is only too evident which is engaged in interference, infiltration and confrontation,” Wang said.
He also said that the Chinese Embassy in Washington has received bomb and death threats, and accused the U.S. government of fanning hatred against China.
This story was updated at 6:50 a.m. to reflect the U.S. statement.


fortune--2020-07-22--Two college friends-turned-prolific hackers allegedly tried to steal COVID vaccine data for China

They were former classmates who studied computer technologies at an electrical engineering college in southwestern China’s Sichuan province. But instead of a conventional post-college career path, Li Xiaoyu and Dong Jiazhi embarked on a global hacking spree that became one of the most prolific ever tracked by the FBI, according to Justice Department officials and an indictment unsealed Tuesday.
The duo engaged in criminal hacking for their own personal profit, stealing trade secrets worth hundreds of millions of dollars, the indictment alleges. But they also worked to further the goals of China’s Ministry of State Security, stealing foreign military secrets and targeting opponents of the Chinese state, according to the U.S.
Over the course of more than ten years, Li and Dong allegedly stole secrets related to military satellite programs, wireless networks, and counter-chemical weapons system. They also targeted computer games companies, a cancer research organization, a solar energy company and the private emails of Chinese dissidents, according to the indictment.
Senior Justice Department officials stressed that the case showed how China was using criminal hackers to do some of its dirtiest work – including stealing research on possible vaccines and treatments for COVID-19, which was among the duo’s most recent alleged targets.
“China has now taken its place alongside Russia, Iran and North Korea, in that shameful club of nations that provide a safe haven for cybercriminals in exchange for those criminals being on call for the benefit of the state,” John C. Demers, assistant attorney general for national security, said at a press conference on Tuesday.
Asked for comment, officials at China’s embassy in Washington pointed to remarks made by Hua Chunying, a spokesperson for the country’s foreign ministry, on July 17. “China is a staunch defender of cybersecurity,’’ Hua said at the time. “China has long been a major victim of cyberthefts and attacks.’’
“Some U.S. politicians seem to be alleging that China is waging cyber-attacks to steal U.S. research on COVID-19 vaccines,” Hua added. “It’s just absurd.”
The 27-page indictment lays out in surprising detail much of the hackers’ career — and it demonstrates how carefully U.S. intelligence and law enforcement agencies are tracking some of China’s most prolific cyberspies.
Li, 34, and Dong, 33, had studied computer application technologies at the University of Electronic Science and Technology of China, in Chengdu. They formed an efficient partnership. Dong would research victims and find potential methods of remotely breaking into computer systems. Li would then compromise the networks and steal the information, according to the indictment.
At one point, Li was having difficulty penetrating the email server of a Burmese human rights group, the indictment alleges, so his MSS handler helped out by providing specially developed software that would allow him to slip into the group’s computers unnoticed.
That detail appears to provide a smoking-gun link between the hackers and China’s Ministry of State Security, one likely made possible because U.S. spy agencies had access to the hackers’ communications.
Such access is now likely to be cut off, according to Laura Galante, founder of the cybersecurity firm Galante Strategies, as the hackers review their own security to find out how they were monitored.
According to U.S. officials, they first became aware of the hackers’ operations when they targeted the Department of Energy’s Hanford site in the eastern district of Washington. U.S. Attorney William D. Hyslop said on Tuesday that a firm working with the Department of Energy in Hanford notified the FBI of the activity, which took place in March 2015, according to the indictment.
As the FBI learned more, they found the duo was among the “the most prolific hacker groups the FBI has ever investigated,” Raymond P. Duda, a FBI special agent, said. Their victims were located all across the world, including the U.S., Australia, Belgium, Germany, Japan, Lithuania, Netherlands, South Korea, Spain, Sweden and U.K., according to the indictment.
“A government hacker shows up 9 to 5 and takes holidays off,” according to Galante, who formerly served in the Defense Intelligence Agency. “These guys were probably making a lot of money, so they had a different incentive structure.”
Although China has made criminal prosecutions of hackers a point of pride, in this case the duo’s activities bought them protection from Chinese authorities, according to the indictment. The idea of hacker working on the state’s behalf and for personal profit is a model normally associated with Russia.
“The Russians use criminals as proxies. They coerce good hackers into cooperating,’’ said James Lewis, director of the Technology Policy Program at the Center for Strategic and International Studies, a Washington think tank. “So the Chinese people have picked up on that.’’
“It’s a way to get talent without putting them in uniform,’’ he said.
After stealing source code from one victim, Li allegedly emailed the company and threatened to make the code public unless he was paid $15,000 in untraceable Bitcoin, Demers said in remarks prepared for the press conference. Demers accused China of carrying out its business like an “organized criminal syndicate.”
More recently, the indictment alleges, the hackers researched vulnerabilities in the networks of biotechnology and other firms publicly known for work on COVID-19 vaccines, treatments and testing technology. Between January and February, for instance, Li allegedly searched for vulnerabilities in the computer networks of firms that were researching COVID-19 vaccines and antiviral drugs in Massachusetts, Maryland and California. It wasn’t clear whether the hackers ultimately penetrated these companies’ systems and obtained COVID-related data.
China’s theft of corporate secrets has been known for some time, but Tuesday’s indictment adds details likely to further embarrass the country and its spies. The indictment even gives the address of a secret MSS facility in Guangzhou, along with a photo. Spies everywhere prefer to work in the shadows, not in an MSS facility across from Hong Kong whose location was broadcast to the world.
Lewis said it sends a signal “that they’re not invisible anymore.’’ “When you see the pictures and address it tells the Chinese that, one, you have to pick up your game, and, two, that we’re coming after you legally,’’ he said.
Lewis said that while indictments like the one unsealed Tuesday were once relatively rare, the Justice Department has signaled that is likely to change.
“The Chinese hate being indicted, because if they go overseas they never know if they’re going to find an Interpol red notice,’’ Lewis said. “So indictments are effective.’’


