TheChek News Flow

ChatGPT maker hires advertising talent from big tech rivals

OpenAI is discussing plans to introduce advertising to its artificial intelligence products, as the ChatGPT maker seeks new revenue sources as it restructures as a for-profit company.

Sarah Friar, chief financial officer at OpenAI, told the Financial Times in an interview that the $150bn AI start-up was weighing up an ads model, adding that it planned to be “thoughtful about when and where we implement them [ads]”.

The San Francisco-based group, which in October secured $6.6bn in new funding, has been hiring advertising talent from big tech rivals such as Meta and Google, according to multiple people familiar with the matter and an FT analysis of LinkedIn accounts.

In a statement following the interview, Friar added: “Our current business is experiencing rapid growth and we see significant opportunities within our existing business model. While we’re open to exploring other revenue streams in the future, we have no active plans to pursue advertising.”

OpenAI is stepping up efforts to generate revenue from its products, such as its AI-powered search engine, as it seeks to capitalise on its early lead in the booming AI sector. Its smaller rival Perplexity is already piloting advertising in its AI-powered search engine.

Friar, who previously held leadership roles at companies such as Nextdoor, Square and Salesforce, pointed to the wealth of advertising experience between herself and Kevin Weil, the company’s chief product officer.

Weil was previously responsible for building out ad-supported products at major tech platforms including Instagram and X. “The good news with Kevin Weil at the wheel with product is that he came from Instagram. He knows how this [introducing ads] works,” said Friar. 

In May OpenAI also hired Shivakumar Venkataraman, who previously led Google’s search advertising team, as vice-president.

Advertising has been a highly successful route for big tech companies such as Google and Meta to monetise their huge online audiences. But OpenAI executives are divided on what advertising might look like on their platform, according to two people with knowledge of the discussions.

Chief executive Sam Altman is warming up to the idea, according to a person familiar with his thinking.

The fast-growing group, which is now one of Silicon Valley’s most valuable private companies with a $150bn valuation, is in the midst of restructuring as a for-profit corporation.

The steep costs of training new models means AI start-ups including OpenAI, Anthropic and Elon Musk’s xAI are looking for new ways to commercialise their technology and are engaged in frequent fundraising efforts. 

OpenAI’s revenues have surged to about $4bn on an annualised basis thanks to the runaway success of ChatGPT, putting it among the fastest-growing start-ups of all time. The chat bot, which launched two years ago, has grown to more than 250mn weekly active users.

But the massive costs associated with developing “frontier” AI models mean OpenAI anticipates burning through considerably more than the company is spending each year in the near-term. It is on track to burn through more than $5bn of cash.

One of OpenAI’s largest sources of revenue comes from access to its application programming interface (API), which enables businesses and developers to build with its technology, as well as by selling individual and enterprise licences of ChatGPT.

“They are pursuing consumer productivity and consumer search. The API is not a high margin business,” the person added.

Friar pointed out that ad models come with drawbacks, including the fact they are sensitive to swings in the broader economic cycle, and that they tend to shift a company’s focus from pleasing their users to their advertisers.

“I don’t preclude [ads],” she said. “But for now there’s lots of low hanging fruit in the way we are doing things.”

While the French are known for their culinary expertise, more people are consuming sugary foods and drinks, and the government is worried that the nation is transforming itself from cheese connoisseurs into snackers of cheesy bites, moving from a country of artisanal draft ale lovers into consumers of sweet bottled beer.

The best example of this trend towards processed food is that of McDonald’s. In 1979, the fast food giant opened its first restaurant in Strasbourg and then strategically spread to all the big cities and, later, to all shopping centers, railways, and motorway service stations to reach as many consumers as possible. France is now the most significant market after the U.S., with 1,707 branches nationwide.

Le Monde cites the pressures of the past few years as another growth factor; the French are desperate to eat more for pleasure, to stem the anxiety felt over the past few years from COVID-19, the Ukraine war, political instability, and food inflation. The nation wants to snack its way to feeling better, and manufacturers are producing more and more fast food snacks that are increasingly calorific.

Last year, the big winners, according to NielsenIQ, were Heineken’s Desperados Tropical beer (rum and passion fruit flavor), Kinder chocolate ice cream, and Kinder Tronky wafers.

Likewise, in the past year, Krispy Kreme has launched 20 outlets across Paris and made $15 million, marketing donuts as the new croissants, tying in with major cultural touchpoints, selling Barbie, Harry Potter, and Halloween versions.

