26 FACEBOOK

Christian Fuchs

Social media and web 2.0 are terms that have become popular since 2005 when Tim O’Reilly, founder and CEO of the computer technology and business press O’Reilly Media, introduced the concept of web 2.0.1 On the one hand, these notions are capitalist ideologies that have tried to convince investors and advertisers that the Internet has been completely renewed after the 2000 dot-com crisis and that it poses great new investment opportunities.2 The ultimate goal underlying the notions of web 2.0 and social media is to attract venture capital investments to the capitalist Internet economy. On the other hand, there is an element of rationality to this marketing ideology: platforms such as Facebook, YouTube, Twitter, Weibo, Wikipedia, Pinterest, etc. do not constitute a completely new Internet, but they have integrated various forms of sociality into their services (i.e., creating and sharing information, communication, and cooperation) that were previously only supported by Internet technologies.3

Facebook is in many of the world’s countries one of the most used WWW platforms. At the end of 2014 it had 1.39 billion monthly active users,4 which makes it—with around 20% of the world population—one of the media with the largest audience and user group in the world. Facebook is a media giant.

In 2013, 88.7% of Facebook’s revenues stemmed from advertising and 11.3% from payments and fees.5 In 2014, the advertising share was 92.2%.6 With almost $7 billion in advertising revenue in 2013 and $11.5 billion in 2014, Facebook is not a communication company but one of the world’s largest advertising agencies.

Facebook achieves profits by selling targeted advertising space. The access to the platform is not a commodity. The commodity that is sold is rather users’ registration data, profile data, browsing behavior on Facebook and other parts of the World Wide Web, communication content, and social relation data.

This chapter analyzes the political economy of one of the most widely used social media platforms. It discusses Facebook’s history followed by a discussions of its economic, political, and cultural profiles.

History

Mark Zuckerberg, Eduardo Saverin, Andrew McCollum, Dustin Moskovitz, and Chris Hughes founded Facebook as a college social network in 2004 at Harvard University. The initial site was www.thefacebook.com. The platform quickly became popular at Harvard University and was extended to other Ivy League universities.

The movie The Social Network (Columbia Pictures, 2010) describes the history of Facebook as a bunch of talented Harvard students, who because of a good idea became billionaires and realized the American Dream of becoming rich and famous. The movie frames the story in individualistic terms, neglecting that Facebook, like most large Silicon Valley tech companies, received millions in venture capital, from Peter Thiel, Accel Partners, Jim Breyer, and others, which allowed its expansion as a company.

In 2006, Facebook was turned from a college network into a general social network open to everyone. From then on the users of Facebook increased rapidly, reaching 500 million in 2010 and one billion in 2012. In 2012, Facebook made an IPO on the NASDAQ and became a publicly traded company. Facebook subsequently developed into the social networking site with the largest number of users and the highest profits and one of the world’s largest advertising agencies.

Economic Profile

Facebook is a media giant both in terms of the number of its users and its capital. This section outlines Facebook’s financial data/market share, properties (corporate structure, holdings, joint ventures), typical corporate strategies, and new developments.

Financial Data/Market Share

According to the Forbes 2000 list in 2014, Facebook was the world’s 510th largest transnational company (TNC) as measured by a composite index of sales, profits, capital assets, and market value.7 In the category of computer services, it was the world’s fifth largest TNC, ranked after IBM, Google, Accenture, and Tencent. The following figures illustrate Facebook’s profits and revenues. In 2015, Forbes listed Facebook as the world’s 280th largest company, now ranked third in the computer services industry behind Google and IBM.

Figure 26.1 shows the development of Facebook’s profits in the years 2007–2013 and Figure 26.2 visualizes the development of Facebook’s revenues during the same time period.

As indicated by Figure 26.2, Facebook’s revenues have been continuously growing since 2007. During the analysed time period, the company had losses in 2007 and 2008 but was profitable in the years 2009–2013. The reason why profits decreased in 2012 is that Facebook had to record expenses made by compensating employees in the form of restricted stock options (RSU) in preparation for its initial public offering on the NASDAQ stock exchange. It wrote down RSU compensation of $986 million in 2012, which reduced its profits.8 In 2013, its profits reached a new high of $1.5 billion. In 2014, the profits further increased to nearly $3 billion.

Properties (Corporate Structure, Holdings, Joint Ventures)

Facebook’s acquisition strategy is to buy other online technology providers that could either compete with Facebook directly or that allow the company to enhance its own platform and services in other technological realms. The most important acquisitions have been the mobile phone instant messaging app provider WhatsApp (2014, $19 billion), the online video advertising company LiveRail (2014, $500 million), Oculus Virtual Reality that produces head-mounted displays (2014, $2 billion), the photo-sharing platform Instagram (2012, $1 billion), the face recognition software company Face.com (2012, $100 million), the advertising technology company Atlas (2013, $100 million), and the mobile app developer Snaptu (2011, $70 million).

WhatsApp and Instagram are examples of social media that competed with Facebook, which meant that Facebook became horizontally integrated in social media after acquiring the companies. The acquisitions of Atlas, Snaptu, and Face.com are examples of vertical integration, whereby

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FIGURE 26.2 The Development of Facebook’s Revenues Source: SEC Filings, Form-S1 Registration Statement: Facebook, Inc., Form 10-K: Annual Reports

FIGURE 26.1 Facebook’s Profits, 2007–2013 Source: SEC Filings, Form-S1 Registration Statement: Facebook, Inc., Form 10-K: Annual Reports

Facebook extended its services into other realms, such as advertising, mobile phones, and photo tagging. The acquisition Oculus is another example, whereby Facebook extended its business into the virtual reality market. Taken together, these purchases constitute a case of conglomeration within the media technology sector.

The purchase of WhatsApp in 2014 gave Facebook a strong presence in the mobile online communication market. Instagram has become an increasingly popular social network that is focused on image sharing. Its acquisition allowed Facebook to strengthen its presence in the realm of content-sharing networks. Atlas strengthens Facebook’s provision and use of targeted advertising. Snaptu developed the Facebook app for use on all mobile phones, which increased Facebook’s presence on mobile phones. Face.com’s photo tagging applications are direct enhancements for Facebook that take into account the fact that people use their mobile phones as digital cameras and want to share the images they take with others. Facebook’s purchase of Oculus may have been driven by Google’s development of Google Glass, which may have raised Facebook’s fears about missing out on profits in the augmented reality market.

Whereas Instagram uses a targeted advertising-based capital accumulation model just like Facebook, WhatsApp and Oculus have different strategies: the first charges subscription/access fees, the second sells hardware. Although Facebook uses predominantly targeted advertising (i.e., the commodification of user data as capital accumulation model), it has also created a presence in the commodification of hardware and of the access to online services.

Typical Strategies

Understanding Facebook’s political economy needs to be connected to an analysis of the political economy of advertising. Facebook’s typical capital accumulation strategy is the exploitation of users’ digital labor.

Capitalists’ source of profits is the exploitation of workers’ labor. Capitalism’s essence is that workers work more hours than they are paid for, are only compensated for part of their working day, and do not own the products and value they create. Marx points out that capital has a “werewolf-like hunger for surplus labor.”9 He also characterizes capital as “vampire-like,” claiming it “lives only by sucking living labor, and lives the more, the more labor it sucks.”10 Capital has a “vampire thirst for the living blood of labor.”11 Marx uses the metaphor of the vampire and the werewolf in order to point out that capitalism as system of exploitation is morally detestable, a scandal that confronts the working class and that should be abolished. How does the exploitation of labor work in the case of Facebook?

Dallas Smythe12 established the notions of audience commodity and audience labor for understanding the political economy of commercial media using advertising as their capital accumulation model. “The work which audience members perform for the advertiser to whom they have been sold is to learn to buy particular ‘brands’ of consumer goods, and to spend their income accordingly. In short, they work to create the demand for advertised goods, which is the purpose of the monopoly capitalist advertisers. While doing this, audience members are simultaneously reproducing their own labor power.”13 Smythe’s notion of audience labor challenged the idea that one can only be exploited if one earns a wage in a factory. He opened up the notion of exploitation for the age of consumer culture. His concepts of the audience commodity and audience labor also challenge the idea that the home and the private sphere are insulated against exploitation, an insight that he shares with Marxist feminism that since the 1970s has stressed the importance of considering reproductive labor as value-generating and therefore exploited by capital. The two notions also share insights with Autonomous Marxism, which stresses that the factory and labor have diffused beyond factory walls and have created a social factory and the social worker.

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In the age of capitalist social media, Smythe’s notions of audience labor and the audience commodity have gained new attention and relevance.14 Facebook’s commodity is not its platform that can be used without charges. It rather sells advertising space in combination with access to users. An algorithm selects users and allows individually targeting ads based on keywords and search criteria that Facebook’s clients identify. Facebook’s commodity is space on a user’s screen or profile that is filled with ad clients’ commodity ideologies. The commodity is presented to users and sold to ad clients either when the ad is presented (pay-per-view) or when the ad is clicked (pay-per- click). The user gives attention to his or her profile, wall, and other users’ profiles and walls. For specific time periods, parts of his or her screen are filled with advertising ideologies that are targeted to his or her interests with the help of algorithms. The prosumer commodity is an ad space that is highly targeted to user activities and interests. The user’s constant online activity is necessary for running the targeting algorithms and for generating viewing possibilities and attention for ads. The ad space can therefore only exist based on user activities, which provide the labor that creates the social media prosumer commodity. Constant real-time surveillance of users’ personal data is an inherent feature of Facebook’s capital accumulation model.

For Marx,15 work is the creation of use-values that satisfy human social needs. In class societies, work is at the same time labor that creates a surplus product and surplus value that not the working class, but the dominant class owns. Given that communication serves the human need of social reproduction (i.e., the establishment and maintenance of social relations), it is a form of work. Communication on Facebook and other social media platforms is therefore also a form of work. On commercial, advertising-based platforms, such as Facebook, communication is also a kind of digital labor that creates commodities (user data) that are sold and generate economic value and monetary profit. For understanding exploitation on social media and its connection to labor in the ICT industries in general, the concept of digital labor has been coined and developed.16

Figure 26.3 shows the process of capital accumulation on corporate social media platforms such as Facebook that are funded by targeted advertising.

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FIGURE 26.3 Capital Accumulation Process for Corporate Social Media Platforms Based on Targeted Advertising

Social media corporations invest money (M) for buying capital: technologies (server space, computers, organizational infrastructure, etc.) and labor power (paid employees). These are the constant capital (c) and the variable capital (v1) outlays. The outcome of the production process P1 is not a commodity that is directly sold, but rather a social media service (the specific platforms) that is made available without payment to users. The waged employees’ paid digital labor that creates social media online environments that are accessed by users produces part of the surplus- value. The users employ the platform for obtaining information, communicating, and generating content that they upload (user-generated data). The constant and variable capital invested by social media companies (c, v1) that is objectified in the online environment is the prerequisite for users’ activities in the production process P2. The products of digital labor are user-generated data, personal data, social networks and transaction data about browsing behavior and communication behavior on corporate social media. Users invest a certain labor time, v2 in this process. Corporate social media sell the users’ data commodity to advertising clients at a price that is larger than the invested portion of constant and variable capital. Partly the users and partly the corporations’ employees create the surplus value contained in this commodity. Once the Internet prosumer commodity that contains the user-generated content, transaction data, and the right to access virtual advertising space and time are sold to advertising clients, the commodity and the surplus-value contained are transformed into monetary capital and profit.

Facebook’s clients run ads based on specific targeting criteria. For example, the company can target an ad to 25–35-year-old men who are interested in literature and reading. What exactly is the commodity in this example? It is the ad space that is created on a specific 25–35-year-old man’s screen while he browses Facebook pages about books or other pages about literature. The ad is potentially presented to all Facebook users who fall into this category, which amounted to 25,593,175 on October 4, 2014. What is the value of the single ad presented to a user? It is the average labor or usage time needed for the production of the ad presentation.

Let’s assume these 25,593,175 million users are on Facebook an average of 60 minutes per day and that 60 ads are presented to them during these 60 minutes on average. All the time they spend online is used for generating targeted ads. It is labor time that generates targeted ad presentations. We can therefore say that the value of a single ad presented to a user in this example is one minute of labor, usage, or prosumption time.

In 2012, Facebook had 4,619 employees and 1.06 billion active users.17 In August 2012, users spent on average 7 hours and 46 minutes on the site.18 We can therefore calculate that an average user spent 93.2 hours per year on Facebook. In total this means 93.2 × 1.06 billion = 98.792 billion hours of annual Facebook usage time.

Furthermore, from Facebook’s financial reports,19 we have data for 2012, shown in Table 26.1. According to other data, the average working day of Facebook’s employees is 9–10 hours, so we can set it at 9.5 hours.20 This means that in total, Facebook employees worked in 2012 around 10 million hours:

4,619 employes × 9.5 hours × 5 days × 45 weeks = 4,619 × 2,137.5 hours = 9,873,112.5 hours.

What do Facebook employees earn on average? Statistics from glassdoor.com allow an approximation. Glassdoor is a platform where employees report average salaries and review working conditions. The data in Table 26.2 are based on reports from N = 1,499 persons. Based on these data, we can estimate that the salary of an average Facebook employee is $120,675.

We can approximate Facebook’s total 2012 wage costs: If there are 4,619 employees with an average salary of $120,675, then the average 2012 wage costs are: 4,619 employees × $120,675 = $557,397,825.

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The data allow calculating the following shares:

• wage share (variable capital) in revenues: 11.0%; • capital share in revenues (profit + constant capital + share-based compensation): 89.0%; • profit share in revenues: 10.6%; • shareholder compensation share in revenues: 34.5%; • constant capital share in revenues: 43.9%; • total working hours:

– employees: 9,873,112.5 hours; – users: 98.792 billion hours; – total: 9,873,112.5 + 98,792,000,000 = 98,801,873,112.5 hours;

• number of unpaid working hours: – 89% of employees’ working hours were unpaid = 8,787,070.1 hours; – 100% of users’ working hours were unpaid = 98.792 billion hours; – total unpaid working hours = 98,792,000,000 + 8,787,070.1 = 98,800,787,070.1;

• total paid working hours: 9,873,112.5 × 0.11 = 1,086,042.4; • rate of exploitation (Facebook, 2012): unpaid labor time / paid labor time = 98,800,787,070.1

hours ÷ 1,086,042.4 = 90,973.

The macro-economic wage share is the share of an economy’s wage sum in the GDP. The macro-economic profit share is the share of the sum of an economy’s profits in the GDP. We can approximate these shares the following way:

Wage Share (ws) = net operating surplus (NOS) GDP Profit Share (ps) = compensation of employees (COE) GDP.

The U.S. economy-wide profit share was 24.8% in 2012 and the wage share 53.1%.21 As shown, I estimated the company-level equivalents of the profit share and the wage share for Facebook:

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TABLE 26.1 Financial Data for Facebook, 2012 ($)

Revenue 5.089 billion Profit before taxes 538 million Costs (constant and variable 1.57 billion capital, share-based compensations)

Source: SEC filings, form 10-K, 2012

TABLE 26.2 Estimation of Facebook Employees’ Average Wages, N = 1,499 ($)

Software engineer 117,652 Research scientist 128,996 Production engineer 126,565 Product designer 123,460 Operations engineer 98,789 Product manager 136,561 Software engineer 100,100 Technical program manager 146,063 Data scientist 124,051 Engineering manager 155,724 Senior software engineer 147,144 User operations analyst 43,518 Software engineer 145,194 User interface engineer 115,299 Software engineering new grad 106,000 Database engineer 131,500 Applications operation engineer 104,852 Average 120,675

Source: glassdoor.com, accessed December 1, 2013

Facebook’s wage share was 11.0% in 2012 and its profit share 45.1% (when profits are calculated as the sum of actual profits and paid-out shareholder compensation). Facebook achieves such a high profit share by keeping its wage costs low. Calculating exploitation at the level of prices only allows taking wage labor into account, not unpaid labor that also creates value. Therefore, we need to calculate also at the level of labor time in order to analyze non-wage workers’ unpaid labor time of non-wage as a source of value. By performing such a calculation, we can see that unpaid labor is a huge source of value for social media.

New Developments

Facebook made an initial public offering on the NASDAQ stock market in 2012 with an opening price of $38 per stock.22 Its market capitalization (the amount of issued shares multiplied by the stock price) increased from $81.7 billion at the start of its stock market presence on May 18, 2012, to around $200 billion in autumn 2014.23 Facebook’s capital assets grew from $14.9 billion in June 201224 to $20.8 billion25 in June 2014. Whereas the market value increased during the same time period by almost 250%, Facebook’s capital increased by 40%. As a consequence, the difference between Facebook’s market value and its capital assets increased from a factor of 5 in 2012 to a factor of 10 in 2014. This increasing differential between market value and capital is an indication of Facebook’s overvaluation.

Whereas the growth of Facebook’s capital is based on the exploitation of users’ digital labor, the growth of its market capitalization is based on investors’ assumptions that Facebook’s profitability will forever grow rapidly. The 2000 dot-com crisis of the Internet economy was an example of financial bubbles that result from the difference between expectations and reality of profitability. Since the mid-1970s, profitability in the world economy has remained unstable and fluctuating, which has increased the growth in speculative financial markets that promise high short-term returns but are high-risk and highly volatile.

Twitter started trading stocks on the New York Stock Exchange in November 2013, Weibo on the NASDAQ stock market in April 2014. Twitter’s annual loss amounted to $647 million in 2013;26 Weibo’s annual loss was $38 million in 2013.27 These two examples, just like Facebook’s growing difference between capital and market capitalization, are indications that financial capital underlies the social media industry. The monetary profits are driven by the exploitation of users’ digital labor. The financial investments enable social media companies to operate but at the same time decouple their financial economy from their capital/labor economy. This simultaneous coupling and decoupling of the financial and the capital/labor economy in the social media industry can only work as long as a significant amount and share of profits can be derived from targeted advertising and investors maintain large-scale confidence that such ads are a viable form of capital accumulation. How often do you click on an ad that is presented to you on Facebook or another corporate social media platform? And if you click, how often do you buy something on the website to which you are transferred?

Online advertisements’ click-through rate is on average just 0.1%,28 which means that users tend to click on 1 out of 1,000 ads presented to them. And if a user clicks on a targeted ad, we do not know whether such single clicks make them buy commodities on the websites they are referred to or not. In addition, more and more users find any form of online advertising annoying and use ad-block software and do-not-track cookies. If the belief that targeted ads work suddenly dwindles when one larger social media platform is in decline, for example, the social media bubble may burst. Bursting financial bubbles always have devastating social, political, and economic effects. There are many reasons not to wait until the social media bubble explodes, but to start establishing and supporting alternatives to corporate social media.

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Political Profile

This section discusses Facebook’s ownership structures, ties to the state and lobbying efforts, corporate board members and interlocking directorates, and social marketing.

Ownership

Table 26.3 shows Facebook’s largest shareowners. The difference between class A and B stock is that holders of class A stock have one vote per share while holders of class B stock have 10 votes per share at the Annual Facebook Meeting.29

Mark Zuckerberg is not only Facebook’s co-founder, chairman, and CEO, he also holds the majority of all stock and absolute majority of the voting power, which means that he is the company’s main financial profiteer and decision-maker. Facebook co-founders Dustin Moskovitz and Eduardo Saverin also hold significant shares of stock and voting power. The U.S. financial investment company Fidelity controls a significant share of class A stock, which shows the importance of financial investors for corporate social media.

Large investors in Facebook that funded the company’s early development were the U.S. venture capital firm Accel Partners, which owned around 15% by investing $12.7 million in 2005, and Mail.ru that invested $200 million in 2009. In 2010, Accel Partners sold its Facebook ownership share for $35 billion.30 Mail.ru sold its Facebook shares in 2013 for $525 million.31 These examples show a typical strategy of financial capital: investing in start-up companies and selling their ownership shares after these firms have increased their capital or market value in order to make a profit.

Facebook’s successful exploitation of digital labor translates into a growing wealth for its owners. In 2014, Mark Zuckerberg was the world’s 13th richest person,32 his net worth being $34.1 billion. In the computer industry, only Bill Gates (Microsoft, #2) and Larry Elison (Oracle, #5) were richer than Zuckerberg.

Ties to the State and Lobbying Efforts

An important link between the capitalist economy and the state is taxation. In the U.K., Facebook paid £238,000 corporate tax on a U.K. revenue of £175 million (0.1%) in 2011.33 In 2012, it paid no corporate tax on U.K. revenues of £223 million.34

In order to avoid paying taxes, Facebook makes use of what is called the “Double Irish Strategy” in the economic world: its European headquarters are based in Dublin, Ireland. Existing tax regulation allows Facebook and other transnational companies to shift revenue from a country with higher tax rates to ones with lower tax rates. In the “Double Irish Strategy,” two companies work together: one is an Irish company resident in a tax haven (the Cayman Islands in Facebook’s case), while the other one resides in Ireland. The company based in Ireland receives revenues

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TABLE 26.3 Facebook’s Largest Shareowners (%)

Class A Stock Class B Stock % of Voting Power

Mark Zuckerberg, chairman and CEO 0.00001 74.3 55.2 All other directors and executive officers together 0.9 9.0 6.0 Dustin Moskovitz 2.3 8.5 6.9 Eduardo Saverin 0.0002 9.3 6.9 Entities affiliated with Fidelity 7.1 – 1.8

Source: Facebook SEC filings, form DEF 14A, Definitive Proxy Statement 2014, March 31, 2014

that Facebook makes outside of the U.S. that it offshores to the company in the Cayman Islands by paying licensing fees to it that are tax deducible in Ireland. For the remaining profits, it pays corporate tax at the level of 12.5% in Ireland. Using this strategy, Facebook in 2011 paid only £2.9 million in taxes on non-U.S. profits of £840 million (0.3%).35

Facebook’s tax avoidance strategy is indicative of how states operate under neoliberal capitalism. The state is not passive or unregulated, but rather regulates the economy with the help of laws in such a way that capitalist companies derive profits at the expense of the public. The bourgeois state’s law protects capitalism. Legislation tends to be predominantly national, whereas the capitalist economy is global, which creates a contradiction between national legislation and global capitalism. Also the Internet is a global system. Internet companies such as Facebook therefore bring together global capitalism and a global communication system, which makes it difficult for nation states to effectively regulate and tax such corporations. Being driven by the fear of losing investments in their countries, many states choose not to tax global corporations at all, which undermines public finances and is an even more severe problem in times of austerity.

Facebook has again and again faced massive public criticism because of privacy violations. For example, the Europe v. Facebook initiative36 filed 22 complaints against Facebook to the Irish Data Protection Commissioner. It argued that Facebook had breached European and Irish data protection laws. The issues in question concerned users’ consent to the privacy policy; excessive data storage; liberal standard privacy settings; the deletion of postings, images, and messages; consent to the storage of data about pokes; shadow profiles; tagging; mobile data use; postings on other users’ walls; facial recognition; and third-party applications and likes.37 The legal results of this conflict were negligible and did not in any way decrease Facebook’s capacity to commodify personal data. Ireland’s Data Protection Commissioner, Billy Hawkes tends to be soft on companies and concluded that it is a fair deal that Facebook provides free platform access and in return commodifies personal data.38

The privacy critique of Facebook is a rather liberal discourse grounded in the ideology of possessive individualism whereby data are seen as an individually owned private good that is in the wrong hands because it is owned by Facebook and not by the users. The logical implication is that it is evil if Facebook makes profits out of data, but legitimate if a user makes profit out of his or her own data. An individualistic privacy discourse cannot adequately challenge the profit and commodity logic. A socialist privacy strategy that argues for privacy of consumers, workers, and citizens, while simultaneously advocating for greater surveillance of the state and companies reverses the existing power relations. Such a strategy can challenge the power of corporations and the capitalist state while strengthening citizens’ interests. In a classless society devoid of any domination, more personal data can be shared in public because humans would be less prone to suffer disadvantages when doing so than in class-based societies.

In the years 2011–2014, Facebook spent annually between $1 million and $6 million on political lobbying.39 It hired lobbying firms such as Elmendorf Ryan, Peck Madigan Jones, Squire Patton Boggs, Steptoe & Johnson, and Stewart Strategies & Solutions for this purpose. Facebook paid for lobbying on political issues and laws concerning visas and permanent residency for high-tech workers, online privacy, children’s online privacy and safety, corporate taxes, intellectual property, advertising, free trade, and education about the Internet. These examples show that laws in capitalist societies are not just issues of rational parliamentary discourse and decision making, but rather have their own political economy in which corporations purchase lobbying efforts that represent their interests as commodity.

Three examples of Facebook’s lobbying spending—corporate tax, data protection policies and legislation, and lobbying—show how bourgeois state power40 works in favor of Facebook. State power supports, protects, and legitimizes Facebook’s exploitation of digital labor and its monitoring of users for economic purposes.

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The bourgeois state supports Facebook, but the reverse is also true. Facebook has supported the state’s power of control over citizens: In June 2013 and with the help of the Guardian, Edward Snowden revealed the existence of large-scale Internet and communications surveillance systems such as Prism, XKeyscore, and Tempora. According to the leaked documents, the National Security Agency (NSA) in the U.S. obtained direct access to user data from seven online/ICT companies via the Prism program, including Facebook.41 Mark Zuckerberg denied that his company is part of Prism in a posting on Facebook from June 7, 2013. The question is, however, why the NSA should make such claims in its internal documents if they are not true and why Edward Snowden should lie.

Driven by the ideology that surveillance and violence (warfare, law, and order politics) are fixes to terrorism after 9/11, Western nation states have intensified and extended surveillance, including Internet surveillance. In the surveillance-industrial complex, user data are first externalized and made public or semi-public on the Internet in order to enable users’ communication processes, then privatized as private property by Internet platforms in order to accumulate capital, and finally particularized by secret services who bring massive amounts of data under their control that are then made accessible and analyzed worldwide with the help of profit-making security companies. As such, the relationship between Facebook and the nation state is a very good example of how state power and corporate power scratch one another’s back.

Corporate Board Members and Interlocking Directorates

Facebook received its first venture capital injection of $500,000 from Peter Thiel in 2004. Thiel is a co-founder of PayPal and a venture capitalist. Thiel is also on Facebook’s board of directors, which is an example of financial investors not just acquiring economic shares of a company, but thereby also gaining an important role in its governance structure. Table 26.4 gives an overview of Facebook’s board of directors and indicates of which other company boards the directors are members.

Table 26.4 shows that Facebook’s board is interlocking with other corporations, especially with companies in the realms of finance and venture capital, media and entertainment, and retail. The link to the financial industry shows that Internet companies such as Facebook tend to be started and based on venture capital and financial investments that allow financial companies to gain

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TABLE 26.4 Facebook’s Interlocking Board

Name Role at Facebook Other board involvements

Mark Zuckerberg Chairman, CEO

Sheryl Sandberg Chief Operating Officer Walt Disney Company (entertainment)

Marc Andressen Director Andreessen Horowitz (venture capital), eBay Inc. (online retail), Hewlett-Packard Company (ICTs)

Erskine B. Bowles Director Morgan Stanley (finance), Belk Inc. (retail), Norfolk Southern Corporation (railway)

Susan Desmond- Director The Gates Foundation (private foundation), Hellmann The Procter & Gamble Company (consumer goods)

Donald E. Graham Director The Washington Post Company (news media)

Reed Hastings Director Netflix Inc. (online entertainment)

Peter A. Thiel Director Thiel Capital (venture capital), Founders Fund (venture capital), Clarium Capital Management (hedge fund)

Source: http://investor.fb.com/directors.cfm, accessed October 4, 2014

governance and ownership stakes. Facebook also interlocks with other media companies with which it does not compete.

Social Marketing

Corporate social responsibility (CSR) is an ideology that capitalist companies use for trying to present themselves in a positive light to the public. Media and communications companies have discovered the importance of CSR as a way to distract attention from how their capitalist operations harm humans, society, and nature.42 The critical cultural theorist Marisol Sandoval has theorized and analyzed CSR in the media and cultural industry, and she claims:

CSR matches the logic of contemporary capitalism: in the context of globalization and neoliberal deregulation, which created regulatory gaps, the idea of socially responsible corporations [. . .] is used as an argument to legitimize deregulation and voluntary corporate self-regulation. [. . .] CSR furthermore becomes a necessary component of corporate image and reputation management.43

CSR is a contradictio in adjecto: capitalist corporations necessarily exploit workers and are therefore always irresponsible. “CSR cannot fulfil its promises, it cannot wipe off the monstrous features of capital, it cannot make corporate media social.”44

Unlike many other transnational media companies, Facebook did not have a CSR strategy as of 2014 and also did not publish CSR reports. This may be an indication that Facebook’s management thinks it is inherently doing good by allowing people to communicate and providing a platform for charities, that this circumstance is self-explanatory, and that it therefore does not have to write ideological reports explaining what is good about it.

Communication as such is, however, neither good nor evil. Facebook is a platform for the Clean Clothes Campaign, War on Want, and Oxfam, among many others. Indeed, Facebook provides publicity for fascist and far-right groups such as the German NPD, the French Front National, the English Defence League, and the British National Party. Therefore, there is nothing inherently benevolent or morally good about Facebook as such.

In 2013, Mark Zuckerberg helped found the advocacy group FWD.us that works for immigration reform. The main funders are Silicon Valley capitalists such as Zuckerberg, Reid Hoffman (LinkedIn), Drew Houston (Dropbox), Steve Chen (YouTube), Brian Chesky (Airbnb), Reed Hastings (Netflix), Marissa Mayer (Yahoo!), and Eric Schmidt (Google). Others include, for example, Bill Gates and Steve Ballmer (Microsoft), or Tim Armstrong (AOL). Zuckerberg explained that to “lead the world in this new [knowledge] economy, we need the most talented and hardest-working people,” which is why FWD.us lobbies for immigration reforms that “attract the most talented and hardest-working people, no matter where they were born.”45

Zuckerberg makes clear his instrumental and particularistic understanding of political causes. He does not mention what should happen with poor migrants that flee from poverty and warfare caused by global imperialism and who therefore want to get into Western countries. FWD.us rather supports providing “law enforcement the tools necessary to secure the borders.”46 The focus here aligns FWD.us with the right-wing goal of closing the borders for poor migrants and also other Silicon Valley firms that develop surveillance technologies funded by the state.

Zuckerberg focuses political attention on lobbying for easier immigration for the lucky few who are highly skilled. The goal of FWD is to provide a legal framework that makes it easier for tech companies to employ workers whose skills produce a lot of surplus value and therefore help these corporations to further increase their profits. As such, Facebook’s understanding of social causes is imperialist and capitalist. It seeks only its own monetary advantages, not advantages for

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all and for society as a whole. Zuckerberg and other Silicon Valley capitalists are surely convinced that egoistic profit seeking creates a better society, but the reality of neoliberalism—the massive increase of inequalities—has falsified such assumptions.

Cultural Profile

This section discusses Facebook’s ideology and aspects of popular culture.

Symbolic Universe/Ideology

Facebook’s self-understanding is that it is an online platform that wants “to give you the power to share and to make the world more open and connected.”47 Zuckerberg continuously foregrounds Facebook’s use-value for sharing, communication and sociality:

• “At Facebook, we build tools to help people connect with the people they want and share what they want, and by doing this we are extending people’s capacity to build and maintain relationships. People sharing more—even if just with their close friends or families—creates a more open culture and leads to a better understanding of the lives and perspectives of others. We believe that this creates a greater number of stronger relationships between people, and that it helps people get exposed to a greater number of diverse perspectives.”48

• “Our mission is to make the world more open and connected. We do this by giving people the power to share whatever they want and be connected to whoever they want, no matter where they are.”49

Social media ideologies use language that constantly stresses sharing, empowerment, connecting, opening, access, inspiring others, creating, informing, fun, collecting, and loving something. This engaging/connecting/sharing ideology is grounded in an individualistic and consumerist notion of freedom that stresses social media’s enablement of single users to communicate, create, consume, and share more. Corporate social media have hijacked the concept of free access and turned it into an ideology that tries to conceal the existence of a mode of capital accumulation based on the commodification of personal data and targeted advertising. Corporate social media present themselves as free, open, and social, but are in reality unfree, closed, and particularistic machines for the commodification of personal data that produce and sell targeted ads. The problem is that Internet companies, consultants, managers, and those who believe in their ideology do not see that freedom is, as Karl Marx stressed, a “realm of freedom”50 that is not based on the logic of profitability and accumulation but the principle “from each according to his ability, to each according to his needs!”51 The implication is that the “first freedom” of the media “consists in not being a trade.”52

The engaging/connecting/sharing discourse is an ideology because it only views social media positively and is inherently technological-deterministic. It assumes that social media technologies have positive effects, and it disregards the power structures and asymmetries into which it is embedded. Social media ideology is an expression of what Herbert Marcuse terms one-dimensional language, by which he means “ideas, aspirations, and objectives that, by their content, transcend the established universe of discourse and action are either repelled or reduced to terms of this universe.”53 The engaging/connecting/sharing ideology stresses only the use-value and advantages of social media in order to ideologically forestall discussion and critique of its negative, exploitative, dominative dimensions of exchange value and surveillance.

Such an undialectical one-dimensional ideology is not just a discourse from and about Facebook, but it is also embedded in Facebook’s design as well. Facebook is all about “liking”

440 Christian Fuchs

what others post, which fosters a culture of agreement without disagreement, of cheering and celebrating that suppresses critique. Facebook’s one-dimensional culture of positivity that represses critique turns, however, into a repressive negativity, namely into an individualism that makes users compete for likes, attention, and recognition. Facebook is not just a capital accumulation machine that exploits digital labor but also a machine for the production and reproduction of the neoliberal self.

Ideologies are strategies of dominant classes and groups for legitimatizing their power. It is not determined how dominated groups and individuals react to ideologies. It is, however, rather difficult for users to think of corporate social media use as labor or exploitation because the inverted commodity fetishism present on corporate social media creates a social experience and social use- value for users that tries to ideologically hide the role of the commodity and class relations.54

There are empirical indications that social media users on the one hand cherish the social use- value such platforms offer, but at the same time have concerns about privacy and surveillance.55

Users tend to have relatively little knowledge about how the surveillance and commodification of data actually works and, at the same time, are highly critical of targeted advertising.56 The more users know about how targeted advertising works, the more skeptical they tend to be of it.57

Popular Culture

Facebook has become one of the main platforms for popular culture that shapes human practices, communication, and meaning-making in everyday life. Facebook is a public relations platform for all sorts of commercial and non-commercial popular culture. It has also been the subject of popular forms of culture, such as The Simpsons (Season 23 [2013], Episode 11: The D’oh-cial Network). The most well-known example is the 2010 movie The Social Network (distributed by Columbia Pictures, a division of Sony Pictures, which is a subsidiary of Sony) that tells the story of Facebook’s creation as a college network. The film achieved worldwide box-office revenues of more than $220 million.58 The movie advances the ideological view that in the American Dream a good idea such as Facebook can make you famous and popular. It completely ignores Facebook’s political economy and the fact that Facebook’s popularity would have been unlikely if financial companies, such as Accel Partners, Greylock Partners, or Meritech Capital, had not provided millions of U.S. dollars in venture capital. The capitalist culture and finance industry has a huge influence on what becomes popular. The movie, however, focuses on the individual activities of entre - preneurs and completely ignores the role of users’ digital labor in Facebook’s economic growth.

Concluding Remarks

This chapter has shown that Facebook is a capitalist social media giant that exploits users’ digital labor, commodifies personal data, fosters financialization, undermines capital taxation and the public interest, is part of a surveillance-industrial complex, fosters an uncritical and one-dimensional engaging/connecting/sharing-ideology, and is a machine for the production and reproduction of the neoliberal self.

The critique of the political economy of global media giants is useful not just for its critique of media capital, however, but also as a way to understand various expressions of underlying capital/labor contradictions and also as a way to reflect upon and support the potential for class struggle and alternatives to a capitalist media world. As such, there have been attempts to establish alternative, non-commercial, non-profit, and user-controlled social media platforms such as N-1, Lorea, Diaspora, identi.ca, StatusNet, Quitter, Vinilox, Load Average, Thimbl, or Crabgrass. The problem they face is Facebook’s monopolistic status that tends to lock in users, as well as the lack of resources (money, employees, users, server space, bandwidth, etc.) necessary for operating

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an anti-capitalist social media platform. Such anti-capitalist social media are critical but, at the same time, they are marginalized and largely invisible to most people.