fortune--2020-07-22--Twitter cracks down on QAnon, will ban thousands of accounts

Twitter Inc. will ban thousands of accounts associated with the QAnon conspiracy theory movement, which claims there is a deep state plot against President Donald Trump — the latest battle front in the social media company’s campaign against disinformation.
We’ve been clear that we will take strong enforcement action on behavior that has the potential to lead to offline harm. In line with this approach, this week we are taking further action on so-called ‘QAnon’ activity across the service. — Twitter Safety (@TwitterSafety) July 22, 2020
The social media company said it will permanently suspend accounts tweeting about topics that it knows are violating Twitter policy and coordinating abuses around individual victims or attempting to evade suspensions. Twitter will also ensure it’s not highlighting QAnon activity by keeping such posts out of trends and recommendation sections as well as blocking URLs associated with the movement.
Twitter didn’t say how many accounts will be affected. NBC separately reported that about 150,000 accounts will be impacted and so far more than 7,000 QAnon accounts have been taken down in the last couple of weeks, citing an unnamed Twitter spokesman.
These actions will be rolled out comprehensively this week. We will continue to review this activity across our service and update our rules and enforcement approach again if necessary. — Twitter Safety (@TwitterSafety) July 22, 2020
Supporters of QAnon have started to enter mainstream politics with Lauren Boebert, a fan of the movement and gun rights advocate, winning the Republican primary for Colorado’s 3rd District earlier this month. QAnon has become latest battle front for Twitter, which saw the hacking of several prominent accounts last week fuel questions about whether it is capable of curbing disinformation ahead of the U.S. election in November.


fortune--2020-07-23--Tesla is poised to join the S&P 500 after turning another profit; Elon Musk says its cars will becom

Tesla is poised to join the S&P 500 after turning another profit; Elon Musk says its cars will become ‘5x more valuable’

Banks can now hold Bitcoin : Behind the OCC ’ s big decision and why it matters

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Tesla reported its fourth quarterly profit in a row Wednesday, positioning the electric-car maker as a leader in an auto sector that has struggled during the pandemic, and clearing the way for the stock to join the S&P 500.
For the second quarter of 2020, Tesla made $104 million in net income on more than $6 billion in revenues. That beat forecasts by Wall Street analysts who had anticipated a loss of nearly $250 million and revenues of $5.4 billion.
Despite analysts’ caution, bullish investors had held out hope for a profitable quarter, bidding up Tesla stock 49% so far in July alone. Year to date, Tesla has nearly quadrupled in value, giving the company a current market capitalization of nearly $300 billion.
The profit was particularly significant because it marks the first time Tesla has recorded four quarters in a row—or a year’s worth—of positive earnings, a key milestone for inclusion in the S&P 500 index. Tesla’s addition to the S&P 500 would require many investment funds that track the market index to buy the stock, potentially driving its price even higher, as has been the case when other companies have been inducted.
“S&P 500 here we come?” wrote Morgan Stanley analyst Adam Jonas in a note following the earnings report.
Tesla shares rose about 4% in after-hours trading, though the stock remained below its all-time high set last week of nearly $1,795 a share.
The gains are bad news for investors shorting Tesla’s stock, who have bet big that its shares will fall. As of last week, short-sellers had put $19.7 billion against Tesla, according to S3 Partners, which highlighted Tesla as a top candidate for a so-called short squeeze—a situation in which a price surge forces bearish investors to buy back the stock before it rises further.
“I’ve never been more optimistic or excited about the future of Tesla in the history of the company,” Elon Musk, Tesla’s CEO, said on the earnings call, sounding a bullish tone. While the coronavirus crisis has taken a toll on many companies and sapped consumer interest in travel and many other products, Musk said Tesla had defied the trend. “Demand is not our problem, definitely not,” he said. “Don’t worry about demand.”
When will Tesla be added to the S&P 500?
Just because Tesla is now eligible to be join the S&P 500 index does not mean it will happen right away. The committee that controls the makeup of the S&P 500 meets once a month to review the index constituents and can swap companies in and out then, but a spokesperson declined to comment on when the next meeting is scheduled to take place.
The company that oversees the S&P 500, S&P Dow Jones Indices, announced changes to its other indices earlier this week, suggesting that the committee’s July monthly meeting has already happened. That means it may be mid-to-late August before investors can expect any announcement on whether Tesla will be added to the index when the next round of changes are made.
Can Tesla stay profitable?
Despite Tesla’s growing track record of profits, Musk said he was balancing the company’s margins with his overall goal of lowering the price of its cars.
“The thing that bugs me the most about where we are right now is our cars are not affordable enough. We need to fix that,” Musk said. “So, we need to not go bankrupt, obviously, that’s important, because that will fail in our mission, but we’re not trying to be super profitable, either.”
Besides lowering the price, Musk is also seeking to make the cars more affordable by making them fully autonomous, which would allow Tesla vehicles to be shared by multiple drivers. Tesla expects to make its cars fully self-driving by the end of 2020 through a software update, which “may go down as the biggest asset value increase in history as a step change,” Musk said on the earnings call.
“You’d have at least a few million cars suddenly becoming 5x more valuable,” he said. “They go from 12 hours a week of utility to 60, or something like that.”
In typical Musk fashion, he has already been testing Tesla’s full autonomous mode himself. “It’s almost getting to the point where I can go from my house to work with no interventions,” he said, noting that his route includes construction zones and other complex areas. “That’s why I’m very confident about full self driving functionality being complete by the end of this year—because I’m literally driving it.”