In the fight against obesity and the need to raise revenue for a seriously impoverished economy, one policy idea is to tax these sugary, highly processed products.

Nutritional taxes are gaining favor

The WHO currently recommends that countries use nutritional taxing to combat the increase in chronic diseases like diabetes and obesity, and many institutions like the World Bank are also arguing the same.

The Institut Montaigne, a liberal think tank, plus the CEOs of Coopérative U, BEL (Babybel, Laughing Cow), and Sodexo, recently advocated to raise VAT to 20% for very sweet products, compared to the current 5.5% or 10%.

Or, to help one in five obese adults in France, they suggested that the government could levy a tax on products that don’t meet sugar levels as agreed upon by government ministries. They’re thinking specifically of sweets, chocolate, biscuits, breakfast cereals, spreads, and industrial pastries.

The Institut suggests that the money raised by these measures, equalling €1.2 billion and €560 million a year, could finance a food voucher worth €30 a month for the 4 million poorest French people.

These arguments now have more traction in France, particularly for soft drinks. In 2012, the government introduced a tax on sugary drinks, and then again in 2018 arguing they’re too easy to drink and possibly addictive.

Every year, French people consume more than 21 liters of sugary drinks, and this tax raised about €443M in 2023. Now that the French Senate has voted to make fizzy and sweet drinks much more expensive, this sum could easily double in 2025.

A tax of 4 to 35 cents per liter bottle

The new soda tax will work on a sliding scale based on the amount of added sugar a drink contains.

Below 5g of added sugar per 100g, manufacturers will have to pay four cents on a liter bottle (up from the current 3.79 cents). This would be the case for Lipton’s Peach Ice Tea, say, which has 3g of added sugar per 100g and costs around €1.20 per bottle.

The second tranche is more considerable. Suppose a drink contains between 5 to 8g of added sugar per 100g; then the tax triples to 21 cents, from the current charge of 7.3 cents per liter. This is the case for Schweppes tonic (5,8g of added sugar per 100g), and Oasis, which has 6.6g per 100g. Both, owned by Coca-Cola, will now have to pay a tax of 21 cents on each liter bottle, which sell for $1.20 and €1.40, respectively.

For the third and largest tranche, the tax rises to a whopping 35 cents for any soft drinks where the added sugar is more than 8g per 100g (up from 17.7 cents). This higher tax level applies to a liter of regular Coca-Cola, which contains 10.6g of added sugar and costs about €1.30 per liter in supermarkets, as well as kids’ favorite, Capri Sun (8g of added sugar).

Its difficult to say if large corporations will choose to charge consumers more for soft drinks or try to reduce their sugar content.

Less traction on food products

Forty countries have introduced nutritional taxes, mostly on sugary drinks, because it’s a more straightforward win. The public generally believes it’s more reasonable to tax sugary beverages because they hold little nutritional value and can easily be replaced by cheaper, more nutritious, unsweetened alternatives. The same argument can only sometimes be as easily made for heavily processed food products.

Several MPs in France are calling for a new tax on food products whose nutritional value compromises children’s health by having sugar levels much higher than the recommended limits. However, the Ministry of Health has been squaring up against the Ministry of Agriculture and Food; the latter worried that a new sugar tax would negatively impact businesses that must remain economically competitive and preserve jobs.

To begin with, there may be a softer solution. The government could work with manufacturers on sugar targets, changing ingredients, and using healthier recipes, which could eventually trigger taxation measures, but only if these targets weren’t met.

Investors piling into funds that seek to amplify daily return of MicroStrategy shares, but the ETFs haven’t been working as intended in recent days

Investors have flocked to a pair of turbocharged exchange-traded funds to ride the momentum in bitcoin, but they contain hidden risks that aren’t widely understood.

The ETFs seek to amplify the daily return of MicroStrategy MSTR -0.35%decrease; red down pointing triangle, the software company that has turned itself into a bitcoin buying machine. Using complex derivative bets, they aim to offer double the daily return of the stock—to the upside or downside.

The funds, from asset managers Tuttle Capital Management and Defiance ETFs, are inherently risky. MicroStrategy itself is a leveraged bet on bitcoin, holding some $35 billion of the cryptocurrency. But bullish investors have swelled its market value to almost $90 billion, or more than twice the value of the bitcoin it holds. Skeptics say this is unsustainable.

The Defiance Daily Target 2X Long MSTR ETF and the T-Rex 2X Long MSTR Daily Target ETF MSTU -1.48%decrease; red down pointing triangle were designed for investors who want to place an even more aggressive bet on the stock. Collectively the two funds have ballooned to roughly $5 billion in assets since launching in August and September respectively.

