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Market Pulse
Monday, March 20, 2023

A banking crisis, Microsoft making big bets on the future, and VCs going all in on Generative AI

Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team. 

In this week’s edition we have:

  1. A banking crisis this side of the Atlantic
  2. Microsoft is making some big bets on the future
  3. VCs going all in on generative AI. A trillion dollar market?

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It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) A banking crisis this side of the Atlantic 

Concerns about the liquidity and solvency of banks might have started on the other side of the Atlantic, but it has quickly spread to Europe. Over the last week Credit Suisse was in investors’ crosshairs and Swiss officials had to step in to provide more than $50bn in support [1]

There are few similarities between the crisis at Silicon Valley Bank and Credit Suisse. At SVB the crisis was, at least in part, brought about by rapidly rising interest rates but the problems at Credit Suisse have been festering for years. 

Credit Suisse is one of the largest banks in Europe and is more than 166 years old. Unlike SVB, Credit Suisse is a bank with a global presence and is considered to be systemically important by regulators. This means it is subjected to very strict liquidity rules and regulatory stress tests. But the issues at Credit Suisse did not stem primarily from its balance sheet. 

Credit Suisse has been involved in scandal after scandal over the last few years [2]. Credit Suisse was recently fined for its involvement in the Mozambican ‘Tuna Bond’ scandal and it was also the first Swiss Bank found guilty of corporate crime after it was discovered they failed to prevent money laundering relating to a Bulgarian cocaine cartel [3].  Partly as a result of all of this, the market value of Credit Suisse had fallen from more than $50bn early in 2018 to less than $10bn at the end of last week [4]

Investors and depositors have been on edge since SVB. It didn’t take much for investors and customers to lose faith in Credit Suisse. Last week, Credit Suisse announced they had identified material weakness in their internal controls related to financial reporting [5]. Things quickly escalated when one of their biggest shareholders, The Saudi National Bank, announced they will not invest any more into the troubled bank [6]

The Swiss National Bank quickly stepped in to provide liquidity support in the form of fully collateralised loans. Credit Suisse also reminded investors that, as a global systemically important bank, they had more than adequate liquidity cover. But despite all the efforts investors and depositors seemed unconvinced. By late last week customers were withdrawing more than $10bn a day from Credit Suisse [7]

Over the weekend, regulators announced that they were working on a deal to merge the two biggest Swiss lenders, UBS and Credit Suisse. A potential deal would normally have to be approved by UBS shareholders but in an extraordinary move, Swiss authorities announced they might change the country's laws to bypass a shareholder vote. On Sunday, UBS offered to buy Credit Suisse for $3.25bn, 59% lower than the market value on Friday [8].  

If the deal goes through it would be one of the most important banking combinations in Europe since the financial crisis in 2008 and would make UBS one of the biggest banks and asset managers in Europe. 

2) Microsoft. Making some big bets on the future

Microsoft is aiming to get a piece of the roughly $100bn mobile gaming market pie. 

Microsoft acquired Activision for almost $70bn in January 2022. But the deal isn’t done yet. Regulators around the world are worried that it would give Microsoft too much power in the gaming industry and lead to higher prices and fewer choices for customers [9]

The Competition and Markets Authority (CMA) in the UK recently did a review and provisionally concluded that the merger could harm UK gamers who can’t afford expensive consoles like the Xbox. Microsoft already accounts for 60%-70% of global cloud gaming services and gaming is the biggest form of entertainment in the UK. UK consumers spend more on gaming than on streaming TV and music services, going to the cinema or buying books [10].

The CMA is worried that Microsoft buys Activision and makes their flagship game, Call of Duty, exclusive to Microsoft. This worry is not misplaced. Buying gaming studios and then making content exclusive is a strategy Microsoft has used in the past [11]

In documents released to the CMA, Microsoft revealed that they plan to open their own game store on mobile devices and, through it, offer titles like Call of Duty Mobile and Candy Crush. It makes sense for Microsoft to expand into mobile gaming as the mobile gaming segment generates more revenue than console and PC gaming combined. 

But their plans face a few roadblocks. For starters, Apple doesn't allow other companies to operate their own app / games stores on the iPhone. This could be about to change. In the EU, the new Digital Markets Act, is expected to come into force in early 2024. This could force companies, like Apple and Google, to open up their platforms to app stores operated by companies like Microsoft [12]

It might prove difficult to lure mobile gamers out of the app / games stores they have gotten used to but Microsoft is betting that offering hit games like Call of Duty and Diablo Immortal, could entice gamers into their own games store. 

The CMA said the only way competition concerns can be resolved is by spinning off the Call of Duty franchise but Microsoft is arguing the franchise is a pillar of its plans to enter mobile gaming. In an effort to meet regulators halfway, Microsoft proposed binding commitments to offer games like Call of Duty on rival platforms.  

We don’t yet know how this will play out but what is clear is that Microsoft is making some big bets on the future. First, it announced the acquisition of Activision, its biggest ever, and more recently, it invested $10bn into OpenAI, the company that invented ChatGPT. Let's see how this plays out over the next few years. If Microsoft has its way we’ll soon be playing Call of Duty on our iPhones while ChatGPT4 is creating that Excel sheet the boss needs.

3) VCs going all in on Generative AI. A trillion dollar market?

Many of us have been amazed by ChatGPT3. Now we have ChatGPT4 and, according to some accounts, it knocks the socks off its predecessor [13]. But is there a risk that this is the start of a new AI hype cycle? Is Generative AI a solution in search of a problem like some have claimed [14]?