fortune--2020-07-23--Microsoft is starting to experience symptoms of COVID-19 in its cloud business

Microsoft is beginning to show some signs that the economic malaise related to the COVID-19 pandemic is affecting its business.
The technology giant said Wednesday that its overall revenue jumped 13% year-over-year to $38 billion in its fiscal fourth quarter, which for most companies operating amid the coronavirus pandemic would be something to cheer. But Microsoft shares nonetheless declined 2.3% in after-hours trading, to $206.93, likely due to slowing growth in the company’s all-important Azure cloud-computing unit.
Azure sales were up 47% in the fourth quarter, which again sounds like a breakneck pace—but which marked the first time ever that the unit didn’t deliver year-over-year revenue growth of 50% or higher. Microsoft does not disclose specific sales numbers for many of its units, including Azure, only how much they’ve grown on a percentage basis.
Investors have grown accustomed to breathtaking growth in the cloud computing service that serves as the core of everything Microsoft sells to customers. But the coronavirus pandemic appears to be causing companies to slow their IT spending, as research firm Gartner reported earlier in July, which seems to have caused a bit of a slowdown for Azure.
Other aspects of Microsoft’s business have hit roadblocks as of late as well. Earlier this week, the company’s LinkedIn unit said it would lay off 960 employees, particularly affecting the unit that’s responsible for hiring and recruiting services. As LinkedIn CEO Ryan Roslansky said in a public note, “fewer companies, including ours, need to hire at the same volume they did previously.”
And Microsoft’s Bing search advertising business plunged 18%, an indication that companies are pausing their online ad spending.
Despite these hiccups, however, Microsoft is experiencing massive growth in one area of its business where it’s investing heavily—gaming. The advent of the coronavirus and ensuing shelter-in-place orders have meant that people have a lot more free time at home than they once did, and they are turning to video games to help fill the void.
Sales in Microsoft’s Xbox gaming unit (a combination of Xbox console sales, video games, and gaming subscription software) skyrocketed 65% year-over-year in the company’s fourth quarter. For comparison, the Xbox unit only grew 2% year-over-year in Microsoft’s previous quarter.
“It is simply a breakthrough quarter for gaming,” CEO Satya Nadella said during a call with analysts.
Although Nadella didn’t reveal specific numbers, he said that the company’s Xbox Game Pass subscription service “is seeing record subscribers.” In April, Microsoft said it now has 10 million Game Pass subscribers who use the service to download and play video games online and interact with others. Earlier this month, Microsoft said it would let subscribers of the premium version of Game Pass access the experimental xCloud cloud gaming service—which lets people stream games to their smartphones or tablets, among other features—for free. That was a big deal because Microsoft, like rivals including Google and Amazon, believes cloud gaming represents a potentially massive future business.
But just because Microsoft is investing in cloud gaming doesn’t mean it’s forsaking its Xbox gaming console business. The new version of its Xbox console, the Xbox Series X, is still slated to be released this fall, Nadella said.


fortune--2020-07-22--Amy Schumer’s documentary ‘Expecting Amy’ proves pregnancy can coexist with women’s careers and ambi

Amy Schumer’s documentary ‘Expecting Amy’ proves pregnancy can coexist with women’s careers and ambition