Some analysts say the funds are contributing to the furious rally in MicroStrategy shares. They warn that if the stock were to drop 51% in a single day, the ETFs could be completely wiped out, a blowup similar to what happened with some volatility-linked ETFs after the 2018 market episode dubbed Volmageddon.

On top of that, the two 2X ETFs haven’t been working as intended in recent days. MicroStrategy shares rose 9.9% Wednesday, but the T-Rex fund rose just 13.9%, instead of the 19.8% target. The fund’s performance disappointed when the stock declined, too. Its share price dropped 10.7% on Nov. 25 when MicroStrategy fell 4.4%.

The performance caused an uproar among investors on social media who questioned the discrepancy and said they felt cheated.

Jesse Schwartz, a 36-year-old winemaker and day trader in Washington state, has been using the funds as a tool to amplify his exposure to the stock.

He was surprised to see the shares weren’t performing as advertised. Schwartz called his broker, Charles Schwab, to ask about the discrepancy and wasn’t satisfied with the explanation. He sold all of his shares by the end of the week.

“It’s disappointing to say the least,” Schwartz said. “I’m getting more than the full risk to the downside and then not getting rewarded on the upside.”

Niche fund managers have launched dozens of single-stock ETFs since they were first approved by regulators in 2022. Until this point, the funds have largely worked as advertised. Popular funds that aim to double the daily return of Nvidia and Tesla tend to track closely to their target, thanks to their use of financial contracts known as total return swaps.

Proponents of the funds say they give regular investors access to strategies long used by Wall Street. Critics argue they can be dangerous because they don’t offer diversification. In the case of the MicroStrategy funds, they add leveraged exposure to a volatile stock that moves in relation to an unpredictable cryptocurrency. They warn the hype is part of a broader investor euphoria for speculative assets that will eventually collapse.

The managers of the MicroStrategy funds say they might be struggling to hit the 2x targets because their prime brokers—firms that provide securities lending and other services to professional investors—have reached the limit of the swap exposure they are willing to offer.

Leveraged ETFs typically achieve their desired result through the use of swaps, which are widely available for the biggest, most liquid stocks. Swap contract payments are tied directly to the performance of an underlying asset and allow a fund to double the daily performance of a stock or index with precision.

Matt Tuttle, who runs the Tuttle Capital and Rex Shares 2x long MicroStrategy fund, said he can’t get anywhere close to the amount of swaps he needs for his booming fund. He says his prime brokers are offering him $20 million to $50 million in swaps when at one point last week he could have used $1.3 billion.

Both Tuttle and Sylvia Jablonski, the chief executive of competitor Defiance ETFs, said they are turning to the options market instead to achieve leveraged outcomes for their MicroStrategy funds. Traders can effectively use options to double the daily return of an asset, but analysts say it is more of an inexact science. Options prices fluctuate, and big buyers like the ETFs can move the market.

The use of options is the primary reason tracking has worsened, Tuttle said.

The Defiance ETF dropped nearly three times as much as the underlying stock on Nov. 25. On Friday, it fell 1.76% when MicroStrategy was down just 0.35%.

Analysts say the introduction of the leveraged MicroStrategy ETFs has accelerated moves in the stock. The ETFs have to increase or decrease their exposure every day to achieve a leveraged outcome. The network of market makers offering swaps and options often buys or sells actual MicroStrategy shares to hedge their exposure.

“It’s like putting a lead weight on your foot when you’re driving a car. You can still deal with the gas, but the default mode is going to be floored,” said Dave Nadig, an ETF industry veteran formerly at VettaFi and FactSet.

US hits China’s chip industry with new export controls

Parting measures by Biden administration aim to slow Beijing’s development of AI with military applications

The US has introduced new export controls in an effort to curtail China’s ability to create an advanced semiconductor industry and to slow its development of artificial intelligence with military applications.

The restrictions on the export of key manufacturing tools will affect both US companies and foreign firms that use American technology in their chipmaking equipment.

The US will also prevent the export of advanced high bandwidth memory (HBM), a critical component in AI chips, to China.

US commerce secretary Gina Raimondo said the new controls, which follow two previous broad packages enacted in October 2022 and October 2023, were “groundbreaking and sweeping”.

“They’re the strongest controls ever enacted by the US to degrade the People’s Republic of China’s ability to make the most advanced chips that they’re using in their military modernisation,” she said

The commerce department will also add 140 Chinese groups to the “entity list” — a blacklist that requires US and other companies to apply for export licences which are expected to be virtually impossible to obtain.