In 2014, the social network Ello presented itself as alternative to Facebook and to targeted advertising (“simple, beautiful & ad-free”), which attracted users and made it the 6,112th most accessed website in the world on October 4, 2014.59 Its capital accumulation model was to sell special features. Venture capital firm Fresh Tracks invested around $435,000 into Ello in 2014. Ello is not fundamentally different from Facebook because both are capitalist social media. Being ad-free is not enough—the point is that you have to be non-capitalist in order to be an alternative to Facebook. In late 2014, Ello received another venture capital injection of $5.5 million.

Facebook is an expression of the contradictions of communication in capitalism. It shows how social life under capitalist relations serves particular profit interests that monetarily benefit single individuals. As an alternative, digital class struggle is a political strategy that aims at creating a non- capitalist, commons-based Internet. Such a strategy needs to consider the relationship between social movements and state power, alternative social media projects and public service social media, civil society and state institutions. In addition, digital labor unions could support these struggles. We need a participatory media fee that taxes the rich companies and distributes this income to all citizens with the help of participatory budgeting. In turn, these citizens would be obliged to donate it to non-commercial alternative media projects. We need an alternative Internet and an alternative to Facebook. A truly social media is a good idea that has not yet been realized, and it can only become reality within and through class struggle against capitalism. This requires the “responsibility to socialize corporations” (RSC),60 which entails “replacing the privately owned and controlled commercial media system with a commonly owned and controlled commons based media system.”61

Notes 1 See Tim O’Reilly, “What Is Web 2.0: Design Patterns and Business Models for the Next Generation

of Software,” September 30, 2005. http://oreilly.com/web2/archive/what-is-web-20.html 2 Christian Fuchs, Culture and Economy in the Age of Social Media (New York: Routledge, 2015); Christian

Fuchs, Digital Labor and Karl Marx (New York: Routledge, 2014); Christian Fuchs, Social Media: A Critical Introduction (London: Sage, 2014).

3 Fuchs, Digital Labor . . . , 2014; Fuchs, Culture and Economy . . ., 2015. 4 Facebook, SEC Filings, Form 10-K, 2014. 5 Facebook, SEC Filings, Form 10-K and Annual Report 2013. 6 Facebook, SEC Filings, Form 10-K and Annual Report 2014. 7 http:/www.forbes.com/global2000/list/ 8 Facebook, SEC-Filings, Form 10-K, 2012. 9 Karl Marx, Capital. Volume I (London: Penguin, 1867), 353. 10 Marx, Capital, 342. 11 Marx, Capital, 367. 12 Dallas W. Smythe, “Communications: Blindspot of Western Marxism,” Canadian Journal of Political and

Social Theory 1(3) (1977). 13 Smythe, “Communications . . . ,” 6. 14 Fuchs, Culture and Economy . . . ; Fuchs, Digital Labor . . . ; Fuchs, Social Media . . . ; Lee McGuigan and

Vincent Manzerole, eds, The Audience Commodity in a Digital Age: Revisiting a Critical Theory of Commercial Media (New York: Peter Lang, 2014).

15 Marx, Capital, Chapter 1. 16 Trebor Scholz, ed. Digital Labor: The Internet as Playground and Factory (New York, Routledge, 2013). 17 Facebook, SEC filings, Form 10-K, 2012. 18 Ben Parr, “You Spend 8 Hours Per Month on Facebook,” http://mashable.com/2011/09/30/wasting-

time-on-facebook/, accessed on January 7, 2014. 19 SEC filings, Form 10-K, 2012. 20 Steven Grimm, “What are the Average Working Hours per Day for a Facebook Engineer?,” Quora,

Oct. 31, 2010, www.quora.com/Facebook-company/What-are-the-average-working-hours-per-day- for-a-Facebook-engineer, accessed on January 7, 2014.

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20 Steven Grimm, “What are the Average Working Hours per Day for a Facebook Engineer?,” Quora, Oct. 31, 2010, www.quora.com/Facebook-company/What-are-the-average-working-hours-per-day-for-a- Facebook-engineer, accessed on January 7, 2014.

21 Annual Macro-Economic Database of the European Commission’s Directorate General for Economic and Financial Affairs (AMECO), http://ec.europa.eu/economy_finance/db_indicators/ameco/index_en. htm.

22 Yahoo! Finance, http://finance.yahoo.com/ 23 Yahoo! Finance, https://ycharts.com/ 24 Facebook, SEC filings, Form 10-Q, June 30, 2012. 25 Facebook, SEC filings, Form 10-Q, June 30, July 2014. 26 Facebook, SEC filings, Form 10-K, 2013. 27 Facebook, SEC filings, Form F-1 – Registration Statement. 28 Comscore, The Power of Like2: How Social Marketing Works. White Paper. June 2012. www.comscore.

com/Insights/Presentations-and-Whitepapers/2012/The-Power-of-Like-2-How-Social-Marketing- Works

29 Facebook, Definitive Proxy Statement, 2014. 30 http://techcrunch.com/2010/11/19/accel-facebook-chunks-of-stock/ 31 Megan Davies, “Russia’s Mail.Ru sells remaining Facebook stock,” Reuters Online, September 5, 2013

www.reuters.com/article/2013/09/05/us-mailru-results-idUSBRE98409720130905. 32 Abram Brown, “Forbes List of the World’s Billionaires 20.4,” Forbes, March 3, 2014, www.forbes.

com/sites/abrambrown/2014/03/03/forbes-billionaires-full-list-of-the-worlds-500-richest-people/ #7e56ecae6c87.

33 Stephen Moss, “Should We Boycott the Tax-avoiding Companies?” The Guardian Online. Shortcuts Blog. October 17, 2012. www.guardian.co.uk/business/shortcuts/2012/oct/17/boycotting-tax- avoiding-companies

34 Juliette Garside, “Facebook’s UK corporation tax bill: £0,” The Guardian Online. October 8, 2013. www.theguardian.com/business/2013/oct/08/facebook-uk-corporation-tax-zero-income

35 Rupert Neate, “Facebook Paid £2.9m Tax on £840m Profits Made Outside US, Figures Show,” The Guardian Online. December 23, 2012. www.theguardian.com/technology/2012/dec/23/facebook-tax- profits-outside-us

36 Europe versus Facebook, http://europe-v-facebook.org/EN/en.html 37 For a detailed discussion, see: PACT 2012, Annex 2.D, June 29, 2012, www.consilium.europa.eu/

uedocs/cms_Data/docs/pressdata/en/ec/131388.pdf. 38 Mark Tighe, “Data commissioner: I Was Not Too Soft on Facebook,” The Sunday Times. January 8,

2012, www.thesundaytimes.co.uk/sto/news/ireland/News/Irish_News/article853298.ece. 39 Data source for all information provided in this paragraph: OpenSecrets.org, “Facebook Inc,”

www.opensecrets.org/lobby/clientsum.php?id=D000033563 40 I here use the term “bourgeois state power” in order to indicate that under socialist governments,

limits could be put on corporate power. 41 Glenn Greenwald and Ewen MacAskill, “NSA Prism Program Taps in to User Data of Apple, Google

and Others,” The Guardian Online. June 7, 2013. www.theguardian.com/world/2013/jun/06/us-tech- giants-nsa-data

42 Marisol Sandoval, From Corporate to Social Media: Critical Perspectives on Corporate Social Responsibility in Media and Communication Industries (New York: Routledge, 2014).

43 Sandoval, 2014, 251. 44 Sandoval, 2014, 253. 45 Mark Zukerberg, “Mark Zuckerberg: Immigrants are the Key to a Knowledge Economy,” The

Washington Post. April 10, 2013. www.washingtonpost.com/opinions/mark-zuckerberg-immigrants- are-the-key-to-a-knowledge-economy/2013/04/10/aba05554-a20b-11e2-82bc-511538ae90a4 _story.html

46 FWD/us, www.fwd.us/about_reform, accessed on October 5, 2014. 47 “About Facebook,” , accessed on October 4, 2014. 48 “Mark Zuckerberg’s Letter to Investors: “The Hacker Way,” Wired Online. February 1, 2012.

www.wired.com/2012/02/zuck-letter 49 Mark Zuckerberg, “Mark Zuckerberg’s Full Statement on Facebook Buying WhatsApp,” The Guardian.

February 20, 2014. www.theguardian.com/technology/2014/feb/20/mark-zuckerberg-statement- facebook-buying-whatsapp

50 Karl Marx, Capital Vol III: A Critique of Political Economy: Vol. 3 (London: Penguin, 1894), 958. 51 Karl Marx, Selected Writings, 2nd ed., ed. David McLellan (Oxford: Oxford University Press, 2000),

615. 52 Karl Marx, On Freedom of the Press & Censorship (New York: McGraw-Hill, 1974), 41.

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53 Herbert Marcuse, One Dimensional Man (Boston, MA: Beacon Press, 1964), 12. 54 Christian Fuchs, Digital Labor and Karl Marx (New York: Routledge, 2014). 55 Thomas Allmer, Christian Fuchs, Verena Kreilinger, and Sebastian Sevignani, “Social Networking Sites

in the Surveillance Society: Critical Perspectives and Empirical Findings,” in André Jansson and Miyase Christensen (Eds.), Media, Surveillance and Identity: Social Perspectives (New York: Peter Lang, 2014), 49–70.

56 Ibid. 57 Ibid. 58 Box Office Mojo, “The Social Network.” Accessed October 4, 2014 from www.boxofficemojo.com/

movies/?id=socialnetwork.htm 59 Data source: www.alexa.com 60 Marisol Sandoval, From Corporate to Social Media: Critical Perspectives on Corporate Social Responsibility in Media

and Communications Industries (New York: Routledge, 2014), 256. 61 Ibid., 257.

444 Christian Fuchs

Tencent, as an Internet giant, substantially controls a variety of online value- added services (VAS) in China’s Internet industry, including IM, social net- working, online entertainment, gaming, and e-commerce, among others. This chapter turns to the cultural sphere to review Tencent’s popular products and cultural influences and their connection to its transnationalization strategies. After an overview of Tencent’s cultural products, the chapter dives into the two most popular and successful products and services—mobile chat and digital gaming—and discusses how Tencent managed to monetize its mobile chat apps and VAS, including QQ and WeChat, through a bittersweet rela- tion with China’s major telecom carriers. Tencent’s roadmap to becoming a global giant in the game industry used the gaming sector as an entry point to gain transnational competitiveness. Building upon its advantages in num- bers of users, capital power, and global reach, Tencent has not only estab- lished itself as a vertically integrated global gaming empire—from engine services to game development and to publishing and distribution—but and also formed a cultural synergy of gaming, mobile and online communica- tion, and social networking. The chapter concludes with an evaluation of Tencent’s overall transnationalization strategies in the cultural industries.

Tencent’s Cultural Products Tencent’s flagship products—QQ, WeChat, and online games—generate the greatest portion of revenues annually. They form a unique cultural brand for the company and a community for its diverse users.

QQ

As one of the first free instant messaging (IM) services in China, QQ accu- mulated registered users very quickly. In May 2000, within only half a year of its debut, OICQ’s online users reached 100,000. “As a domestically developed online paging software, OICQ was the best. It brought us a lot of conveniences and friends,” People’s Daily commented on May 29, 2000.1

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Table 4.1 Number of QQ Accounts, 2004–18

Year Account

Registered User (Million) Active User (Million)

2004 369.7 134.8 2005 492.6 201.9 2006 580.5 232.6 2007 741.7 300.2 2008 891.9 376.6 2009 * 522.9 2010 647.6 2011 721.0 2012 798.2 2013 808.0 2014 815.3 2015 853.1 2016 868.5 2017 783.4 2018 807.1

* Tencent no longer documented this item starting with the 2009 annual report. Note: Figures are for the last 16 days of the fiscal year, ending December 31.

Sources: Tencent, Annual Reports, 2004–18 (revenue year-end of December 31).

The popularity did not bring much profit for Tencent at the beginning, though. Instead, to maintain the server, Tencent had to throw in a great deal of money, which caused its serious financial difficulties in 1999 and 2000.

It was not until QQ became available on mobile devices that Tencent was able to monetize it. Mobile QQ is similar to QQ in function, as mobile QQ allows users to exchange instant messages through preinstalled QQ software on mobile SIM cards and devices. In order to make this work, Tencent collaborated with telecommunication carriers and device manufac- turers. When users chat with friends on their mobile phones via QQ and related services, they bring traffic and, hence, revenues to telecom opera- tors’ networks. A large portion, 63.6 percent, of Tencent’s 2003 revenues in mobile and telecom VAS came from the mobile-data fees that mobile users paid with their subscriptions; the fee was determined by fixed terms with Chinese telecom giants.2 Tencent also worked with mobile device manufac- turers to “preload QQ client software on the advanced mobile phones and conduct joint marketing activities to customize the QQ client software for various mobile handset environments.”3

Enterprise IM

In addition to personal services, Tencent also developed IM products for corporate communication. In April 2002, Tencent first launched BQQ, a

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Table 4.2 Weixin and WeChat Combined Monthly Active Users (MAU) (Millions)

2011 2012 2013 2014 2015 2016 2017 2018

Active users – 160.8 355.0 500.0 697.0 889.3 988.6 1097.6

Sources: Tencent, Annual Reports, 2013–18 (revenue year-end of December 31).

corporate version of QQ for business communication within an enterprise.4 In August 2003, Tencent upgraded BQQ and launched a new product, Real Time eXchange (RTX).5 In working with individual companies, Tencent helped to build internal communication networks that allowed corporate employees to communicate instantly and locally.6 In the following years, Tencent collaborated with IBM and Cisco in developing RTX, IBM and Cisco providing their expertise in enterprise communication services and software technologies.7 Some important customers included Postal Savings Bank of China, Jiangsu Provincial Taxation Bureau, Air China Limited, the northwestern branch of Sinopec Group, and Chia Tai Group.8

Weixin and WeChat

On January 21, 2011, Tencent released a mobile device-based chatting ser- vice, Weixin and WeChat, with Weixin the name for its Chinese services and WeChat the one targeting overseas users.9 The core service is based on instant messaging, but Weixin/WeChat is more than just a chatting tool. It integrates other value-added functions and eventually became a gateway for users to connect online and offline lives and to integrate the two in one app. Upon its launch, Weixin/WeChat gained immediate growth and has quickly become a major communications and social platform for smartphone users in China.10

Other VAS of social networking, entertainment, gaming, e-commerce, group purchases, local business reviews, online payments, and others were constantly added onto the Weixin and WeChat platform, which made it a mul- tifunction hub for online lifestyles. For example, Weixin/WeChat Moments, a feature to share experiences, blogs, photos, and articles through publish- ing to users’ Weixin/WeChat contacts, became another social platform for user interactions, in addition to Tencent’s well-established QZone, the per- sonal home page.11 Weixin/WeChat Payment, to give another instance, an integrated online payment service, offers further monetization channels for Tencent through online advertising and e-commerce transactions:

With the increasing popularity of Weixin Pay, bank handling fees related to C2C payment transactions via Weixin Pay, mainly arising from money transfers, increased significantly, amounting to over RMB 300 million (net of related revenue we received from users) for the month of January 2016.12

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QQ Game Portal

Tencent started out entertainment service with casual mini-games, such as “board games, card games and other games of skill” in 2003 through QQ Game Portal, a program bundled with the QQ software package.13 Free to users and giving easy access to basic game services, QQ Game Portal quickly attracted a large number of users and became the largest casual- game portal in China.14 New games, such as QQ Tang (a 2004 collection of a few mini-games for friends), QQ Speed (a self-developed car racing game), and QQ Dancer (a 2008 musical dancing game), were continually launched, and Tencent monetized them by adding fee-based subscriptions and game accessories for purchase.15 In view of its growing popularity, Tencent launched Game Center on both Mobile QQ and Weixin/WeChat in 2013, which immediately contributed over $96.93 million (RMB 600 mil- lion) to the revenue in that year.16

Massive Multiplayer Online Games (MMOG)

Another real moneymaker for Tencent was its massive multiplayer online game (MMOG) business. Tencent, on the one hand, actively sought licenses from foreign game developers and imported games permitted under the Chi- nese regulations.17 According to China’s Ministry of Culture (MOC) regula- tions on online cultural activities, any party who wanted to operate imported online games in China needed to apply for MOC’s approval of both the con- tents of and the license contracts for them.18 Tencent brought the first MMOG into China in April 2003, which was Sephiroth, licensed by Korean developer Imazic.19 Dungeon and Fighter (DNF)—a well-liked MMOG developed by Neople and Samsung—to give another example, was licensed to Tencent for its Chinese distribution in 2007 and launched in June 2008.20 DNF gained peak concurrent users (PCU) of 1.2 million at the end of that year.

On the other hand, Tencent was also devoted to creating its own MMOG by primarily adopting Chinese storylines. In 2007 Tencent launched its first self-developed MMOG QQ SanGuo, which features the ancient Chinese his- tory of the wars among three kingdoms around ad 220 to 280.21 QQ Huaxia, another MMOG launched in the same year, was codeveloped by Tencent and Shenzhen Domain Computer Network Co. Ltd., a Tencent investee com- pany.22 This game was also plotted against the background of an ancient, mythical China.23 More games of this style, such as Silk Road Hero, Hero Island, and World of West, were developed between 2009 and 2011.24

First-Person Shooting (FPS)

In addition to MMOG, Tencent made an effort in developing FPS genre in 2007 when it gained the licensing of CrossFire by Neowiz.25 Launched

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in 2008, the game achieved one million PCU in 2009, which was a world record.26 Carrying on the success, Tencent introduced another Korean- developed FPS game, A.V.A., in 2010 by working with Neowiz again as its Chinese agent.27

Children’s Games

In July 2010, Tencent entered the children’s game segment by launching Roco Kingdom, which later became an online-gaming community for chil- dren from 7 to 14.28 Adapting from the storyline in the game, Tencent later produced a series of animated movies that won a box office of $24.4 million (RMB 150 million).29

As Tencent’s gaming kingdom grew large, the company started an inter- national expansion through mergers and acquisitions. In 2010 it acquired a major stake of 92.78 percent in Riot Games and became the parent com- pany of the U.S.-based online-game developer and publisher of League of Legends, a widely played game across the world.30 In 2015 Riot Games became a wholly owned subsidiary of Tencent.31 In June 2016 Tencent bought a majority stake in Supercell, a Finnish mobile-game developer and the publisher of Clash of Clans, for $8.6 billion.32 The company’s roadmap to becoming a global game giant is discussed further in the following sections.

Besides these superstars in chat platforms and games, in recent years, Tencent has put enormous efforts in the broadly defined cultural industry, including online publication and e-reading, online music and streaming ser- vices, and the previously discussed media and movie industry.

Online Publication and Reading Service

Tencent had only launched its own online reading service in 2014.33 In early 2015 Tencent and Shanda formed China Reading Ltd., moving their own online publishing and literature services, namely, Tencent Literature and Shanda Cloudary, together into one company specializing in online publish- ing and e-book services.34 Shanda Group, founded in Shanghai in 1999, was originally an online game company and became an investment group that focused on “financial services, technology and healthcare sectors.”35 The newly launched China Reading Ltd. was codirected by Tencent Literature’s former CEO Wu Wenhui and Shanda Cloudary’s former CEO Liang Xiao- dong. Tencent held a majority 66.4 percent stake in China Reading.36

With Tencent being a latecomer, the deal, more like an acquisition than a merger, made China Reading the largest online publishing and e-book company in China.37 Said to have more than 600 million registered users in China, China Reading in 2017 was planning an initial public offering in Hong Kong.38

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Online Music

In July 2016 Tencent partnered with China Music Corp. in promoting the digital music business and acquired a majority stake of 61.6 percent of China Music Corp. The two joined Tencent’s QQ Music and China Music Corporation’s KuGou and Kuwo to form a new company, Tencent Music Entertainment Group, with Tencent’s vice president Pang Kar Shun as CEO and China Music Corporation’s co-CEOs Xie Guomin and Xie Zhenyu as copresidents.39 The alliance created a dominant player in China’s music- streaming market, as China Music Corp. KuGou and Kuwo each occupied 28 percent and 13 percent of the mobile music market, respectively, with another 15 percent owned by QQ Music.40 In addition to a majority market share, the strategic merger was expected to advance the battle against online piracy in China, considering that the combined exclusive content licenses held by Tencent and China Music Corp. represented “more than 60 percent of all available music rights in China.”41

In December 2017, Tencent started a collaboration with the Sweden- based music-streaming giant Spotify through a minority stake exchange, which would allow Spotify and Tencent’s music subsidiary Tencent Music Entertainment (TME) to each hold a minority equity stake in the other.42 In the following October, Tencent Music Entertainment (TME) filed an IPO prospectus, at which time Tencent owned 58.1% of TME’s shares and Spotify owned 9.1 percent. TME became publicly traded at NYSE on December 12, 2018.43

From QQ to WeChat For a closer look into the development of QQ and WeChat, next examined are the strategies to promote the QQ brand as a cultural synergy, followed by a discussion on the challenges Tencent encountered, especially with major Chinese telecom carriers.

Building a QQ Community

Taking advantage of QQ’s popularity and user base, Tencent launched a set of fee-based VAS that construct an interactive online community. Users within this community, through purchasing different services, are able to individu- alize their virtual profiles, interact with friends or strangers, and play casual games, among other activities, all of which were centered around the QQ brand, such as Premium QQ, QQ Show, QQ Fantasy, QQ Pet, QQ Magic, QQ Ring, QQ Farm, and QQ Ranch, to name a few.44 The QQ-related VAS have become a new time-space for self-display, self-expression, relation- ship maintenance and establishment, and entertainment.45

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Tencent launched QQ Membership Club in November 2000, which was a higher-level IM service based on a monthly membership fee.46 By paying a monthly charge of $1.20 (RMB 10.00), users were able to buy additional services to individualize their QQ usage, such as the ability to choose their own QQ numbers, store message logs on QQ servers, to have 100 mega- bytes storage space, free credits to use various QQ VAS (including online entertainment services), special signs indicating their QQ membership sta- tus, and exclusive access to additional chat rooms.47 To take a QQ number as an example, when a user registers a free QQ account, the program would randomly assign the user a unique identification number. A member who pays a premium fee could choose a specific number, very often one that represented a date with special meaning, such as a birthday or anniversary. The service has gotten so popular that Tencent now has an entire website— haoma.com—to manage the selling and issuing of customized QQ num- bers. Some parents would even buy a QQ number for their yet-to-be-born children as a gift based on the date and time of birth. Romantic partners would choose a QQ number that symbolizes their relationship.48 In a way, QQ is no longer just a chat tool but is sold and exchanged as a commodity that represents the consumer’s name and identity online.

The fee-based QQ membership later developed into a tier-based system that is integrated into every aspect of Tencent’s value-added services. The system has nine tiers from “ordinary users” to “SVIP8,” each level enjoy- ing a different set of benefits and privileges.49 For example, an ordinary user without paying any premium fee can have up to 500 QQ friends and 2G online storage. At SVIP8, the highest level, the user is able to have up to 2,000 QQ friends, two chatting groups of 2,000 people, storage of up to 1,400 personalized stickers on the account, a 500G online photo album, 2.5T online storage, and 350 QQ coins redeemable for other services within the QQ system.50 All of these symbolize a privileged “social-economic sta- tus” in the QQ universe. Other similar privileges relate to gaming, shop- ping, and decoration in Tencent’s online community.51 Gaming privileges, for instance, include early access to newly released games and free toolkit packages for game use, promotions, and discounts, among others; shopping privileges connect online lifestyles to offline activities by providing users with offline shopping coupons; users could also customize their account skins, decorate homepages, and individualize profile avatars.52

To implement the premium membership system, a variety of micro- applications installed in QQ software let users customize their profile pic- tures and message-notification ringtones, play casual games, raise virtual pets, and so on. QQ Show, one of the earliest and most successful micro- apps, was a virtual avatar system that allowed users to choose an individual virtual character and pay for “virtual clothing, hairstyles, scenes and acces- sories” to decorate their profile images.53 The service was carried out in

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January 2003 and commercially run two months later.54 Tencent promoted the service by first providing particular QQ Show items free. The company gradually introduced new features to the service with different levels of charges.55

Rivals in IM

As discussed in Chapter 2, the success of QQ was partly owed to Tencent’s partnership with major Chinese telecom carriers who allowed mobile QQ to be preinstalled on their mobile SIM cards. At the same time when Ten- cent collaborated with China Mobile, China Unicom, and China Telecom, these giants to different extents felt the threat posed by Tencent’s mobile QQ, which provided text messaging, voice communication, and visual exchanges, among other VAS, at a price lower than the common charges through traditional telecom channels.

These state-backed telecom titans first approached the problem by rene- gotiating terms in their partnerships with Tencent. In October 2004, as for- mer Tencent executive Chengmin Liu related, China Mobile called for a sudden meeting with Tencent and asked to redefine the rates collected out of one MVAS—the 161 Mobile Chat.56 According to Liu, the 161 Mobile Chat represented a significant portion of Tencent’s overall earnings, which left Tencent little bargaining power with China Mobile.57 On December 22, 2004, Tencent announced in an official release that it was in negotiations with China Mobile on the matter.58 In view of the fact that 161 Mobile Chat contributed 10 percent and 16 percent of Tencent’s net profit in the calendar year 2003 and the half year ended June 30, 2004, respectively, Tencent’s monthly net profit from 161 Mobile Chat would be reduced by approxi- mately $484,000 (RMB 4 million) with China Mobile’s new terms.59 In January 2005, the two companies terminated their shared fee-collection agreements, and Tencent only received “a predetermined monthly mainte- nance fee” until the end of June 2005.60

As a result, revenues immediately declined in Tencent’s mobile and tel- ecommunication sectors: “Revenues from our mobile and telecommunica- tions value-added services decreased by 19.3 percent to RMB 517.3 million for the year ended 31 December 2005 from RMB 641.2 million for the year ended 31 December 2004.”61

A collateral damage was the unprecedented drop of Tencent’s stock price, which fell by over 8 percent during negotiations with China Mobile in December 2004.62 During the next two years, Tencent engaged in an array of buyback and repurchase of its own shares.63 Analysts said that this was aimed to show the company’s confidence in its continual growth.64

A second move, taken by telecom carriers, was to start their own instant- messaging products. As early as 2003, China Telecom started developing

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Vnet Messenger (VIM), a service to connect landline phones, lower-end cell phones (Little Smart), and mobile phones for chatting, document trans- mission, and video chatting.65 Little Smart ran on a much-cheaper technol- ogy than GSM or CDMA and “used wireless local loop (WILL) technology to connect mobile devices with traditional landline networks, with its own set of base stations, switchers, and handsets.”66 Bound with China Tele- com’s broadband services, VIM was also an integral platform for enter- tainment VAS, such as browsing pictures and downloading ringtones and mobile games for household desktops. “It was a reasonable move for China Telecom to develop its own IM,” according to one VIM R&D staff member, commenting on the growing threats that traditional phone services were faced with.67 Not enough data suggests whether VIM was a successful move or not. Upon its acquisition of China Unicom’s CDMA business in 2008, China Telecom, with the 3G licenses granted by the state, launched a new mobile and desktop IM app—e-Surfing live—that integrated instant infor- mation services with voice and data communication.68

China Telecom was not alone. In 2006 and 2007, China Mobile and China Unicom both developed their own instant-messaging systems. China Mobile launched a mobile-to-PC IM service, Fetion. Initially, an IM plat- form only for China Mobile’s cell-phone subscribers who were able to exchange messages between computers and cell phones, Fetion enjoyed a dramatic growth during Tencent’s fight with Qihoo 360 and eventually opened up to all mobile users, including those of China Unicom and China Telecom in November 2010.69 China Unicom, on the other side, launched a mobile-Internet instant-messaging app, Chaoxin, in 2007, which was later shut down in 2009 when its CDMA business was relocated to China Telecom.70

At the end of 2006, Tencent and China Mobile revisited their terms of collaborations on Mobile QQ. Prior to this, China Mobile was said to have terminated collaborations with all major IM service providers, including Tencent, in order to promote its own IM application.71 The negotiation resulted in a “cooperation memorandum” to jointly develop the two compa- nies’ IM platforms and to extend their contracts for another half a year, dur- ing which they would together launch Fetion QQ.72 According to the plan, Fetion QQ would realize the “interconnection between China Mobile’s Fetion handset users and QQ subscribers.”73

Debate on Weixin/WeChat

The coexistence of QQ, Fetion, and other mobile messaging apps remained for several years until January 2011, when Tencent launched its mobile social application Weixin/WeChat as an integral site for free text and mul- timedia messages, video calls, photo sharing, mobile games, e-commerce,

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and e-life, among others.74 Telecom carriers’ SMS took an immediate hit, as Weixin/WeChat provided convenient text-message service at a much lower price than SMS. Traditionally, SMS was charged according to the number of messages sent. One message, regardless of length, was $0.01 (RMB 0.1). The cost of Weixin/WeChat, however, was based on the amount of the data traffic through general packet radio service (GPRS). For every 1 MB of data streamed via GPRS, users could send thousands of text messages by Weixin/WeChat and only be charged a total of $0.15 (RMB 1.00).75 Weixin/ WeChat, quickly diffused among QQ users, is said to have taken away 20 percent of the SMS businesses immediately, which totaled half a year’s profits for China Unicom and China Telecom combined in 2011.76 Taking the hit hard, China Unicom and China Mobile launched their own Weixin- like mobile applications in 2011, WO and Feiliao, respectively. Neither turned out to be a noticeable counterweight to Tencent’s Weixin/WeChat. In July 2013 China Mobile aborted its Feiliao business, while China Uni- com chose to work with Tencent in promoting the customized SIM card for packaged deals of Weixin/WeChat services.77

The challenge posed by over-the-top content (OTT) providers to tradi- tional telecom carriers did not stand out as a unique phenomenon in China. It was a natural trend because the growing Internet industry would want to expand both horizontally and vertically and to enlarge business territory. It was essentially a battle between the different units of capital for the limited resources possessed by users. Dong-Hee Shin analyzed the rise of mobile voice over Internet protocol (mVoIP) in Korea that had resulted in a decline in voice calls carried by mobile operators.78 In the European and North American contexts, the growing popularity of social media, such as Facebook and Twitter, and online-streaming platforms, such as Netf- lix, Hulu, and YouTube, brought similar challenges to telecom and cable operators.79 How the Internet firms and telecom operators negotiated the terms, however, varied depending on the specific context. For Tencent, the triumph of Weixin/WeChat came as a negotiated outcome among the telecom carriers, the Internet companies, and China’s central regulatory entities.

First, the rise of Weixin/WeChat fell along the national strategy to con- verge three networks—telecommunications, broadcasting and TV network, and the Internet. In January 2010 in a State Council meeting, Premier Wen Jiabao pushed for the integration of the three networks.80 This was not just about reconsolidating national infrastructural networks but an important strategy to further open up domestic communication markets to additional players who were traditionally kept from service provision or content pro- duction, such as equipment manufacturer or Internet VAS providers.

The central government made another gesture when in 2014 the National Development and Reform Commission (NDRC) and Ministry of Industry

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and Information Technology (MIIT) jointly announced a notice to liberal- ize pricing of the telecommunications services.81 The message was clear: to further open up the domestic telecom industry, to encourage and protect domestic Internet capital, and to rebalance the national political economy by accelerating the “Chinese-style digital capitalism.”82

It was under this context that MIIT played a critical role in protecting Tencent’s advantage with Weixin/WeChat. In early 2013, there was a heated debate over whether telecom carriers should charge additional fees either on Tencent or users for using Weixin/WeChat, considering how much impact Weixin/WeChat had on the carriers’ SMS services. According to a statistic announced by the MIIT in March 2013, the growth rates of SMS business and telephone business in the first two months of 2013 were much lower than those of the mobile Internet businesses.83 Telecom carriers insisted that there should be additional charges to Tencent for maintaining the network infrastructure because Tencent services took so much advantage of it.84 In February and March 2013, MIIT called for multiple meetings of telecom operators and Tencent to coordinate their requests. MIIT’s attitude, how- ever, was ambiguous and inexplicit. On the one hand, MIIT head Miao Wei acknowledged the validity of telecom carriers’ concerns, as they had to expend money and effort in managing the network. On the other hand, Miao also noted that this problem should be solved by a competitive market mechanism, the principle of which was to contain telecom giants’ monopoly power and to encourage the growth of innovative Internet companies. More of mediation than regulation, MIIT asked China Mobile, China Telecom, and China Unicom not to collude on this matter, and they were instructed to negotiate terms with Tencent separately.85

Under the guideline to “follow the market rule,” MIIT instructed that China Mobile, China Telecom, and China Unicom were not supposed to form an alliance in negotiating with Tencent. Previous telecom history already suggests an enduring rivalry among the three, not to mention their different approaches in responding to the Weixin/WeChat challenge. China Telecom started working with Tencent by launching QQ service on its CDMA mobile devices in as early as 2011.86 Any China Telecom user can use his or her phone number as the QQ numbers to log onto Mobile QQ, along with other services on the mobile phones certified by China Telecom.87 In terms of Weixin/WeChat, China Telecom suggested that it was an opportunity, instead of conflict, for further collaboration in its data business. The president of China Unicom also implied that the relationship with Tencent should be an interdependent one rather than a water-fire antagonism.88 Both China Telecom and China Unicom shortly launched their own versions of contract cell phones with preinstalled Weixin/WeChat. China Mobile, for the moment, was sticking to its own Fetion service.

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Game Industry as Game Changer In a different theater, Tencent used the game sector as an entry point to gain transnational competitiveness. Building upon its advantage in its user base, capital power, and global reach, Tencent was vertically integrated as a global game empire from engine service through game development to production and distribution.

The Chinese Distributor and Operator

Tencent states in its prospectus, “Online games currently are one of the fast- est growing online services in China. We develop and source online games for our customers.”89 Collaborating with foreign game developers and publishers, mostly Korea- and U.S.-based, provided a convenient path for Tencent, especially at the company’s infant stage when it was not competi- tive enough to offer appealing game contents and services. Tencent started representing foreign-developed games as their Chinese distributor and oper- ator in 2003 when it first worked with Korean game company Imazic for the distribution of a massive multiplayer online game (MMOG)—Sephiroth. Sephiroth, the Chinese name of which is QQ Kaixuan, was Tencent’s first MMOG for commercial operation.90 Although a popular one, the game was shut down in 2009 due to the termination of license from Imazic.91

Many of Tencent’s popular games in varying genres were launched through such an importing-distributing-operating strategy, including Korean game pub- lisher Neowiz’s online music-related rollerblade racing game: R2Beat; Ger- man game developer Crytek’s first-person-shooter game Warface; Korea-based Webzen’s Battery; Korean company Vertigo Games’ War of the Zombie; Korean developer Nextplay’s popular MMOG Punch Monster; San Francisco-based social-game developer Zynga’s localized Cityville on QZone, among others.92

These collaborations formed a symbiosis between Tencent and foreign game developers. The relationship proved beneficial. For overseas game developers, by taking advantage of Tencent’s local user base, they often found their games to be well accepted in China. For Tencent, securing exclusive licenses of popular online and mobile games from foreign devel- opers and publishers not only attracted more Chinese players to Tencent’s network but also made it convenient to promote Tencent’s own games.93 A seemingly win-win strategy helped to sustain Tencent’s dominance in China’s gaming market, as well as to tighten Tencent’s relation with foreign developers for further collaborations.