I went into comedian Amy Schumer’s new documentary Expecting Amy hoping for a laugh or two: We’re all looking for a little levity these days.
And I did laugh. But I also cried through most of it and then clutched my 6-month-old daughter to my chest for the rest of the weekend, staring deeply into her sweet, confused little face.
Expecting Amy begins two days after Schumer finds out she’s pregnant and proceeds to follow her into doctor’s appointments, comedy clubs, and countless bathrooms—she has hyperemesis gravidarum (HG), a condition that can lead to a traumatic level of nausea and vomiting for women who suffer through it.
The reviews of the documentary, the majority of which is filmed by Schumer and her husband on their iPhones, have rightly touted its incredibly raw and intimate portrayal of a pregnancy. But I was most struck by the honest depiction of a woman dealing with not just a pregnancy but also a career and ambition.
Schumer’s big personal project, as it were, coincides with the development of her Netflix comedy special, Growing, and the three-part documentary series tracks the conception, gestation, and birth of both. I’ve never seen the intertwining of a pregnancy and work—which is real for so many women—captured in all of its messy complexity like it is in Expecting Amy.
Schumer’s decision to put together a comedy special at the same time as her pregnancy is an intentional one. She wants to do something big before the birth of her son to essentially bookend this stage of her life. Her pregnancy may be horrific as she suffers through HG, but it’s also fueling her work and creativity. The two become linked as she mines her personal experience for material. In one case, she is loath to publicly reveal that she’s having a boy, not out of any sense of privacy—she’s way past that point—but because it will ruin one of her jokes. (“I don’t know what I’m having. I hope it’s a girl. But really just because it’s such a scary time for men.”)
The pressure Schumer puts on herself is enormous as she follows a grueling schedule of 60 shows in 42 cities so she can work out the material for her upcoming special in front of a live audience. She performs night after night even as she is debilitated by HG. She continues on even as she is forced to compartmentalize the anxiety she feels after learning her son might be born with a kidney issue.
In spite of it all, Schumer still gets up onstage. She still makes people laugh. She still puts in the work. At one point she banters with the audience, “People are like, ‘You’re so strong, look at you out there! You’re on the road!’ I’m contractually obligated to be out here, guys. I’m not like, ‘The show must go on.’ I’m like, ‘I will be sued by Live Nation.’” But while there’s likely some truth behind the joke, Schumer’s presence on the stage does say something about her strength and her ambition. She can’t help but put everything she has into her show. And she rightly acknowledges how proud she is, and how powerful she feels, to be doing stand-up amid her taxing pregnancy.
These scenes brought me back to some of the choices I made while I was pregnant: sleeping overnight in a lounge of the Beijing airport at 20 weeks; racing against the clock to finish a big story before I went into labor; or continuing to come into the office even once my daughter blew past her due date. I felt that urgency to tie up loose ends before she arrived. But I also wanted to prove to myself, and my colleagues, that I would have the same commitment to the work I love after becoming a mom—that it would still give me the same satisfaction and joy it always had. As Schumer says in her special, “You don’t stop being you.”
Looking back now, I realize I was happy to have those war stories as evidence that I could still handle all the normal pressures of the job. I was always hesitant to talk about my pregnancy at the office unless someone else brought it up first, fearing that my identity as a hardworking, reliable employee would be subsumed by my new one of “pregnant lady” and eventually “working mom.” I hadn’t yet realized that it would be possible for all of those things to coexist for me.
Of course, the impulse to go above and beyond to show the world that pregnancy doesn’t stop you from being good at your job doesn’t solely come from within. It’s also a reaction to the way society judges pregnant women. Last week, my colleague Emma Hinchliffe reported on pregnancy and “stereotype threat,” or the fear of confirming a stereotype about a group one belongs to. Researchers found that pregnant women who think they may be seen as no longer effective at or committed to their jobs are more likely to skip doctor’s appointments or not ask for needed physical accommodations, ultimately increasing their odds of a workplace injury.
It’s a complicated balancing act. The physical demands of pregnancy are real—but for many women, so is the need to continue to do your best work. You can see Schumer’s struggle to unite the two throughout her documentary. Onstage she tells the audience, “I hate women who start to act, like, really just, like, precious.” She doesn’t want to be treated like a delicate flower, but she also wants her pain to be acknowledged. She is worried about coming off as whiny even in her lowest moments. She is hyperaware of the resources she has and feels deeply for women who might be experiencing the same thing without them. And less than two weeks after giving birth, she’s back on the stage. She’s back to doing the work.
Schumer’s comedy has always been threaded with feminism—who else can so effortlessly land a sex joke that has a punch line about equal pay? But by capturing the nuanced and complicated picture of a pregnancy, Expecting Amy may be the biggest service Schumer has done for women yet.