The targets include chip manufacturers — such as Semiconductor Manufacturing International Corporation and Huawei — in addition to Chinese companies that produce the equipment to manufacture chips.

Meghan Harris, an export control expert at Beacon Global Strategies, a consultancy, said hitting China’s chipmaking equipment industry would target an area the Biden administration had underestimated.

“Trying to impede China’s advanced semiconductor industry without addressing their accelerating domestic toolmaking capabilities is like trying to prevent a fisherman from catching bigger fish simply by denying him bigger fishing poles. He’ll get there in the end,” said Harris.

The rules restrict the export of 24 types of chipmaking tools that were not previously targeted. To make them more effective, the US will in many cases apply an extraterritorial measure called the foreign direct product rule [FDPR] that will hit non-US companies that have US parts in their tools, which is the overwhelming majority.

One person familiar with the rules said the US had carved out an FDPR exemption for Japan and some European allies, including the Netherlands, after they agreed to apply their own export restrictions. South Korea has not yet secured an exemption, but could later.

One US official said the FDPR would make it harder for US groups to circumvent existing controls by producing tools in other countries — such as Singapore and Malaysia — for export to China.

In a recent report, Gregory Allen, an AI expert at CSIS, said the main American toolmakers — Applied Materials, KLA and Lam Research — had “doubled down” on expanding their non-US manufacturing.

Some critics have privately questioned why the administration is not placing more Huawei chip production facilities on the entity list. Asked how many fabrication plants exist that are not on the list, a second US official would say only that the controls were focused on advanced chip production.

People familiar with the situation said there had been an intense debate inside the administration over how to tackle Huawei. One person said some of the Huawei plants were still not operational, so it was unclear if they would be for advanced chips. But some officials had pushed for tougher controls on the Shenzhen-based company.

In addition to compromises reached between different agencies, the US decided to take a less aggressive approach in some areas in order to get chip-related co-operation on restrictions from its allies.

Questions have also been raised about why the administration did not add CXMT, a Chinese producer of HBM, to the entity list. Some inside the administration had pushed for this, but one person said the other restrictions would have some impact on its ability to produce HBM.

Allen said there was a “bizarre contradiction” at the heart of the new controls. He said that, for example, the administration was significantly expanding the scope of FDPR to cover almost all chipmaking tools around the world, but on the other hand the controls would only cover some Huawei and SMIC shell companies but not others.

“What is the point of blocking sales of HBM and AI chips to China while continuing to allow sales of equipment to CXMT, which is one of the most likely HBM producers in China?” he said.

Private equity group and Singaporean sovereign wealth fund to control smart meter provider

Private equity group EQT and Singapore’s sovereign wealth fund GIC have agreed to buy a majority stake in UK smart meter provider Calisen, valuing the group at about £4bn, as buyout firms step up their bets on the sector.

The investors will acquire the stake in Manchester-based Calisen from BlackRock’s Global Infrastructure Partners, the alternative asset management arm of Goldman Sachs and Abu Dhabi’s sovereign wealth investor Mubadala, according to EQT and GIC.

Founded more than two decades ago, Calisen is one of Britain’s largest owners and managers of smart meters. It also installs electric vehicle charging units, solar and battery technology, and heat pumps.

The move is the latest in a string of acquisitions by private equity firms of companies that help consumers to monitor their energy use, marking increased investor appetite in companies benefiting from the transition to more sustainable power usage.

In recent months, GIC also partnered with the US private equity group TPG on a nearly €7bn deal to acquire the German metering company Techem from Switzerland’s Partners Group.

Other takeovers in the sector include KKR’s acquisition of the UK’s Smart Metering Systems in a £1.4bn deal agreed last December.

Manchester-based Calisen posted a £51.6mn annual pre-tax loss in 2023, from a £138.2mn profit the previous year, on a 25 per cent increase in revenue to £358.2mn. The group manages and owns 12mn smart meters, nearly half of those in the UK.

The group agreed to be taken private for £1.43bn in 2020, by a consortium of investors including BlackRock, less than a year after it listed as a FTSE 250 company in one of London’s biggest initial public offerings that year.

The consortium paid a more than 50 per cent premium to Calisen’s three-month average price, capping a disappointing year for public listings at a time of Brexit uncertainty.

At the time of the delisting, US buyout firm KKR owned the majority of Calisen’s shares, having previously acquired the company in 2016 for a reported value of about £1bn.