Vertical Integration Through Investments

A second and more important strategy that Tencent took—when it had grown bigger—was to acquire minority or majority stakes in other players

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in the global PC, console, and mobile gaming markets.94 The first move of this kind was in 2006 when Tencent bought 16.9 percent of the equity interest in GoPets Ltd., a Korean corporation that developed and published interactive games, such as raising virtual pets.95 Between 2008 and 2010, Tencent invested in a few online and mobile-game developers, though the details of the deals are scant. Among them, Tencent gained 20.02 percent of equity interest in a “Southeast Asia-based online game company” in 2008 and raised its stake to 30.02 percent as of the end of 2009.96 In 2010 alone, Tencent acquired equity interests in seven online-game development firms based in Southeast Asia, East Asia, or the United States, based with varying stakes from 10 percent to 49 percent.97

Whereas these unspecified deals involved small expenditures, Tencent launched some large-scale mergers and acquisitions beginning in 2011. These displayed distinctive characteristics of vertical integration in the gaming industry.

In 2012 and 2013 Tencent purchased enough equity to ultimately own 67 percent of Level Up, the online game and game-magazine publisher, mentioned in Chapter 3, that primarily operated in the Philippines, India, Brazil, and some other parts of Latin America.98 The deal helped Tencent “identify further opportunities in” the emerging markets of Brazil and the Philippines.99 Tencent’s game distributing businesses, since 2012, further extended into Activision Blizzard’s territory. Activision Blizzard, “the world’s most profitable pure-play game publisher and a global leader in interactive entertainment,” set foot in China by collaborating with Tencent for its blockbuster franchise Call of Duty.100 In addition to an exclusive license to operate Call of Duty in Mainland China, Tencent also subscribed a 6 percent partnership interest in Activision Blizzard with about $429 mil- lion (RMB 2.638 billion).101 While Tencent’s effort to explore distribution rights for various games was ongoing, in 2017 Tencent achieved another landmark victory when it won the right to publish that year’s blockbuster online multiplayer battle royale game PlayerUnknown’s Battlegrounds (PUBG) in China on mobile and smart platforms.102

Then Tencent moved upstream in the business chain by entering the game- engine market, which would provide the technical and, especially, software support for game visualization in various genres and settings.103 This was primarily achieved through Tencent’s investment in the U.S.-incorporated Epic Games. In July 2012 Tencent acquired 48.4 percent of equity shares in Epic Games, which specializes in 3D game-engine technology and had reputable collaborations with Electronic Arts (EA).104

Even greater efforts were put in expanding into the game-development sector—a main battlefield in the industry—both in online and mobile businesses. Riot Games, a U.S.-based developer and publisher of the well-known massive online battle arena (MOBA) game League of Leg- ends, which boasted more than 100 million monthly active players as of

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September 2016, became a wholly owned subsidiary of Tencent as of the end of 2015.105 The acquisition was achieved through a series of arrange- ments initiated since 2008. In November 2008 the two companies entered into a licensing partnership that gave Tencent the exclusive license to dis- tribute Riot Games’ under-development title League of Legends: Clash of Fates.106 In February 2011 Tencent strengthened its links to the widely distributed game by acquiring a majority interest of 92.78 percent in Riot Games, prior to which Tencent held a minority of 22.34 percent.107 Subse- quent to the deal, Tencent was set for the beta opening of League of Legends in China while Riot Games remained independent in its own operations and management.108 In 2015 Tencent acquired the remaining shares of Riot Games and became its parent company.109

In 2015 Tencent further expanded in the U.S. market by acquiring 14.6 per- cent stake in Glu Mobile, a San Francisco-based mobile-game developer.110 The deal was closed at an 11 percent premium to Glu’s closing price at the time, as Tencent paid $126 million for 21 million shares.111 As a result of the partnership, Steven Ma, Tencent’s senior vice president for the interactive enter- tainment division, joined Glu’s board of directors in April 2015. Although Glu Mobile was famous for its mobile games associated with celebrities, such as Kim Kardashian: Hollywood and Gordon Ramsay: DASH, the collaboration was aimed at bringing Tencent’s Weixin/WeChat-based smartphone shooter game—WeFire—to overseas markets, including North and South America, Europe, the Middle East, Africa, Australia, New Zealand, and others.112

In the Asian market, through a range of agreements in 2014, Tencent bought around 28 percent interest in a Korean online and mobile-game developer and publisher, Netmarble Games Corp., better known by its for- mer name CJ Games Corp.113

At the same time, integration into the mobile-gaming sector was con- solidated when a high-profile trade—its buy-in in Supercell, the developer of the hit game Clash of Clans—took place in mid-2016.114 With a record- breaking price of $8.6 billion, Tencent bought the Finland-based company from SoftBank, the Japanese telecommunications and Internet corporation that was an important institutional shareholder of the Chinese e-commerce giant Alibaba.115 While Supercell strengthened Tencent’s arm in mobile gaming with the popular and fast-growing Clash of Clans, the strategic part- nership also gave Supercell access to “hundreds of millions of new gamers via Tencent’s channels” in China.116

As a unique arena of global and local cultural interactions, the digital gaming industry has become a potentially strategic market in transnational capitalism. Tencent, through a carefully unfolding and integrating process, was able to position itself as an important force transnationally in the game industry, more than in other submarkets of the Internet industry, such as IM or social media. The game sector, in this sense, was prospectively a critical “game changer” in Tencent’s reach for global power.

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Table 4.3 Tencent’s Yearly Investments by Region, 2004–18 (RMB Million)

Early Years

Year Hong Kong United States Europe Other Countries

2004 589.831 542.598 519.874 174.437 2005 282.157 862.921 376.891 83.255 2006 231.386 566.695 301.549 74.561 2007 550.911 735.705 630.795 10.044

Beginning of Shift

Year Mainland China

Hong Kong United States

Europe Other Asian Countries

2008 2.055 819.670 106.240 400.559 329.398 2009 90.244 564.321 49.949 341.410 644.784 2010 446.608 2,735 159.719 3,869 886.024

Focus on Korea in Other Regions

Year Mainland China

Hong Kong United States

Europe Other Regions

2011 4,410 3,538 206.962 2,658 1,145 2012 4,818 6,382 2,938 3,974 2,435 2013 10,726 10,535 4,185 6,235 3,478 2014 43,106 17,804 6,066 3,327 14,849

Reorganization and Expansion in North America

Year Mainland China and Hong Kong

North America Europe Asia Excluding Mainland China and Hong Kong

Others

2015 85,282 14,412 2, 462 9, 036 93 2016 108,715 22,310 21,645 11,322 113 2017 161,903 52,542 34,515 26,407 250 2018 254,992 44,835 37,451 30,148 1760

Sources: Tencent, Annual Reports, 2004–18.

Transnationalizing the Tencent Brand Tencent’s growth in QQ, WeChat, and the game industry showed a clear path to extend its influences from domestic to global markets. As Tencent started incorporating transnational elements into its capital structure at an early stage—two years after the company’s birth, the company was active in making overseas investments. According to the company’s reports in past years, it had investments, aside from Mainland China and Hong Kong, in North America, Asia, Europe, and other parts of the world. The company rearranged the ways to present overseas investments by regions a few times. Table 4.3 shows Tencent’s overseas investments in four sections, which

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Figure 4.1 Tencent’s Investments by Regions in 2018 Source: Tencent, Annual Report, 2018.

reveal the way the company organized its foreign businesses and reflect shifts in Tencent’s business focus throughout the years.

As revealed by the company’s financial reports since 2004, early years’ investments, between 2004 and 2007, were primarily in financial instru- ments, such as “held-to-maturity investments, trading investments, term deposits and cash and cash equivalents.”117 By comparing volumes to those in later years, the early years’ financial investments were not as significant as the business deals Tencent later made. In 2008 investments in associates and, particularly, in Southeast Asian countries begin to stand out as a major focus.

Korea was the focus for 2013 and 2014. Of the $562 million (RMB 3.5 bil- lion) invested in other regions in 2013, $279 million (RMB 1.8 billion) went into Korea. In 2014, of the $2.4 billion (RMB 14.8 billion) invested in other regions, $1.1 billion (RMB 6.4 billion) went to Korea.

In recent years, investments expanded to both financial and nonfinancial forms, such as associates, redeemable preference shares of associates, joint ventures, and available-for-sale financial assets.118 In 2015 Tencent reor- ganized its spreadsheet again by putting Mainland China and Hong Kong together, enlarging the United States into the North American region, and adding another section on other Asian areas excluding Mainland China and Hong Kong.

On the revenue side, as of 2018, the revenue from overseas markets was $1.35 billion (RMB 9.037 billion), accounting for 2.9 percent of Tencent’s total revenues.

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Table 4.4 Tencent’s Yearly Revenues Outside China, 2009–18

Year Revenue (RMB Million) Percentage of Total Revenue

2009 5.649 0.05 2010 13.914 0.07 2011 468.556 1.6 2012 2,158.610 4.9 2013 4,459 7.4 2014 6,470 8.2 2015 6,612 6.4 2016 7,566 4.9 2017 7,993 3.4 2018 9,037 2.89

Sources: Tencent, Annual Reports, 2009–18.

Transnational activities took a variety of forms: market expansion of Ten- cent’s services, investments in or acquisitions of foreign-based media and digital companies by purchasing stakes in them, research and development collaboration in working on data centers and network systems, strategic partnerships with foreign-based companies in jointly developing services, and strategic memoranda with giants from different media industries, among others.

Market expansion was primarily through the use of Tencent’s IM services and value-added services of QQ, micro-blogging, QZone, and WeChat.

Figure 4.2 Tencent’s Yearly Revenues Outside China, 2009–18 Sources: Tencent, Annual Reports, 2009–18.

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Tencent achieved this in several ways. First, it launched its services in mul- tiple foreign languages. In December 2010 Tencent launched the first inter- national version of QQ in English, Japanese, and French.119 In 2011 Tencent launched the English service for its microblogging site.120 For WeChat, the service in 2012 was available in two South Asia countries—India and Thai- land.121 As of 2018, WeChat was offered in 18 languages, including English, Indonesian, Spanish, Portuguese, Thai, Vietnamese, and Russian, and had over 70 million registered overseas users. In particular, WeChat enjoyed high popularity in South and Southeast Asian countries, such as India, Thai- land, and Malaysia.122

Secondly, Tencent collaborated with local media companies and Inter- net service providers to both promote publicities and diffuse its products. In Indonesia, Tencent partnered with Indonesia PT Global Mediacom to launch a TV commercial campaign for WeChat in 2013.123 The company even recruited soccer stars Lionel Messi of Argentina and Neymar da Silva Santos Júnior (Neymar) from Brazil for WeChat commercials.124 Such an approach was made loud and clear when Ma Huateng revealed his plan to expand WeChat services and localized it by adapting it to Western users: “[The next step] will be to cooperate with local developers, for example with game developers to promote products, and also to adjust to Western user habits.”125 In late 2015 WeChat took another step further when its online payment service started fully opening to overseas purchases so that users could pay with RMB using WeChat, and the vendors would receive local currency for the transactions.126

In addition to the instant-messaging and social-media businesses, many investments, acquisitions, and strategic partnerships focused on games, unsurprisingly, with developers primarily based in South Korea and the West Coast of the United States. Tencent’s intensive efforts put forward in the global game industry did not fully kick off until 2008, when it first invested $11 million in the San Francisco-based online-game company Out- spark, together with two other investment partners, DCM and Altos Ven- tures.127 Some major investments, as disclosed previously, include alliances with Zynga, Riot Games, Epic Games, Activision Blizzard, Netmarble Games, and Supercell, among others.

Last but not least, strategic partnerships with foreign media-content provid- ers suggest a clear ambition of Tencent to enter cultural industry and, specifi- cally, content production.128 The first step the company took was to become an exclusive partner with U.S.-based TV, film, and music corporations and provide paid online-streaming services of their contents to Chinese users. Between 2013 and 2016, Tencent secured exclusive distribution licenses from Warner Bros. Pictures, Warner Music, Universal Studios, Miramax Films, Lionsgate, Pixar Studios, Marvel Studios, Sony Music Entertainment, HBO, Paramount, MGM, Walt Disney, 20th Century Fox, and ESPN’s NBA, NCAA

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Men’s Basketball Championship Tournament, and the X Games.129 These partnerships altogether built up Tencent’s online-streaming kingdom as a unique content provider and distributor of the major Hollywood productions.

Conclusion Tencent’s cultural profile further exemplifies its strategy of integration and transnationalization. The brand’s star products in instant messaging and chatting, including QQ, Weixin, and WeChat, have together successfully built an online community and cultural identity for Chinese users. While its mobile chat is primarily grounded on a popular domestic base, Tencent’s establishment in the gaming industry has taken full advantage of its global collaborators as their distributors, operators, codevelopers, and/or investors.

The company’s overall transnational expansion has unfolded gradu- ally since its public offering in 2004 and featured a full-scale strategy that incorporated various forms of inter-capital relations, such as mergers and acquisitions, strategic alliances, service expansions, and research and development. With IM and gaming being two primary vectors, Tencent’s IM and social-media services are predominantly expanded into South and Southeast Asia, while the collaborations and investments in the gaming sec- tor are connected more closely with the capital units from the United States and Korea. Recent moves into media and cultural markets suggest a further diversification of Tencent’s businesses.

Notes 1. “OICQ Users Reached 100, 000,” People’s Daily, May 29, 2000, accessed

August 10, 2016, www.people.com.cn/GB/channel5/28/20000529/80561.html. 2. Ibid; Tencent, Annual Report, 2004, 6. 3. Ibid. 4. Wen, “Tengxun BQQ xiandai bangong xin liangdian” 腾讯BQQ现代办公新

亮点 [Tencent’s BQQ Brought New Highlight to Modern Office], Zhonggong Jisuanji Bao 中国计算机报, April 22, 2002.

5. Ying Hu, “Cong QQ2003 dao RTX” 从QQ2003到RTX [From QQ2003 to RTX], Jisuanji Shijie 计算机世界, August 25, 2003, E06.

6. Tencent, Prospectus, 92. 7. “Tencent Reached an Agreement with IBM for Close Cooperation in the Future,”

press release, Tencent, November 3, 2003, accessed March 20, 2017, www.ten cent.com/en-us/articles/80237.html; “Cisco and Tencent Launch Unified Com- munications Solution for Chinese Market,” press release, Cisco, September 9, 2010, accessed March 20, 2017, https://newsroom.cisco.com/press-release-con tent?type=webcontent&articleId=5692711.

8. RTX, “Successful Cases,” Tencent, accessed March 20, 2017, http://rtx.tencent. com/rtx/case/index.shtml.

9. Jiulong Cheng, “Weixin PK duanxin Tengxun tiaodou yunying shang” 微信 PK短信 腾讯挑逗运营商 [Weixin Versus Text Message Tencent Challenging Carriers], 21st Century Business Herald, January 25, 2011, 20.

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10. Tencent, Annual Report, 2012, 7. 11. Ibid. 12. Tencent, Annual Report, 2015, 7. 13. Tencent, Prospectus, 89. 14. Tencent, Annual Report, 2010, 10. 15. Ibid., Annual Report, 2004, 17; 2007, 8; 2008, 8; 2004, 17. 16. Ibid., Annual Report, 2013, 9. 17. Tencent, Prospectus, 42. 18. Ibid. 19. Le Wang, “Tengxun qianyue Imagic gongsi Sephiroth jinru zhongguo” 腾讯

签约Imagic公司 Sephiroth进入中国 [Tencent Signed Contract with Imagic and Sephiroth Entered Chinese Market], ChinaByte, April 24, 2003, accessed August 20, 2016, http://news.chinabyte.com/371/1665371.shtml.

20. Tencent Annual Report, 2007, 8; 2008, 8. 21. Ibid., 8; “Games: QQ Sanguo Background,” Tencent, accessed August 20,

2016, http://sg.qq.com/web2009/gamedata/gamedata_newpalyer.htm. 22. Tencent, Annual Report, 2007, 8. 23. “Interactive Entertainment Service,” Tencent, accessed August 20, 2016, www.

tencent.com/en-us/ps/ieservice.shtml. 24. Tencent, Annual Report, 2009, 8; 2010, 11. 25. Ibid. 26. Ibid., Annual Report, 2009, 8. 27. Ibid. 28. Ibid., Annual Report, 2010, 10. 29. Yue Wang, “Tencent Is Now Building a Movie Empire,” Forbes Asia,

September 17, 2014, accessed August 20, 2016, www.forbes.com/sites/ ywang/2014/09/17/tencent-is-now-building-a-movie-empire/#139fdd7c6dc0.

30. Tencent, Annual Report, 2010, 190. 31. Ibid., Annual Report, 2015, 191. 32. Paul Carsten, Jussi Rosendahl, and Ritsuko Ando, “China’s Tencent Buys ‘Clash of

Clans’ Maker Supercell for $8.6 Billion,” Reuters, accessed August 20, 2016, www. reuters.com/article/us-supercell-m-a-tencent-holdings-idUSKCN0Z716E.

33. Wu Nan, “China’s Amazon? Tencent and Shanda to Merge Online Publishing and eBook Services,” South China Morning Post, March 17, 2015, accessed September 5, 2016, www.scmp.com/lifestyle/technology/article/1740029/ merger-chinese-online-publishing-sites-will-create-chinas.

34. Ibid. 35. “About Us,” Shanda, accessed February 13, 2017, www.shanda.com/about-us. 36. Tencent, Annual Report, 2015, 191. 37. Ibid. 38. Zen Soo, “Tencent-Backed China Reading Plans IPO of Up to US$800 Million in Hong

Kong, South China Morning Post, February 6, 2017, accessed February 16, 2017, www.techinasia.com/wechats-growing-empire-tencent-invested-acquired-2014.

39. Tencent, Interim Report, 2016, 66; “Financial Releases of 2016: China Music Corporation and Tencent’s QQ Music Announce a Strategic Merger to Jointly Develop Digital Music Business in China,” Tencent, July 15, 2016, accessed September 5, 2016, www.tencent.com/en-us/news_timeline.html.

40. Alec MacFarlane and Juro Osawa, “Tencent to Buy Majority Stake in China Music Corp., Creating Streaming Giant,” Wall Street Journal, July 14, 2016, accessed September 5, 2016, www.wsj.com/articles/tencent-to-buy-majority- stake-in-china-music-corp-creating-streaming-giant-1468470851.

41. Ibid. “Financial Releases of 2016.”

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42. “Spotify, Tencent and Tencent Music Entertainment Announce Equity Invest- ments,” Tencent, December 8, 2017, accessed March 24, 2019, www.tencent. com/en-us/articles/16000721512809778.pdf.

43. Tencent Music Entertainment Group, “Form F-1 Registration Statement” (Pro- spectus), October 2, 2018, accessed March 24, 2019, www.sec.gov/Archives/ edgar/data/1744676/000119312518290581/d624633df1.htm.

44. “Internet Value-Added Services,” Tencent, accessed August 20, 2016, www.ten cent.com/en-us/ps/internetservice.shtml.

45. Sonia Livingstone, “Taking Risky Opportunities in Youthful Content Creation: Teenagers’ Use of Social Networking Sites for Intimacy, Privacy, and Self- Expression,” New Media & Society 10, no. 3 (2008): 393–411; Dal Yong Jin, “Critical Analysis of User Commodities as Free Labour in Social Networking Sites: A Case Study of Cyworld,” Continuum 29, no. 6 (2015): 938–50.

46. Lin and Zhang, Ma Huateng de Tengxun Diguo, 133. 47. Tencent, Prospectus, 87. 48. Ibid. 49. “Tier-Based Privileges,” QQ Membership, accessed December 14, 2016, http://

vip.qq.com/freedom./freedom_grade.html?ADTAG=www.tencent.com/en-us/ ps/internetservice.shtml&SNO=1481753754605.

50. Ibid. 51. “Four Reasons to Join the Membership,” QQ Membership, accessed Decem-

ber 14, 2016, http://vip.qq.com/help/why.html?ADTAG=www.google.com/ &SNO=1481754886316.

52. Ibid. 53. “Internet Value-Added Services.” 54. X. Wu, Biography of Tencent, 84–87. 55. Tencent, Prospectus, 89. 56. X. Wu, Biography of Tencent, 118. 57. Ibid. 58. “Tencent in Negotiation with China Mobile on ’161 Mobile Chat’ Agreement

with China Mobile,” 2004 Financial Releases, Tencent, December 24, 2004, accessed February 13, 2017, www.tencent.com/en-us/news_timeline.html.

59. Ibid. The currency exchange rate is based on “Historic United States Dollar Chinese Yuan Renminbi,” accessed February 13, 2017, http://currencies.zone/ historic/us-dollar/chinese-yuan/p68.

60. “Tencent Signs New ’161 Mobile Chat’ Agreement with China Mobile,” 2004 Financial Releases, Tencent, January 18, 2005, accessed February 13, 2017, www.tencent.com/en-us/news_timeline.html.

61. Tencent, Annual Report, 2005, 16. 62. Sidney Luk, “Tencent Sees Lower Profit on China Mobile Deal,” South China

Morning Post, December 23, 2004. 63. “General Mandates to Issue and Repurchase Shares,” Tencent, March 30, 2005,

www.tencent.com/en-us/notice_timeline.html; “Voting Results at the 2005 Annual General Meeting of Tencent Holdings Limited,” Tencent, April 27, 2005, www.tencent.com/en-us/notice_timeline.html.

64. “Tencent Announces 2005 Fourth Quarter and Annual Results,” Financial Releases, Tencent, March 22, 2006, accessed September 8, 2016, www.tencent. com/en-us/news_timeline.html.

65. Xiaowu Cao, “Zhongguo Dianxin mizao VIM” 中国电信密造“VIM” 欲 “拦截”虚拟运营商 [China Telecom Developed VIM], 21st Century Business Herald 21世纪经济报道, November 22, 2003, accessed September 8, 2016, http://tech.sina.com.cn/it/t/2003-11-22/1636259281.shtml.

104 Cultural Profile

66. Qiu, Working-Class Network Society, 60. 67. Xiaowu Cao, “Sanda yunying sharu jishi tongxin Tengxun simian chuge” 三大运

营杀入即时通信腾讯四面楚歌 [The Telecom Carriers Entered the IM Market], 21st Century Business Herald 21世纪经济报道, December 18, 2003, accessed February 8, 2016, China Knowledge Resource Integrated Database (CNKI).

68. “E-surfing,” China Telecom, accessed September 8, 2016, http:// en.chinatelecom.com.cn/products/t20090227_48412.html; “Business Review 2009,” China Telecom, accessed September 8, 2016, www.chinatelecom-h. com/en/ir/report/annual2009/online/Eng/bus_rev.html.

69. “3Q dazhan zhi feixin xiazai sousuo liang shangzhang 600%” 3Q大战”致飞信下 载搜索量上涨600% [Fetion Received 600% More Download and Search Rates by Users Due to the 3Q War], Saidi Wang 赛迪网, November 4, 2010, accessed September 8, 2016, http://tech.ifeng.com/telecom/detail_2010_11/04/3006046_0. shtml; Chaoli Jin, “Feixin xuanbu xiang liantong dianxin yonghu kaifang” 飞信 宣布向联通电信用户开放 [Fetion Now Open to Users of China Unicom and China Telecom], Beijing Shangbao 北京商报, November 8, 2010, accessed Sep- tember 8, 2016, www.c114.net/topic/2428/a557142.html.

70. Xiaoyu Gu, “Zhongguo Dianxin jiang guanting yuanshu Zhongguo Liantong chaoxin ji UNIJA yewu” 中国电信将关停原属中国联通超信及UNIJA业务 [China Telecom to Shut Down the Chaoxin App Developed by China Unicom], Jinghua Shibao 京华时报, June 27, 2009, accessed September 8, 2016, http:// tech.qq.com/a/20090627/000017.htm.

71. Yuanwei Xin, “mianlin duanliang daxian Tengxun wunai jiang tui mianfei Shouji QQ面临“断粮”大限 腾讯无奈将推免费“手机QQ” [Tencent May Have to Provide Mobile QQ for Free], Jinghua Shibao 京华时报, Decem- ber 26, 2006, accessed February 13, 2017, http://news.xinhuanet.com/for- tune/2006-12/26/content_5532052.htm.

72. Tencent, Annual Report, 2006, 7. 73. Ibid., 13. 74. “Weixin and WeChat,” Tencent, accessed September 8, 2016, www.tencent.

com/en-us/system.html. 75. Cheng, Weixin PK duanxin, 20. 76. Chunchao Wang, “Tengxun tui xin kehuduan gangshang feixin” 腾讯推新客户

端杠上飞信 分流运营商超 600 亿短信收入 [Tencent to Launch New Service Challenging Fetion], Tongxin Xinxi Bao 通信信息报, January 26, 2011, A06.

77. Chen Tian, “China Mobile Pushing Fetion,” Global Times, July 9, 2013, accessed September 8, 2016, www.globaltimes.cn/content/794978.shtml; Yan Ma, Xia Liu, and Qiling Lin, “Liantong Tengxun lianshou tui Weixin” 联通 腾讯联手推微信 [Unicom and Tencent to Jointly Promote Weixin], Qiyejia Ribao 企业家日报, July 22, 2013, 4.

78. Dong-Hee Shin, “What Makes Consumers Use VoIP Over Mobile Phones? Free Riding or Consumerization of New Service,” Telecommunications Policy 36, no. 4 (2012): 311–23.

79. Shahrokh Nikou, Harry Bouwman, and Mark de Reuver, “The Potential of Con- verged Mobile Telecommunications Services: A Conjoint Analysis,” Info 14, no. 5 (2012): 21–35; Aniruddha Banerjee, James Alleman, and Paul Rappoport, “Video-Viewing Behavior in the Era of Connected Devices,” Communications and Strategies 92 (2013): 19–42.

80. Hu Hu, “Sanwang ronghe de lishixing tupo” 三网”融合的历史性突破 [A His- torical Breakthrough of the Three-Network Convergence], Renmin Youdian Bao 人民邮电报, January 18, 2010, accessed February 3, 2017, www.chinau- nicom.com.cn/news/ywsm/hyzx/file876.html.

Cultural Profile 105

81. Rangrang Bai and Guangwei Wang, “Jiegou chongzu guizhi zhihou yu zongxi- ang quanding—Zhongguo Dianxin Liantong fanlongduan anli de ruogan sikao” 结构重组、规制滞后与纵向圈定—中国电信、联通“反垄断”案例 的若干思考 [Some Thoughts on the Anti-Monopoly Case Against China Tel- ecom and Unicom], China Industrial Economics 10 (October 2012): 135–47; Zhan Hao and Annie Xue, “China Deregulates Pricing in Telecommunica- tion Sector,” China Law Vision, May 29, 2014, accessed September 8, 2016, www.chinalawvision.com/2014/05/articles/competitionantitrust-law-of-th/ china-deregulates-pricing-in-telecommunication-sector/.

82. Hong, Networking China, 11. 83. Xiao Xu, “Duanxin yewu mianlin weixin chongji” 短信业务面临微信冲击

通讯巨头与运营商博弈日趋激烈 [Text Message Service Took a Hit from Weixin], Gongren Ribao 工人日报, March 20, 2013, 6.

84. Yan Ma, “Gongxinbu cheng you keneng dui Weixin shoufei” 工信部称有可 能对微信收费 运营商态度各有不同 [MIIT May Consider Charging Weixin Service], Securities Daily 证券日报, April 1, 2013, C03.

85. Ibid. 86. Lirong Chen, “Zhongdianxin yu Tengxun gaodiao hezuo” 中电信与腾讯高调

合作 移动互联网上演变革记 [China Telecom to Collaborate with Tencent], Tongxin Xinxi Bao 通信信息报, April 20, 2011, B03.

87. Ri Yao, “Dianxin lianhe Tengxun tui tianyi QQ haoma fuwu” 电信联合腾讯推 天翼QQ号码服务 手机号即QQ号 [China Telecom and Tencent Jointly Pro- mote E-Surfing QQ Number Service], Tech.qq.com 腾讯科技, November 1, 2011, accessed September 8, 2016, http://tech.qq.com/a/20111101/000010.htm.

88. Na Li and Jia Liu, “Tengxun gei Liantong fa Weixin” 腾讯给联通发微 信：OTT 之争破冰求共赢 [Tencent and China Unicom to Collaborate with Weixin Service],” China Business News 第一财经日报, July 19, 2013, B04.

89. Tencent, Prospectus, 26. 90. Ibid., 89. 91. “QQ zuankuo leyuan” 钻阔乐园, “pandian Tengxun tingzhi yunying de youxi”

盘点腾讯停止运营的游戏 腾讯停运的游戏有哪些 [The Games Tencent No Longer Operating], n.p., July 17, 2016, accessed September 26, 2016, www. qqzuankuo.com/article/youxigonglue/2016061701061890.html.

92. “Tencent and Neowiz to Bring Online Rollerblade Racing Game ‘R2Beat’ in China,” Financial Releases of 2005, Tencent, accessed September 26, 2016, www.tencent.com/en-us/news_timeline.html; Matt Martin, “Tencent to Manage Crytek’s Warface in China,” gamesindustry.biz, December 13, 2010, accessed September 26, 2016, www.gamesindustry.biz/articles/2010-12-13-tencent-to- manage-cryteks-warface-in-china; “Jianzhi TGA Lieyanxingdong xianshang yuxuan mingluo kaisai” 剑指TGA 《烈焰行动》线上预选鸣锣开赛 [Ten- cent to Launch Battery], n.p., April 18, 2013, accessed September 26, 2016, http://news.pcgames.com.cn/280/2806538.html; Eric Jou, “Check Out China’s ‘New’ ‘Genuine American-Style Zombie Shooting Game,’ ” n.p., June 5, 2013, accessed September 26, 2016, http://kotaku.com/check-out-chinas-new-genu- ine-american-style-zombie-493092880; “Our Story,” Vertigo Games, accessed September 26, 2016, www.vertigogames.co.kr/#/; Teng Shi, “Tengxun daily Han 2D hengban QQ xianjing pingce” 腾讯代理韩2D横版《QQ仙境》评 测 [Review on QQ Xianjing], PCGames, January 6, 2011, accessed Septem- ber 26, 2016, http://news.pcgames.com.cn/ceping/guonei/1012/2088012_all. html; THR Staff, “Zynga Partners with Tencent in China for Chinese Version of Cityville,” Hollywood Reporter.com, July 26, 2011, accessed June 28, 2014, LexisNexis Academic.

106 Cultural Profile

93. Charles Custer, “Game Developers: Want to Win in China? Partner with Ten- cent,” Tech in Asia, February 25, 2014, accessed March 3, 2017, www.techi nasia.com/the-key-to-foreign-game-success-in-china-partner-with-tencent.

94. Charles Custer, “How Tencent Is Taking Over Global Gaming,” Tech in Asia, June 21, 2016, accessed September 26, 2016, www.techinasia.com/ tencent-gaming-world.

95. Tencent, Interim Report, 2007, 19; “GoPets, Ltd. Continues Global Expan- sion, Achieving 300,000 Users Worldwide and Securing Singapore Partner- ship Deal,” PR Newswire, April 25, 2006, accessed September 26, 2016, www.prnewswire.com/news-releases/gopets-ltd-continues-global-expansion- achieving-300000-users-worldwide-and-securing-singapore-partnership- deal-56543132.html.

96. Tencent, Annual Report, 2008, 118; 2009, 123. 97. Ibid., 132. 98. Ibid., 2011, 189; 2012, 176. 99. “Connected Transaction Purchase of Shares of Level Up,” Tencent, January 19,

2012, accessed September 26, 2016, www.tencent.com/en-us/news_timeline.html. 100. “About Us,” Activision Blizzard, accessed September 26, 2016, www.activi

sionblizzard.com/about-us. 101. “Multi-Year Agreement Joins One of the World’s Biggest Interactive Enter-

tainment Franchises with China’s Largest Online Games Platform,” Financial Releases, Tencent, July 3, 2012, accessed September 26, 2016, www.tencent. com/en-us/articles/802871466501124.pdf; Tencent, Annual Report, 2013, 150.

102. Joe Donnelly, “Tencent Wins Rights to Officially Release PUBG in China, Will ‘Accord with Socialist Core Values’,” PC Gamer, November 22, 2017, accessed January 10, 2019, www.pcgamer.com/tencent-wins-rights-to-offi cially-release-pubg-in-china-will-accord-with-socialist-core-values/.

103. Lynn T. Harrison, Introduction to 3D Game Engine Design Using DirectX 9 and C# (Berkeley, CA: Apress, 2003), 1.

104. Tencent, Annual Report, 2012, 133. 105. Ibid., 191. 106. “Riot Games and Tencent Ink Deal to Bring League of Legends to China,”

Riot Games, accessed September 26, 2016, www.riotgames.com/sites/default/ files/uploads/081121_NEWS_lol_tencentchinarelease.pdf.

107. Tencent, Annual Report, 2010, 190. 108. “Tencent Holding Acquires Majority Stake in Game Publisher Riot Games,”

Financial Releases of 2011, Tencent, February 4, 2011, accessed Septem- ber 26, 2016, www.tencent.com/en-us/news_timeline.html.

109. John Gaudiosi, “This Chinese Tech Giant Owns More Than Riot Games,” For- tune, December 22, 2015, accessed September 26, 2016, http://fortune.com.

110. Catherine Shu, “Tencent Will Pay $126M for a 14.6% Stake in Glu Mobile, Maker of Kim Kardashian: Hollywood,” TechCrunch, April 29, 2015, accessed September 26, 2016, https://techcrunch.com/2015/04/29/tencent-glu/.

111. George Stahl, “Tencent Buys Stake in Kardashian Game Maker Glu Mobile,” Wall Street Journal, April 29, 2015, accessed September 26, 2016, www.wsj.com/ articles/tencent-buys-stake-in-kardashian-game-maker-glu-mobile-1430344216.

112. Bien Perez, “China’s Tencent Partners with Glu Mobile to Bring Popular WeFire Mobile Shooter Game to International Markets,” South China Morning Post, Novem- ber 6, 2015, accessed September 26, 2016, www.scmp.com/tech/apps-gaming/ article/1876205/chinas-tencent-partners-glu-mobile-bring-popular-wefire-mobile.

113. Tencent, Annual Report, 2014, 143.

Cultural Profile 107

114. Jon Russell, “Tencent Confirms Deal to Buy Majority Stake in Supercell from SoftBank for $8.6B,” TechCrunch, June 21, 2016, accessed September 26, 2016, https://techcrunch.com/2016/06/21/tencent-confirms-deal-to-buy- majority-stake-in-supercell-from-softbank-for-8-6b/.

115. Alibaba, Annual Report, 2015, 149–50, accessed September 26, 2016, www. alibabagroup.com/en/ir/secfilings.

116. “Tencent to Acquire Majority Stake in Supercell from SoftBank,” Financial Release of 2016, Tencent, accessed September 26, 2016, www.tencent.com/ en-us/news_timeline.html.

117. This is the earliest documented information I was able to trace. No such infor- mation was revealed in Tencent’s IPO Prospectus. Tencent, Annual Report, 2004, 60.

118. Ibid., Annual Report, 2015, 133. 119. “Tencent Announces Launch of Int’l QQ,” Chinadaily.com.cn, December 12,

2010, accessed March 3, 2017, www.chinadaily.com.cn/business/2010-12/16/ content_11712170.htm.

120. “China’s Tencent Launches English Microblogging Site,” AFP, October 11, 2011.

121. Harsimran Julka, “China’s Tencent Aims to Battle U.S. Web Firms like Google, Facebook in India,” Economic Times, July 27, 2012; Suchit Leesa- nguansuk, “Tencent Launches Wechat Messaging App in Thailand,” Bangkok Post, November 27, 2012.

122. “Tencent’s WeChat Overseas Users Exceed 70 Million,” CRI Online, July 5, 2013, accessed October 25, 2016, http://en.people.cn/90778/8311962.html.

123. Jon Russell, “Tencent Focuses on Indonesia with Local Joint Venture to Promote Its Wechat Mobile App,” Next Web, February 28, 2013, accessed September 18, 2016, http://thenextweb.com/asia/2013/02/28/tencent-focuses- on-indonesia-with-local-joint-venture-to-promote-its-wechat-mobile-app/.

124. Steven Millward, “WeChat’s Global Expansion Has Been a Disaster,” Tech in Asia, May 25, 2016, accessed October 25, 2016, www.techinasia.com/ wechat-global-expansion-fail.