fortune--2020-07-22--Markets get a shot in the arm from U.S.-Pfizer vaccine deal

This is the web version of Bull Sheet, a no-nonsense daily newsletter on what’s happening in the markets. Sign up to get it delivered free to your inbox.
Good evening, Bull Sheeters. This is Fortune finance reporter Rey Mashayekhi, filling in this week for Bernhard Warner with a special PM edition of the newsletter.
Global market performance was mixed on Wednesday, though the U.S. fared better than most on the back of Uncle Sam’s vaccine deal with Pfizer. More corporate earnings gave us further insight into the state of the economy, and tensions reignited between the U.S. and China. Meanwhile, these are heady days for those holding gold.
Markets update
U.S. 🌎
The markets in New York rallied late in the afternoon to see all the major indices end the day in positive territory. The Dow gained more than 165 points to finish up 0.6%, while the S&P 500 also climbed 0.6%. The Nasdaq notched up 0.2%.
gained more than 165 points to finish up 0.6%, while the also climbed 0.6%. The notched up 0.2%. The market undoubtedly got a boost from news that the U.S. government has agreed to pay Pfizer and BioNTech nearly $2 billion to produce 100 million doses of their COVID-19 vaccine , one of the more advanced coronavirus vaccines currently being trialed. The U.S. has the option to acquire an additional 500 million doses of the vaccine under the agreement. Pfizer’s stock was up 5% Wednesday, and BioNTech shares were up nearly 14%.
and nearly $2 billion to , one of the more advanced coronavirus vaccines currently being trialed. The U.S. has the option to acquire an additional 500 million doses of the vaccine under the agreement. Pfizer’s stock was up 5% Wednesday, and BioNTech shares were up nearly 14%. Today’s earnings spotlight was on Microsoft and Tesla. Microsoft shrugged off coronavirus concerns to beat analysts’ targets for both earnings and revenue—the latter climbing 13% year-on-year. Tesla also beat expectations and took another step toward joining the S&P 500 by posting four straight quarters of profits for the first time.
Europe 🌍
Asia 🌏
Most Asian markets slipped on Wednesday. Tokyo’s Nikkei shed -0.6% and Hong Kong’s Hang Seng fell nearly -2.3%, while South Korea’s KOSPI was virtually flat at -0.01%. Mainland China bucked the trend; Shanghai’s SSE Composite gained 0.4%, and Shenzhen’s SZSE Component was up 0.9%.
shed -0.6% and Hong Kong’s fell nearly -2.3%, while South Korea’s was virtually flat at -0.01%. Mainland China bucked the trend; Shanghai’s gained 0.4%, and Shenzhen’s was up 0.9%. The big macro angle out of Asia: further heightened U.S.-China tensions , in the wake of the U.S.’s move to order China to close its diplomatic consulate in Houston amid espionage allegations. That development has put Asian investors on edge, especially as Beijing has already pledged to retaliate.
, in the wake of the U.S.’s move to order China to amid espionage allegations. That development has put Asian investors on edge, especially as Beijing has already pledged to retaliate. Meanwhile, Chinese leaders have promised to boost job growth via an array of subsidies, loans, and tax incentives designed to help spur the nation’s economic recovery from the pandemic.
Elsewhere 📈
Gold is on a tear. (More on that in a second.)
is on a tear. (More on that in a second.) The dollar continued its decline against the euro .
continued its decline against the . Crude oil fell slightly, with Brent still settling at more than $44 a barrel.
All gold everything
With all the macro uncertainty in the world today, perhaps it shouldn’t come as a surprise that the price of gold—as safe of a “safe harbor” as there is in global finance—is on the rise.
The precious metal is currently in the midst of a historic run-up. Spot gold and gold futures both settled at around $1,870 per ounce on Wednesday—levels not seen since September 2011.
The recent decline of the U.S. dollar is undoubtedly a factor, given the shaky sentiment around a U.S. economy that is currently heavily dependent on federal stimulus measures and low interest rates. There are also worries over ongoing tensions between the U.S. and China, which have escalated today with the controversy over the Chinese consulate in Houston.
Gold isn’t the only precious metal on the rise. Silver prices are also rallying, with both spot silver and silver futures at around $23 per ounce—their highest levels in nearly seven years.
The run-up in the price of these metals reflects investors’ heightened anxieties over the state of the global economy in the time of COVID-19. It remains to be seen whether things get worse—and gold and silver prices climb even further—before they get better.
***
That’s all for now. Have a pleasant evening and see you tomorrow.
Rey Mashayekhi
@ReyM12
Rey.Mashayekhi@Fortune.com
Today's reads
In the Works. Fortune's Shawn Tully spoke with CardWorks CEO Don Berman to find out what the subprime credit card lender's platform tells us about the state of the American consumer—and, in turn, the U.S. economy at large.
Swoosh swoon? Apparel giant Nike announced job cuts and a shakeup in its senior leadership ranks as the company looks to streamline its business and focus on digital operations.
On the hunt. Hedge funder Bill Ackman has launched a new special-purpose acquisition firm—also known as a "blank-check company"—that raised $4 billion in its IPO on the New York Stock Exchange on Wednesday. The publicly traded vehicle is looking to acquire "mature unicorns," or private companies valued at more than $1 billion.
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Market candy
$0.03
That was Tesla’s average expected second-quarter earnings per share, according to a survey of 16 analysts compiled by Refinitiv. Those estimates ranged from a loss of $2.53 per share to positive earnings of $1.45 per share.
In the end, Elon Musk’s forward-thinking automaker smashed most analysts’ targets by reporting earnings of $2.18 per share.


fortune--2020-07-22--Banks can now hold Bitcoin: Behind the OCC’s big decision and why it matters

Microsoft is starting to experience symptoms of COVID-19 in its cloud business

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Big banks have long held precious objects on behalf of their customers—from jewels in safe-deposit boxes to shares of stock. Now, thanks to a new policy by a federal banking regulator, they will be able to hold cryptocurrencies like Bitcoin too.
The new policy is set out in a letter published on Wednesday by the Office of the Comptroller of the Currency (OCC). The letter, addressed to an unnamed bank, stated that national banks and savings associations can engage in so-called custody services for their clients.
The news is significant because regulatory uncertainty has until now led major banks to avoid Bitcoin. What’s more, the bylaws of many big investment funds, including pension funds, oblige them to park clients’ money only with federally chartered banks. As the research group Coin Center notes, this amounts to a de facto ban on cryptocurrency.
The upshot is that big banks now have a green light to open crypto operations. If they do, they will likely begin by focusing on custody services, which until now have been the purview of crypto-focused companies like Coinbase and BitGo.
Custody is important in the world of crypto since currencies like Bitcoin are entirely digital, making them easy to steal. Being a custodian entails storing the so-called private key that provides access to a given digital wallet.
As the OCC notes in its letter, banks already offer to safeguard other digital items on behalf of their clients. This includes offering “secure web-based document storage, retrieval, and collaboration of documents and files containing personal information.”
Custody of cryptocurrency also has the potential to be a lucrative line of business, given that the market cap of Bitcoin is around $170 billion, and that custodians typically charge fees of around 0.25% to keep it safe.
The OCC letter also opens the door for banks to offer more exotic services such as “staking”—a form of proxy voting for certain cryptocurrencies—and crypto lending. Such activity is tiny in the context of the broader financial system, but has become increasingly important in the crypto industry.
All of this raises the question of whether banks will seek to build their own cryptocurrency divisions or seek to acquire some of the numerous crypto startups in the U.S.
In the meantime, one influential crypto entrepreneur, Barry Silbert—who runs the large conglomerate called Digital Currency Group—took to Twitter to express his pleasure with Wednesday’s development.
I’m looking forward to getting my ass kissed by all the banks now — Barry Silbert (@barrysilbert) July 22, 2020
Fortune was not immediately able to ascertain the national bank to which the OCC addressed its letter.
More must-read finance coverage from Fortune:


fortune--2020-07-22--Apple helper Jamf sees stock jump over 50% in first day of trading

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Going public during a pandemic has changed the process dramatically for debuting companies like Jamf, which started trading on the Nasdaq on Wednesday.
Jamf, which helps companies, schools, and other large organizations manage their fleets of iPhones and Mac computers, priced its shares at $26, higher than planned and giving the company a stock market value of about $3 billion. In active trading on Wednesday, the shares shot up as high as $51, before closing at $39.20, a 51% gain from the IPO price.
CEO Dean Hager says that because of the COVID-19 pandemic, he was able to stay put at headquarters in Minneapolis instead of hitting the road for weeks of travel and in-person meetings to promote the IPO.
“Spending each evening with my family, sleeping in my own bed—not so bad during a road show when you hear about how these road shows typically go,” he tells Fortune.
And the virtual meetings he had with investors were more efficient, he says. “I think they’re more effective, I honestly do,” Hager says. “You’re face-to-face with everybody. They’re extraordinarily effective meetings.”
The pandemic has not hurt Jamf’s business much, Hager says. The company has over 40,000 customers—including Apple itself—which have deployed more than 17 million Apple devices.
In an early peek at its second-quarter results, Jamf disclosed revenues between $61.1 million and $62.3 million, which is a gain of 26% to 29% over the same period last year. That’s a slower rate of growth than in the first quarter, when Jamf’s revenue increased 37% to $60.4 million. It also expects to report a second-quarter profit of $2.7 million to $3.9 million versus a loss of $4.4 million in 2019.
“Of course, we saw the same macroeconomic impact that every other business saw,” Hager explains. “The difference with Jamf is, one, we had a very resilient business model ourselves with recurring, all-subscription revenue. In addition, while we did see the macroeconomic headwinds, we have specific workflows that are in need right now.”
Those workflows more in demand from customers during the pandemic include helping doctors make virtual visits with a simple videoconferencing app that doesn’t require setup by the patients. Jamf also helps teachers manage student use of classroom tech like iPads even in a virtual classroom setting. And the company’s technology allows a customer’s IT department to set up a new Mac or iPhone out of the box from Apple without needing physical access to the device.
Recently, Apple bought a small Jamf rival called Fleetsmith. The four-year-old startup says it provides initial setup, software updates, and security services for Apple devices in corporate and school settings. Apple also already offers some help for large organizations managing many devices via its Apple Business Manager app.
“It’s really not competitive,” Hager says. “There’s a very, very thin overlapping of technology to the point that it’s immaterial to us. Our partnership with Apple over the years has always been that we embrace what they build, and we extend it for the enterprise and for education.”
The Fleetsmith acquisition should lead Apple to improve services like the Business Manager app that Jamf already relies on to serve its customers, he adds. “We applaud it because all that means is our solutions will be better for our customers.”
Excluding about 4.5 million shares sold in the IPO by existing shareholders, Jamf sold 13.5 million new shares and raised $320 million. Some of those proceeds will go toward repaying a $205 million bank loan. That should help lower or eliminate Jamf’s quarterly interest expenses of about $5 million, further improving profitability.


fortune--2020-07-22--Kanye West’s outlandish statements may be a problem. Mental health stigma is a bigger one