Generative AI is a technology that can generate creative output, like text or images, based on user input. VCs, the people and companies that fund new startups, have quickly shifted their focus from the Metaverse and Web3 to backing this new disruptive technology. Generative AI is seen as a productivity enhancing tool for more than a billion knowledge workers in the global economy. If generative AI can improve productivity, it has the potential to create trillions of dollars of economic value [15]

Over the last few months companies have gained developer access to base AI models, like ChatGPT and Dall-E, and the application layer is now seeing explosive growth. The race to build killer generative AI apps is on. And VCs are in a race of their own to find the startups that will develop them. 

Mobius AI is an interesting case study. Four AI researchers left Google to create their own startup. They weren’t entirely sure what their product might be other than it would be driven by generative AI and focus on photos and videos. Within a week, top VC firms like Andreessen Horowitz and Index Ventures, offered funds that valued Mobius AI at a staggering $100mn. An unusually high valuation for a very early stage startup [16].

Since then, dealmaking in generative AI has accelerated. At Y Combinator, an incubator of startups, at least 50 of the more than 200 companies currently in the program are working on generative AI [17]. During 2022 investors poured over $2.6bn into more than 100 generative AI deals and recently Salesforce announced that its Salesforce Ventures corporate VC was launching a new $250mn generative AI venture fund [18]. The fund has already invested in at least four generative AI startups, including Antropic founded by former OpenAI employees and Cohere, a startup that recently partnered up with Google. 

Generative AI has clearly caught the imagination of consumers and investors alike but it’s important to keep a few things in mind. Training an AI model like ChatGPT4 can cost up to half a billion dollars [19]. Training large language models is a game of kings. Many startups will likely have to try and build their own unique and differentiated products using a model pre-trained by someone like OpenAI or Google. 

Another thing to remember is that the use of AI in the workplace is an emotive topic. People are generally excited about the potential but many are also a bit apprehensive. They don’t want to lose their jobs to ‘productivity enhancing tools’. Copilot, a tool that writes code, already writes up to 40% of the code on the projects it’s used on. This clearly suggests the possibility of a future where fewer coders are needed [20].

It’s reasonable to expect regulators to be heavily involved in the ethical deployment of AI and to balance the potential of the technology with the potential harm to society. Some types of applications might be banned altogether. There are already examples emerging of the ability of the new AI tools to be used for more nefarious purposes. One reporter recently used an audio AI tool to fool the voice analysis security protocols at his bank [21]

We’re only just beginning to fully understand how the combination of smartphones and social media are harming the mental health of teenagers around the world [22]. We don’t want to look back in 10 or 20 years from today and find a collapse in the mental health of knowledge workers due to the advent of generative AI. This is a technology that should strive to make our lives better, more productive, happier. Not make us stress over long-term job security. 

We don’t know if this is just another AI hype cycle or if we are at the beginning of one of the most fundamental advances in technology since the invention of electricity. The pace at which VCs are investing in the sector seems to indicate we might be at the cusp of something truly transformative. Time will tell.


[1] https://www.ft.com/content/17892f24-4ca0-417f-9093-289b019a0852 

[2] https://www.ft.com/content/18278291-772e-4caa-8910-1d7b8563ed42 

[3] https://www.ft.com/content/17892f24-4ca0-417f-9093-289b019a0852 

[4] https://www.investorschronicle.co.uk/news/2023/03/20/credit-suisse-rescue-shockwave-spreads/ 

[5] https://www.ft.com/content/3605c3fb-973d-440d-88e3-9ddf367bbef2

[6] https://www.ft.com/content/85f6768d-0a01-41a3-8925-1c636d3f7dbc 

[7] https://www.ft.com/content/5746165a-3a0c-42c7-9a2e-cb7cf5f33f46 

[8] https://www.ft.com/content/9fe40e6a-f01f-4205-b885-7771d305721e 

[9] https://www.theverge.com/2023/2/8/23590700/microsoft-activision-uk-cma-findings-call-of-duty 

[10] https://www.gov.uk/government/news/microsoft-activision-deal-could-harm-uk-gamers 

[11] https://www.ft.com/content/7707705e-b288-4531-b30d-7fa993325018 

[12] https://www.ft.com/content/0c2d56f7-a402-45ea-8aa6-0e05e6260b68 

[13] https://sifted.eu/articles/testing-gpt4-ai-news/ 

[14] https://sifted.eu/articles/generative-ai-startups-chatgpt-openai/  

[15] https://www.sequoiacap.com/article/generative-ai-a-creative-new-world/ 

[16] https://www.nytimes.com/2023/03/14/technology/ai-funding-boom.html 

[17] https://www.nytimes.com/2023/03/14/technology/ai-funding-boom.html 

[18] https://techcrunch.com/2023/03/07/salesforce-ventures-targets-new-250m-fund-at-generative-ai-startups/ 

[19] https://epochai.org/blog/trends-in-the-dollar-training-cost-of-machine-learning-systems 

[20] https://www.reuters.com/technology/microsoft-attracting-users-its-code-writing-generative-ai-software-2023-01-25/ 

[21] https://www.vox.com/technology/2023/3/6/23624015/silicon-valley-generative-ai-chat-gpt-crypto-hype-trend 

[22] https://www.ft.com/content/0e2f6f8e-bb03-4fa7-8864-f48f576167d2

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