125. Paul Mozur, “China’s Tencent Aims App at Mobile Users in the U.S.,” Wall Street Journal Asia, March 6, 2013, 17.

126. “WeChat Payment Fully Open to Overseas Purchase,” Xinhua, November 20, 2015, accessed October 25, 2016, http://news.xinhuanet.com/english/2015- 11/20/c_134838085.htm.

127. Scott Duke Harris, “S.F. Firm Gets China Investor,” Mercury News, January 9, 2008, accessed November 20, 2016, www.mercurynews. com/2008/01/09/s-f-firm-gets-china-investor/.

128. Scott Cendrowski, “Tencent’s Venture Capital: Huge in China, Invisible in America,” Fortune, July 22, 2015, accessed March 3, 2017, http://fortune. com/2015/07/22/tencents-venture-capital-us/.

129. Zhang Zhao, “Action Rolls as Online Portals Sign on with US Movie Giants,” China Daily European Edition, January 30, 2013; Patrick Brzeski, “Chinese Internet Giant Tencent Licenses Disney Films for Streaming Video Service,” Hollywood Reporter.com, September 9, 2013; Tencent, “Financial Releases,” 2014–2015, www.tencent.com/en-us/news_timeline. html; Paul Melvin, “Tencent Joins Hands with ESPN in Exclusive Digital Partnership in China,” ESPN Media Zone, February 2, 2016, accessed Sep- tember 18, 2016, http://espnmediazone.com/us/press-releases/2016/02/tencent- joins-hands-with-espn-in-exclusive-digital-partnership-in-china/.

23 MICROSOFT CORPORATION

Benjamin J. Birkinbine

From its founding in 1975, the Microsoft Corporation has grown to become one of the largest and most dominant companies in the world. In its 2014 annual review of the world’s most valuable brands, Forbes ranked Microsoft the second most valuable brand in the world with an estimated value of $63 billion.1 Forbes also listed the company’s founder, Bill Gates, as the richest person on the planet in 2015 with an estimated $79.2 billion fortune.2 In addition, Gates topped the Forbes list of billionaires 16 out of the previous 21 years, which is indicative of the immense wealth that Microsoft earned during its rise to become one of the world’s largest new media giants. The company initially focused solely on producing computer software, but has since diversified its product lines and expanded into new areas of business. Microsoft now has regional offices in more than 100 countries worldwide, and offers products and services that range from video games and mobile phones, to operating systems and cloud computing solutions. The company’s growth, however, has not been without controversy.

Throughout its history, Microsoft negotiated strategic partnerships with original equipment manufacturers (OEMs). Most notably, the company partnered with IBM, which ensured that its software would come pre-installed on personal computers. In effect, these partnerships and licensing agreements dramatically increased the ubiquity of Microsoft’s software and solidified its position as a recognizable brand worldwide. However, Microsoft’s corporate structure and its strategies have shifted in recent years, particularly as the company expands beyond personal computer and software licensing markets. This represents a fundamental shift in the focus of the company, which is reflected in its recent acquisitions as well as its change in leadership. As evidence of this new era at Microsoft, Satya Nadella was appointed as Chief Executive Officer in 2014, which made him only the third person to hold the position since the company’s founding.

Despite these changes, Microsoft still remains one of the largest and most powerful companies in the world. To understand the current changes occurring within Microsoft as well as the events that led to its rise to power, this chapter begins by charting the history of the company before providing an overview of the company’s current economic profile, including its corporate struc - ture, executive board members, and investors. Next, an analysis of the company’s political ties as well as its cultural and symbolic power is provided before the chapter concludes with reflections on the company’s core strategies.

Historical Background

Paul Allen and Bill Gates founded Microsoft in 1975 after they developed the Altair BASIC interpreter, which was designed to execute functions written in the BASIC (Beginner’s All-purpose Symbolic Instruction Code) programming language so that they could be performed on the Micro Instrumentation and Telemetry Systems (MITS) Altair 8800 microcomputer. Altair BASIC became Microsoft’s first product, which was distributed by MITS under contract with Microsoft. This initial product established the basis of Microsoft’s business model and its primary strategy, which relied on producing software and establishing contracts with equipment manufacturers as a way to ensure the company’s products were included with hardware devices.

In the 1980s, Microsoft shifted its focus to the production of operating systems. During this time, Microsoft developed its Microsoft Disk Operating System, or MS-DOS, which became its core commodity until the mid-1990s. MS-DOS was developed in 1981 after IBM requested an operating system that could be used on its IBM-PC line of personal computers (PCs). Shortly after IBM’s initial request, Microsoft acquired the rights to 86-DOS, an operating system from Seattle Computer Products, eventually renaming it MS-DOS.3 Microsoft customized the newly acquired operating system to the specifications required by IBM and licensed the operating system to IBM. In turn, IBM included MS-DOS with its IBM-PC line of personal computers under the name PC DOS.

The agreement with IBM was perhaps the biggest turning point in Microsoft’s rise to power. The agreement ensured that its software would be shipped with IBM’s hardware, which led to rapid adoption of its products and increased revenue. Based on its success with MS-DOS and its relationship with IBM, Microsoft held its initial public offering (IPO) in 1986, which earned $61 million. The funds earned from the IPO were primarily invested in developing an operating system that used a graphical user interface (GUI). The development of a GUI operating system was driven by the need to make personal computers more accessible to the consumer market. Both the investment in Windows and its relationship with IBM ensured that Microsoft Windows would be installed on all IBM-compatible computers. Ultimately, Microsoft Windows continued the company’s dominance of the personal computer software industry as well as ushering in an era of personal computer sales.

Microsoft’s revenues and market share grew tremendously during this period. By some estimates, Microsoft’s market share rose to 90% of the entire computing market in the mid-1990s.4

By the time Windows 3.0 was released in 1990, however, the relationship between IBM and Microsoft became strained to the point that the companies decided to terminate their Joint Development Agreement, which specified the partnership between the two firms for the purpose of working on IBM’s OS/2 operating system.5 Because the Windows operating system was much more developed when the companies ended their relationship, Microsoft continued to gain market share, as its operating system was included on sales of IBM-compatible PCs. In fact, the relationship between IBM and Microsoft was what initially drew attention from the United States Federal Trade Commission (FTC) in 1990.

The initial FTC investigation began as a result of a joint news release by IBM and Microsoft during the Comdex trade show in Las Vegas, NV, on November 13, 1989.6 In the press release, the companies claimed “Microsoft would hold back features for Windows in order to help industry acceptance of the OS/2 operating system.”7 The FTC was concerned that the companies were colluding to control the market for operating systems. Ultimately, the FTC investigation ended in 1993 because the commissioners were split 2–2 on whether to bring an administrative action against Microsoft. In the same year, however, the Antitrust Division of the United States Depart - ment of Justice (DoJ) took over the investigation, which eventually led to Microsoft’s conviction for antitrust violations. The main issues in that case did not center on Microsoft’s control of the operating system market but its web browser, Internet Explorer.8

384 Benjamin J. Birkinbine

The Browser Wars

The development of Internet Explorer occurred within the context of the “browser wars” in the mid-1990s. One of the most notable web browsers developed at this time was the Mosaic web browser, which was developed by a team of researchers at the University of Illinois at Urbana- Champaign. After gaining popularity, Mosaic changed its name to Netscape Navigator to avoid trademark disputes with the university. The truly novel characteristic of the Netscape browser was that it was freely available to the general public for personal use. As a result, Netscape Navigator quickly rose to hold nearly 90% of the browser market in April 1996.9 Based on this quick success, Netscape held its IPO in August 1995. Netscape’s success was not lost on Microsoft, which began to develop a browser to rival Netscape.

Since Microsoft had not devoted any significant amount of time or resources to developing a web browser of its own, the company sought to acquire an existing browser rather than build one on its own. Microsoft approached Spyglass, which held the rights to the code base of the original Mosaic browser. Spyglass had been developing its own version of Mosaic, known as Spyglass Mosaic. Microsoft negotiated a license to use the Spyglass Mosaic code base in exchange for royalty payments for each copy of the browser issued, with an annual cap of $5 million.10 The resulting browser, Internet Explorer, was based on the same foundation as Netscape. As evidence of how aggressively Microsoft pursued its new browser strategy, the company originally had only five or six employees working in the browser department in 1995, but that number rose to more than 1,000 employees by 1999.11

In addition to assigning more employees to the browser division, Microsoft began packaging IE with distribution of its Windows operating system. As Microsoft held nearly 90% of the market for operating systems because of its contractual relationships with OEMs, the company quickly gained market share of the web browser market. In effect, Microsoft was giving away copies of Internet Explorer for free by bundling it with its Windows operating system. Microsoft began distributing versions of Internet Explorer to OEMs by sending discs to the manufacturers, but it eventually required the OEMs to install Internet Explorer with Windows 95. According to the Findings of Fact from the United States v. Microsoft antitrust case, Microsoft prohibited OEMs from “modifying or deleting any part of Windows 95, including Internet Explorer, prior to shipment” because of a non-negotiable licensing restriction that Microsoft placed on OEMs.12 In other words, the restriction did not allow OEMs to ship new PCs without Microsoft’s browser installed. The effect on the market for web browsers was almost immediate, as Netscape Navigator’s market share plummeted and Microsoft’s ascended.

The United States v. Microsoft

Microsoft’s actions during the browser wars were what ultimately led to its conviction for violations of Sections 1 and 2 of the Sherman Act. Section 1 of the Sherman Act prohibits “every contract, combination . . . or conspiracy, in restraint of trade or commerce . . .”13 Section 2 prohibits any person or firm to “monopolize . . . any part of the trade or commerce among the several States, or with foreign nations . . .”14 In United States v. Microsoft, the court found Microsoft to be in violation of both sections of the Act. Microsoft violated Section 1 by unlawfully bundling Internet Explorer with its operating system and restricting OEMs from modifying or removing the software. In addition, the company violated Section 2 by maintaining its monopoly power by anticompetitive means and attempting to monopolize the web browser market. In light of these violations, the U.S. District Court Judge, Thomas Penfield Jackson, ordered Microsoft to divest its operating systems business from its applications business operations.15 The intent of the decrees was to separate Microsoft’s operating system business from the business operations that handled

Microsoft Corporation 385

its web browser development. These actions would prevent Microsoft from engaging in the same types of anticompetitive behavior that it had used during the browser wars.

However, Judge Thomas Penfield Jackson recused himself from the case in 2001 because of public comments that he made, which gave the impression that he had a personal bias or prejudice against Microsoft.16 In his place, U.S. District Judge Colleen Kollar-Kotelly took over the case, and approved a settlement between the parties that would not require the break-up of Microsoft’s two divisions. Instead, Microsoft agreed to a series of consent decrees in November 2002, whereby the company was prohibited from retaliating against any OEM that develops, distributes, promotes, uses, sells, or licenses any non-Microsoft products.17 In addition, Microsoft needed to establish a clearly documented schedule of all royalties received from OEMs for its Windows Operating System.

These provisions were aimed at prohibiting Microsoft from engaging in any anticompetitive behaviors, but Microsoft was also required to promote interoperability with its products. Interoperability ensures that other companies could develop products that would operate with Microsoft’s products. As such, Microsoft was ordered to disclose its Application Programming Interfaces (APIs), which specify how software components should interact with one another. By releasing its APIs to independent vendors, OEMs, and other Internet providers, they could develop software that could communicate with Microsoft’s operating systems and other software. These consent decrees were ultimately renewed twice, but officially expired May 12, 2011.18

The antitrust conviction marked a turning point in Microsoft’ history, as well as the broader information technology market. The antitrust conviction occurred in 2001, which coincided with the bursting of the so-called “dot-com bubble” of speculative capital investment in information technology companies.19 Microsoft, which had risen to power because of its bundled software and strong intellectual property protections, needed to shift its business strategies to reflect the broader changes occurring within the information technology industry. The most significant of these changes was the growth of smartphones and tablets, as well as Microsoft’s entrance into the video gaming industry. It is within this context that Microsoft released its Xbox video gaming console in late 2001 and began developing tablets for personal computing. Later, in 2014, Microsoft acquired the mobile phone business of Finnish telecommunications company Nokia. The acquisition of Nokia’s mobile phone business as well as the change in leadership will be discussed in greater detail in the section on new developments, which appears later in the chapter. What follows, however, is an economic profile of the company, which includes financial data and its current corporate structure.

Economic Profile

Figure 23.1 provides an illustration of Microsoft’s revenues and net profits from 1998 to 2014. The company’s revenues continued to grow during this period, despite its conviction for antitrust violations and the subsequent consent decrees. Moreover, Microsoft’s revenues were not affected by the dot-com crash during 2001. Indeed, the same can be said of the company’s profits during that time, although Microsoft did experience a dip in profits during the latest financial crisis that occurred between 2007–2008.

Properties (Corporate Structure, Holdings, Joint Ventures)

In 2014, Microsoft acquired the Nokia Corporation’s Device and Services Business (“NDS”). The acquisition led to a change in Microsoft’s organizational structure and represents the company’s broader strategic transition to a “devices and services company.”20 The upshot of the restructuring was the creation of a new operating segment as well as renaming others. The new organizational structure is divided into two main areas: (1) Devices and Consumer, and (2) Commercial. Both

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of these primary areas is further broken down into smaller operating segments. Brief descriptions of these operating segments are provided below.

Devices and Consumer (D&C)

Microsoft’s Devices and Consumer (D&C) segments “develop, manufacture, market, and support products and services designed to increase personal productivity, help people simplify tasks and make more informed decisions online, entertain and connect people, and help advertisers connect with audiences.”21 The company’s D&C operations are divided into four smaller operating segments: D&C Licensing, Computing and Gaming Hardware, Phone Hardware, and D&C Other.

D&C Licensing

The D&C Licensing segment primarily derives its revenue from licensing fees for use of Micro- soft software, including Microsoft Windows and Microsoft Office. The licensing revenues for Microsoft Windows come from the fees charged to original equipment manufacturers that sell hardware devices with Microsoft software pre-installed. Also included in this operating segment are patent licensing fees.

Computing and Gaming Hardware

The Computing and Gaming Hardware segment includes the Xbox video game console and accessories. This includes revenue from the subscription-based Xbox Live service, which allows subscribers to link with other Xbox players for collaborative or competitive video gaming. Premium Xbox Live accounts receive access to free games and special offers. This segment also includes royal ties from second- and third-party video game sales. Sales of Microsoft Surface tablets and accessories as well as Microsoft PC accessories are also included.

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0

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FIGURE 23.1 Microsoft Corporation Annual Revenue and Net Profit, 1998–2014 (in $ billions)

Phone Hardware

The Phone Hardware segment is Microsoft’s newly created segment and was created because of Microsoft’s acquisition of Nokia’s Device and Services Business. This newly created segment includes sales of Lumia Smartphones and other non-Lumia phones.

D&C Other

The D&C Other segment includes revenue streams from those areas not otherwise covered by other segments. D&C Other includes sales from online marketplaces like Windows Store, Windows Phone Store, and Xbox Live as well as its retail stores. It also includes revenues earned from advertising on its Bing search engine, Xbox gaming console, and the Microsoft Network, also known simply as MSN, which is a collection of web sites and services provided by the company. This segment also includes Office 365 Consumer software, which is a subscription-based cloud service that provides access to Office 365 Home, Office 365 Personal, and other productivity software. The segment also includes Microsoft Studios, which develops and publishes video games. Microsoft also operates a Partner Network, whereby vendors can become an official reseller of Microsoft product licenses. Revenues from this service are also reported in this segment.

Commercial

Whereas the D&C segments cater specifically to consumers, the commercial segments are focused on providing products and services for other businesses. These products and services are aimed at increasing business productivity and efficiency. The company’s commercial operations are divided into two segments: Commercial Licensing and Commercial Other.

Commercial Licensing

The Commercial Licensing segment derives revenue from licensing fees paid by other businesses for access to Microsoft’s software and services. This includes a range of server-level products like Windows Server, Microsoft SQL Server, Visual Studio, and System Center. The company also earns revenue from sales of its Microsoft Office for business software, including the productivity software offered by Office, the Microsoft Exchange email server software, the SharePoint web application framework and platform, and the Microsoft Lync instant messenger. Microsoft also licenses Skype to businesses, which enables voice and video calling from devices connected to the Internet. Through Microsoft Dynamics, the company offers software for resource planning, customer relationship management, financial management, supply chain management, and analytics. In addition, Microsoft also derives revenue from licensing of its Windows operating system, including Windows Embedded. Embedded systems are computer systems that are embedded within other devices, which allows for the expansion of Internet-connected automation in everyday objects and devices.

Commercial Other

The Commercial Other segment includes product support and consulting services offered through its Enterprise Services division. The company also provides services via Commercial Cloud, which includes Office 365 Commercial and other Microsoft Office services. In addition, Microsoft Azure is a cloud computing platform and infrastructure for developing and managing applications.

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Typical Strategies

Throughout its history, Microsoft has relied on a few primary strategies. Microsoft ensured the ubiquity of its software by negotiating contractual relationships with original equipment manufacturers. Beginning with its initial contract with IBM to fuel adoption of its MS-DOS operating system, Microsoft continued this strategy with subsequent technologies like Microsoft Windows and Internet Explorer. Indeed, the findings from the United States v. Microsoft antitrust suit focused on the anticompetitive nature of Microsoft’s contractual agreements with manu- facturers. In particular, Microsoft used “contractual and, later, technological shackles in order to ensure the prominent (and ultimately permanent) presence of Internet Explorer on every Windows user’s PC system, and to increase the costs attendant to installing and using [Netscape] Navigator on any PCs running Windows.”22 In addition, Microsoft restricted manufacturers from reconfiguring Windows 95 and Windows 98 in ways that could lead to greater use of Netscape Navigator. Finally, Microsoft “used incentives and threats to induce” certain manufacturers to make “distributional, promotional and technical efforts” that would favor Internet Explorer instead of Navigator.23

Once Microsoft achieved its market dominance, it relied on strong intellectual property protections of its software as a way to defend its ability to charge licensing fees for use of its software. Indeed, the company has consistently exhibited an antagonistic position with respect to alleged infringements on its intellectual property. In one early example, Bill Gates authored an “Open Letter to Hobbyists” in response to the fact that hobbyists were sharing copies of Microsoft’s Altair BASIC interpreter for the purposes of experimenting with the technology. In the letter, Gates claimed that most hobbyists steal software, and he rhetorically asked whether this is a fair practice because it ultimately prevents good software from being written.

The “Open Letter to Hobbyists” is indicative of Microsoft’s longstanding position toward the hobbyist community and, more specifically, the model of open development championed by this community. The most notable example of an open development model is the open source operating system, GNU/Linux. In 1998, a confidential source leaked a series of documents to Eric Raymond, a well-known member of the free and open source software community, which provided evidence of Microsoft’s strategies and tactics for combatting GNU/Linux in particular and open source software in general. These documents, known as “The Halloween Documents,” show that Microsoft viewed free software products as a genuine threat to its own products because such products had “acquired the depth and complexity traditionally associated with commercial projects.”24

In the first Halloween Document, Vinod Valloppillil argues “to understand how to compete against OSS [open source software], we must target a process rather than a company.”25 The author also discusses possible strategies for competing with open source software, with special attention given to “FUD tactics,” which is an acronym for Fear, Uncertainty, Doubt. FUD tactics are used in sales, marketing, public relations, and other propaganda, whereby one attempts to instill feelings of fear, uncertainty, or doubt in consumers about the quality of competitors’ products. For example, in an advertisement for Microsoft Server 2003, Microsoft claimed that research had demonstrated “Linux was found to be over 10 times more expensive than Windows Server 2003.”26 Microsoft was asked to change the advertisement by the Advertising Standards Authority in the United Kingdom because the results of the study were deemed to be misleading to consumers.

In subsequent Halloween Documents, Microsoft employees claimed that a possible strategy for fighting Linux was patent and copyright litigation.27 Indeed, Halloween Document X, leaked in 2004, features an internal email from the SCO Group, which discusses, albeit somewhat vaguely, the relationship between the SCO Group and Microsoft.28 The email appears to disclose the amount of money paid to SCO on behalf of Microsoft. The SCO Group was a software company that

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became infamous for engaging in a number of legal battles over alleged intellectual property infringement in Linux-related software. The SCO Group went bankrupt in 2007, but the leaked document suggests that Microsoft was contributing money directly to the SCO Group as a way to support intellectual property litigation against Linux vendors.

The contractual agreements and vehement policing of its intellectual property allow Microsoft to derive revenue from licensing fees. Based on its 2014 annual report, nearly 70% of Microsoft’s revenue came from licensing fees.29 As such, Microsoft relies on strategies that increase its ability to derive licensing revenue, particularly by encouraging adoption of its technologies globally. For example, between 1999 and 2001, four Brazilian cities—Amparo, Solonopole, Recife, and Ribeirao Pires—passed a series of laws and directives that encouraged or required the use of free software in favor of Microsoft products.30 The rationale for switching to free software was primarily economic, as Brazil reported spending nearly $1 billion on software licensing fees to Microsoft between 1999 and 2004.31 By switching to free and open source software, Brazil estimated the savings at approximately $120 million per year.32

New Developments (Convergence, Integration, Expansion, etc.)

In recent years, however, Microsoft’s stance toward free and open source software has thawed a bit from its previous position. This is indicated by the creation of an entirely new subsidiary in 2012 called Microsoft Open Technologies, which is dedicated to “interoperability, open standards, and open source.”33 This contrasts sharply with statements made by Microsoft’s previous CEO, Steve Ballmer, when he claimed, “Linux is a cancer” in 2001.34 The reason for the shift in embracing open source is, in part, driven by the need for interoperability. Interoperability is particularly important because it enables various technologies to communicate with one another, regardless of its original manufacturer. Microsoft recognizes the need for its software to communicate effectively with other devices and systems, and the company can no longer rely solely on developing software that will only run on Microsoft devices. Rather, Microsoft’s software will need to be adapted to a range of devices that may be manufactured or managed by different organizations.

This change in perspective can also be contextualized within the company’s recent shift to prioritize mobile and cloud-based products and services. On a broader level, the shift in business strategy brings Microsoft in line with more general trends in the information technology market, exemplified by companies like Google, Amazon, and Facebook. These companies are increasingly trying to control various types of Internet infrastructure that they can lease to consumers and businesses as a way to provide access to increased computational power, unique applications or services, or to facilitate collaborative projects via the cloud. The strategy attempts to take advantage of demand for ubiquitous access to software and services across a range of different devices (i.e., laptops, tablets, gaming consoles, smartphones, etc.).

One can view Microsoft’s recent acquisition of the Nokia Corporation’s “Device and Services” business within this broader context. The acquisition allows Microsoft to integrate the production of mobile phones, smartphones, and tablets into its corporate structure. Furthermore, the acquisition makes Microsoft vertically integrated in telecommunications, although not completely vertically integrated in traditional forms of telephony. While the company does not provide a traditional telephony service to its clients, it does control Skype, which offers Internet-based voice and video communication. As of 2013, Microsoft claimed that Skype had approximately 299 million users worldwide.35

As of the time of writing, Microsoft was in the process of integrating many of its products and services into a single service. The service will be driven by development taking place within its Windows operating system. The new system, Windows 10, is being built as an integrated operating system that will function with all types of hardware, including smartphones, the Xbox

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gaming system, tablets, laptop computers, as well as Microsoft HoloLens. The HoloLens is Microsoft’s attempt to bring three-dimensional immersive computing to consumers with the use of holographic technology. By wearing a piece of headgear, users of HoloLens will be able to view digital displays within their physical environment. For example, users could build a hybrid digital-physical environment in their living rooms by playing Minecraft with the HoloLens, which would enable digital structures to be built on top of a couch or coffee table.36

Political Profile

Microsoft held its initial public offering in 1986, and it has remained a publicly traded company since that time. Currently, the ownership structure of Microsoft is composed of both institutional and non-institutional (or personal) investors. Institutional investors own approximately 72% of the company’s total shares, with the remaining 28% belonging to non-institutional members. Table 23.1 lists Microsoft’s top five institutional investors and the percentage of total shares owned by each company.

The largest institutional investor is Vanguard Group, Inc., a U.S.-based investment management company. The Vanguard Group’s investment portfolio shows that the company also holds the greatest amount of total shares for General Electric, Bank of America, Pfizer, Apple, and AT&T. However, the most valuable shares the company owns are those of Apple, where its 330 million shares are worth more than $42 billion.37

While Table 23.1 provides a snapshot of Microsoft’s top institutional investors, two individuals are the largest non-institutional shareholders. Former CEO, Steve Ballmer, owns more than 330 million shares in the company, while founder Bill Gates owns approximately 239 million shares.38

When considered in conjunction with the institutional investors, Bill Gates arguably holds the most power to control the direction of the company because he is its founder, a major direct investor, and a current board member. However, ownership is not always the same as control; rather, management and equity owners form a “community of interest” in which the strategic decisions are informed both by management and financial interests.39 Gates is somewhat unique in that he serves as a member of both communities, although this may or may not translate directly to control.

Complicating the analysis of Gates’ influence is the way in which his fortune is spread out through multiple other ventures outside Microsoft’s corporate structure. For example, Bill Gates controls Cascade Investments, LLC, which is a holding and investment company.40 Cascade Investments holds ownership stakes in companies across a range of industries, including food and beverage, transportation, waste management, biofuel, and real estate. Most notably, Cascade Investments holds a 7% ownership stake in Televisa, the Mexican media giant discussed in this volume.41 Another notable investment is the Four Seasons Hotels and Resorts, which Cascade Investments co-owns with Saudi Arabia’s Prince al-Waleed bin Talal’s investment company.42

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TABLE 23.1 Microsoft Corporation’s Top Five Institutional Investors

Company Percentage of total shares

Vanguard Group, Inc. 7.27 Capital World Investors 5.95 State Street Corp 5.93 FMR LLC 3.78 Barclays Global Investors UK Holdings Ltd 3.74

Source: NASDAQ, “Microsoft Corporation Ownership Summary,” www. nasdaq.com/symbol/msft/ownership-summary, accessed March 18, 2015

Corporate Board Members and Interlocks

On the other hand, Bill Gates has only recently returned to serve on the company’s Board of Directors. Table 23.2 lists the current board of directors and the corporate interlocks of the board members, but only lists the board members’ current and active involvement in other leadership positions. However, certain members previously served in positions that are worth mentioning here. John Wendell Thompson, the current Chairman of the Board, previously served on the National Infrastructure Advisory Council (NIAC), which was created in the wake of the September 11, 2001 attacks on the World Trade Center in New York City. The council provided advice to the President of the United States, through the Secretary of Homeland Security, about the security of critical infrastructures and may advise policies or strategies to keep those infrastructures secure.43 Mr. Thompson was also CEO of Symantec, a computer security company,

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TABLE 23.2 Microsoft Executive Board Members and Corporate Interlocks

Board Member Interlocks with Other Companies

John Wendell Thompson, Virtual Instruments (CEO) Chairman of the Board Liquid Robotics (Director)

PernixData (Advisor) Wetlands American Trust (Trustee)

Satya Nadella, Chief Executive Officer

Bill Gates, Corbis Corporation (Founder, Owner, Chairman) Founder & Technology Advisor Berkshire Hathaway (Director)

Bill & Melinda Gates Foundation (Founder, Co-Chairman)

Charles H. Noski, Avon Products (Director) Director National Association of Corporate Directors (Director)

Charles W. Scharf, Visa (CEO & Director) Director Johns Hopkins University (Trustee)

Maria M. Klawe, Broadcom Corporation (Director) Director Math for America (Director)

Mathematical Sciences Research Institute (Trustee) American Academy of Arts & Sciences (Fellow) Canadian Information Processing Society (Founding Fellow) Stanford Engineering Advisory Council (Member) Advisory Council for the Computer Science Teachers Assoc. (Member)

Garrison Mason Morfit, ValueAct Capital (President) Director

Helmut Gunter Wihelm Panke, UBS AG, Switzerland (Director) Director Singapore Airlines Limited (Director)

Bayer AG (Supervisory Board)

Teri L. List-Stoll, Kraft Foods Group (Exec. VP & Chief Financial Officer) Director Danaher Corporation (Director)

John W. Stanton, Trilogy Equity Partners (Chairman) Director Trilogy International Partners (Chairman)

Columbia Sportswear (Director) Year Up of Puget Sound (Chairman) Whitman College (Trustee) Seattle Foundation (Director)

and a member of the Financial Crisis Inquiry Commission, which was charged with investigating the causes of the 2007–2008 financial crisis.44 In addition, Charles H. Noski previously served in various leadership positions at other large corporations, such as Bank of America, Northrup Grumman Corporation, AT&T, Morgan Stanley, and Merrill Lynch.

Ties to the State and Lobbying Efforts

While corporate interlocks can provide a glimpse of Microsoft’s ability to negotiate strategic partnerships, they can also influence policies and regulations through its ties to the state and spending on lobbying efforts. Microsoft makes publicly available information about its participation in the political process. For example, Microsoft provides access to data on fees paid to consultants, lobbying expenses, and trade association dues spent on advocacy.45 The Center for Responsive Politics, through its OpenSecrets.org website, provides additional details about the connections between Microsoft and members of the United States government. During 2013–2014, Microsoft hired 113 lobbyists, 91 of whom previously held government jobs. Furthermore, 55 members of the United States Congress and Senate owned stock in Microsoft.46 These interlocks give a sense of Microsoft’s ability to influence legislation, particularly when paired with more specific details about their lobbying efforts.

In 2014, Microsoft spent more than $8 million on lobbying. The top five issues for which the company lobbied were (1) taxes, (2) immigration, (3) copyright, patent, and trademark, (4) telecommunications, and (5) computers and information technology.47 More specifically, the company most frequently lobbied support for the Immigration Innovation Act, also known as the I-Squared Act, which increases the cap on H-1B visa availability for specialty occupation foreign workers and also allows spouses of H-1B recipients obtain work visas.48 Microsoft’s support for the bill is directly related to its interest in hiring foreign workers with specialized knowledge.

Labor

As of 2014, Microsoft had approximately 128,000 full-time employees.49 Of these employees, approximately 62,000 worked in the U.S. and 66,000 worked outside the U.S. These figures include nearly 25,000 new employees that were part of the Nokia acquisition. Microsoft also provides details about how many employees work within each of its segments. Nearly 44,000 employees work in research and development, 30,000 in sales and marketing, 23,000 in support and consulting services, 20,000 in manufacturing and distribution, and 11,000 in administration.50

However, Microsoft were planning to eliminate nearly 18,000 jobs in 2015 as part of restructuring in the wake of the Nokia acquisition. This included nearly 12,500 professional and factory positions specifically related to Nokia products and services.51

In addition to the projected downsizing, Microsoft was also implicated in controversial labor practices related to its contract with Foxconn Technology Group, which is also known as Hon Hai Precision Industry Company Limited. Microsoft had a contract with Foxconn for assembly of its Xbox gaming console; after Foxconn announced that the production lines for the Xbox 360 would be closed, workers were told that they would receive severance packages. The company latter reneged on that promise, prompting workers to climb to the top of the six-story assembly plant and threaten a mass suicide in response.52 In response to the story, Microsoft conducted an independent investigation of the dispute. In the end, Microsoft determined that the dispute was “related to staffing assignments and transfer policies, not working conditions.”53 Microsoft also reaffirmed its commitment to a Vendor Code of Conduct, which includes specifications for ethical labor practices and a respect for human rights.54

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Social Marketing (Support for Certain Causes, Initiatives, Charities)

The Microsoft Citizenship Report, which is released annually, provides an overview of the company’s activities in supporting various causes, initiatives, and charities.55 These include workforce diversity inclusion programs to promote underrepresented populations in the science, technology, engineering and math (STEM) fields. For example, the Digigirlz program encourages high school girls to pursue careers in technology. The company also awards scholarships to members of the lesbian, gay, bisexual, and transgender (LGBT) community as well as students with disabilities as a way to promote involvement in the technology industry.

In addition to these programs, Microsoft’s philanthropic giving was more than $1 billion for the first time in 2014. These funds were primarily given for two broad initiatives: (1) providing access to technology and skills training for youth around the world, and (2) donating technology to non-profit organizations. For example, Microsoft donated more than $948 million worth of software and hardware to more than 86,000 non-profit organizations.56 Furthermore, the company encourages its employees to volunteer or donate to non-profits of their choice, and the com- pany will match the donations up to $15,000 per employee.57

Although not specifically a Microsoft foundation, the Bill and Melinda Gates Foundation is also associated with the company through Bill Gates. The Bill and Melinda Gates Foundation has an endowment of approximately $43.5 billion, and claims to have paid out approximately $3.9 billion in grants during the 2014 fiscal year.58 The Foundation also claims to support global health and development programs in all 50 U.S. states and more than 100 countries.59 Its development activities include financial services for those living in poverty, agricultural development initiatives, and aid for areas effected by environmental disasters. Its health initiatives include the Global Fund to Fight AIDS, Tuberculosis and Malaria as well as programs for research and treatment of other diseases including the promotion of vaccinations.

Cultural Profile

Microsoft’s place in culture is one that has been defined by its history of negotiating partnerships with equipment manufacturers, thereby leading to the ubiquity of its software in business settings. According to the company, more than 1.5 billion people use the Microsoft Windows operating system everyday, and more than 1.2 billion people use Microsoft Office, which includes Microsoft Word, Excel, and PowerPoint.60 These figures suggest that nearly one in every seven people on the planet use Microsoft products on a daily basis. However, the company’s image has generally been associated with “suits and megacorps,” which can be contrasted with Apple’s marketing that is directed at a younger and more fashionable audience.61 Indeed, Apple’s “Get a Mac” advertising campaign, which ran between 2006 and 2009, featured John Hodgman playing the role of a human incarnation of a PC. Hodgman was dressed in a suit and tie, and was typically portrayed as having a very dry personality, while Justin Long played the younger, cooler, and more relaxed Mac.

On the other hand, Microsoft is working to change this perception by trying to attract more start-ups and Silicon Valley entrepreneurs to its company.62 Microsoft is also striking back at Apple in its advertising campaigns. Microsoft’s advertisements for its Surface Pro tablet feature the Surface Pro side-by-side with Apple’s MacBook laptop computer. The advertisements extol the wide- ranging functionality and portability of the Surface Pro in comparison with the limitations of the MacBook.

Beyond Microsoft’s brand image, the company’s products still feature prominently in everyday life for many people around the world. Microsoft’s software products, particularly its Windows operating system, remain the global leader in the personal computing market. Outside of its more traditional operating system business, the growth of the global video gaming industry has been

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staggering, and Microsoft’s Xbox console has been a prominent player in the growth of this industry. When combined with the number of businesses that use Microsoft software, Microsoft truly constitutes a company that has become an integral part of both work and leisure time for many people worldwide.

Concluding Remarks

As illustrated in this chapter, Microsoft rose to power after it negotiated strategic partnerships with original equipment manufacturers to have its software pre-packaged on shipments of personal computers. These partnerships ensured the ubiquity of Microsoft’s software worldwide, and they still enable the company to collect licensing fees for use of its products. However, the bundling of Microsoft’s Internet Explorer web browser with shipments of its Windows operating system ultimately led to the company’s conviction for antitrust violations in 2001. The antitrust conviction marked a turning point in Microsoft’s history, and the company began to expand its product lines, including the introduction of the Xbox gaming console in 2001.

Beginning in 2007 with the smartphone boom, Microsoft began to fall behind competitors like Apple and Google in developing an operating system for mobile devices. But Microsoft is currently going through a period of restructuring along with a shift in its business strategy. This is reflected in its latest filings with the Securities and Exchange Commission in the United States. The company claims to be shifting to a “devices and services” company, which will reorient the company’s strategy to focus more on cloud computing platforms and mobile devices.

However, the company’s core strategy of locking customers into Microsoft technology as a way to earn subscription or licensing revenue remains the same, regardless of the device or method used to access that technology. When viewed this way, even Microsoft’s philanthropic activities support this strategy, particularly when it donates software and hardware to developing countries and offers training and education on how to use software and devices. The same might also be said of Microsoft’s shift to embracing open source software. Seemingly, interoperability is a technical concern, but it is also an economic imperative. In other words, charity, sharing, interoperability, and a greater appreciation for open source are suitable corporate objectives as long as they attract more people to Microsoft products and ultimately contribute to the company’s bottom line.

