Data Sheet—Winter Is Coming for China’s Tech Sector

We’re trying something new with Data Sheet today. The lead essay is by Clay Chandler, Fortune’s Asia editor, bringing a different perspective to the tech beat.

Greetings from Hong Kong, where it is hotter than the inside of a bamboo steamer and Typhoon Jongdari looms ominously in the distance. And yet, here in The Greater Bay Area (that’s right, the other bay area) it seems like the only season techies want to talk about is winter. As in: “capital winter.” A lot of smart people say it’s coming soon to China.

Don’t get me wrong. It’s not like a horde of Chinese entrepreneurs has taken the black, scaled the Great Wall, and are now moodily scouring the horizon for White Walkers Game of Thrones style. But there’s been a significant shift in mood. I’m hearing uncharacteristic expressions of caution, anxiety, and sometimes even humility from a group of folks whose outlook hitherto I’d describe as maximum bullish turned up to eleven.

More on that below. But first an introduction: I’m Clay Chandler, Fortune’s Hong Kong-based Asia editor and co-chair with Adam of the new Fortune Global Tech Forum, which we’ll host in Guangzhou, China November 29-30. On Saturdays, I chime in on China issues over on Alan Murray’s CEO Daily. Adam and Aaron have invited me, beginning this week, to focus on Chinese tech issues here in Data Sheet each Wednesday. I will try to keep you up to speed on key China tech developments—and preview issues we’ll be exploring in Guangzhou. Send your comments and feedback. We’d love to hear from you.

Now about that China chill. New York Times technology writer Li Yuan surveyed the sudden “climate change” for China tech investments here. She recounts the plight of three young men who raised $45 million almost effortlessly for a tech venture fund in 2016, but this June decided to close the firm. The problem: a sudden dearth of investors and promising ventures. She wonders whether the sudden scarcity of venture funding in China “may be a symptom of a widening malaise” in the economy.

Warnings that China’s red hot tech sector might be cooling began in spring, as investors and analysts started to notice the number of Chinese tech startups planning IPOs. China is home to more than 70 unicorns; nearly two dozen were waiting to raise money on public exchanges. The queue included some of China’s heftiest startups: Tencent Music, estimated to be worth about $25 billion; Didi Chuxing, estimated to be worth $80 billion; and the biggest prospect of them all, Ant Financial, the Alibaba Group affiliate said to have a valuation of $150 billion.

In April, the Wall Street Journal fretted that investors risked getting crushed in the Chinese tech IPO rush. Bloomberg considered it a “bad omen” that two-thirds of the 21 China tech IPOs that debuted in 2017 have dipped below their issue prices. This year’s IPOs have hardly improved the feng shui. ZhongAn Online and PingAn Good Doctor, which listed on the Hong Kong exchange, have been trading well below their IPO price. On the Nasdaq, shares of iQiyi, a video-streaming platform, peaked in mid-June. Pinduoduo, which raised $1.6 billion in a U.S. public offering July 26, shot up 40% in its first day of trading but has lost ground since. The big shocker was Xiaomi, China’s smartphone manufacturing powerhouse, which was valued at $50 billion—half the valuation it said it was seeking few months ago—in its July 8 IPO in Hong Kong. Financial Times’ Henny Sender warns Xiaomi’s lackluster debut has “cast a lengthy shadow” over the listing prospects of other Chinese tech companies. Meanwhile, the share price of Tencent Holdings, one of China’s two Internet giants, has fallen by about 25% from its January peak, wiping out $140 billion in value.

None of this is to say China’s tech prowess is illusory. Adam and I have argued elsewhere in Fortune that we think China has emerged alongside the U.S. as a new tech and innovation superpower. A capital winter, if it comes to China, will eventually thaw. For better or worse, China’s rise remains one of the global economy’s most important developments.

NEWSWORTHY

Role reversal. Speaking of China, Google may be making a return, of sorts, to the mega-market it left in 2010. The company is planning to launch a government-approved, censored version of its search service in China, code-named Dragonfly, The Intercept reports citing internal Google documents and people familiar with the plan. Google didn't comment to the publication.

Not quite a trillion yet. Still in the far east, Apple reported results for its fiscal third quarter, and sales to the greater China region gained a healthy 19% to $9.6 billion. Overall revenue jumped 17% to $53.3 billion and earnings per share gained 40% to $2.34. Both figures were slightly better than Wall Street expected and Apple's shares were up 4% in premarket trading on Wednesday. CEO Tim Cook also gave the strongest hints yet that Apple is planning a subscription video service. Asked about the company’s deal with Oprah Winfrey, Cook said Apple is “working on a project that we’re not really ready to share all the details of it yet,” adding “I couldn’t be more excited.”