Good afternoon, readers.
I’m already hearing the groans in my head but this is a personal one. Let’s spend a moment to talk about Kanye West and how we talk about mental health.
The hip hop mogul has a well-established, and self-inflicted, reputation for stirring the pot and can be downright diabolical in the ways he seeks attention. Some of his most audacious stunts—such as becoming one of President Donald Trump’s prominent Black supporters before breaking with him and announcing a 2020 presidential run as an independent—have a weird tendency to coincide with album releases. West and his family have openly spoken about his struggles with bipolar disorder.
West, and his wife Kim Kardashian West, have been in the news lately after the rapper sent out a slew of often incoherent tweets about their relationship and his announced presidential bid.
Kardashian issued a statement via her Instagram supporting her husband. And while it’s easy to roll our eyes at a rich, famous, often bombastic couple, the stigma she speaks of is borne by millions of Americans far less fortunate than they are. All the money in the world can’t eliminate a mental illness or reduce the burden it has on a family.
“As many of you know, Kanye has bipolar disorder. Anyone who has this or has a loved one in their life who does, knows how incredibly complicated and painful it is to understand,” Kardashian wrote. “I’ve never spoken publicly about how this has affected us at home because I am very protective of our children and Kanye’s right to privacy when it comes to his health. But today, I feel like I should comment on it because of the stigma and misconceptions about mental health.”
Everyone is free to have their own opinions about West’s behavior and speculate on motivations. But I’d still urge a dose of charity when it comes to matters of mental health, no matter who the vessel.
I’ve had experiences with my own family members on mental health issues. I’m sure many readers have as well—one in five Americans suffers from a mental illness, according to the National Institutes of Health (NIH).
It took until 2008 for the U.S. to pass the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act, which was the first time that federal law made it illegal to treat mental health and physical health benefits by different standards. (Enforcement, however, has still been inconsistent, and mental health care can be extremely difficult to obtain for the average American, and particularly for minorities.)
And beyond those policy issues, there’s the matter of how we frame these issues, and the very real practical effects that attitudes about mental health can have on patients.
“People with lived experience of a mental illness commonly report feeling devalued, dismissed, and dehumanized by many of the health professionals with whom they come into contact,” according to one NIH-published study on mental health stigma from 2017.
“Key themes include feeling excluded from decisions, receiving subtle or overt threats of coercive treatment, being made to wait excessively long when seeking help, being given insufficient information about one’s condition or treatment options, being treated in a paternalistic or demeaning manner, being told they would never get well, and being spoken to or about using stigmatizing language.”
That’s the kind of underlying stigma that can prevent people from seeking care in the first place (and often does, per the National Alliance on Mental Illness). The thought of being locked up and institutionalized, not to mention ostracized, wouldn’t be a fun feeling for anyone. That’s true irrespective of your lot in life and inevitably gets amplified the lower you are on the socioeconomic ladder.
Read on for the day’s news.
Sy Mukherjee
sayak.mukherjee@fortune.com
@the_sy_guy
DIGITAL HEALTH
LabCorp's CEO on COVID test result delays. Fortune CEO Alan Murray and I spoke with Adam Schechter, the CEO of diagnostics giant LabCorp, this week about the troubles of turnaround times for COVID-19 tests. I'll have a whole lot more on this soon—but I'll leave you with a bit of a teaser from Alan. "Schechter says LabCorp was doing two or three thousand tests a week in March, and is now doing 165,000 tests a day. The company’s 14 labs are operating seven days a week–including the July 4 holiday–and three shifts a day. And if one lab gets behind, the tests are rerouted to another lab," he writes. Now, there's still a whole lot of nuance behind that. It's hard to get access to test kits, the chemical reagents required to conduct these tests, and the machines used to conduct the tests in the first place—and creates a vicious cycle. (Fortune)
INDICATIONS
The U.S. buys up to $2 billion worth of Pfizer, BioNTech coronavirus vaccine. The U.S. has ordered up to 100 million doses of an experimental coronavirus vaccine being developed by drug giant Pfizer and Germany's BioNTech. Both companies' stocks spiked on the news, and this adds to an existing effort by the American government to buy up as many potential treatments as possible (including ones from AstraZeneca and the University of Oxford). It's a gamble given that we still don't know which vaccines will be the most effective, and for how long—and bound to be a logisitical issue as governments around the world scramble for these medical resources. (Fortune)
THE BIG PICTURE
WHO: The first COVID vaccinations won't happen till 2021. The World Health Organization (WHO) on Wednesday cautioned that, despite progress on several COVID vaccine candidates, people should not expect widespread deployment until 2021. “Realistically it is going to be the first part of next year before we start seeing people getting vaccinated,” said Mike Ryan of WHO's emergencies program during a public social media event. (Reuters)
REQUIRED READING
How the pandemic is fundamentally changing how Americans eat, by Beth Kowitt and Lance Lambert
P&G says it will go carbon neutral by 2030, by Katherine Dunn
Tesla earnings: China and S&P loom large, by David Z. Morris
Sign up for other Fortune newsletters.


fortune--2020-07-22--Extra $600 unemployment benefit could get short-term extension before bigger stimulus bill passes

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The tens of millions of Americans currently receiving unemployment benefits are likely to see their $600 per week federal unemployment benefits lapse if Congress doesn’t pass an extension this week.
An extension—or a replacement of the benefit with something else—is currently being discussed in the House and Senate as part of a bigger coronavirus stimulus bill. However, Democratic and Republican party leaders said yesterday a stimulus bill is unlikely to pass until August.
To prevent a lapse in benefits while the bigger stimulus bill debate ensues, the White House and Senate Republican leaders suggested Wednesday that a short-term extension of the Pandemic Unemployment Assistance be passed this week, according to Bloomberg News. It’s unclear if a short-term extension would be of the full $600 weekly benefit, or what period it would cover.
Democratic leaders have already showed resistance to the idea of a short-term extension of the $600 unemployment benefit. House Majority Leader Steny Hoyer said he’d rather see a bigger stimulus deal made than a short-term fix.
The CARES Act, which passed in March, set aside an additional $600 per week in unemployment insurance for jobless Americans on top of their state benefits. However, the money from the Pandemic Unemployment Assistance goes through only the week ending Saturday, July 25.
A more comprehensive stimulus bill is being debated in Congress. But disagreements on issues such as state and local government funding (favored by Democrats), and COVID-19 lawsuit immunity for businesses and schools (favored by Republicans), are holding up its passage.