Notes

1 Kurt Badenhausen, “Apple, Microsoft, and Google are World’s Most Valuable Brands,” Forbes.com, November 5, 2014, www.forbes.com/sites/kurtbadenhausen/2014/11/05/apple-microsoft-and-google- are-worlds-most-valuable-brands/, Aaccessed January 28, 2015.

2 Kerry A. Dolan and Luisa Kroll, “Inside the 2015 Forbes Billionaires List: Facts and Figures,” Forbes.com, www.forbes.com/sites/kerryadolan/2015/03/02/inside-the-2015-forbes-billionaires-list-facts-and-figures/, accessed March 2, 2015.

3 The original name for 86-DOS was actual QDOS, which stood for “Quick and Dirty Operating System,” but Seattle Computer Products changed the name to 86-DOS once it began marketing the product.

4 Richard J. Gilbert, “Networks, Standards, and the Use of Market Dominance: Microsoft (1995),” in The Antitrust Revolution: Economics, Competition, and Policy, eds. John E. Kwoka and Lawrence J. White (New York: University of Oxford Press, 2004, 409–429).

5 A digitized version of the Joint Development Agreement is available at http://tech-insider.org/ os2/research/acrobat/871126.pdf, accessed March 12, 2015.

6 James Wallace and Jim Erickson, Hard Drive: Bill Gates and the Making of the Microsoft Empire (New York: Wiley, 1992, 373.

7 Wallace and Erickson, Hard Drive, 373. 8 See United States v. Microsoft Corporation, 84 F.Supp.2d 9 (D.D.C. 1999). 9 Michael A. Cusumano and David B. Yoffie, Competing on Internet Time: Lessons from Netscape and Its Battle

with Microsoft (New York: The Free Press, 1998, 9).

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10 Peter Elstrom, “Microsoft’s $8 million Goodbye to Spyglass,” Businessweek.com, January 22, 1997, www. businessweek.com/bwdaily/dnflash/january/new0122d.htm, accessed May 20, 2014.

11 William H. Page and John E. Lopatka, The Microsoft Case: Antitrust, High Technology, and Consumer Welfare (Chicago: University of Chicago Press, 2007, 26–27).

12 United States v Microsoft, 84 F.Supp.2d 9 (D.D.C. 1999), see Finding 158. 13 Sherman Antitrust Act, 15 U.S.C. §1 (1890). 14 Sherman Antitrust Act, 15 U.S.C. §2 (1890). 15 In addition, all the intellectual property rights previously held by the two businesses were to be transferred

to the Applications Division, which was required to grant a perpetual, royalty-free license to the operating systems business so that it could license, develop, and distribute modified or derivative versions of the intellectual property. However, the Operating Systems Division was prohibited from doing this with the intellectual property related to the Internet browser (Internet Explorer). Aside from divesting the operations of these two businesses, Microsoft was ordered to transfer all the assets from either one of the divisions into a newly formed company, for which the transfer of ownership was to be accomplished by a distribution of stock to shareholders not connected with Microsoft.

16 Joe Wilcox, “Jackson Exits Microsoft Discrimination Case,” Cnet, March 13, 2001, http://news.cnet.com/ Jackson-exits-Microsoft-discrimination-case/2100–1001_3–254049.html, accessed March 12, 2015.

17 United States v. Microsoft, Final Judgement, Civil Action No. 98–1232 (Nov. 12, 2002), www.justice.gov/ atr/cases/f200400/200457.htm, accessed March 12, 2015.

18 Sharon Pian Chan, “Long Antitrust Saga Ends for Microsoft,” The Seattle Times, May 11, 2011, http://seattletimes.com/html/microsoft/2015029604_microsoft12.html, accessed March 12, 2015.

19 For more information, see John Cassidy, Dot.con: The Greatest Story Ever Sold (New York: HarperCollins, 2002).

20 Microsofot Corporation, Form 10-K, Annual Report (United States Securities and Exchange Commission, July 31, 2014, 3), www.microsoft.com/investor/SEC/default.aspx?year=2014&filing=annual, accessed March 18, 2015.

21 Microsoft, Form 10-K, 2014, 4. 22 United States v. Microsoft, Conclusions of Law, Civil Action No. 98–1232 (April 3, 2000, 11), www.justice.

gov/atr/cases/f218600/218633.pdf, accessed March 18, 2015. 23 United States v. Microsoft, Conclusions of Law, 11. 24 Eric S. Raymond, “Halloween Document I (version 1.17),” August 11, 1998, www.catb.org/esr/

halloween/halloween1.html, accessed March 18, 2015. 25 Raymond, Halloween Document I. 26 BBC News, “Microsoft’s Linux Ad ‘Misleading,’ ” BBC.co.uk, August 26, 2004, http://news.bbc.co.uk/

2/hi/technology/3600724.stm, accessed March 18, 2015. 27 Eric S. Raymond, “Halloween Document II (version 1.7),” August 11, 1998, www.catb.org/esr/halloween/

halloween2.html, accessed March 18, 2015. 28 Eric S. Raymond, “Halloween Document X: Follow the Money,” March 3, 2004, www.catb.org/esr/

halloween/halloween10.html, accessed March 18, 2015. 29 Ed Bott, “Apple, Google, Microsoft: Where Does the Money Come From?” ZDnet, February 6, 2014,

www.zdnet.com/article/apple-google-microsoft-where-does-the-money-come-from/, accessed April 6, 2015.

30 Marcelo Tramontano and Nilton Trevisan, “A Dimensão Digital de Solonópole, Brasil,” SIGraDi: Pro - ceed ings from the 7th Iberoamerican Congress of Digital Graphics (Rosario, Argentina, 2003, 74–77), http:// cumincades.scix.net/data/works/att/sigradi2003_060.content.pdf, accessed March 18, 2015; Paul Festa, “Governments Push Open Source Software,” Cnet News, August 29, 2001, http://news.cnet.com/ 2100-1001_3–272299.html, accessed March 18, 2015.

31 Martin Kaste, “Brazil Switches from Microsoft to ‘Open Source’ Software,” NPR.org, September 15, 2004, www.npr.org/templates/story/story.php?storyId=3919175, accessed March 18, 2015.

32 Steve Kingstone, “Brazil Adopts Open-Source Software,” BBC News, June 2, 2005, http://news.bbc. co.uk/2/hi/4602325.stm, accessed March 18, 2015.

33 Microsoft Open Technology, “About,” 2015, https://msopentech.com/about/, accessed March 18, 2015. 34 Thomas C. Greene, “Ballmer” ‘Linux is a Cancer,’ ” The Register, June 2, 2001, www.theregister.

co.uk/2001/06/02/ballmer_linux_is_a_cancer/, accessed March 18, 2015. 35 Matt Swider, “Microsoft Highlights 299M Skype Users, 1.5B Halo Games Played,” TechRadar, June 27,

2013, www.techradar.com/us/news/software/operating-systems/xbox-live-upgrade-includes-300–000- servers-600-times-more-than-its-debut-1161749, accessed March 9, 2015.

36 Microsoft Corporation, “Microsoft HoloLens,” 2015, www.microsoft.com/microsoft-hololens/en- us?ocid=WOL_HoloLensGlobe, accessed March 18, 2015.

37 NASDAQ, “Institutional Portfolio: Vanguard Group Inc,” NASDAQ.com, December 31, 2014, www.nasdaq.com/quotes/institutional-portfolio/vanguard-group-inc-61322, accessed March 9, 2015.

396 Benjamin J. Birkinbine

38 Yahoo Finance, “Microsoft Corporation: Major Holders,” March 18, 2015, http://finance.yahoo.com/ q/mh?s=MSFT+Major+Holders, accessed March 18, 2015.

39 Thomas Guback, “Ownership and Control in the Motion Picture Industry,” Journal of Film and Video, 38 (1986): 17.

40 Bloomberg Business, Company Overview of Cascade Investment, LLC, November 9, 2015, www. bloomberg.com/research/stocks/private/snapshot.asp?privcapId=100912, accessed November 9, 2015.

41 Dow Jones Newswires, “Gates Buys 4% Stake in Televisa of Mexico,” The Wall Street Journal, July 31, 2003, www.wsj.com/articles/SB105960368386198100, accessed November 9, 2015.

42 Craig Karmin and Anupreeta Das, “Bill Gates’s Cascade Indicates Interest in Potential Talks with Strategic Hotels,” The Wall Street Journal, August 11, 2015, www.wsj.com/articles/bill-gatess-cascade-investment- indicates-interest-in-potential-talks-with-strategic-hotels-1439331777, accessed November 9, 2015.

43 United Stated Department of Homeland Security, “National Infrastructure Advisory Council Charter,” November 13, 2013, www.dhs.gov/sites/default/files/publications/niac-charter-renewal-cmotbs-final- 11–13–13.pdf, accessed March 18, 2015.

44 Virtual Instruments, “Leadership,” March 9, 2015, www.virtualinstruments.com/about/leadership/, accessed March 9, 2015.

45 Microsoft Corporation, “Corporate Citizenship: Political Engagement,” March 11, 2015, www.microsoft. com/about/corporatecitizenship/en-us/working-responsibly/principled-business-practices/integrity- governance/political-engagement/, accessed March 11, 2015.

46 Center for Responsive Politics, “Microsoft Corp.,” OpenSecrets.org, March 11, 2015, www.opensecrets. org/orgs/summary.php?id=D000000115, accessed March 11, 2015.

47 Center for Responsive Politics, “Microsoft.” 48 Center for Responsive Politics, “Microsoft.” 49 Microsoft, Form 10-K, 15. 50 Microsoft, Form 10-K, 15. 51 Microsoft, Form 10-K, 15. 52 Associated Press, “Xbox Assembly Workers in China Threaten Mass Suicide Over Jobs Dispute,” The

Guardian, January 12, 2012, www.theguardian.com/world/2012/jan/12/xbox-assembly-workers- threaten-mass-suicide, accessed March 9, 2015.

53 Brian Ashcraft, “Report: Mass suicide threats at Xbox 360 plan [update],” Kotaku, January 10, 2012, www.theguardian.com/world/2012/jan/12/xbox-assembly-workers-threaten-mass-suicide, accessed March 9, 2015.

54 Microsoft, “Microsoft Code of Conduct,” 2012, http://download.microsoft.com/download/F/9/9/ F998F8EB-038A-4EEE-8B36–4B87362DBE96/Microsoft_Vendor_Code_of_Conduct_2011.pdf, accessed March 11, 2015.

55 Microsoft Corporation, Microsoft 2014 Citizenship Report, www.microsoft.com/about/corporate citizenship/en-us/reporting/, accessed March 11, 2015.

56 Microsoft, Microsoft 2014 Citizenship Report, 28. 57 Microsoft, Microsoft 2014 Citizenship Report, 30. 58 Bill and Melinda Gates Foundation, “Who We Are: Foundation Factsheet,” 2015, www.gatesfoundation.

org/Who-We-Are/General-Information/Foundation-Factsheet, accessed March 27, 2015. 59 Bill and Melinda Gates Foundation, “Who We Are.” 60 Microsoft Corporation, “Microsoft by The Numbers,” 2014, http://news.microsoft.com/bythenumbers/

index.HTML, accessed March 11, 2015. 61 Peter Bright, “Microsoft’s Continuing Efforts to Be Cool,” ArsTechnica, February 11, 2015, http://

arstechnica.com/information-technology/2015/02/microsofts-continuing-efforts-to-be-cool/, accessed March 11, 2015.

62 Bright, “Microsoft’s Continuing Efforts to be Cool.”

Microsoft Corporation 397

14 SONY CORPORATION

William Kunz

Sony Corporation assumes a unique place in the assemblage of global media giants. It owns one of the six major motion picture studios and is one of the three dominant corporations in the music industry, and it is the lone corporation that belongs to both of those groups. Unlike some other media giants, Sony is also a diversified conglomerate, with holdings in the manufacturing of media devices, from televisions to disc players to game consoles to smartphones, and the production and distribution of media content. It has also delved into financial services. The other difference is that Sony is a Japanese corporation, the only conglomerate based outside the United States to own one of the major studios, one that was built on start-up capital of just 190,000 yen in the aftermath of World War II with a stated goal to help rebuild Japan.1

Sony presents other contradictions. In terms of total revenue—approximately $75 million in revenue in 2014 based on end of fiscal year exchange rates—it is larger than the other global media giants, although its approximately $13 million in revenue from its pictures and music divisions over the same period pales in comparison to some other conglomerates in terms of core media production and distribution.2 There was also a time when Sony was viewed as one of the world’s most iconic brands, but such perceptions are now more mixed. It ranked fifth in the Global RepTrak 100 for 2014 for the best corporate reputation, behind only Disney, Google, BMW, and Rolex, but it was also ranked among most the hated companies in the United States around the same period, between General Motors and Dish Network.3 The reputational hit in the United States was related to the hacking of Sony Pictures Entertainment and the online PlayStation Plus system, as well as ongoing struggles with other products. Unlike other media giants that distribute products under various brands, Sony focuses on a single monolithic brand, so “a threat to one is a threat to all.”4

Sony is also a corporation in search of an identity. The acquisition of CBS Records and Columbia Pictures in the late 1980s was based on a desire to control the production and distribution of content for its electronics devices, but one must ask whether these strategic initiatives have been successful. In 2013, an activist investor called on Sony to break the corporation in two, dividing its electronics and content businesses, which indicates that such questions are no doubt swirling around its headquarters in Tokyo. To answer these and other questions, one must understand the evolution of Sony in post-war Japan, the move into content production and distribution on a global scale, and the challenges it now faces in its core businesses. It is also important to understand the different cultures in which Sony functions, for while the hacking of Sony Pictures Entertainment in 2014 made headlines in the United States, it was little noticed in Japan.

Historical Background

The launch of the Sony Corporation can be traced back to post-war Japan, but the relationship on which it was built was formed during the bombing of Tokyo in March 1945. It was at a meeting of the Imperial Navy Wartime Research Committee that month that Masaru Ibuka met Akio Morita, and 14 months later they co-founded the Tokyo Tsushin Kogyo Corporation (Totsuko) in May 1946. Prior to the war, Ibuka engaged in research on sound recordings and on the development and production of home sound movie equipment. That proved to be valuable experience, as the first product Totsuko produced was a reel-to-reel tape recorder. Ibuka came to the United States in 1952 to learn how Americans were using tape recorders and it was during that trip that he visited Bell Telephone Laboratories, which had announced the sale of manu - facturing licenses for transistors. Ibuka received permission from MITI, the Ministry of Inter- national Trade and Industry in Japan, to obtain the license for $25,000 and the corporation released its first transistor radio in 1955. The TR-55 required a large battery, which limited its commercial success, but Sony soon after designed the TR-63, a “shirt-pocket” radio that used miniaturized components and ran on a 9V battery. The TR-63 was the smallest portable transistor radio in the world at that time and became the first Sony export model when it was released in 1957.

From the formation of Totsuko in 1946, Ibuka took the lead in product development while Morita focused on marketing. In the late 1950s, it was Morita who took the lead in debates over the name of the corporation. While Totsuko became well known in Japan, the name was not easy to pronounce outside of Asia, which undermined the desires of Ibuka and Morita to expand to foreign markets. Sony became the brand name for Totsuko products starting in 1955 and Morita argued for the adoption of Sony as the corporate name as well. Some argued against the plan, including Totsuko’s primary Japanese bank, Mitsui, while still others suggested keeping electronics in its name, such as Sony Electronic Industries. Morita, however, was adamant, arguing that Sony would allow it to expand worldwide and in new directions, even those outside of electronics. Sony replaced Totsuko as the official corporate name in January 1958, and it established the Sony Corporation of America in 1960.

The timeline for Sony through the 1960s, 1970s, and 1980s is dotted with the creation of new consumer electronics, including the first Trinitron color television in 1968, the Walkman personal stereo in 1979, the first CD player in 1982, and the Handycam video camera in 1989. It was also in this period that Sony Corporation became a diversified conglomerate, with Sony moving into the insurance business in 1979 with the creation of Sony Prudential Life Insurance, a 50–50 joint venture with the Prudential Insurance Co. of America. The diversification and creation of new products continued over time, with Sony at the forefront in the development of DVD and Blu- ray discs and players and the launch of its own line of video games consoles, the PlayStation and PlayStation Portable, as well as a move into computers and phones.

Not all Sony initiatives were without challenges or even successful. The launch of the Betamax videotape recording system in 1975 provides an important chapter in its story that influenced later decision making. A short time after the release of the Betamax, JVC and RCA released a different home video system, the VHS, in Japan and the United States, respectively, and the format wars were born. The Betamax provided superior recordings than the VHS, but the original model was limited to 60 minutes of recording time, compared to 120 minutes for the JVC version of the VHS and 240 minutes for the RCA version. The sale price for the Betamax was also higher. Both of these differences became issues as Sony competed with JVC and others for market share. The longer record time on VHS tapes became a significant factor once the home video market began to develop in the late 1970s when Hollywood studios embraced the rental model. JVC also followed a more open policy with partners, and in 1984 more than 40 companies were producing VHS

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Sony Corporation 241

machines worldwide compared to just a dozen for Betamax. As the difference in market share between VHS and Betamax grew, it became less cost effective for motion picture studios to release films on Betamax and the Sony format became starved for content; it released a VHS machine of its own in 1988.

The scars from the format wars had a lingering effect on Sony. In November 1987, Sony announced the intent to acquire CBS Records for $2 billion, with that sale coming two months after Michael Jackson’s Bad album reached number one on the Billboard charts under the CBS label. Less than two years later, in September 1989, Sony completed the acquisition of Columbia Pictures Entertainment for $3.4 billion. Sony was convinced that the future course was to combine Japan’s thirst for consumer electronics with America’s lead in entertainment software. A Japanese financial analyst at the time said: “Sony may be the only company with a corporate culture that is Americanized enough to pull it off . . . Everyone talks about the importance of getting into software. Sony really feels it.”5

The move into software had additional short- and long-term costs for Sony. After the purchase of Columbia was complete, Sony reached agreement with Peter Guber and Jon Peters to head the studio, a deal that included $200 million to acquire Guber-Peters Entertainment Co. as well as contracts with the two that paid them $14 million each over five years in addition to a percentage of the profits.6 At the time, Guber and Peters were under contract with Warner Bros., and it required an estimated $500 million in penalties and concessions to free them from their contract.7

The duo also proved to be lavish in the running of the studio, spending millions to redesign office suites and studios, including $100 million for the old Metro-Goldwyn-Mayer lot. Guber became the sole chairman in 1991 as Columbia adopted the Sony Pictures Entertainment name, but he was ousted three years later, a short time before Sony announced a $3.2 billion write-off from the acquisition of the studio in November 1994.

The Sony discomfort with the studio was evident once again two decades later in November 2014. Late that month, when employees at the Sony Pictures Entertainment studios logged onto their computers they were greeted with an image of a skeleton and an acronym of an organization called the Guardians of Peace, which authorities later argued was linked to the North Korean government. Over the ensuing days and weeks, scores of sensitive emails and digital files containing confidential information were released. The hacking of Sony was linked to the release of The Interview, a comedy starring James Franco and Seth Rogen about a fictional attempt to assassinate North Korean leader Kim Jong-un. Leaked emails also showed the discomfort the film caused in Sony headquarters in Japan. In the months leading up to the release of the film, Sony chairman and chief executive officer Kazuo Hirai broke with precedent and became involved in the production process, asking for changes in the film. There was a focus on a particular scene in which the head of the fictional leader exploded, which was later toned down with “no face melting, less fire in the hair, fewer embers on the face and the head explosion has been considerably obscured by the fire.”8

Economic Profile

The examination of the financial profile of Sony reveals the complexity of the corporation and establishes its unique position among media firms. An obvious focus in the analysis of Sony is on its dual role as a producer of media content as well as media devices. The relative strength and importance of those activities becomes evident in the financial data. That combination distinguishes Sony from other media giants, as does the existence of both motion picture studios and music labels under the same corporate umbrella. What is perhaps most significant, however, is the degree to which Sony has become a diversified conglomerate, defined as corporations that produce many products and services that may be unrelated. This is most evident with the prominence of the

Financial Services division of the corporation, but its entry into phones, computers, and cameras represent an approach that is unlike other media giants.

Financial Data

There were persistent concerns about the product competitiveness and financial well-being of Sony Corporation long before the hacking of Sony Pictures Entertainment made headlines. For decades the growth of Sony Corp. was impressive, with increases in total sales from $4.231 billion in 1980 to $18.343 billion in 1990 to $65.090 billion in 2000, but growth has been modest at best since the dawn of the new millennium (see Table 14.1). Between 2010 and 2014, Sony experienced a slight increase in sales from $77.193 billion to $77.556 billion, but it suffered a net loss in five of the six fiscal years (see Table 14.2). In 2009, Sony announced its first annual loss in 14 years, but that was attributable in large part to the prolonged economic recession and a strong Japanese yen.9 What was harder to stomach were the continued losses as the global economy rebounded. In September 2014, Hirai announced that the corporation expected to lose over 230 billion yen, an estimated $2.15 billion, in the 2015 fiscal year, almost five times what it forecasted four months earlier. At the same time, he announced that Sony would not pay a dividend in that fiscal year, the first time it had not done so since its stock was first listed in 1958. In keeping with Japanese tradition, Hirai bowed to journalists and photographers at a shareholder meeting and apologized, stating his desire to see through changes: “I am deeply sorry for shareholders . . . I’d like to take responsibility for finishing implementing structure reform efforts in this fiscal year and returning the company to profitability in the next fiscal year.”10

The evolution of Sony Corp. from an electronics manufacturer into a diversified corporation is evident in the organization of its business segments. In the mid-1980s, before Sony acquired CBS Records and then Columbia Pictures, its sales were reported in four product groups: video equipment, televisions, audio equipment, and other products. In 1984, for example, video

242 William Kunz

TABLE 14.1 Sony Corp. Total Sales and Operating Revenue, 1980–201011

Sony Corp. Total (in billions) Sony Pictures (in billions) Sony Music (in billions)

Japanese U.S. Japanese U.S. Percent Japanese U.S. Percent Yen Dollars Yen Dollars of Total Yen Dollars of Total

2010 7,209.849 77.193 705.2 7.55 9.8 522.6 5.60 7.2 2005 7,191.325 67.071 733.7 6.84 10.2 N/A N/A N/A 2000 6,686.661 65.090 494.3 4.81 7.4 655.0 6.47 9.9 1995 3,990.583 45.948 281.7 3.24 7.1 494.9 5.70 12.4 1990 2,879.856 18.343 92.5 0.59 3.2 445.2 2.90 15.8 1985 1,420.785 6.702 — — — — 1980 892.763 4.231 — — — —

TABLE 14.2 Sony Corp. total sales and operating revenue, 2010-2014 (End of Year Exchange Rate)12

Sony Corp. Total (in billions) Sony Pictures (in billions) Sony Music (in billions)

Japanese U.S. Japanese U.S. Percent Japanese U.S. Percent Yen Dollars Yen Dollars of Total Yen Dollars of Total

2014 7,767,266 75.425 829.6 8.06 10.1 503.3 4.89 6.1 2013 6,795,504 72.170 732.7 7.78 10.0 441.7 4.69 6.0 2012 6,493,083 78.790 657.7 7.98 9.6 442.8 5.37 6.4 2011 7,177,589 86.728 600.0 7.25 8.0 470.7 5.69 6.3 2010 7,209.849 77.193 705.2 7.55 9.2 522.6 5.60 6.8

Sony Corporation 243

equipment accounted for 40.6% of net sales, followed by televisions (23.6%) and audio equipment (21.5%).13 A decade later, Sony reported revenue from its entertainment business, which included its music group and pictures group as well as insurance and financing, but the electronics business still accounted for 75.9% of total sales in 1994.14 The transformation of Sony was most evident in 2014, when the electronics products identified in 1984 were combined into a single segment, Home Entertainment & Sound, and that group accounted for just 14.2% of total Sony sales. That year, Sony was divided into nine business segments: Mobile Products & Communications, Games & Network Services, Imaging Products and Solutions, Home Entertainment & Sound, Devices, Pictures, Music, Financial Services, and All Other (see Table 14.3).

Some of the issues outlined above become evident in the segment results for 2014. The mobile segment reported sales and operating revenue of $15.83 billion, but suffered a net loss of $748.9 million. The games division generated $9.51 billion in sales, with a loss of $80.8 million. Home entertainment experienced an increase in sales and operating revenue, but suffered a net loss of $254.6 million on $11.35 billion in revenue. That deficit, once again, decreased from a $1.016 billion loss in 2013, but it is still representative of Sony’s struggles in the consumer television marketplace. Five of the nine business segments within Sony suffered losses in fiscal year 2014, an increase from two in 2013. What is most striking is that the most profitable segment in all of Sony was financial services, with a net income of $1.7 billion. That segment includes Sony Life Insurance, Sony Bank, and Sony Assurance, with the lattermost selling various products including auto, medical, fire, and even pet insurance. While many Sony products rely on the disposable income of consumers around the world, the financial services division focuses on more basic needs, although pet insurance could be debated. This also paints a richer picture of Sony Corporations and establishes a difference from other giants that increasingly focus on related products with clear synergies.

TABLE 14.3 Sony Corp. total sales and operating revenue by segment, FY 2014 (in billions)15

Japanese U.S. Percent Largest Shares of Segment Totals Yen Dollars of Total

Mobile Products & 1,630.1 15.83 19.8 Mobile Communications (73.1%) Communication Personal and Mobile Products

(26.5%)

Games 979.2 9.51 11.9

Imaging Products & Solutions 741.2 7.20 9.0 Digital Imaging Products (56.0%) Professional Solutions (41.6%)

Home Entertainment & Sound 1,168.6 11.35 14.2 Televisions (64.7%) Audio & Video (34.4%)

Devices 794.2 7.71 9.6 Semiconductors (57.2%) Components (42.4%)

Pictures 829.6 8.06 10.1 Motion Pictures (50.9%) Television Productions (29.9%) Media Networks (19.2%)

Music 503.3 4.89 6.1 Recorded Music (70.7%) Music Publishing (13.6%)

Financial Services 993.8 9.65 12.1

All Others 594.6 5.77 7.2

Corporate and Elimination (467.3) (4.54)

The relative strength of Sony’s content businesses must be framed within that context. Those segments combined to account for 16.2% of total sales and operating revenue in fiscal year 2014, 10.1% for pictures and 6.1% for music. Both divisions increased sales in 2014, with pictures up 13.2% to $8.06 billion and music up 13.9% to $4.89 billion, although those increases resulted from the favorable impact of the depreciation of the Japanese yen against the U.S. dollar. On a constant currency basis, sales in the music division were more or less flat, while those in the pictures division were down about 6%.16 Both divisions, however, were profitable, with pictures showing net income of $515.2 million for the fiscal year compared to $501.2 million for music. That made them the second and third most profitable divisions within the corporation behind financial services.

Corporate Structure

True to its Japanese origins, Sony Corporation is based in Tokyo, but it has deep roots in the United States. In 1985, even before it acquired CBS Records and Columbia Pictures, 33.6% of Sony’s total sales were in the United States, higher than even Japan (25.8%).17 The share of sales to customers in the United States declined over time and was half that in 2014, accounting for 16.8% of total sales compared with 28.3% in Japan and 22.6% in Europe.18 Sony’s operations in the United States fall under its subsidiary, Sony Corporation of America, with Sony Electronics Inc., Sony Mobile Communications (USA) Inc., Sony Computer Entertainment America LLC, Sony Network Entertainment International LLC, Sony Pictures Entertainment Inc., and Sony Music Entertainment its principal businesses.

Electronics Divisions

Sony remains an electronics business at its core, but those same segments have been an area of concern over the past decade. That was most evident in the television business, which brought Sony an Emmy Award in 1973 for the Trinitron receiver, but lost more than $7 billion from the mid-2000s through the mid-2010s.19 The television unit was forecast to post a modest profit in the fiscal year ending in 2015, but the days of dominance are over. The Sony market share for televisions was down to just 8% in the third quarter of 2014, compared with 27% for Samsung Electronics and 15% for LG Electronics, and there was little hope that it could compete for market share after lagging behind in the development of plasma screens and liquid crystal displays.20 The focus for Sony, instead, was on high-end televisions, including the so-called 4K sets that offer four times the resolution of conventional high-definition television sets. This is consistent with the focus in its mobile division, where Sony had suffered significant financial losses and decided in 2014 to focus on the high-end market with the Xperia smartphones. Sony sold is devices segment, which focused on the Vaio personal computer, in 2014.

While most of the electronics and content divisions are separated, in terms of structure, location, and culture, there is one segment in which Sony blends hardware and software, product manufacturing and content creation. That is the games division. Sony introduced the first PlayStation in 1994 and it became the first video game console to ship over 100 million units. The PlayStation 2 ranked as the best-selling console of all time with over 150 million units sold. Sony released the PlayStation 4 in November 2013 and it had sold over 18 million console units prior to the start of 2015. At that time, PlayStation had sold over 80 million game units. Another dimension of the Sony games model is PlayStation Plus, an online network that had 10.9 million subscribers at the start of 2015. This is also an area in which Sony has wrestled market share from Microsoft, with estimates that shipments of PS4 close to doubled those of the Xbox One through September 2014 after PlayStation consoles had lagged behind in previous years.21

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Sony Corporation 245

Pictures Division

Sony Pictures Entertainment was the focus of the so-called Sony hack, and the headlines in late 2014 focused on the release of The Interview and the inner workings of a major Hollywood studio. In normal times, Sony Pictures Entertainment (SPE) is broken into three sub-units—motion pictures, television productions, and media networks. The motion pictures group is the most prominent of the three, featuring Columbia Pictures, Screen Gems, and Sony Pictures Classics. This collection represents the horizontal integration that is a trademark of the major studios, with Columbia focusing on big-budget, wide-release films on one end of the spectrum and Sony Pictures Classics acquiring and distributing independent and art films at the other. In 1999, Sony revived Screen Gems to produce and distribute films that fall in the middle of the other two. SPE also owns Destination Films, Stage 6 Films, and Affirm Films for various niche markets as well as TriStar Pictures. Affirm Films, for example, “acquires faith-based and inspirational content across a wide range of genres and budgets for the various global distribution platforms at SPE including theatrical, television, and home entertainment.”22

Sony Pictures ranks among the six major studios, but in most years it resides in the middle of that group at the box office in the United States. From 2005 through 2014, Sony ranked third through fifth in eight of ten years, with its number one rankings in 2006 and 2012 the exceptions.23

Sony Pictures Classics, on the other hand, was consistently ranked between 14th and 16th, with its highest market share since 2010 being 0.9% in 2011 (see Table 14.4). In 2006, an odd collection of films fueled the Sony box office at the domestic box office: The Da Vinci Code ($217.5 million), Casino Royale ($153.5 million), and Talladega Nights: The Ballad of Ricky Bobby ($148.2 million). In 2012, two franchise films were dominant at the domestic box office, with Skyfall ($304.4 million), the latest in the James Bond franchise, and The Amazing Spider-Man ($262.0 million) both ranking among the top seven films.

The television productions and media networks groups remain outside of the spotlight within SPE, although the two combined for just under 50% of total sales for the segment in 2014.24

Television productions accounted for 29.9% of the segment total, a significant turn-around from the previous decade when Sony had announced that it would phase out Columbia TriStar Television. Back then there was little new in the Sony pipeline, but SPE has since put additional resources into television production. In 2014, the Jeopardy and Wheel of Fortune programs remained significant contributors to the bottom line, but Sony Pictures Television had experienced other successes, including basic cable sensation Breaking Bad, and had a significant number of shows on broadcast and cable networks in 2014-15.

TABLE 14.4 SPE Domestic Gross & Market Share (in millions)25

Films Total Gross Market Share Top Grossing Film Tracked ($) (%)

2014 Sony/Columbia 22 1,261.5 12.2 (4th) The Amazing Spider-Man 2 ($202.9) Sony Classics 22 41.8 0.8 (14th) Magic in the Moonlight ($10.5)

2013 Sony/Columbia 20 1,144.6 10.5 (4th) Grown Ups 2 ($133.7) Sony Classics 21 70.2 0.6 (15th) Blue Jasmine ($33.0)

2012 Sony/Columbia 25 1,792.2 16.6 (1st) Skyfall ($290.9) Sony Classics 24 50.0 0.5 (15th) To Rome with Love ($16.7)

2011 Sony/Columbia 28 1,273.7 12.5 (3rd) The Smurfs ($142.6) Sony Classics 25 90.2 0.9 (14th) Midnight in Paris ($56.4)

2010 Sony/Columbia 23 1,282.9 12.1 (5th) The Karate Kid ($176.6) Sony Classics 26 62.9 0.6 (14th) Get Low ($9.1)

For American audiences, properties within media networks are the least known in this group. Sony is the one parent corporation of a major motion picture studio that does not own a share of a broadcast network in the United States, where its ownership of cable networks was limited to a small collection of investments in 2014, including Game Show Network, 3net, and Sony Movie Channel. The picture was far different outside the United States, however. In corporate documents, Sony stated that it owned or had investments in 78 channels with 148 feeds in 178 countries worldwide in the first quarter of 2015, with 1.28 billion subscribers.26 This includes Animax, the first and largest network in the world dedicated to anime, which is carried via satellite throughout Asia, Europe, and North America. There are also networks focused on a particular region, such as Canal Sony, which is transmitted across Latin America, and Sony Channel Asia, available in 17 countries in the Asia-Pacific region. In India alone, Sony operates a large collection of channels, starting with Sony Entertainment Television, a Hindu-language version of the general entertainment channel that debuted in 1995. In addition to the networks designed for broad audiences, Sony developed a number of channels for the Indian marketplace alone, including Sony MAX, a Hindi movie channel, Sony PIX, a Hollywood movie channel, and Sony AATH, a Bengali movie channel.

Music Division

Sony Music Entertainment, at least as an official name, dates back to 1991, which was two years after Sony acquired CBS Records. The roots of music within Sony run much deeper, however, as the corporation formed a 50–50 joint venture with CBS in 1968 known as CBS/Sony Records, which focused on the distribution of CBS labels in Japan. The relationship between CBS and Sony would change with the acquisition of CBS Records, and Sony has ranked among the leaders in the music industry since that date. Sony expanded the scope of its music operations in 2004 when it formed a 50–50 joint venture with Bertelsmann known as Sony BMG. Prior to that merger, Sony ranked third among distributors, behind Universal and Warner, but the combination of Sony and BMG moved it into second place. Sony acquired Bertelsmann’s interest in Sony BMG in 2008 and brought it under Sony Music Entertainment.

Sony Music features some of the most influential labels the recording industry has ever seen. The foundation of CBS Records was built on the Columbia label, which traces its roots back to Columbia Phonographic in the late 1800s. Bertelsmann Music Group, on the other hand, included RCA Records, which adopted that name in 1929 when the Radio Corporation of America acquired the Victor Talking Machine Company. Sony Music Entertainment is also home to Epic Records. In 2014, Sony Music Entertainment labels accounted for four of the top ten in terms of market share: Columbia (2nd), RCA (6th), Sony Nashville (9th), and Epic (10th).27 Sony units also distributed 10 of the top 33 albums in the final Billboard charts, a group that ranged from Miley Cyrus to Barbra Streisand and included Beyoncé, John Legend, Pharrell Williams, Justin Timberlake, and Kelly Clarkson.28

The music industry is highly concentrated, with the horizontal integration evident in the combination of Columbia and RCA under the umbrella of Sony—a common pattern. It became even more so with the Universal Music Group acquisition of EMI for $1.9 billion in 2012, which included the sale of the EMI music publishing operation to a Sony-led consortium for $2.2 billion. In approving the acquisition, the European Commission mandated that UMG sell one-third of its operations to companies with “proven track record” in the music industry.29 The impact of those deals was evident in 2014, when the big three accounted for an 86.0% market share in the distribution of albums and track-equivalent albums. Sony was second behind Universal Music Group with a 28.5% market share, which was consistent with its market share the previous half-decade (See Table 14.5). The EMI deal gave Sony control over the largest music publishing operation in the world,

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with Sony/ATV Music Publishing, a joint venture that Sony created with Michael Jackson in 1995, moving under the same management as EMI Music Publishing. In 2013, that combination accounted for a 29.4% market share, ahead of Universal Music Publishing Group (22.6%) and Warner/ Chappell Music (13.2%), and an increase from 21.7% in 2012 and 11.7% in 2011.31

Political Profile

The political reach and influence of Sony is once again complicated, with its Tokyo base and the absence of a broadcast network in the United States, and in turn a network news division, making it less prominent in American politics. That does not mean it has been apolitical. In the late 1960s and 1970s, Sony was the focus of illegal dumping charges made against Japanese manufacturers, and a Time magazine cover in 1971 featured Akio Morito under the headline “How to Cope with Japan’s Business Invasion.” It was under Morita the corporation designated Sadami “Chris” Wada as Sony’s in-house lobbyist in the United States in 1977. There were also clear connections between Sony and Japanese political parties, as well as corporate policies that reflect the political and social context of its Japanese base. And it was the corporate headquarters in Tokyo that grew uncomfortable with the political dimensions of The Interview, concerns that were revealed in emails released through the Sony hack.