Large and in charge. And finally, still speaking of China, the country appointed a new Internet czar. Zhuang Rongwen, 57 and a close associate of President Xi Jinping, will head the Cyberspace Administration of China, which sets industry guidelines related to technology, cybersecurity, and censorship.

Not so fast. The Internet will not be flooded with plans for making untraceable plastic gun parts on a 3D printer—at least not yet. Federal District Judge Robert Lasnik in Seattle issued a temporary restraining order blocking a nonprofit called Defense Distributed from posting the plans. The Obama administration had sued to block the nonprofit run by Cody Wilson from posting the plans in 2015 but the State Department settled that case last month.

Look up. French lawmakers voted to ban smartphones in schools, covering kids up to the age of 14 or 15. Smartphones were already banned in the classrooms of French primary and middle schools since the start of the decade, but had been allowed on other parts of school grounds.

Avoiding the wild west. Genetic testing companies including Ancestry and 23andMe agreed to a voluntary set of more stringent rules to protect the privacy of customer DNA data. Under the new guidelines, companies must get “separate express consent” before providing genetic information to third parties. They also promised to provide “detailed transparency about how Genetic Data is collected, used, shared, and retained."

Fooled me once, shame on me. In the run up to the November midterm elections, Facebook said it uncovered evidence of additional meddling by unknown "bad actors." The company said Tuesday that it removed 17 profiles, eight pages, and seven Instagram accounts that were exhibiting “inauthentic behavior.” Some of the now-removed pages were titled “Aztlan Warriors,” “Black Elevation,” “Mindful Being,” and “Resisters.”

There's no such thing as a free lunch. Wither MoviePass? Helios and Matheson Analytics, parent of the too-good-to-be-true service, has been running out of cash lately. On Tuesday, it increased the price of a standard monthly plan to $15 and limited subscribers' access to first run movies. Shares of the company went on a wild ride, jumping to $2 before plunging to 50 cents, down 38% on the day.

FOOD FOR THOUGHT

Technology has revolutionized the advertising business, or so it seems. So-called adtech firms use hundreds of data points collected about consumers to target online and video ads to precisely chosen audiences. The methodology challenges the traditional business, overturning the image of Don Draper making up genius TV commercials. Ian Leslie has a piece for The New Statesman delving into whether the adtech business is quite as overwhelming as it seems. There may still be utility in the old mass market ad, he writes:

In his 2001 book Rational Ritual, the academic Michael Suk-Young Chwe argued that advertising solves what economists call a “co-ordination problem.” It helps us to see the world as others see it, and adapt our behaviour accordingly. If I know that a particular beer brand is associated with “quality” in the eyes of most people in the bar, then I will find it easier to drink it in public, regardless of my own personal preference, presuming I even have one. That wouldn’t be the case if I didn’t know that those people have seen the same ads as me. Being able to solve a problem like that is highly valuable for a brand, which is one reason why the cost of Super Bowl TV advertising has risen so steeply in the era of the internet: a 30-second commercial in 2018 cost about $5m, up from $1m in 1995. Messages can be microtargeted, but meaning has to be mass-produced.

Trust, too. The very act of advertising in public tends to make a brand more trusted, since people can see it has a social reputation to maintain. When ads are invisible to people outside their target audience, it is easier to send messages that would fare badly in the light of public scrutiny—for political actors, Facebook is a dog-whistler’s paradise. Researchers have consistently found that ads in broadcast media are taken more seriously than online ads: one reason for this is that people can see that other people can see them too. Even Mark Zuckerberg understands this at some level. Seeking to restore trust in Facebook in the wake of the Cambridge Analytica scandal, he ran full-page ads in newspapers.

IN CASE YOU MISSED IT

Hack, Bug or Easter Egg? Why an 'Airplane' Reaction Appeared in Some Facebook News Feeds By Kevin Kelleher

Apple CEO Tim Cook Treads Cautiously on Trade, Does Not Criticize Trump By Aaron Pressman

Why We Might See 'Facebook Prime' in the Near Future By Rahul Kapoor

HP Will Pay Researchers $10,000 If They Can Hack Its Printers By Kevin Kelleher

Sprint Had Merger Talks With 3 Other Companies Before Agreeing to T-Mobile Deal By Aaron Pressman

A Google Company Just Got Approved to Build a 'Neighborhood of the Future' By Renae Reints

BEFORE YOU GO

At Hogwarts, the fictional school of witchcraft and wizardry attended by Harry Potter and his pals, books about dark magic were kept in a special restricted section of the library.

But in real life, many libraries also have (or used to have) a restricted section for books deemed too controversial to make easily available. The massive British Library has a "private case" for books about French erotica and the like. Even the New York Public Library has marked obscene works with *** and put some behind lock and key. Sounds kind of spooky.

This edition of Data Sheet was curated by Aaron Pressman. Find past issues, and sign up for other Fortune newsletters.