fortune--2020-07-22--How researchers are tracking illegal ghost boats and the decline in flying squid

Just a few short years ago, researcher Jaeyoon Park said there was frequently one thing on the menu in his aunt’s coastal Korean village: cheap, plentiful squid.
Now, that bounty is over, he says.
“It’s become three to four times the price it was a couple years ago,” he says. “People call it ‘golden squid’ now.”
The disappearance of east Asia’s flying squid population—which has declined by 80% over the past 15 years—has continued despite efforts by Japan and South Korea to manage the catch sustainably. In the process, it has destroyed local livelihoods, changed diets, and produced a dark legacy of “ghost boats” washing up on Japanese shores.
Now, an international group of researchers, including Park, a data scientist at the NGO Global Fishing Watch, say they have tracked the source: an army of untracked, so-called “dark” fishing vessels, that leave Chinese ports to fish illegally off the coast of North Korea. The research, published in Science Advances on Wednesday, is also a case study for a new method of using satellite-based tracking technologies that the researchers say will make it possible to track shadowy activity on the world’s oceans—from overfishing to sand mining—like never before.
The study, Illuminating Dark Fishing Fleets in North Korea, was conducted as a partnership between Global Fishing Watch and SkyTruth—two NGOs which use satellite technology to track fisheries and environmental exploitation—with researchers at Duke University, the Japan Fisheries Research and Education Agency, the Australian National Centre for Ocean Resources and Security, the Korea Maritime Institute, Planet Labs, and the University of California at Santa Cruz.
While illegal fishing isn’t unique to North Korea, the broader region’s extreme geopolitical tension and lack of co-operation make the country’s coasts “one of the least monitored regions in the world,” says Park, where illegal activity can flourish, unwatched.
The choice to go with the “worst test case” possible, in North Korea, will demonstrate that it’s finally possible to comprehensively track the movement of vessels around the world, whether they’re involved in sanctions busting, overfishing, or trafficking, Park said.
Because of international sanctions against North Korea, which make fishing or buying seafood from the country illegal, the vast majority of boats in the region go “dark”, or turn off their AIS, a universal vessel-tracking system based on GPS, when entering territorial waters. The region is also home to endemic GPS jamming and spoofing, methods of disrupting or confusing GPS receivers, therefore making vessels harder to track.
“When we look at the AIS map, there’s a big hole,” says Park. “That’s quite suspicious.”
In order to create a map of fishing in the region, the team combined four satellite tracking methods for the first time: AIS, alongside Satellite Synthetic Aperture Radar (SAR), which can identify metal vessels; the Visible Infrared Imaging Radiometer Suite (VIIRS) sensor, which can regularly detect vessels with bright lights—including the lights used at night by squid fishing boats to attract the squid—and high-resolution optical imagery. Collectively, those methods made it possible to map vessels over time, even through cloud cover, which has previously made tracking difficult.
Illegal activity at sea has long been difficult to track and enforce. Even with tracking measures, Park admits that finding the owners or operators behind vessels is difficult. Even if it’s possible to find a vessel’s name or tracking number, a vast system enables owners to operate in secrecy: vessels can be registered in countries with lax oversight, while Russian Doll-style systems of shell companies allow even vessels on international sanctions lists to quickly appear to change ownership.
It’s a “big headache,” said Park. “Not just for us, but for everyone, to find out who’s behind these vessels.”
The North Korean study followed anecdotal reports from governments that overfishing, paired with climate change that has warmed the region’s waters, was likely the source of a decline in squid populations so severe that many Japanese fishermen simply no longer bother to fish for them. Yet squid is extremely popular: in South Korea, it is the country’s top seafood by production value, and it is in the top five in Japan.
The study estimated that the catch by vessels in North Korean waters collectively outstripped the combined annual catch of both Japan and South Korea. In 2017, trawlers off the coast of North Korea caught an estimated 101,300 metric tons of squid, worth $275 million; the next year, an estimated 588 vessels caught squid worth $171 million, making the haul the largest known case of illegal fishing by vessels from distant waters in the world.
Due to a lack of transparency, it’s impossible to say exactly how much of the total squid consumption in the region is the result of illegal fishing, or how much of that reaches the United States, where regional varieties of squid are available. However, the Monterey Bay Aquarium’s Seafood Watch project advises against eating flying squid from the region, citing declining stocks and suspected overfishing.
The rates of illegal fishing also have dire consequences for North Korean fishermen, who have been pushed by competition from the Chinese boats to move north, fishing illegally off the far eastern coast of Russia. Pre-sanctions, squid was North Korea’s third largest export.
However, unlike the well-equipped fishing boats from Chinese ports, the North Korean boats are small, wooden fishing vessels that are unequipped to travel the hundreds of kilometers into Russian waters, the study said. That dangerous journey has produced evidence of a humanitarian crisis. In 2018 alone, 225 so called “ghost boats”, some containing the bodies of fishermen who starved to death onboard, were found washed up on Japanese coasts.
The study is a grim reminder of the scale of commerce taking place in the shadows on the world’s oceans, and the knock-on effects of the race for resources when regional and international co-operation and transparency is lacking.
The next step will be whether regional governments can find a way to enforce or intervene to limit the sheer scale of the illegal fishing.
“This is the beginning of the story, probably,” said Park. “What we provide is underlying information and data.”