Ownership

Sony is a multinational conglomerate with operations around the world but, despite the fact that more of its shareholders are outside Japan than within, its Japanese home impacts on corporate governance and strategic planning. There were a total of 1.150 billion shares of Sony stock issued as of September 30, 2014, with 607,649 shareholders.32 A majority of these shares, 52.8%, were in foreign hands, either institutions or individuals. That was an increase of almost 20% from March 31, 2013 when 32.6% of the total shares were held outside of Japan. The shares controlled by Japanese financial institutions were more or less constant, accounting for 25.1% of the total as of September 2014. The biggest difference was in the number of shares held by Japanese individuals and others, which declined from 38.4% in March 2013 to 18.6% in September 2014. The ownership of Sony stock is widely dispersed, with Sumitomo Mitsui Trust Bank of Japan the only shareholder with more than 5.0% of the common stock as of April 4, 2014, and the Sumitomo Mitsui total was just 5.04%.

Board of Directors

The absence of a significant portion of Sony stock with any given group or individual has a clear impact on corporate governance and on the Board of Directors. There is also a clear connection between the Japanese foundation of Sony and the nature of governance within the corporation.

TABLE 14.5 Sony Music Entertainment Market Share—Albums & Track-Equivalent Albums by Distribution Ownership30

Year Market Share (%) Rank (Market Leader)

2014 28.5 2nd (Universal Music Group, 38.7%) 2013 29.6 2nd (Universal Music Group, 38.8%) 2012 30.3 2nd (Universal Music Group, 32.4%) 2011 29.3 2nd (Universal Music Group, 29.9%) 2010 28.0 2nd (Universal Music Group, 30.8%)

In the United States, the maximization of the wealth of shareholders is the narrow goal, whereas in Japan, firms are concerned with a broader collection of stakeholders, including employees. The concept of lifetime employment, which became prominent in Japan during the period of economic growth after World War II, is an example of this focus. Corporate boards in Japan have tended to be larger than those in the United States, with fewer outside directors who have little influence. Sony, once again, provides an interesting study since it is a rare Japanese corporation that brought in leadership from the United States, specifically the Welsh-born head of Sony Corporation of America, Howard Stringer. When Stringer was named chief executive officer in June 2005, the Board of Directors of Sony included 16 individuals, eight of whom were executives within the corporation. The chairman at that time, Nobuyuki Idei, started working at Sony in 1960 and five other board members had been Sony employees for 30 years or longer. The composition looked rather different at the start of 2015 (see Table 14.6), with the size of the group reduced from 16 to 12, only two of whom were Sony employees, the chief executive officer (Kazuo Hirai) and chief financial offer (Kenichiro Yoshida).

The Sony board was consistent with other large corporations in Japan, notably in the absence of women. One study of corporate boards in 2014 found that women held 19.2% of board seats on S&P 500 companies in the United States, compared with just 3.1% on the Topix Core 30 Index, which is composed of the 30 largest corporations in the First Section of the Tokyo Stock Exchange.34 In 2015, there was only one woman on the Sony Board of Directors, Eriko Sakurai, the chair and chief executive officer of Dow Corning Toray Co., Ltd. The board did have a connection to Sony’s largest shareholder through the Sumitomo Mitsui Financial Group president. There are members of the board who provide strategic connections with governments in Japan and the United States. One of the newest members of the board, and one of the few from outside Japan, was John V. Roos, the U.S. Ambassador to Japan from May 2009 until August 2013. Another recent addition to the board was Kazuo Matsunaga, a former high-ranking official in the Ministry of Economy, Trade, and Industry (METI) in Japan, which replaced MITI in 2001.

Labor

As of March 21, 2014, Sony had an estimated 140,900 employees around the world, with 52,200 located in Japan and 88,700 outside Japan.35 The highest percentage of employees was in the five

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TABLE 14.6 Sony Corporation Board of Directors as of January 201533

Internal Directors Country of Birth Primary Position

Kazuo Hirai Japan President and Chief Executive Officer, Sony Corp. Kenichiro Yoshida Japan Executive Vice President and Chief Financial Officer, Sony Corp.

External Directors

Kanemitsu Anraku Japan Former Vice Chairman, Nissan Motor Co., Ltd Eikoh Harada Japan Chairman, McDonald’s Holdings Japan Joichi Ito Japan Chief Executive Officer, Neoteny Co. and Director, MIT Media Lab Kazuo Matsunaga Japan Former Vice-Minister, Ministry of Economy, Trade and Industry Koichi Miyata Japan Director and President, Sumitomo Mitsui Financial Group, Inc. Osamu Nagayama Japan Chairman and Chief Executive Officer, Chugai Pharmaceutical Co., Ltd. Takaaki Nimura Japan Former Executive Board Member, Ernst & Young ShinNihon LLC John V. Roos United Chief Executive Officer, The Roos Group, LLC and Former U.S.

States Ambassador to Japan Eriko Sakurai Japan Chairman and Chief Executive Officer, Dow Corning Toray Co., Ltd Tim Schaaff United Independent Startup Adviser and Former President, Sony Network

States Entertainment

Sony Corporation 249

business segments involved in electronics, with a combined total of 101,700. By contrast, the content segments—pictures and music—accounted for just 13,900 employees combined. Sony estimated that about 20% of its employees were members of labor unions in 2014. These unions range from various manufacturing facilities in China to trade unions in Hollywood. In 2014, for example, the pictures group concluded agreements with the Directors Guild of America and the Writers Guild of America and began negotiations with the Screen Actors Guild and American Federal of Television and Radio Artists. In corporate documents, Sony states that it considers its labor relations to be good.36

Japan presents an interesting framework for the discussion of labor relations. As discussed earlier, the concept of lifelong employment was an important one in post-war Japan. Lifetime employment is not guaranteed by statute or collective bargaining agreements, but employment laws and social norms in Japan make large reductions uncommon. When the Japanese economy faltered in the 1990s, corporations began to chafe at the limitations in this area that made downsizing impractical. Sony did announce a broad initiative to eliminate 17,000 jobs in 1999, although it did not plan outright layoffs and intended to use attrition to reduce its payroll.37 There has been a reduction in Sony employees in Japan since then, from an estimated 77,000 in 1999 to 52,200 in 2014, but still it continues to struggle in this area. An article in The New York Times in 2013 focused on an employee at the Sony Sendai Technology Center outside of Tokyo who had spent his work time in what was called a “chasing-out room” for two years after refusing to take an early retirement, which was his prerogative under Japanese labor law.38 Shinzo Abe promised changes in the Japanese labor system in an effort to stimulate economic growth when he became prime minister for a second time in 2012, but such reforms had still not materialized by the end of 2014.

The location of the corporate home of Sony introduces another interesting dimension to the discussion of labor relations. In 2012, an AFL-CIO study found that the average chief executive officer of large U.S. companies received $12.260 million in compensation based on an analysis of the S&P 500.39 That was 354 times the $34,645 compensation for the average worker in the United States. An Economic Policy Institute study found a smaller but still significant ratio, 272.9- to-1, in 2012.40 In contrast, in the AFL-CIO study, the average CEO of a large Japanese company earned almost $2.355 million in total compensation in 2012, which was just 67 times what the average Japanese worker earned. The average compensation for workers in Japan and the United States was similar, $35,143 to $34,645, with the difference in the compensation for executives. These differences became a focus of information released after the hacking of Sony Entertainment in 2014. In corporate documents, Sony listed the annual compensation for corporate head Kazuo Hirai in 2014 at ¥184 million, which converted to $1.837 million with the end of fiscal year conversion rate. This was much lower than his counterparts in the United States, such as Disney chairman and chief executive Bob Iger, who earned total compensation of $43.7 million in 2014, including $25.3 million in cash from his base salary and bonuses. Hirai was also below various Sony Entertainment executives, including Michael Lynton and Amy Pascal, who were both reported to receive $3 million per year. Pascal was the only female among the 17 Sony Entertainment executives receiving $1 million or more.

Ties to the State and Lobbying Efforts

The assessment of government relations in the case of Sony Corp. is complicated, for it must be considered in the context of both Japan and the United States and framed within the dramatic changes since it was created in 1946. The role of the state was quite different in post-war Japan, with the MITI established in 1949 to coordinate international trade. MITI became the leading state actor in the economic development of Japan, and collaboration between the state and prominent corporations became a defining characteristic of the Japanese system and the foundation

for the “Japanese miracle.” In the 1950s, Sony had to receive permission from MITI to acquire the transistor from Bell Labs, and its pursuit of that license was delayed while Sony convinced MITI that a small start-up was more appropriate than some of the larger Japanese manufacturers. Over time, MITI declined in prominence and Sony became a cornerstone of Japanese trade overseas, with co-founder Akio Morita one of its most prominent ambassadors. He was also a confidant to the leaders of the Liberal Democratic Party that ruled politics in Japan for decades, and he is reported to have had a direct phone line in his home to a series of prime ministers between 1969 and 1987.41

Sony often found itself in the crosshairs of debates in the United States as well, whether it was claims of dumping products in U.S. markets in the 1960s and 1970s or court battles related to time-shifting, the Betamax, and illegal music downloading. As such, it is not surprising that Sony also assumes a prominent role in U.S. politics through its subsidiaries, as well as numerous trade organizations. Lobbying is one avenue through which corporations and others attempt to influence government decision making, and Sony is active in this arena through Sony Corporation of American, Sony Music Entertainment, and SPE. In the decade from 2005 through 2014, Sony spent $31.6 million on lobbying, with $19 million of that coming through Sony Music Entertainment and Sony BMG Music Entertainment.42 That annual average of over $3.1 million was a significant increase for Sony, which averaged $694,000 per annum from 2000 through 2004. Between 2005 and 2014, the SPE Political Action Committee contributed $1.3 million to candidates while Sony Entertainment Inc. chief executive Michael Lynton alone donated at least $120,000 to national committees of the Democratic Party in addition to contributions to individual candidates.43 There was a second component of Sony influence in this area, as the corporation is active in three prominent trade organizations: Motion Picture Association of America, Recording Industry Association of America, and Consumer Electronics Association.

Cultural Profile

The cultural profile of the Sony Corporation remains more ambiguous than with other media giants, not tied to a specific nation or product. Even in Japan, Tokyo Disneyland and Universal Studios Japan are far more prominent than any cultural imprint attributable to Sony or one of its subsidiaries. When one digs deeper, however, there are clear links between Sony and consumer behavior that are most prominent in Japan and across the globe, evident in the myriad of ever- smaller media devices and the mainstream consumer media content that define the digital age. The promotion of that lifestyle in its media devices and media content is central to the success of Sony.

Symbolic Universe/Ideology

The trans-Pacific nature of Sony complicates the analysis of its cultural impact and embedded ideologies. One could frame the discussion around the music of Beyoncé, John Legend, and Pharrell Williams that is released on Columbia labels, but the conclusions might be different with a focus on Arashi, a popular Japanese idol group whose music is distributed through Sony Music. There is also not a central theme to films released through SPE and there is no Sonyland theme park, although Jon Peters did push for one when he was co-chairman of the studio from 1989 until 1991.

The one ideology that is at the core of Sony is consumerism, and its electronics unit has developed products such as the Walkman that were about both style and substance. When Sony released its first pocket radio in the 1950s, the model was too large for the average shirt pocket, so Akio Morita had new shirts made for his sales force in Japan and the United States with a larger

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chest pocket. As its electronics business has faltered in recent years, Sony has refocused on high- end products, whether in televisions, smartphones, or tablets. Its past successes, and its future, are predicated on the disposable income of wealthy consumers around the world.

Popular Products/Services and Cultural Significance

The discussion of popular Sony products could revolve around various devices, including the PlayStation and Blu-ray, but it has also been successful with action films that do well in international markets. Two superheroes, Spider-Man and James Bond, represented the most lucrative franchises within Sony Pictures in the mid-2010s. The Spider-Man franchise was built around a comic book series developed by Americans Stan Lee and Steve Ditko in the 1960s through Marvel Comics, while the Bond franchise is based on a character that Englishman Ian Fleming created in a series of spy novels that were first published in the 1950s. Sony Pictures became involved in the Bond franchise with the release of Casino Royale in 2006 and continued to co-finance and distribute the franchise with MGM through Skyfall in 2012. Casino Royale marked the reboot- ing of the Bond franchise with the debut of Daniel Craig as 007, and while Craig, like Fleming, is an Englishman, the big-budget, action-packed genre is pure Hollywood and a format designed for a global audience. Skyfall was the most successful of all the Bond films, grossing over $1.1 billion in theaters worldwide, with 72.5% of that coming outside the United States.44

The Spider-Man franchise follows a similar pattern. Sony Pictures released its first Spider-Man film in 2002 and grossed over $400 million at both the domestic and foreign box office for Spider- Man, which reached $821.7 million worldwide.45 The balance in the first in the series is no longer evident as the four that followed decreased at the U.S. box office, with the balance shifting towards the foreign markets. The domestic gross of the five films has decreased from $403.7 million for Spider-Man in 2002, 49.1% of the worldwide total, to just $202.9 for The Amazing Spider-Man 2 in 2014, just 28.6%.46 The rise in foreign revenue totals, with the last three topping $495 million, ensured that the franchise remained lucrative for Sony, even with the decline in the United States.

The shifting balance between the box office in the United States and that elsewhere in the world also points to a central business tactic within Sony Entertainment. While Sony Music does produce localized content on some of its smaller labels, most of what is produced within its content divisions is created for worldwide audiences. The Spider-Man franchise, for example, features high-end special effects and storylines that translate with ease. While the films were based in New York City, the use of high-rise buildings makes a natural connection to major metropolitan centers around the world, including the 12 cities in Japan with a population of over 1 million. And Spider- Man did well in Japan, grossing over $56 million, second only to the United States. This approach is consistent with the other media giants that focus on big-budget products that are exportable to markets around the world.

Conclusion

Sony is a corporation at something of a crossroads. Is it a manufacturer of devices that transmit and display media content, or is it a producer and distributor of that very same content? Sony has attempted to be both since it was scarred by the format wars that started in the 1970s, but there are real questions being raised about the path forward. New ventures such as computers and phones have presented challenges to the corporation, and it has lost market share to Samsung and others in televisions and other sectors. The content businesses were among the most successful over the first half of the 2010s, but the hacking of SPE in 2014 cast a negative light there as well. The corporate identity crisis is further complicated by the cultural gap between its Japanese roots and its Hollywood beachhead.

There is one constant, however, as the success of Sony Corporation, whether in devices or content, hardware or software, is built on consumer culture and ideology. That extends from the corporate headquarters in Tokyo to its entertainment units in Hollywood to Sony operations around the globe. The films, television programs, and music, moreover, largely represent the Western culture in which they are created and from which they are shipped around the globe. In the end, it is media globalization that provides the roots of the Sony story and from which its power is derived.

Notes

1 Sony Corp., “The Founding Prospectus,” www.sony.net, accessed March 15, 2015. 2 Sony Corp. Form 20-F, 2014. 3 Reputation Institute, “Meeting the Demands of Consumers – 2014 Global RepTrak 100,”

www.reputationinstitute.com, accessed February 15, 2015; William Pelegrin, “Sony, Uber, and Spring can count themselves Among America’s Most Hated Companies,” www.digitaltrends.com, accessed February 15, 2015.

4 Dr. Charles J. Fombrun, “Sony Reputation Challenge,” Reputation Institute, December 14, 2014. 5 Quoted in David E. Sanger, “Sony Had High Hope For Columbia Pictures,” The New York Times,

September 28, 1989, D1. 6 Michael Cieply, “Lucrative Sony Offer to Managers Is Detailed,” Los Angeles Times, October 6, 1989,

accessed December 6, 2014. 7 Nina J. Easton, “Sony Oks Paying Up to $500 Million to Get 2 Producers,” Los Angeles Times, November

17, 1989. 8 Quoted in Martin Fackler, Brooks Barnes, and David E. Sanger, “Sony’s International Incident: Making

Kim Jong-un’s Head Explode,” The New York Times, December 14, 2014. 9 Hiroko Tabuchi, “Recession and Strong Yen Drive Sony to Annual Loss,” The New York Times, May

15, 2009. 10 Quoted in Takashi Mochizuki and Eric Pfanner, “Sony Turnaround Effort Falters, Expects $2.15 Billion

Yearly Loss,” The Wall Street Journal, September 17, 2014. 11 Sony Corporation, Form 20-F, 2010; Sony Corporation, Form 20-F, 2005; Sony Corporation, Form

20-F, 2000; Sony Corporation, Form 20-F, 1995; Sony Corporation, Annual Report, 1990; Sony Corporation, Annual Report, 1985; Sony Corporation, Annual Report, 1981. All U.S. dollar totals were derived using the end of fiscal year exchange rate. Sony Corp. and Bertelsmann AG combined the bulk of their music interests in a 50–50 joint venture, Sony BMG Music Entertainment, in March 2004. Sony Corp. acquired Bertelsmann’s 50% interest in August 2008, at which time Sony BMG became Sony Music Entertainment. Sony Corp. did not break out sales for Sony BMG in corporate documents in the fiscal years from 2004 through 2008.

12 Sony Corporation, Form 20-F, 2014; Sony Corporation, Form 20-F, 2012; Sony Corporation, Form 20-F, 2010. All U.S. dollar totals were derived using the end of fiscal year exchange rate.

13 Sony Corp., Annual Report, 1985. 14 Sony Corp., Form 20-F, 1995. 15 Sony Corporation, Form 20-F, 2014. All U.S. dollar totals were derived using the end of fiscal year

exchange rate. 16 Sony Corp., Form 20-F, 2014, 49. 17 Sony Corp., Annual Report, 1985. 18 Sony Corp., Form 20-K, 2014, 33. 19 Eric Pfanner and Takashi Mochizuki, “Sony’s TV Business Head for Profit, but Big Challenges Remain,”

Dow Jones Newswires, December 12, 2014. 20 Ibid. 21 Kyle Orland, “Updated numbers show PS4 with at least 65 percent of two-console market,”

www.arstechnica.com, October 31, 2014, accessed March 17, 2015. 22 Affirm Films, “Mission Statement,” www.affirmfilms.com, accessed February 16, 2015. 23 www.BoxOfficeMojo.com, accessed February 15, 2015. 24 Sony Corp., Form 20-F, 2014, 28. 25 Sony/Columbia includes films distributed under the Columbia, TriStar, and Screen Gems labels,

www.Boxofficemojo.com, accessed February 16, 2015. 26 Sony Pictures Television, Worldwide Networks, https://sites.sonypicturestelevision.com/aboutspt/

spt.php?id=5, accessed February 16, 2015.

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27 “The Biggest Record Lables of 2014, By Market Share,” www.thatericalper.com, accessed February 21, 2015.

28 Year End 2014, Billboard; www.billboard.com/charts/year-end/2014/top-billboard-200-albums. Retrieved September 25, 2015.

29 Quoted in Ben Sisario, “U.S. and European Regulators Approve Universal’s Purchase fo EMI,” The New York Times, September 21, 2012.

30 “The Biggest Record Labels of 2014, By Market Share,” www.thatericalper.com, accessed February 21, 2015; “2013 SoundsScan Stats—Market Share of Major Record Labels Compared to Independent Labels,” www.routenote.com, accessed February 21, 2015; “The Nielsen Company & Billboard’s 2012 Music Industry Report,” www.Businesswire.com, accessed February 21, 2015; “The Nielsen Company & Billboard’s 2011 Music Industry Report,” www.Businesswire.com, accessed February 21, 2015; “The Nielsen Company & Billboard’s 2010 Music Industry Report,” www.Businesswire.com, accessed February 21, 2015.

31 “UMG and WMG see gains in recorded-music market share in 2013, while Sony/ATV dominates music publishing,” https://musicandcopyright.wordpress.com.

32 Sony Corp., “Stock Information,” September 30, 2014, accessed February 20, 2015. 33 Sony Corp., 20-F, 2014; www.Sony.net, CorporateInfo, accessed February 15, 2015. 34 Knowledge Center, “2014 Catalyst Census: Women Board Directors,” www.Catalyst.org, January 13,

2015, accessed February 21, 2015. 35 Sony Corp, Form 20-F, 2014, 108. 36 Sony Corp, Form 20-F, 2014, 109. 37 Mark Magnier, “Sony to Cut 17,000 Jobs in Bold Restructuring,” Los Angeles Times, March 9, 1999. 38 Hiroko Tabuchi, “Layoffs Taboo, Japan Workers Are Sent to the Boredom Room,” The New York Times,

August 16, 2013. 39 “CEO-to-Worker Pay Ratios around the World,” www.aflcio.org, accessed February 21, 2015. 40 Lawrence Mishel and Natalie Sabadish, CEO Pay in 2012 was Extraordinarily High Relative to Typical

Workers and Other High Earners,” Economic Policy Brief #367, June 26, 2013. 41 John Nathan, Sony: The Private Life. New York: Houghton Mifflin, 1999. 42 Sony Corp., Center for Responsive Politics, www.opensecrets.org, accessed February 20, 2015. 43 Donor Lookup: Lynton, Michael, www.Opensecrets.org, accessed February 20, 2015. 44 Skyfall, www.Boxofficemojo.com, accessed February 16, 2015. 45 Spider-Man, www.Boxofficemojo.com, accessed February 16, 2015. 46 Spider-Man and the Amazing Spider-Man 2, www.Boxofficemojo, accessed February 16, 2015.

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25 AMAZON.COM

Andrew Calabrese and Tyler Rollins

In 1942, Austrian economist Joseph Schumpeter sought to explain how capitalist enterprises emerge and thrive, and how such developments tend to come at the expense of previously existing economic structures. “The fundamental impulse that sets and keeps the capitalist engine in motion comes from new consumers’ goods, the new methods of production and transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates,” he wrote. Schumpeter termed the process that follows this impulse “creative destruction,” and he characterized it aptly as “the essential fact about capitalism.”1 Schumpeter’s thought has gained traction in recent decades as Keynesian welfare economics have been displaced by neoliberal theory and practice.2

The central role of technological innovation to streamline industrial change is not a new preoccupation in economics and business studies. Theodore Levitt’s influential 1960 article in the Harvard Business Review criticized industry leaders who wed themselves to particular technological models for their production systems and who, according to his analysis, myopically fail to recognize what business they are in, and are therefore unprepared when technological innovation makes competing business and service models possible that eventually render a previously dominant model obsolete. The classic example used by Levitt was the way in which die-hard investors in the U.S. railroad industry lost out to the more flexible means of moving freight provided by the postwar interstate highway system and the trucking industry. As Levitt puts it, the railroad owners and managers had failed to recognize that the business they were in was freight transportation, not railroads.3 Twelve years later, in 1972, Levitt published another highly influential article in the same journal, titled “Production-Line Approach to Service,” in which he argues for streamlining labor-intensive service provision by modeling it after the Fordist production-line principles of goods manufacturing.4 Levitt makes a compelling case for creating greater efficiencies in service provision through the strategy of breaking down the tasks involved into smaller and simpler ones, reflecting the principles of “scientific management” that F.W. Taylor advocated.5 One of the cases that Levitt highlights as a success story to be modeled by other labor-intensive service providers is the McDonald’s fast-food chain, wherein tasks for food production are broken down in factory- like steps, and less skill is required of individual workers by standardizing and simplifying narrowly defined sets of tasks (deskilling), which also simplifies the management role of training workers, along with work-pace acceleration and related incentives for increased worker output.6 Levitt’s case illustrates how the analysis of the steps involved in making a hamburger can yield valuable information for streamlining and routinizing the service labor process. McDonald’s was not the

first labor-intensive service company to apply principles of scientific management to the labor process, but it has been one of the most successful.

Today, a new round of reflection and theorization within business studies gives sharper focus to contemporary anxieties about threats to and collapsing of old business models and the rise of new ones. Leading this wave has been economist Clayton Christensen, who is well known for his series of articles and books on the subject of “disruptive innovation,” most notably the bestseller, The Innovator’s Dilemma.7 Christensen’s essential argument is that firms who define the dominant mode of production for an industry have an interest in continuing with the model that served them well in reaching and sustaining their market positions, whereas new entrants that rely on innovative technologies are not bound by the same market logic as the incumbents. Instead, the innovators Christensen highlights look to derive smaller profit margins from larger customer bases at the fringes of the narrower but higher margin markets that the incumbents dominate. Eventually, these new entrants undermine the old industry models and come to define new business models in which their products and services are more attractive to a greater portion of the mainstream markets, ultimately redefining the industry and its terms.

Among the many corporations and corporate CEOs who are cited as disrupters of contemporary business as usual is Amazon, led by its founder, Jeff Bezos, who Fortune magazine has called “the ultimate disrupter.”8 In 1994, Bezos, a former communications engineer,9 incorporated Amazon.com, Inc. Initially, the company focused on selling printed books online, but soon expanded its offerings to everything from electronics to kitchenware. To many, Amazon.com is known for being one of the premier online retailers and an economic powerhouse, bringing in over $70 billion from product sales in 2014. Not surprisingly, Bezos was not the first to envision the vast market potential of online retailing. For example, Alton Doody and William Davidson constructed in 1967 a seemingly science-fiction vision of a housewife who does her grocery shopping from the comfort of a desktop terminal in her kitchen, where she communicates with “the Customer Communications Department of City Wide Distribution Center, Incorporated.”10

One of the earliest market tests of online retailing was conducted in 1980 in Columbus, Ohio,11

and since then many major telecommunications firms, banks, retailers, and news and entertainment organizations have partnered in pursuit of the business opportunities in online retailing, but no previous effort foreshadowed the success and dominance established by Amazon. Amazon offers more than physical products to consumers, including AmazonSupply, a business-to-business service that began in 2012 and is expected to be replaced by the newer Amazon Business Marketplace,12 as well as digital services such as Amazon Elastic Compute Cloud (EC2), a cloud computing service boasting nearly 500,000 servers.13 Amazon is ranked number 13 on Forbes list of World’s Most Valuable Brands, just above Louis Vuitton (#14) and below AT&T (#12), Disney (#11), and Facebook (#10).14

Amazon’s economic impact is impressive. Though the company is centered in Seattle, Washington, it employs over 154,000 workers in 32 countries, adding over 38,000 new employees in 2014.15 Many workers in the United States are hired seasonally to help fulfill increased orders placed during holidays. Amazon also has a political action committee known as the Amazon PAC, which is less politically active than one might expect, receiving just over $500,000 in receipts and spending just over $200,000 in 2014.16 Lobbying by Amazon, on the other hand, has seen far greater expenditures at nearly $5 million in the same year.17

Amazon has securely positioned itself in popular culture. The sheer number of users would likely be enough to ensure the company’s impact, however the unique business philosophy of Bezos has also altered the business world’s understanding about how to successfully run a company: get big fast. Bezos advocates for low profits on many items rather than high profits on a few, is extremely customer-focused in order to encourage repeat customers, and creates a “frugal” work environment where employees get uncharacteristically low wages, must pay for their own lunch,

414 Andrew Calabrese and Tyler Rollins

and have strict performance standards from which they cannot deviate, unlike other major technology companies like Google.

Bezos says, “the three big ideas at Amazon are long-term thinking, customer obsession, and a willingness to invent.”18 However, these three ideas prove inadequate for understanding how Amazon has ascended the ranks to become the largest online retailer in the U.S., which had more net sales in 2014 than the company’s ten closest online competitors, including Apple and Wal- Mart, combined.19

Following a brief history of Amazon, this chapter will discuss the economic, political, and cultural impacts of Amazon as well as some of the strategies that have been used to achieve such success and the conditions to which Amazon’s many warehouse and fulfillment center workers are subjected.

History

Before graduating from Princeton University in 198620 with Bachelor’s degrees in both electrical and computer engineering, Jeff Bezos had already worked as a computer programmer for Exxon, developing a computer model on an IBM 4341 mainframe that calculated oil royalties, as well as at IBM’s Santa Teresa Research Center in California.21 After graduation, Bezos worked a number of jobs on Wall Street, eventually becoming the youngest vice-president of investment firm D.E. Shaw. In 1994 he left his finance career after learning that Internet usage was growing at a rate of approximately 2,300% each year. Believing the Internet to be a unique and lucrative opportunity for a new type of commerce, Bezos started Amazon as an online book retail company. The company operated out of his garage in Bellevue, Washington, a suburb of Seattle, after raising “several million dollars from private investors.”22

Following the launch of Amazon.com in July 1995, the company quickly outgrew his garage, moving into a 2,000 square-foot warehouse after six weeks and into a 17,000 square-foot building after six months. Amazon’s revenues doubled every 2.4 months and sales totaled over $5 million in the first year.23 By the end of 1996, Amazon had rented a 93,000 square-foot warehouse, and sold over $16 million worth of books to nearly 200,000 customers in over 100 countries. The company went public in May 1997 at $18 per share, valuing the company at $429 million. In 1997, the company’s six-month sales (January to June) rose to $43 million.24 One year after the Initial Public Offering, stock in Amazon was selling at $105 per share, valuing the company at $5 billion.25

In 1997 the company began offering music CDs as well as movie videos to customers, and added five more product categories (toys, electronics, software, video games, and home improvement)26 before Christmas. Amazon also opened its first warehouse outside of Washington State, in New Castle, Delaware. The former vice-president of distribution for Wal-Mart, Jimmy Wright, was hired by Amazon in the summer of 1998 as the company’s Chief Logistics Officer and was put in charge of a company initiative that sought to negotiate contracts directly with publishers and build new warehouses in an effort to “eliminate the middle man in the supply chain.”27 Further, Bezos wanted to develop efficient warehouses with the highest technology. To achieve this, he began hiring so many executives away from Wal-Mart that Wal-Mart sued Amazon, claiming the hiring practice was “an attempt to steal [trade] secrets,” which “was causing [Wal- Mart] economic damage.”28 The two companies would eventually settle out of court, restricting some of the projects to which the former Wal-Mart employees would be assigned.

The first international Amazon domains, Amazon.co.uk and Amazon.de, went online in 1998, with fourth-quarter sales quadrupling over those of the third quarter. The two domains also became the leading online booksellers in their respective markets, according to a 1998 letter to shareholders.29 In that same letter, Bezos summarized the benefits of Amazon’s business model:

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We’re fortunate to benefit from a business model that is cash-favored and capital efficient. As we do not need to build physical stores or stock those stores with inventory, our centralized distribution model has allowed us to build our business to a billion-dollar sales rate with just $30 million in inventory and $30 million in net plant and equipment.30

The high value of Amazon provided the ability to begin purchasing other companies. In April 1998, the Internet Movie Database (IMDb) became the first company purchased by Amazon, and set up as a subsidiary.31 Amazon would use IMDb to help push the sale of videos and DVDs. Sales continued to increase and, by the end of the 1999 calendar year, had reached $1.6 billion.32

That year, in September, Amazon introduced zShops, which allowed third parties to sell products through the website but required they pay a 5–25% fee to Amazon.33 zShops would later become Amazon Marketplace. In December, Bezos was named Time magazine’s “Person of the Year,” meanwhile Barron’s magazine named Amazon and Microsoft “the two most overvalued stocks on the market.”34

In 2001, the company laid off 1,300 employees after reporting a $1.4 billion fiscal loss. From its creation until this point, Amazon had lost a total of $2.8 billion.35 However, a combina- tion of ridding the company of many full-time employees, using 3,200 fewer temporary workers to fulfill holiday orders, and offering various discounts and promotions such as free shipping on orders over $99, the company was able lower its costs by 24% while increasing the number of orders shipped by 23%. This, in turn, lead to Amazon’s first profitable quarter in 2001, earning 9 cents per share or $35 million.36

The early 2000s brought many changes and opportunities for Amazon. In 2000, Amazon teamed up with Toys “R” Us to launch a co-branded site that would allow each company to leverage the other’s strengths—Amazon was charged with warehousing and distribution while Toys “R” Us was charged with selecting and purchasing the inventory for the new site.37 The 10-year contract would eventually end up in court with both companies claiming they were deceived.38 Similarly, in 2001 Amazon teamed up with bricks-and-mortar book retailer Borders Group, Inc. to launch a co-branded website.39 The relationship lasted until 2008. The seven-year deal—in which Borders effectively outsourced sales to Amazon, thereby allowing Amazon to increase its own customer base—is often cited as one of the key decisions that led to Borders’ bankruptcy in 2011.40 Amazon and Target formed an alliance in 2001 with similar stipulations to those of zShops, whereby Target would pay a per-unit fee as well as an annual fee to have a branded store on Amazon.com, and Amazon was put in charge of Target’s e-commerce, including order fulfillment and customer service.41 In 2003, Amazon took over e-commerce for the NBA and WNBA through a co-branded pipeline, which integrated basketball merchandise into Amazon’s product catalog.42

In an attempt to “persuade more shoppers to consider buying more different kinds of products from Amazon—stuff they might have only bought in physical stores,”43 Amazon unveiled its Prime membership in 2005. The service allows for unlimited two-day delivery and heavily discounted overnight delivery on many items for an annual fee of $79. Prime memberships currently (February 2015) number in the tens of millions, increasing 53% in the last year.44 Amazon Grocery Store launched in 2006 allows customers to purchase many pantry and grocery items for home delivery, such as “146 varieties of ground or whole-bean coffee.”45 The company’s cloud computing service, EC2, moved out of beta testing46 and into full production in 2008.47 Internet giants such as Reddit, Dropbox, Netflix, and Newsweek have used the service.48 Currently, approximately one-third of Internet users connect to at least one Amazon-powered website every day.49

Amazon’s e-reader, Kindle, was launched in 2009 and has allowed the company to continue to dominate the e-book market. In 2013, nearly 40% of e-book readers over the age of 13 owned a Kindle, while only 27% of e-book readers owned an iPad.50 The second-generation Kindle was

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released in 2010 and Kindle Fire, a full color tablet, became available in 2011. In an effort to further capitalize on the $600 billion grocery market,51 the launch of Amazon Fresh, the newest iteration of the company’s grocery service, expanded beyond Seattle and San Francisco to New York City in late 2014. The service allows for groceries to be delivered directly to customers’ homes and, if ordered before 10:00 AM, the delivery can be made before dinner.52

From its inception through today, founder Jeff Bezos has held Amazon close as the Chairman and CEO. Bezos receives a comparatively modest salary of just over $80,000 per year, but his stock holdings and investments are valued at over $36 billion, placing him at #15 on Forbes worldwide ranking of billionaires. Though Amazon had some major financial losses early on, these growing pains allowed the company to “get big fast” and provided the opportunity to become the leader in online commerce and one of the largest retailers in the world. Offering everything from A to Z, as designated by the arrow seen in the logo connecting the first A to the Z in the word Amazon, the company has successfully branched out beyond media retail, such as books and music, into everything from table saws to canned corn. Given that Amazon is only just beginning to leverage its servers and web services, the company will almost surely remain the leader of cloud computing for the foreseeable future.

Economic Profile

Since turning its first profit in 2001, Amazon has established itself as both innovative and disruptive, being credited with upending entire markets as it did with book retail. The company has always appeared promising, which is perhaps why Bezos was able to raise millions of dollars while operating out of a garage. Amazon currently enjoys the title of leading online retailer. Part of the secret to this success is expressed in the mantra “get big fast.” Early on, Amazon devoted much of its money to expanding its offerings and capacity while cutting prices in an effort to gain market share advantage. Indeed, Amazon has even inspired such books as Robert Spector’s Amazon.com: Get Big Fast. Sales have seen steady increases over recent years and Amazon has gone from selling $5 million worth of books in 1995 to nearly $89 billion in product and service sales in 2014, an increase of 16,000%. This growth is illustrated in Table 25.1 below.

Though Amazon leads online retail, there are a number of competitors that outsell the company by a large margin. For example, Amazon saw its highest total sales numbers ($88.9 billion) in 2014 but the same year Wal-Mart saw over $470 billion in sales. However, from 2012 to 2013, Amazon saw a 27% increase in sales while Wal-Mart’s increase was only 1.7%. The National Retail Federation ranked Amazon.com at #9 of the top 100 retailers of 2014 based on 2013 sales, just below Lowe’s (#8) and above Safeway (#10) and McDonald’s (#11).53

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TABLE 25.1 Amazon.com Company Revenues, 2005–2014 (in $ millions)

Revenue Net Income Total Assets

2005 8,490 359 3,696 2006 10,711 190 4,363 2007 14,835 476 6,485 2008 19,166 645 8,314 2009 24,509 902 13,813 2010 34,204 1,152 18,797 2011 48,077 631 25,278 2012 61,093 –39 32,555 2013 74,452 274 40,159 2014 88,988 –241 54,505

Sources: Amazon.com, Inc., Form 10-K, 2006, 2008, 2010, 2012, 2014

To compare Amazon to Wal-Mart is perhaps unfair—the latter seeming somewhat an outlier with 2013 worldwide retail sales at $473 billion and the closest competitor, Costco, selling $105 billion, or less than a quarter of the sales of Wal-Mart. On the other hand, Amazon does enjoy a 23% market share of all online retail, doing more e-commerce than its 12 closest competitors, combined—a figure that includes the online sales of Wal-Mart. However, this figure can be misleading if one fails to recognize that e-commerce accounts for less than 7% of all retail sales.54

Corporate Structure

Amazon’s sales can be divided into two core categories: products and services. In 2014, net product sales totaled over $70 billion while services brought in nearly $19 billion. To distinguish between the two categories, Amazon includes in its product sales all retail between customers and Amazon, exclusively. Product sales figures include the sales of Amazon Prime accounts, as well as all purchases made in the Amazon Marketplace from Amazon, but not from a third party. Service sales are the total amount earned from fees charged to third parties by Amazon for using and selling in the Marketplace, as well as all earnings generated by Amazon Web Services, including EC2. Recently, Amazon revealed that its Web Services business is by far the most profitable of Amazon’s businesses, by operating margin,55 generating approximately $5 billion in 2014. This differentiation between products and services is the distinction Amazon makes when filing 10-K forms with the Securities and Exchange Commission. However, it is useful to imagine the company as operating four separate branches: retail, services, devices, and web.56 These branches are generally jumbled, with amorphous borders and boundaries, preventing a much more concrete financial analysis. For example, Amazon includes in retail the sales of devices. Though sales data per branch are not accessible, it is important to disclose Amazon’s varying pursuits in each of the four branches.

Retail

Retail sales for Amazon are generally understood as all sales of Amazon’s retail products directly to consumers. This does not include products sold by third parties. It also excludes the sales of web services such as cloud computing. Officially, per SEC filings, retail sales include sales of devices but a more nuanced understanding is beneficial, i.e., examining devices, such as the Kindle, separately.

Amazon, like many major retailers, has the ability to negotiate lower prices with producers. One advantage Amazon has over many large retail chains, however, is that it does not have a sales floor. Operating exclusively online allows Amazon to save money on rents, given that the store front on Main Street in a major metropolitan city with an attached warehouse is much more expensive per square foot than a warehouse in Coffeyville, Kansas. Saving money on rents in this way allows Amazon to operate with a smaller markup on products and still maintain profitability.

Still, physical stores have appeal to consumers who want to try out products or examine them in person before making a purchase. To capitalize on this, Amazon introduced its Price Check application for mobile phones in 2011. The application allows a user to scan a barcode, take a picture, or search for a particular product they see in a physical store and compare that price to the price of the same product offered by Amazon. Some retailers denounced the application as “evil”57 because it encouraged showrooming. That is, Price Check encouraged consumers to use the showrooms of bricks-and-mortar stores as a stand-in for an Amazon showroom, investigate products, test them, and decide which to buy. Then, instead of purchasing from the store that pays for the property, insurance, salespeople, and showroom, the consumers often leave and buy the item from Amazon. In this way, Amazon receives most of the benefits of a showroom without

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having to pay for it. To combat the showrooming phenomenon, some major retailers, such as Best Buy, have implemented a policy whereby the store matches the prices of online retailers.58

Amazon’s domination of online retail is not going unchallenged. Though the company does more e-commerce than its closest 12 competitors, it has been suggested that Amazon’s dominance is a consequence of online sales making up only a small percentage of nationwide retail. With online retail accounting for only 6.6% of all retail sales, it should be no wonder that traditional retailers are putting the majority of their efforts into selling products through their physical stores rather than online. However, that is not to say they are neglecting the world of online retail. In the first quarter of 2014, Home Depot, Costco, Macy’s, and Wal-Mart saw an increase in online sales of 54, 48, 31, and 30%, respectively; Amazon saw an increase of 20%.59 Further, physical stores often have an option for in-store pickup to save on shipping. In 2014, Amazon spent $6.6 billion on shipping while collecting only $3.1 billion in shipping charges.60

Services

In 2014, two million third-party retailers sold over two billion items through Amazon, accounting for nearly 40% of all items sold through the website.61 During the fourth quarter of 2012, third- party sales accounted for 39% of all items sold, up from 36% in 2012.62 On each of those items, Amazon charges a number of fees on top of taking a percentage of the sale. The fees are charged for such things as storage and logistics.63 These fees vary from seller to seller; one third-party retailer disclosed that the fee they were being charged had increased from 8% per item in 2012 to 15% in 2013, when Amazon opted to take a larger cut of sales.64

While the marketplace does offer increased traffic to third parties, these sellers have difficulty securing repeat customers because so many view Amazon sellers as homogeneous. That is, there is no reason to be loyal to a particular seller on Amazon because the service is relatively similar, as are prices, across sellers. Further, Amazon often offers the same products as third parties for a lower price or with preferred webpage placement. This has led some sellers to see a decline in sales as they are put into competition directly with Amazon.65 In the event that Amazon is not able to capture those that may choose to purchase from a third party, the company still makes money through the fees levied against the seller.

Another important service that Amazon provides is Amazon Payments. This wholly owned subsidiary allows a customer to make purchases on a non-Amazon website, using their Amazon credentials. The service helps customers feel secure in their purchase and eliminates the need to enter a credit card number and shipping address, cutting down on the time it takes to complete the purchase and removing burdens that might lead a customer to decide against making the purchase altogether. Amazon Payments faces competition from services such as Apple Pay, Square, and PayPal, forcing it to keep fees competitive.

Devices

Amazon occupies a strange place as a retailer, service provider, and technology company. Perhaps the most famous of Amazon’s physical creations is the highly successful Kindle e-reader, introduced in 2007. The company keeps the numbers on Kindle sales a secret, but it has been estimated that roughly 20 million Kindles were sold in 2013, generating nearly $4 billion in revenue. In addition to selling the physical device, Amazon also earns $265–530 million per year from e-book sales.66

In 2009, just 3 million Kindles were sold. Amazon has seen its e-reader market share drop from 90% in 201067 to approximately 40% in

2014. In 2010, Amazon made headlines by, for the first time, selling more e-books than hardcover

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books.68 Many of these e-books are sold at a loss in an attempt build customer loyalty, as Kindles read proprietary file types accessible only through Amazon.

Amazon also sells the Kindle Fire tablet, which competes with the iPad and various Android- powered tablets. The Fire Phone was Amazon’s failed attempt to create a smartphone. In the fourth quarter of 2014, Amazon took a $170 million loss on the phone.69 The Fire Stick, a competitor to Chromecast and Roku, enjoyed widespread success. In the U.K. it was touted as Amazon’s “fastest-selling device ever.”70

Web

As Amazon grew to be the major online retailer, it developed web technologies that allowed for easy navigation, well-functioning databases, and more. It has capitalized on those developments by allowing other companies to access to them through Amazon Web Services (AWS). Amazon officially launched AWS in 2006 to offer “IT infrastructure services to businesses in the form of web services—now commonly known as cloud computing.”71 The benefit of this type of computing is that businesses are able to rely on Amazon’s global network of servers to store and deliver data, rather than having to purchase and maintain servers in-house. The demand for AWS is widespread and companies such as TicketMaster, Etsy, Netflix, and The Guardian utilize the services, in addition to Yelp, Reddit, and numerous government agencies. In 2014, “a $600 million computing cloud developed by AWS for the Central Intelligence Agency began servicing all 17 agencies that make up the intelligence community.”72

In the first quarter of 2015, Amazon reported AWS revenue at $1.57 billion. It is expected that $6 billion will be total AWS revenue for 2015. Of the $1.57 billion in the first quarter, $265 million was profit, a $20 million increase over the previous year. The profit generated by AWS could exceed $1 billion by the end of 2015.73

Corporate Strategies and New Developments

Amazon is unlike many businesses in that it allows for third parties to sell their wares in its store. An analog would be Best Buy allowing Wal-Mart to set up a kiosk in its showroom. This unusual business tactic is indicative of what Bezos claims are the three big ideas at Amazon: long-term thinking, customer obsession, and willingness to invent. Long-term thinking is what has afforded Amazon the market position it enjoys today. Rather than seeking high profits in its infancy, the company opted to reinvest all money earned, and take on debt and losses, in order to build a huge customer base and product inventory. Now the company is incredibly diverse, selling products and services, creating devices, and developing web technologies that are used by some of the largest companies in the world.

The sheer size of Amazon allows the company to enjoy economies of scale and volume discounts. The fact that Amazon has no physical store allows for the stockpiling and bulk purchasing needed to achieve those price breaks, and the large customer base allows for the distribution of fixed costs over many consumers. Indeed, this customer base is so important that Amazon bought Zappos.com, a company with $1 billion of gross sales in 2008, for just under $1 billion in 2009. One of the most attractive features of the company was the “fiercely loyal customer base at Zappos.”74 This customer base was large at 24 million customers, and nearly 70% of those customers were female. For Amazon, more customers means more distribution, sellers, convenience, selection, and lower prices, which leads to more customers. Having repeat customers is key to Amazon’s success and longevity, and this is achieved through selection, low prices, and customer service.

Interestingly, Amazon has been able to vertically integrate retail so well that it is difficult to recognize where Amazon ends and third parties begin. This benefits the company greatly because

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the risks and opportunity costs associated with a fully stocked warehouse are mitigated by third parties that are able to supply any product that Amazon does not have immediately available. Those third parties, however, do not get their due recognition as customers still understand their purchase to have been made with Amazon.com, a situation that displaces risk from Amazon to third parties and rewards Amazon as well with repeat customers, though those customers are not likely to repeatedly buy from any particular third party.

The customer obsession is simultaneously an obsession with experience and an obsession with convenience. Amazon aims to make the purchasing of products as easy as possible. This has driven the site since the company was founded. This is also apparent in some of Amazon’s more recent offerings such as Prime Instant Video, an on-demand video service accessible for no additional charge with Prime membership, and Amazon Fresh, which offers same-day grocery delivery in several cities around the country. This convenience is also what drives Amazon Payments as well as Kindle sales.

At its heart, however, Amazon is still a no-holds-barred company in search of revenue and profit. The company proposed that it should get a 30% cut of all e-book sales in 2014.75 When publishers choose not to cede to these demands Amazon has, in the past, tried to inhibit the sale of those publishers’ books. For example, in 2012 when the Kindle contract with the Independent Publishers Group (IPG), one of the largest book distributors in the United States, came up for renewal, Amazon attempted to squeeze more profit out by paying less for each title. However, IPG was unwilling to bend as far as Amazon wanted. As a result, Amazon opted to remove nearly 5,000 e-books that were associated with IPG76 in an apparent act of retaliation. Similarly, in 2010, Amazon removed from its website books published by Macmillan due to a dispute over e-book pricing.77 These tactics have often been met uncritically and occasionally praised.

Political Profile

Since the company went public, Jeff Bezos has remained the CEO and chairman of Amazon. He holds the largest block of stock in Amazon as well, boasting over 87 million shares (19% of total shares).78 In 2013 he sold exactly 1 million of those, bringing in $270 million after taxes, to offset his personal purchase of The Washington Post for $250 million in October of that year. Although Bezos holds more Amazon stocks than any other individual, and is both the CEO and chairman of the company, he earns a modest executive salary around $80,000. His political contributions tend to be given to state-level candidates rather than to federal politicians, with Bezos and his wife Mackenzie giving just $162,000 to federal political candidates and committees since 1998.79

Nearly $130,000 of those donations were given to Amazon’s corporate PAC. In the same time, the couple has given $28,000 to Democratic candidates and only $4,000 to Republican candidates. In contrast, Bezos has been significantly more active in state-level politics, giving, with his wife, $2.5 million to a Washington state referendum to legalize gay marriage.80

The Amazon PAC has donated almost equally to Democrats and Republicans, giving $93,000 and $86,500 respectively. Where Amazon spends the most political money is on lobbying efforts. In 2013, Amazon spent $3.5 million on lobbying “with seven outside firms lobbying on its behalf.”81

That figure increased to $4.7 million in 2014.82 The first quarter of 2015 saw lobbying spending increase by 14% over the previous year, up to $1.9 million, outspending Apple’s $1.24 million lobbying efforts in the same 2015 quarter.

Board of Directors

Many of Amazon’s highest-ranking employees have held executive positions within the company for nearly a decade. The executives, however, make relatively low salaries compared to similar

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companies. The highest paid, Diego Piacentini, is Amazon’s senior vice-president for international retail who earns $175,000 annually, and Jeff Wilke, the senior vice-president of consumer business, earns the second largest salary at $165,000.83 However, Wilke does hold approximately $20 million in Amazon stock. It seems the high retention of executives at Amazon is not due to salaries, but instead because Amazon works “on big ideas, and big projects.”84 Former executive Dave Cotter suggests, “You go to Amazon because there’s something big going on. Other companies pay more.”85

Bezos has remained the sole chairman of Amazon’s board of directors since the company started. Other individuals on the Board have ties to publications such as Reader’s Digest, charit- able organizations such as the Bill and Melinda Gates Foundation, media companies such as Viacom, Inc., and tech companies such as webOS. Of the 10 members of the board only 3 are women—a higher percentage than women holding senior management positions in the com- pany. Of the 119 senior managers employed by Amazon, only 18 are women and none have a direct line to Bezos.86 An all-male team of 12, known as the Senior Team or S Team, has such direct lines and the Team seems “reluctant to employ women, according to a leak from an internal directory.”87

Labor Force/Workers

Amazon employs over 150,000 workers around the world. This workforce is predominantly white and male, with 60% of all employees identifying male, a number that increases to 75% when examining only managers. Similarly, 60% of all workers identify white, with 71% of managers identifying white,88 and Amazon’s board of directors is exclusively white. For its part, it appears that Amazon does employ a more diverse workforce than many other tech giants such as Facebook, Twitter, and Google.89

Much of Amazon’s workforce is composed of warehouse and order-fulfillment workers. Amazon’s size and the nature of online retail require the company to hire many seasonal or temporary workers. These workers tend to be employed during the holiday season and are sometimes called “workampers” because they travel to the fulfillment centers in vans, motorhomes, and RVs during the busy season, staying in one of the free RV parking spots provided by Amazon.90

Workampers and other seasonal workers receive bonuses for staying with the company through the entire holiday rush and usually earn $10 to $13 per hour. However, there have been many reports about the harsh working conditions, expectations, and neglect experienced by Amazon’s employees. During the peak season the company implements a “blackout” period, during which time any absence is inexcusable. This policy disproportionately impacts single mothers at the company.91 Medical coverage is not provided for these temporary workers, but full-time employees receive stock shares, 401(k), and health insurance after two years of employment.

Amazon has come under scrutiny for pressuring warehouse workers to refrain from disclosing injuries received while working, resulting in a federal lawsuit filed in Pennsylvania.92 An average warehouse employee walks 7 to 15 miles each day, and this “high stress, high pressure”93 walking has led to injuries such as those experienced by one warehouse worker whose doctor found that the walking induced stress fractures in both of her feet; Amazon disputed that the injuries were work-related.94 Workers have complained to federal regulators about the unbearably hot warehouses, where temperatures reach in excess of 110 degrees. The heat has attributed to heat- related illnesses with such frequency that Amazon has stationed ambulances and paramedics outside of some warehouses during the summer in anticipation,95 rather than invest in air conditioning. Managers have repeatedly refused to open the bay doors of the warehouse for fear of theft, preventing fresh air from entering the warehouse, and contributing to heat related illnesses, which, on June 2, 2011, resulted in 15 workers collapsing in a warehouse in Lehigh Valley, Pennsylvania.

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Workers are closely watched to ensure they meet productivity goals. In March 2011, an employee was fired for having “been found unproductive during several minutes of her shift.”96 Machines measure the efficiency of each worker and those who do not meet the quota are reprimanded. In Germany, Amazon was revealed to have hired a security firm with neo-Nazi ties, called HESS security, to “keep order at hostels and budget hotels” where Amazon housed a largely immigrant temporary workforce.97 The security guards not only harassed the workers, but also “intimidated them by searching their bedrooms and kitchens.”98 In the United States the Supreme Court rejected a lawsuit by Amazon workers that sought wages for time the employees spent waiting in line to be screened for stolen merchandise, in Integrity Staffing Solutions, Inc. v. Busk (2014). The Court found that requiring employees to wait in lines to be screened did not impair their ability to perform their primary duty at work and was therefore not compensable. In addition to poor working conditions, heavy employee surveillance and intimidation, and the requirement to stand in long lines without pay, the non-union workforce at Amazon is also subjected to lower-than-average wages, receives no incentive pay, and is offered no lunch compensation.99 Bezos claims that incen- tive pay is “detrimental to teamwork” and recognizes that the company pays “very low cash compensation relative to most companies.”100 However, Fortune still named Bezos “Businessperson of the Year” in 2012.101

Cultural Profile

The political ideology of creative destruction fits well in making virtue of perceived necessity in discourses about information-age economics, politics, and culture. And the idea of disrupting an established industry or broader set of economic arrangements, including those among publishers and distributors, and between capital and labor, through digital innovation has drawn critical and celebratory attention from many writers in business studies, economics, and film and media studies.102

The notion that digital innovation can and sometimes does dramatically undermine established business models and industry incumbents, leading to the redefining of markets and to new sources of revenue and profit, is now generally accepted as commonplace, if not inevitable and even necessary. In one of the most seductive visions of the economic potential of digital innovation in the modern life of consumers, Microsoft founder Bill Gates wrote about his vision of a time when digital networks would enhance the performance of firms by enabling them to respond optimally to near-perfect information about market demand, fulfilling the classical liberal vision of “friction- free” capitalism, in what Gates calls a “shopper’s heaven.”103 Like most visionaries of how information technology will deliver on capitalism’s utopian promise, Gates and others do not turn sustained attention to how the introduction of new forces of production have produced new and oppressive social relations.104

Amazon is not primarily a content producer, but instead functions more as a pipeline to the content of other providers. In that sense, Amazon more closely resembles a telecommunications common carrier than, for example, a Hollywood studio, a publishing company, or a media conglomerate. As such, Amazon’s cultural profile is best understood from the perspective of the political ideology that characterizes its business practices, particularly in how it approaches its customers and its employees. As discussed above, Amazon CEO Jeff Bezos, and the company as a whole, places a high priority on listening to the customer and on maximizing customer satisfaction. The immense popularity of Amazon as a source for all sorts of media content—video, music, books, ebooks, audiobooks, and more—and on the retail sale of such a wide range of goods that are not available in even the largest shopping malls in the United States, demonstrates that the company is effective in offering high value to consumers. Amazon does in many senses appear to enact the vision of the “shopper’s heaven” and “friction-free capitalism,” presented by Bill Gates.105 However, reports on both blue- and white-collar labor practices of Amazon portray

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a company that has been far from friction-free.106 Despite the company’s public relations efforts to respond to widespread criticism of the cost to Amazon employees in terms of health, safety, compensation, and humane treatment in delivering high value and customer satisfaction, a significant range of independent sources indicate that there are serious company-wide problems. To the extent that such reports corroborate and are valid, they are indicative of the dark side of what passes for “friction-free” in the era of digital capitalism.

Conclusion

In his 1986 book, Misunderstanding Media, media historian Brian Winston traces the introductions of several media innovations into the marketplace, and he demonstrates how in each of those cases the radically futuristic visions for how those innovations would transform communication and society were suppressed. Typically, this “suppression of radical potential,” as Winston terms it, is at the hand of established institutional forces—industry incumbents, government policies, market preferences—that mitigate against the fulfillment of visions of unbridled innovation.107 If Winston’s analysis and challenge to technological determinism were applied to the emergence and enormous success of Amazon, however, we would have to find exception to his generalization, because Amazon’s disruptive market emergence hardly seems to be suppressed by competition, government, or any other organized institutional forces. If there is any source of power that has compelling motivations to place limits on the business practices of Amazon, one might expect it to be labor power. But the radical potential of disruptive innovation that plays itself out under neoliberal capitalism is hardly inhibited by organized labor. Rather, as the case above illustrates, the true radicalism that drives the success of firms that have built their success on digital disruption derives from the intensifying alignment of governments (laws, regulations, politicians, judiciaries) with the interests of large corporations to repress the interests and solidarity of workers. It is in this context that the power of Amazon seems unbridled.

Notes 1 Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper and Brothers, 1950).

Originally published in 1942. 2 Andrew Calabrese, Creative destruction? From the welfare state to the global information society,

Javnost/The Public, 4(4), (1997), 7–24; Tyler Cowen, Creative Destruction: How Globalization is Changing the World’s Cultures (Princeton, NJ: Princeton University Press, 2002).

3 Theodore Levitt, Marketing Myopia, Harvard Business Review, July–August 1960, 45–57. 4 Theodore Levitt, Production-Line Approach to Service, Harvard Business Review, September–October

1972, 41–52. 5 Frederick Winslow Taylor, The Principles of Scientific Management (New York: Harper & Brothers, 1911). 6 Of course, workers who are forced to perform such routinized tasks under constant time pressure are

apt to object. Richard Eskow, The Fast-Food Strikers Are Fighting for All of Us, Huffington Post, October 8, 2013, www.huffingtonpost.com/rj-eskow/the-fast-food-strikers-ar_b_3728990.html; Scott M. Stringer, Human Capital in the Twenty-First Century, Huffington Post, May 21, 2014, www.huffington post.com/scott-m-stringer/human-capital-in-the-twen_b_5367296.html; Jack Temple, Going Nowhere Fast at McDonald’s, Huffington Post, July 23, 2014, www.huffingtonpost.com/jack-temple/mcdonalds- striking-workers_b_5381586.html

7 Clayton M. Christensen, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Reprint edition (Cambridge, MA: Harvard Business Review Press, 2013). Originally published in 2011.

8 Adam Leshinsky, “Amazon’s Jeff Bozo: The Ultimate Disputer,” Fortune, November 16, 2012, ttp://fortune.com/2012/11/16/amazons-jeff-bezos-the-ultimate-disrupter/

9 Richard Brandt, One Click: Jeff Bezos and the Rise of Amazon.com (New York: Portfolio, 2011), 35. 10 Alton F. Doody and William R. Davidson, Next Revolution in Retailing, Harvard Business Review,

May–June 1967, 4. 11 Thomas D. Harnish, Channel 2000, Description and Findings of a Viewdata Test Conducted by OCLC

in Columbus, Ohio, October–December 1980, http://library.oclc.org/cdm/ref/collection/p267701coll 27/id/4526

424 Andrew Calabrese and Tyler Rollins

12 www.forbes.com/sites/clareoconnor/2015/04/28/amazon-launches-amazon-business-marketplace- will-close-amazonsupply/

13 www.wired.com/2012/03/amazon-ec2/ 14 www.forbes.com/powerful-brands/list/#tab:rank 15 www.bizjournals.com/seattle/blog/techflash/2015/01/amazons-headcount-tops-150–000-after-

adding.html 16 www.opensecrets.org/pacs/lookup2.php?cycle=2014&strID=C00360354 17 www.opensecrets.org/lobby/clientsum.php?id=D000023883&year=2014 18 http://fortune.com/2012/11/16/amazons-jeff-bezos-the-ultimate-disrupter/ 19 http://blogs.wsj.com/corporate-intelligence/2014/05/06/apple-jumps-in-rankings-now-second-largest-

online-seller/ 20 www.biography.com/people/jeff-bezos-9542209 21 Brandt, One Click, 32. 22 Suresh Kotha, Competing on the Internet, 1998, 247. 23 Ibid. 24 Ibid. 25 Brandt, One Click, 97. 26 Christine Frey and John Cook, “How Amazon Survived, Thrived, and Turned a Profit,” Seattle Post,

January 28, 2004. 27 Stephanie Lang, Logan Tinder, Jarett Zimmerman, and Jeffrey S. Harrison, Amazon.com: Offering everything

from A to Z (University of Richmond: Robins School of Business, 2012), 2. 28 Brandt, One Click, 107. 29 http://media.corporate-ir.net/media_files/irol/97/97664/reports/Shareholderletter98.pdf 30 Ibid. 31 Brandt, One Click, 113. 32 Christine Frey, How Amazon Survived, 3. 33 Brandt, One Click, 115. 34 Ibid., 121. 35 www.nytimes.com/2002/01/23/business/technology-a-surprise-from-amazon-its-first-profit.html 36 Ibid. 37 http://money.cnn.com/2000/08/10/technology/amazon/ 38 www.wsj.com/articles/SB113798030922653260 39 http://news.cnet.com/2100–1017–255644.html 40 http://business.time.com/2011/07/19/5-reasons-borders-went-out-of-business-and-what-will-take-

its-place/ 41 www.wsj.com/articles/SB100017752821017751 42 www.businesswire.com/news/home/20030417005530/en/Amazon.com-Power-NBA-Store-NBA.

com-WNBA-Store#.VXH9d89Viko 43 www.businessweek.com/the_thread/techbeat/archives/2005/02/amazons_prime_c.html 44 www.washingtonpost.com/blogs/the-switch/wp/2015/02/03/what-amazons-learned-from-a-decade-

of-prime/ 45 http://arstechnica.com/uncategorized/2006/06/7068–2/ 46 www.businessinsider.com/2008/10/amazon-we-promise-our-ec2-cloud-will-only-crash-once-a-week-

amzn- 47 https://aws.amazon.com/blogs/aws/big-day-for-ec2/ 48 https://sg.news.yahoo.com/video/cia-freezer-big-amazon-143129467.html 49 Ibid. 50 www.forbes.com/sites/jeremygreenfield/2013/10/30/kindle-most-popular-device-for-ebooks-beating-

out-ipad-tablets-on-the-rise/ 51 www.businessinsider.com/e-commerce-disrupting-600-billion-grocery-industry-2014–8 52 www.cnbc.com/id/102103709 53 https://nrf.com/2014/top100-table 54 http://time.com/money/3671937/amazon-staples-walmart-ecommerce/ 55 www.cnet.com/news/amazon-says-amazon-web-services-a-5-billion-business/ 56 www.bloomberg.com/bw/articles/2014-12-04/amazon-expanded-far-beyond-retail-as-bezos-took-

on-more-rivals 57 http://business.time.com/2011/12/13/is-amazon-due-for-a-backlash-because-of-its-evil-price-check-

app/ 58 http://bits.blogs.nytimes.com/2013/02/27/more-retailers-at-risk-of-amazon-showrooming/ 59 http://time.com/money/3671937/amazon-staples-walmart-ecommerce/ 60 Ibid.

Amazon.com 425

61 http://techcrunch.com/2015/01/05/amazon-third-party-sellers-2014/ 62 www.forbes.com/sites/greatspeculations/2013/01/30/amazons-third-party-sellers-drive-margins-and-

stock-higher/ 63 Ibid. 64 www.reuters.com/article/2013/03/18/us-amazon-sellers-idUSBRE92H0CR20130318 65 www.wsj.com/articles/SB10001424052702304441404577482902055882264 66 www.forbes.com/sites/greatspeculations/2014/04/02/estimating-kindle-e-book-sales-for-amazon/; see

also www.trefis.com/stock/amzn/model/trefis?easyAccessToken=PROVIDER_c0f663352356827f8709 1d2164ed90f2cc253a52

67 www.thenation.com/article/168125/amazon-effect 68 www.wired.com/2010/07/amazon-e-books-outsell-hardcovers/ 69 www.wired.com/2015/01/amazon-fire-phone-always-going-fail/ 70 www.telegraph.co.uk/technology/amazon/11537336/Fire-TV-Stick-becomes-Amazons-fastest-selling-

UK-device-ever.html 71 http://aws.amazon.com/about-aws/ 72 www.theatlantic.com/technology/archive/2014/07/the-details-about-the-cias-deal-with-amazon/

374632/ 73 www.businessinsider.com/amazon-earnings-q1-2015-2015-4 74 www.reuters.com/article/2009/07/23/us-amazon-zappos-idUSTRE56L6TQ20090723 75 www.amazon.com/forum/kindle/ref=cm_cd_tfp_ef_tft_tp?_encoding=UTF8&cdForum=Fx1D7S

Y3BVSESG&cdThread=Tx3J0JKSSUIRCMT 76 http://business.time.com/2012/02/24/amazon-pulls-5000-books-from-kindle-store/ 77 www.nytimes.com/2010/01/30/technology/30amazon.html 78 www.bloomberg.com/news/articles/2013-04-12/amazon-s-bezos-among-lowest-paid-tech-ceos-with-

81–840-salary 79 www.opensecrets.org/news/2013/08/bezos-leaves-few-money-in-politics/ 80 www.washingtonpost.com/blogs/the-fix/wp/2013/08/07/the-politics-of-jeff-bezos/ 81 www.politico.com/story/2014/06/amazon-drones-lobbyist-k-street-107996.html 82 www.consumerwatchdog.org/newsrelease/google-spends-record-1683-million-2014-lobbying-topping-

15-tech-and-communications-compa 83 www.businessinsider.com/diego-piacentini-amazon-executive-pay-2012-11 84 www.businessinsider.com/working-at-amazon-no-free-food-and-a-low-salary-2012-11 85 Quoted in http://fortune.com/2012/11/16/amazons-jeff-bezos-the-ultimate-disrupter/ 86 www.theguardian.com/technology/2014/apr/25/amazon-employs-18-women-among-120-senior-

managers 87 Ibid. 88 www.techtimes.com/articles/19250/20141101/amazon-workforce-diversity-report-reveals-gender-

gap-no-surprises-here.htm 89 www.bloomberg.com/news/articles/2014-10-31/amazon-discloses-more-diverse-workforce-than-

silicon-valley 90 www.vice.com/read/in-the-prime-of-their-lives-0000544-v2n1 91 Nichole Gracely, “Surviving in the Amazon,” New Labor Forum 21.3 (2012): 80–83. Project MUSE. Web,

June 8, 2015, https://muse.jhu.edu/ 92 www.seattletimes.com/business/amazon-warehouse-jobs-push-workers-to-physical-limit/ 93 www.businessinsider.com/working-conditions-at-an-amazon-warehouse-2013–2 94 www.seattletimes.com/business/amazon-warehouse-jobs-push-workers-to-physical-limit/ 95 www.mcall.com/business/mc-amazon-temporary-workers-unemployment-20121215-story.html

#page=2 96 www.salon.com/2014/02/23/worse_than_wal_mart_amazons_sick_brutality_and_secret_history_of_

ruthlessly_intimidating_workers/ 97 www.independent.co.uk/news/world/europe/amazon-used-neonazi-guards-to-keep-immigrant-

workforce-under-control-in-germany-8495843.html 98 www.businessinsider.com/amazon-to-investigate-german-factories-2013-2 99 www.businessinsider.com/working-at-amazon-no-free-food-and-a-low-salary-2012-11

100 http://fortune.com/2012/11/16/amazons-jeff-bezos-the-ultimate-disrupter/ 101 Ibid. 102 See, for example, Dina Iordanova and Stuart Cunningham, Digital Disruption: Cinema Moves On-Line

(Edgecliffe, UK: St. Andrews Film Studies Publishing, 2012); James McQuivey, Digital Disruption: Unleashing the Next Wave of Innovation (Amazon Publishing, 2013).

103 Bill Gates, Nathan Myhvold, and Peter Rinearson, The Road Ahead, Rev. ed. (Penguin, 1996), 181.

426 Andrew Calabrese and Tyler Rollins

104 For an excellent analysis and critique of Gates’ vision of the future of capitalism, see Jens Schröter, “The Internet and ‘Frictionless Capitalism,’” Triple C, 10(2) (2012), 302–312.

105 Gates, et al., The Road Ahead, 181. 106 Spencer Soper, “Inside Amazon’s Warehouse,” The Morning Call, September 18, 11, http://articles.mcall.

com/2011-09-18/news/mc-allentown-amazon-complaints-20110917_1_warehouse-workers-heat- stress-brutal-heat; Jodi Kantor and David Streitfeld, Inside Amazon: Wrestling Big Ideas in a Bruising Workplace, New York Times, August 15, 2015, www.nytimes.com/2015/08/16/technology/inside- amazon-wrestling-big-ideas-in-a-bruising-workplace.html

107 Brian Winston, Misunderstanding Media (Cambridge, MA: Harvard University Press, 1986).

Amazon.com 427

24 GOOGLE

Information Organizer

Micky Lee

As of December 2014, Google Inc. was listed as the 46th largest corporation in the U.S. and the 162nd largest company in the world in terms of revenue.1 Founders Larry Page and Sergey Brin, and ex-CEO Eric Schmidt, are the 20th, 21st, and 148th wealthiest individuals, respectively, in the world.2 In addition, executives and investors rank Google the third most admired U.S. corporation, the most financially sound, the third most innovative, and the fourth most well managed.3 Because of its large revenues, the immense wealth of its founders, and its huge investment in innovation and employees, many see Google as a company that needs to be admired, not criticized.

The “free” services offered by Google, its fun and energetic work environment, the boyish appearances of Page and Brin, and the simplicity of its homepage all imply that Google is an unconventional corporation—so unconventional that it may just happen to make a lot of money and employ a lot of smart people. This image of Google has effectively masked the economic, political, and cultural power that the corporation holds in the business of information.

Even though Google has received criticism in recent years because of its violation of individuals’ privacy by photographing pedestrians for Google Maps, its compromise of national security by showing an aerial view of the White House, its short-termed submission to the People’s Republic of China (PRC) by sharing political dissidents’ personal data, and its infringement of copyright laws by scanning library books, the criticism focuses on Google not following established rules and regulations. In fact, some critics, such as the founder of Wired magazine, Chris Anderson, argue that the faults lie on the outdated laws impairing a free and open society advocated by Google. Few critics focus on Google’s capitalist tendencies to accumulate surplus capital, commodify public goods, create a near monopoly, or exploit workers. To this end, Google’s ideological power to maintain itself as the world’s primary information organizer is detrimental to achieving a truly free, equal, and open society because this single corporation controls too much information.

History

Like a lot of Silicon Valley companies, the founding of Google follows a certain script: non- conforming geniuses innovate to better humankind and challenge established power. As the often- recited story goes, Page and Brin met at Stanford University in Palo Alto, California, and disliked each other at first before discovering their shared dislike of Internet search engines that take in

advertising money and influence search results. The goal of creating a search engine with objective search results gave birth to an internal one hosted by Stanford. Wanting to show the infinite power of the Internet, Page and Brin initially named their company Googol. A spelling error made it Google, now a synonym with a, if not the, search engine.

As in most Silicon Valley tales, Google first started in the garage of an employee. Within a few years, it set up its “campus” in Mountain View, California, a residential area in the greater San Jose area. Unlike most Silicon Valley companies, Google has refused to become an “adult company” like Apple or Oracle. Anecdotes such as employees spending lazy afternoons competing in volleyball matches on the lawn, the former chef for the Grateful Dead creating healthy menus for the canteen, and the founders cruising indoor on rollerblades all make Google appear like a never-never land of perpetual student life. Whether these anecdotes were carefully selected to mask Google’s capitalist tendencies or to illustrate a new kind of post-Fordist corporation, they are too simplistic to show how the political economy of information works in a capitalist society. In other words, Google would not have existed in another political economic system.

Page the CEO and Brin the Director hold power in both management and ownership. While a lot of corporations have separated ownership from management, Page and Brin combine both. This is an anomaly rather than the norm. What it means is that not only do Page and Brin make final decisions on the company’s directions, but they also reap in the profits. Therefore, there are incentives to gear the company towards profit-making because not only can they please the shareholders, but they can also pocket in the profits. Therefore, to critique Google is to critique how it produces surplus value from information in a capitalist society.

Economic Profile

In early 2015, Google’s revenue reached $17.3 billion.4 In terms of revenue, Google is a large company. Only seven technology or telecommunications companies are larger than Google: Apple, AT&T, Verizon, HP, IBM, Amazon.com, and Microsoft.5

Google Inc. went public in 2004, but it has been disclosing its revenue since 2000. Table 24.1 indicates the staggering growth of the company from 2000 to 2013. The increase in revenue from 2004 to 2013 was 1,700%. Other than a slow period in 2009, which featured only a 9% increase, Google achieved double-digit or even triple-digit growth every year. Although not explicitly stated, the decline of Google’s 2009 revenue most likely resulted from the effects of the global financial

Google 399

TABLE 24.1 Google Revenue, 2000–2013

2000 2001 2002 2003 2004

Revenues (in $1,000) 19,108 86,426 439,508 1,465,934 3,189,223 Increase from the previous year (%) n/a 352 409 233 118 Net income (loss) (in $1,000) (14,690) 6,985 99,656 105,648 399,119

2005 2006 2007 2008 2009

Revenues (in $1,000) 6,138,560 10,604,917 16,593,986 21,795,550 23,650,583 Increase from the previous year (%) 92 73 56 31 9 Net income (loss) (in $1,000) 1,465,397 3,077,446 4,203,720 4,226,858 6,520,448

2010 2011 2012 2013

Revenues (in $1,000) 29,321,000 37,905,000 50,175,000 59,825,000 Increase from the previous year (%) 24 29 32 19 Net income (loss) (in $1,000) 8,505,000 9,737,000 10,737,000 12,920,000

Source: Micky Lee, Free Information? The Case against Google (Champaign, IL: Common Ground, 2010)

crisis that began in 2007–2008. There is no nation-state that has ever achieved such a growth in a decade, let alone the wages of an average worker!

It is also interesting that Google has come to rely on non-U.S. markets for more than half of its revenues, more specifically between 51 and 56% from 2011 to 2013.6

Up until the 2008 annual report, Google listed Yahoo and Microsoft as its two main competitors. Google claims that it is competing with many companies in the markets for search engines and social networking. However, many searches go through its search engine and mobile platform. In the 2013 Annual Report, Google listed its competitors as:

• General purpose search engines: Yahoo, Microsoft’s Bing; • Vertical search engines and e-commerce websites: Kayak, Monster.com, WebMD, and

Amazon; • Social networks: Facebook, Twitter; • Advertising: traditional means such as television, newspapers, billboards, and the yellow page; • Mobile applications: various companies; • Providers of online products and services: new and established companies that offer

communication, information, and entertainment services.7

Four companies dominated the web browser market internationally as of November 2014:8

Microsoft’s Internet Explorer had a 58.94% market share, Google Chrome had 20.57%, Firefox had 13.26%, and Apple Safari had 5.90%. In the search engine market in the same period, Google had a 61.85% market share, China-based Baidu had 24.88%, Microsoft’s Bing had 8.92%, and Yahoo had 3.83%. In the mobile/tablet operating system market, two companies dominated the market in the same period: Google Android had 45.70% market shares and Apple’s iOS had 44.61%.9

Despite Google’s claims that it has multiple competitors, only Microsoft and Apple compete with them across markets, and these three companies are aware of their strength and weaknesses in select markets.

Corporate Properties

Google has four major divisions: (1) search, (2) advertising, (3) consumer platforms, and (4) enterprise. The company acquired Motorola Mobility in 2011, but did not rename it because Google wanted to run it as a separate business.10 Google’s interest in this high-profile acquisition can be explained by the Android platform. By acquiring Motorola Mobility, Motorola handsets now use the Android platform. However, in January 2014, Google sold Motorola Mobility to Hong Kong-based Lenovo, and all Motorola smartphones continue to use the Android operating system.

Not all Google-branded products and services are developed in-house. The company acquires start-ups and usually renames the products. Google only renames those services intended for end users (such as Google Earth, Google Maps). For services that already attract a sizable number of visitors, such as YouTube, Google did not rename the service.

In recent years, Google has acquired start-ups to enhance existing products such as Google+. Previously, the company acquired them and made them stand-alone products. For example, the start-up Keyhole eventually became Google Maps. As the 2013 Annual Report states, “our brand is one of the most recognized in the world.”11

Because of the well-recognized and respected Google brand, the company rarely engages in joint ventures with other corporations. Instead of joint ventures, Google invests in start-ups through Google Ventures (www.gv.com) by supplying seed, venture, and growth-stage funding. The start- ups may or may not relate to Google’s core business, but they have to relate to digitized information.

400 Micky Lee

For example, Google invested in 23 and Me—a genetic mapping company founded by Sergey Brin’s wife Anne Wojcicki—and Uber—an online ride-sharing service.

Google also negotiates deals and forms partnerships with established non-media companies, traditional media companies, and other hi-tech firms for both short- and long-term projects (see Table 24.2).

Google 401

TABLE 24.2 Google’s Select Deals and Partnerships, 2000–2014

2000 Yahoo—partnered to provide web search services. Partnership terminated in 2008 because of potential violation of anti-trust.

2001 Universo Online (Latin America)—provides web search services in Latin America.

2002 AOL—provides web search services; bought 5% of AOL shares.

2005 T-Mobile—Google search services on mobile phone.

2006 Universal Music Group, CBS, Sony Music, Warner Music, and Sundance Channel—broadcast videos on YouTube. National Geographic and Discovery Channel networks—partners with Google Earth to provide contents to enhance users’ experience when surfing the globe. Various mobile phone companies: Motorola, Sony Ericsson, Vodafone (UK), Nokia, Beeline (Vietnam), KDDI (Japan), NTT DoCoNo (Japan), Bharti Airtel (India), China Mobile, Telefonica (Latin America; Spain), Samsung (Korea)—Google search services on mobile phone. Inuit, Verizon, AT&T—helped include more business information online.

2007 CNN—YouTube’s partnership to broadcast Presidential debate in real time. IBM—supercomputing initiative with students.

2008 Earthlink and AOL—AdWords appear in both search engines. T-Mobile—offers G1 phone with Android operating system. Cleveland Clinic—provides online medical records.

2010 Amazon.com and CNBC—provide contents for Google TV. AOL—provides web search for AOL portal.

2011 Jay-Z, Wall Street Journal, and Disney—create channels on YouTube. Heineken—advertising deal with the brewer to target users in Europe. General Motors—provides Google Apps to employees. Intel—improves its chip for Android.

2013 Audi—develops driverless car.

2014 VSP Global—a vision-care company—and Luxottica—owner of Ray-Ban and Oakley eyeglasses—offers Google Glass. Samsung—cross-licencing deal on technology patents. Credit Karma—invests in this online credit site.

Source: Micky Lee, Free Information? The Case against Google (Champaign, IL: Common Ground, 2010)

While it may not be surprising that Google’s Android mobile phone platform requests it to partner with cell phone manufacturers, such as T-Mobile, Google also works with traditional media content providers such as Wall Street Journal and Disney. In 2009, News Corp’s chairman Rupert Murdoch accused news aggregators such as Google News of stealing news headlines from online newspapers.12

Murdoch’s stance did not stop Wall Street Journal, a News Corp company, from partnering with Google in 2011. Similarly, Hulu—partially owned by Disney—was launched in 2009 to counter illegal contents uploaded on Google’s YouTube. In 2011, Google helped Disney to launch its channel on YouTube. While a “new media” company such as Google may appear to be a counter force of traditional media companies, they may help each other to consolidate power.

Typical Strategies

Google has a large budget for in-house research and development (R&D), which increased by 185% between 2008 and 2013, from $2.8 to $8.0 billion. Close to 40% of employees work in R&D, which is more than those working in sales and marketing. Google also gives employees 20% of their work time to develop their own projects, some of which are later adopted by the company. For instance, Google News was a service developed from such a scheme.

As mentioned, Google releases new products and services by acquiring start-ups. Table 24.3 shows Google’s acquisitions from 2001 to 2013. Some acquisitions have become popular services for end users (such as Google Earth and Android); others are for advertising professionals (such as DoubleClick and AdMoc); yet some others have not been promoted as a Google’s service, such as Zagat and Vevo.

Unlike traditional media companies, Google is diversified in its products and services, but not diversified in its stream of revenue. Until 2012, more than 90% of its revenue came from advertising alone.13 After acquiring Motorola Mobility in 2012, 10% of its revenue came from hardware and mobile technology.14

While Google’s services and products are diversified, information is the core of its business. Google releases services and products online frequently for devoted fans to test the beta versions. Google’s corporate structure has been changing rapidly since its inception. The following four areas sum up its current operation.15

Search

Google Search is a tool for locating information on the World Wide Web, which can be used on desktop, tablet, and mobile devices and is available to users for free in exchange for ad displays. In addition, there are specific search services such as Google Maps, Google Scholars, and Google News.

Advertising: AdWords and AdSense

AdWords is an auction system in which advertisers “buy” keywords. Advertisers can either buy the “number of clicks” package (i.e., pay when a user clicks on the ad) or the “number of impressions” package (i.e., pay by the number of times the ad appears). AdSense is a partnership program with content providers (such as online newspapers and personal blogs) which display the ads on their sites.

Consumer Content and Platform

Other than Google hardware, most Google services are offered to users for free. Some have ad displays and others require users to agree let Google collect information that users input online. These services include:

402 Micky Lee

Google 403

TABLE 24.3 Google’s Select Acquisitions, 2001–2013

2001 Deja.com’s Usenet Discussion Service (renamed as Google Groups)

2003 Pyro Labs (renamed as Blogger)

2004 Keyhole (renamed as Google Earth) Picasa

2005 Urchin (renamed as Google Analytics) Android

2006 YouTube; acquired price: $1.65 billion Jotspace (renamed as Google Sites) Dmarc Broadcasting (radio advertising product); $102 million @Last software (renamed as Google SketchUp) Upstartle LLC’s Writely.com (online document editing)

2007 Postini (enterprise e-mail capabilities) DoubleClick (display ad); $3.2 billion Salesforce.com (on demand customer relationship management applications with AdWords) Jaiku (a Finnish company on microblogging, similar to Twitter) Gapminder Foundation (a Swedish company on ad placement in video game) Adscape (ad placement in video game)

2008 ZAO Begun of Rambler Media (a Russian company that works on online advertising); $140 million—deal blocked by the Russian government.

2009 Recaptcha (started in Carnegie Mellon University; web fraud prevention for book scanning for internal distribution) On2 Technology (video compression software); $105 million

2010 AdMob (for developers and advertisers) Mechanicalzoo (question-and-answer web service; similar to like Yahoo! Answers); $50 million ITA software for online travel; $700 million

2011 Motorola Mobility; $12.5 billion Zagat (restaurant reviews in print and online); $151 million Admeld (interactive and graphical ads); $400 million

2012 Wildfire Interactive (social media marketing); $450 million BufferBox (e-commerce); $17 million

2013 Waze (face recognition software; map start-up); $966 million Vevo; bought 7% stake in providing contents on YouTube

2014 Skybox (satellite firm); $500 million

Source: Micky Lee, Free Information? The Case against Google (Champaign, IL: Common Ground, 2010)

• Consumer software: Android is an open source mobile platform that can be “forked” by developers for mobile apps and can be installed by any handset manufacturer. Consumers can download the code for free.

• Consumer hardware: laptops, tablets, smartphones, and devices that stream online TV content. • Social networking: Google+. • Online store: consumers can buy apps, music, books, and movies. • Cloud computing: consumers can use Google Drive to collaborate and share documents with

other users. • Online payment: consumers can use Google Wallet to pay bills online.

Google competes with Apple in the consumer content and platform segment. Apple dominates the hardware market with iPad, iPhone, and Mac laptops, as well as the online retail market with Apple Store. Google also competes with PayPal for online payment services.

Enterprise

Accounting for a small percentage of Google’s revenues, the Enterprise division provides business solutions to companies by offering tailored packaged software and premium services. For example, Google Earth Enterprise provides data visualization for architecture and oil refinery firms. This service is not offered for free.

New Developments

Google constantly releases new products and terminates old ones, largely because it has an abundant amount of surplus capital to invest in R&D and third-party products. Google’s physical assets are small for a corporation of its size. Other than its headquarters in Mountain View, California, it only owns office space in New York, Paris, and Dublin, as well as data storage facilities in America, Europe, and Asia.

Because Google produces surplus value, not through the production of physical goods such as automobiles or natural resources but through the production of intangible goods such as algorithms, information, and intellectual property, its surplus capital is not primarily invested in physical plants and manual labor. In 1964, AT&T’s market worth was $267 billion and employed close to 760,000 people. Today, Google’s market worth is $370 billion but only employs 55,000 people.16

Because Google is an information organizer, it does not invest its surplus capital in the labor of information production. It exploits information from the public domain (such as books with expired copyright protections as well as maps produced by governments) and from Internet users. To harness the “wealth of the web,” it offers beta versions online for users to test and comment. More often than not, Google beta testers are honored to be the pioneers to use a Google product, a case in point being the now folded Google Eyeglasses project: money could not buy users a pair to test, only the insiders could test them.17

Lastly, the company prides itself on inventing cutting-edge technology and on being “democratic.” Therefore, some of the projects in which Google invests have no “market” per se. For example, its social networking Okrut (renamed as Google+) had never been a threat to Facebook—it was only popular in India. Google may have the capital to heavily advertise and market its social networking site, but it decided not to do so. In another example, Google discontinued its Google Health service because WebMD and Mayo Clinic were more popular sites. The failure of these projects may not signal a lack of strategies, but reflect an embarrassment of riches: that it has too many resources to spare, so minor setbacks do not dent the company.

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Political Profile

According to NASDAQ.com as of December 2014, close to 65% of Google stocks are owned by institutional investors. The top five stockholders are: Fidelity (retirement, funds, and online trading firm based in Boston), Vanguard (investment management firm based in Valley Forge, Pennsylvania), State Street (financial services firm based in Boston), Price T Rowe (investment management firm based in Baltimore, Maryland), and Barclays (banking and financial services firm based in London). These five institutional shareholders also own a significant amount of stocks of Google’s rivals such as Apple, Facebook, Microsoft, Amazon, and Baidu. Institutional ownership accelerates the concentration of monopoly capital because the investors probably do not want these corporations to compete with each other to the extent that it drives down stock prices.

About one-third of Google stock is owned by individuals, and the top three individual shareholders are Larry Page, Sergey Brin, and Omid Kordestani (Google’s Chief Business Officer).18

Ties to the State and Lobbying Efforts

Google is not a contractor to the U.S. government, but it has direct ties to Washington. Executive Chairman and former CEO Eric Schmidt and Director Michael Mortiz were vocal supporters of Obama’s candidacy for the U.S. Presidency in 2008. Obama visited Google Headquarters to answer employees’ questions during his first campaign. At the time of writing, Eric Schmidt is a member of the President’s Council of Advisors on Science and Technology. According to OpenSecrets.org, Google employees and their immediate families donated approximately $800,000 to the 2008 presidential campaign of Obama, making it the fourth most generous donor.19

Google’s ties to Washington are also represented through lobbying. According to the Wall Street Journal,20 Google’s spending on lobbying has increased by 100% in a decade since it went public in 2004. As of 2014, Google is the third largest corporation lobbyist after medical insurer Blue Cross/Blue Shield and manufacturer Dow Chemical. That year, it topped the big spender list among all technology and telecommunications companies—it spent $16 million on lobbying while Microsoft only spent half of that.21

It has also set up an office in Capitol Hill in 2013. Google lobbies policies in areas that benefit its products and services, such as laws and regulations regarding copyrights, patent, and trademark; net neutrality; immigration; and driverless cars.

The U.S. Federal Trade Commission had investigated Google’s unfair practices, such as favoring their own services in search results and planting cookies in a competitor’s browser.22 It also lobbies the EU Government to relax its regulations on Internet privacy.23 If technology can’t fix the issues, money certainly can.

Corporate Board Members and Interlocks with Other Organizations

Google’s board of directors consists of 11 members who are drawn from Silicon Valley-based venture capital firms, hi-tech companies (such as Intel and Amazon), and elite higher education institutions that are strong in computing sciences (such as Stanford University and the MIT).

The board is supposed to safeguard the shareholders’ interests, to make sure that the company is doing the right things to offer handsome dividends to both institutional and individual investors. However, the board members cannot be simply drawn from any industries and institutions—they are those with whom Google has a close working relationship. An angel investor would have insider knowledge of Google’s direction, and hence would fund start-ups that may eventually be acquired by Google. Similarly, Google would like angel investors to share knowledge of what

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TABLE 24.4 Google’s Board of Directors

Director Present and Past Titles

Larry Page CEO of Google

Eric E. Schmidt Executive Chairman of Google Chairman and CEO of Novell (1997–2001) Various positions at Sun Microsystems (1983–1997) Board of director of Apple (2006–2009) (resigned because of increased competition between Google and Apple)

Sergey Brin Director of Google

L. John Doerr General Partner of Kleiner Perkins Caufield and Byers, a venture capitalist firm based in Silicon Valley Board member of Amyris, Inc., a synthetic biology company Board member of Zynga, a social game services President of Amazon (1996–2010)

Diane B. Greene Former CEO and President of Vmware, a software company based in Silicon Valley Board member of Inuit, a business and management solutions company Board member of the MIT Corporation

John L. Hennessy President of Stanford University Former board member of Cisco Former board member of Atheors Communications

Ann Mather Former Chief Financial Officer of Pixar, an animation company now owned by Disney Board member of Glu Mobile, a publisher of mobile games Board member of Netflix Board member of Shutterfly, a digital image retailer Board member of Solazyme, a renewable oil and bioproducts company

Alan R. Mulally Former President, CEO and board director of Ford Motors Former Executive VP of Boeing Advisory board member of NASA Board member of the University of Washington Board member of the University of Kansas Board member of the MIT Corporation Advisory board member of the U.S. Air Force Scientific

Paul S. Otellini Former CEO and President of Intel

K. Ram Shriram Managing Partner of Sherpalo Ventures, an angel venture investment company based in Silicon Valley Former Vice President of Amazon Member of the Board of Trustees of Stanford University

Shirley M. Tilghman Former President of Princeton University Trustee of the Advantage Testing Foundation Trustee of Amherst College Trustee of the Carnegie Endowment for International Peace Trustee of the King Abdullah University of Science and Technology Trustee of the Leadership for a Diverse America

Vint Cerf Chief Internet Evangelist of Google Widely known as the father of the Internet because of his invention of TCP/IP protocols

kinds of start-ups are in the industry. An elite institution would like its graduates to be employed by Google, hence it can enhance its marketing value to prospective students. Similarly, Google would like a higher education institution to train students to be value-producing, prospective employees of Google. The power of Google not only comes from its revenue, but also its ability to provide mutual benefits with other corporations and organizations.

Social Marketing

Google funds initiatives that make the world better through the use of information. It also donates money to relieve natural disasters and encourages employees to do voluntary work. Google.org is the philanthropic wing of the corporation. Google.org gives out global impact awards to entrepreneurs in the areas of education and computer science, environment, development, and women and girls. For example, Google funded a project that develops software to analyze gender portrayals in the media. It also funds a project to eliminate images of sexually exploited children online. Google.org also awards Google Impact Challenge to non-profits in Japan, India, Brazil, Australia, the U.K., and the Bay Area. It asks the public to vote on non-profit proposals that use innovation to make the world better. The projects may or may not be related to information. In addition to the awards and challenges, Google also donates money to causes that may or may not deal with information, such as disaster reliefs.

The company has three other public policy initiatives:

• Google Ideas: A think tank that connects users, experts, and engineers to use innovation to confront threats resulted from conflicts and repressions.

• Google for Education: A resource site for educators to connect with each other and to offer discounted Google products for the classroom.

• Google Green: Policies to reduce carbon footprint and to increase energy efficiency.

Cultural Profile

Symbolic Universe and Ideology

The previous two sections laid out the economic and political power of Google. Google may appear to be an unconventional corporation, or an antagonist to traditional media companies. For a company of its size, Google does not own many physical assets, it does not produce tangible goods, and it is a company that reliably generates revenue almost exclusively from advertising. Because Google is so flush with surplus capital, it is able to exert power on the political domain by lavishing money on political campaigns and civil society projects. Its stance on merging business with innovation also attracts notable leaders to join its board from academia and industry.

While popular books such as The Google Story and Googled: The End of the World as We Know It24 like to suggest Google’s success has roots in its revolutionary technology and life-changing services, they do not explain how Google’s slogans of “organizing the world’s information” and “don’t do evil” create and maintain the ideology of “more information is preferred to less” and “access to the world’s information is attainable.” Without this well-maintained ideology, Google would not be able to capitalize on information.

Google’s Annual Reports usually start with a letter from the founders that reiterates Google’s ideology of information, business model, and talent. The following lists the main themes and illustrative quotes under three categories:

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Information

• Online search can change users’ lives and the world: “Sergey and I founded Google because we believed that building a great search experience would improve people’s lives and, hopefully, the world”25; “I have always believed that technology should do the hard work—discovery, organization, communication—so users can do what makes them happiest: living and loving, not messing with annoying computers!”;26 “millions of people living under totalitarian regimes are able to glimpse freedom every day of their lives, albeit virtually”;27 “technology has also democratized communication and creation of information. Capabilities that were once available only to the largest corporations are now available to businesses, political movements, governments, and individuals alike.”28

• Technology only advances, not regresses: “Getting actions lightning fast is especially important on smaller devices like mobile phones”;29 “finding important technological areas where progress is currently slow, but could be made fast, is what Google is all about”;30 “the technology revolution also has an economic impact: it is enabling more and more people globally to make a living for themselves entirely online.”31

• Information is a form of artificial intelligence: “before you’ve even finished typing ‘weather’ into the search box we give you the weather because we’ve learned that’s most likely what you’re looking for”;32 “creating the perfect search engine remains our ultimate goal, but we’re still a long way from doing that, which is why we are not resting on our laurels”33; “we founded Google to help connect people to the information they need, and we have been obsessively focused on that goal ever since”;34 “what were once considered the far-flung corners of artificial intelligence research have now reached the mainstream.”35

• More information is better than less information: “There is a huge amount of data in the world that isn’t publicly available today”;36 “at the basic level, there is tremendous knowledge available in books and libraries that hasn’t made it onto the Internet”;37 “as devices multiply and usage changes (many users coming online today may never use a desktop machine), it becomes more and more important to ensure that people can access all of their stuff anywhere.”38

Business Model

• Please love Google (because we are different): “We have always wanted Google to be a company that is deserving of great love. But we recognize this is an ambitious goal because most large companies are not well-loved, or even seemingly set up with that in mind.”39

• Don’t do evil (to make money): “We have always believed that it’s possible to make money without being evil.”40

• Ambitious and risk-taking: “I’ve found that it’s easier to make progress on mega-ambitious goals than on less risky projects.”41

Talents

• Invest in employees: “Our goal is to hire the best at every level and keep them. In our experience your working environment is enormously important because people want to feel part of a family in the office, just as they do at home.”42

The Google ideology has been critiqued by scholars, but the focus tends to be on Google’s view on information, rather than on the business model and workers.43 For the last two areas, a political economy of communication provides a vantage point from which Google can be seen as a business and as capitalist social relations.

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The Googlization of Everything, Search Engine Society, and Deep Search are three scholarly books that critique Google’s views of information from a sociocultural perspective.44 Siva Vaidhyanathan uses the term “googlization” to describe how Google has permeated culture and has affected how users view themselves, the world, and human knowledge. These three books point out that Google’s search results are claimed to be objective, but they privilege results that are already popular. Consequently, Google provides good answers, but not the best answers, because the popular pages do not necessarily mean the best sources of information. At a macro level, Google “fractures a sense of common knowledge or common priorities.”45 The film Google and the World Brain46 further pointed out the problem of seeing artificial intelligence as the ultimate goal of information gathering. It suggests that Google’s unspoken aim is to collect as much information as possible so as to create a digital world of knowledge that would replace human-centered and oriented knowledge.

While critiques on Google’s view of information hint that Google is after all a business entity, they rarely theorize Google’s business model, especially its reliance on advertising revenue. I argue in “Google Ads and the Blindspot Debate”47 that Google is able to rely on advertising revenue because it has a vertically integrated system in which the company controls every step of the process by providing search results to users, by selling “keywords” to advertisers and by providing statistics to advertisers. In short, Google puts a value on a non-exhaustive, non-exclusive commodity (i.e., keywords) and internally validates its value. It is impossible to bid for keywords outside Google AdWords, and it is impossible to obtain search results statistics outside Google. Christian Fuchs and Dwayne Winseck holistically look at the capital accumulation process.48 Grounded in Marx’s M–C–M' (money–commodity–more money) model, Fuchs argues that because Google provides free services, the company’s commodity is not service, but users who are double objects of commodification.49 At the first level, they are Internet prosumers who provide data for Google at no cost. At the second level, they are subjected to advertisements and are sold as an audience commodity. The subject of the audience commodity in a user-generated-content era has renewed scholarly interest in what the media sell and what advertisers buy.50

Google’s ideology of being a great workplace for the smartest people obscures the social relations between capitalists and workers. The tale of the first handfuls of Google employees becoming millionaires has obscured the working conditions of the lowest-paid workers in the company. The fact that two of its former female executives—Marissa Mayer and Sheryl Sandberg—have become prominent executives in other hi-tech companies has also hidden gender disparities in the workplace. Christian Fuchs calls Google’s engineers a “labor aristocracy,”51 akin to skilled workers during the Industrial Revolution. Their enjoyment of higher wages made their lives more upper-middle-class than working-class laborers. However, the culture of “playbor” (play labor) instilled in the company extracts more value from the workers: the competitiveness of the work environment, the outstanding amenities, and the work culture all ask Google workers to endure long hours on campus. Little has been written on how the prolonged workday has disadvantaged women. The working mother image of Mayer and Sandberg does not apply to all working women at Google, because both are wealthy and privileged individuals. They were able to “make it” and “lean in” because of the paid productive and reproductive female labor that sustains themselves and their family. An example is Mayer eliminating the telecommuting option at Yahoo, which may hurt the work–life balance of working mothers. At the same time, after she returned from giving birth, she was privileged enough to have a nursery in her corner office and hire a full-time nurse to take care of the infant.52

There is an absence of data and discussion of how cheap labor creates surplus value for the company. For example, the secrecy of Google Books obscures who take up the tedious task of scanning the books, how much those workers are paid, where they work, and whether they are Google employees or not.53 Similarly, the work life of administrative and support staff at Google

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is also hardly written about. If attention were paid to the creation of surplus value by the manual labor at Google, then Google may not be such an unconventional company at all.

Example(s) of Popular Products/Services and Place in Culture

The number of Google users is staggering and is the envy of traditional media companies. However, Google’s motto is that users should spend as little time on its page as possible because the less time they spend on their page, the better the results are. The same cannot be said for Gmail and YouTube. The following figures indicate the usage of Google54 as of December 2014:

• Number of monthly Google searches: 11.944 billion (on average, more than one search per person on earth).

• Number of unique Google users: 1.17 billion (on average, one in seven persons on earth). • Number of YouTube users: 1 billion. • Number of Gmail users: 425 million.

In 2006, the Oxford Dictionary included “google” as part of the contemporary English vocabulary. Google is defined as a verb with the definition: “search for information about (someone or something) on the Internet using the search engine Google.” When a company name comes to represent its products or services (such as Xerox or Kleenex), it can be deemed as part of the daily life.

Cultural Exports

Google has localized sites in over 200 domains; most are grounded in a country, but some are linguistic territories (such as google.cat for Catalan countries) or occupied territories (such as google.ps for Palestine). There are more than 130 languages for the Google interface. Google is currently the most used search engine in every country except five: Russia, China, and South Korea, where their respective home-grown search engines are the most popular (Yandex, Baidu, and Naver); and Yahoo is the most popular search engine in Japan and Taiwan. In addition to Google being an exporter of technology and innovation, Google users are also exporters of culture. According to the Oxford Internet Institute,55 U.S. Internet users generate the most content on Google, followed by Germany and Japan. Because the two most populated countries, India and China, are “laggards” in producing user-generated content, Google does appear to be the platform that allows for a googol of webpages. The question is whether capital accumulation of this company can be as indefinite as the number of webpages; if not, then it illustrates the limits of capital.

Conclusion

It is worthwhile to review the The Ten Commandments of Google as stated on the page “Ten things we know to be true”:56

1. Focus on the user and all else will follow. 2. It’s best to do one thing really, really well. 3. Fast is better than slow. 4. Democracy on the web works. 5. You don’t need to be at your desk to need an answer. 6. You can make money without doing evil. 7. There’s always more information out there.

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8. The need for information crosses all borders. 9. You can be serious without a suit.

10. Great just isn’t good enough.

The mottos of Google do not talk about bottom line, profit margins, or market value. An analysis of Google’s business does show that it has used strategies such as diversification and globalization that most corporations do. We may reason that Google’s non-business-oriented mottos are a façade that the company builds to hide its economic motives. However, what may be more likely is that the founders, board members, executives, and workers do truly believe that Google is here for the greater good rather than greater profits, that Google is interested in making the world better rather than making money, and it just accidentally becomes rich. This ideology is perhaps the most dangerous of all of capitalist ideology because it refuses to acknowledge the political economic system to which Google belongs and in which Google thrives.

Notes

1 Global 500, http://fortune.com/global500/ 2 The world’s billionaire, www.forbes.com/billionaire/ 3 Top companies in innovation, responsibility, and more, www.fortune.com/2014/02/27/worlds-most-

admired-companies-top-companies-in-innovation-responsibility-and-more/; wwwfortune.com/2014/02/ 27/worlds-most-admired-companies-top-companies-in-innovation-responsibility-and-more/

4 Google Inc. Announces First Quarter 2015 Results, https://investor.google.com/earnings/2015/ Q1_google_earnings.html

5 Fortune 500, http://fortune.com/fortune500/ 6 Google, Investor Relations, http://investor.google.com/earnings/2013/Q4_google_earnings.html 7 Google, Annual Report 2013 (Mountain View, CA: Google, 2013, 6). 8 Netmarketshare, http://Netmarketshare.com 9 See note 8.

10 Press release “Google to Acquire Motorola Mobility”, August 15, 2011, http://investor.google.com/ releases/2011/0815.html

11 See note 7, 2. 12 Murdoch accuses Google of News “Theft,” http://articles.latimes.com/2009/dec/02/business/la-fi-news-

google2–2009dec02 13 Google, Annual Report 2012 (Mountain View, CA: Google, 2012, 14). 14 See notes 7, 15. 15 For updates, interested readers can consult www.google.com/intl/en/options/ for the latest. 16 Derek Thompson, “A World without Work,” Atlantic Monthly (July/August 2015), 53. 17 Google glasses are $1,500—-and you can’t have them, http://money.cnn.com/2012/06/27/

technology/google-glasses/ 18 Nasdaq, www.nasdaq.com/symbol/goog/ownership-summary 19 Barack Obama (D), www.opensecrets.org/pres08/contrib.php?cid=N00009638 20 A decade in Google lobbying, http://blogs.wsj.com/numbers/a-decade-in-google-lobbying-1713/ 21 Google spent record cash lobbying Congress in 2014—rep, www.theregister.co.uk/2015/01/22/

tech_firms_lobbying_washington_2014/ 22 Google’s New Digs in DC Opens to Senators, Dogs, www.bloomberg.com/news/articles/2014-07-16/

google-s-new-digs-in-dc-opens-to-senators-dogs 23 Issues 2014, http://blogs.wsj.com/numbers/a-decade-in-google-lobbying-1713/; also, consult Open

Secrets.org for full details. 24 Ken Auletta, Googled: The End of the World as We Know It (New York: Penguin, 2009); David Vise and

Mark Malseed, The Google Story (New York: Delta, 2006). 25 See note 13, i. 26 See note 13, ii. 27 Google, Annual Report 2010 (Mountain View, CA: Google, 2010, ii). 28 See note 27, vi. 29 See note 13, vi. 30 Google, Annual Report 2009 (Mountain View, CA: Google, 2009, ii). 31 See note 27, vi.

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32 See note 13, v. 33 See note 30, iv. 34 See note 27. 35 See note 27, v. 36 Google, Annual Report 2011 (Mountain View, CA: Google, 2011, v). 37 See note 30 viii. 38 See note 13, vii. 39 See note 13, x. 40 See note 13, xi. 41 See note 13, xiii. 42 See note 13, xii. 43 See Alexander Halavais, Search Engine Society (Cambridge: Polity, 2009); Siva Vaidhyanathan, The

Googlization of Everything (And Why We Should Worry) (Berkeley, CA: University of California Press, 2011). 44 Konrad Becker and Felix Stalder, eds., Deep Search: The Politics of Search Beyond Google (Innsbruck, Austria:

StudienVerlag, 2009); Halavais, Vaidhyanathan. 145 Vaidhyanathan, 139. 46 Google and the World Brain, Directed by Ben Lewis (Barcelona: Polar Stars Films, 2013), DVD. 47 Micky Lee, “Google Ads and the Blindspot Debate,” Media, Culture, and Society 33, no. 3 (2011): 433–448. 48 Christian Fuchs, “A Contribution to the Critique of the Political Economy of Google,” Fast Capitalism

8, no. 1 (2011), www.uta.edu/huma/agger/fastcapitalism/8_1/fuchs8_1.html, accessed December 10, 2014; Christian Fuchs, “Google Capitalism,” Triple C: Cognition, Communication, Co-operation 10, no. 1 (2012): 42–48, www.triple-c.at/index.php/tripleC/article/view/304, accessed December 10, 2014; Christian Fuchs and Dwayne Winseck, “Critical Media and Communication Studies Today: A Conversation,” Triple C: Cognition, Communication, Co-operation 9, no. 2 (2011): 247–271, www.triple-c.at/index.php/tripleC/ article/view/270, accessed December 10, 2014.

49 Fuchs 2012. 50 Due to the nature of this book chapter, we will not delve deep in the question of prosumers and

affective/subjective labor; interested readers may consult Micky Lee, “From Googol to Guge: The Political Economy of a Search Engine,” in The Audience Commodity in a Digital Era: Revisiting a Critical Theory of Commercial Media, eds. Lee J. McGuigan and Vincent Manzerolle (New York: Peter Lang, 175–191).

51 Christian Fuchs, “Theorising and Analysing Digital Labour: From Global Value Chains to Modes of Production,” The Political Economy of Communication 2, no. 1 (2013): 3–27, www.polecom.org/index.php/ polecom/article/view/19, accessed December 10, 2014.

52 Marissa Mayer, who just banned working from home, paid to have a nursery built at her office. Business Insider, www.businessinsider.com/marissa-mayer-who-just-banned-working-from-home-paid-to-have- a-nursery-built-at-her-office-2013-2#ixzz3en4xgip;153; see note 24.

54 According to the site Digital Marketing Ramblings, http://expandedramblings.com/ 55 Information graphics at the Oxford Internet Institute, http://geography.oii.ox.ac.uk/?page=home 56 The things we know to be true, Google Company, www.google.com/about/company/philosophy/

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