“If you think about the energy transition, it’s well known that a lot of investment is required to meet our objectives,” said Kunal Koya, partner at EQT, adding that it required “patient” capital.

“These businesses do well when backed by long-term owners who can invest over time and grow their asset bases.”

Sean Latus, chief executive of Calisen added: “EQT and GIC’s experience in the energy sector will be invaluable as we look to leverage our scale and customer relationships to significantly expand our smart meter portfolio and replicate our success in adjacent areas.”

The German group’s comeback does not end here

Amid the wreckage of Germany’s industrial sector this year, there is one group whose share price rally outstrips even Nvidia’s artificial intelligence-fuelled ascent. This standout was Siemens Energy, the company that in November 2023 required a €15bn German government-backed rescue as it battled a crisis at its wind turbine business.

Shares in the group have surged more than 300 per cent this year (albeit after a difficult 2023), adding about €30bn to its market capitalisation and making it the top performer in the Stoxx 600. Nvidia’s shares are up 187 per cent year-to-date.

A year ago, the question was whether Siemens Energy — spun out of the Siemens conglomerate in 2020 — was at breaking point. Now it is how much further can the shares run?

The rally has more to do with the strength of the company’s other divisions than any rapid improvement at its turbine manufacturing business, Siemens Gamesa. The latter pushed the group to a net loss of nearly €4.6bn in 2023 after faults were discovered with two onshore turbine models. Gamesa made a lower, but still hefty, €1.8bn operating loss for its fiscal year 2024, ending in September.

The other businesses, however, tap into global electrification trends. For example, the “grid technologies” unit makes equipment such as power transformers and switchgears. This sector is in something of a “supercycle” as data centres, China’s electric vehicle boom and net zero targets increase electricity demand, forcing the upgrade and expansion of grid infrastructure.

Siemens Energy’s gas services business, at present its largest by revenue, has also benefited from a push to build more gas-fired power stations in places such as the Middle East and the US.

Those divisions helped Siemens Energy to post a net profit of €1.3bn for 2024. Strong orders meant an upgrade in medium-term financial targets at its results last month.

One concern is whether all this good news is already baked into the shares. Nobody yet knows how long the booming demand in power equipment will last. But with waiting lists for high-power transformers sitting at about six years, according to Deutsche Bank’s Gael de-Bray, it should be a seller’s market for some time.

There could be another tailwind, too. Sum-of-the-parts calculations suggest the market is not at present attributing any value to the wind division. Admittedly, analysts are forecasting another sizeable operating loss of about €1.4bn at Gamesa in 2025. The wind industry is nervously eyeing Donald Trump’s plans. But the Gamesa division is working towards break-even in 2026. In offshore turbines, it still has a market-leading position.

An Nvidia-beating rally will be hard to repeat. But Siemens Energy’s comeback does not end here.

• UniCredit hits resistance from German corporate elite over Commerzbank bid
• Orcel shifts focus to Banco BPM with a 10 bln euro offer
• Commerzbank takeover now seen as in doubt
• Fears in Germany over repeat of HVB scenario

A group of customers from Germany's corporate elite pleaded with Commerzbank's CEO to reject a deal, according to people involved in the meeting at the bank's Frankfurt headquarters, underscoring the depth of opposition.

They warned Germany's second-largest bank would face the same fate as a Bavarian bank HVB, which UniCredit bought in 2005 and subsequently overhauled and scaled back.

On Monday, Orcel switched his focus to his home market with a 10 billion euro ($10.5 billion) offer for smaller Italian rival Banco BPM, saying this deal would take precedence over any potential move for Commerzbank.

Orcel had caught the German establishment off guard by discreetly building a substantial stake in the German lender.

Its announcement in September prompted backlash from politicians, industry and unions.

They warned of potential job losses and detrimental effects a takeover might have on lending to small and medium-sized companies, or Mittelstand, the backbone of Europe's biggest economy, athough some lobbies were more guarded.

Some in Germany, including finance minister Joerg Kukies, see his bid as all but dead, and Orcel's shift in focus was greeted with guarded relief in Commerzbank, according to people familiar with the bank's thinking.

Orcel may not yet be ready to throw in the towel. The consummate dealmaker is bracing for a battle in Germany that could take many months, according to one person familiar with his thinking. A smaller purchase in Italy could allow UniCredit to keep moving while working on the bigger catch.

Resistance, however, remains stiff.

Ulrich Grillo, one of the executives at the recent meeting at Commerzbank, who leads the eponymous chemical maker - a Mittelstand company - said he told the board he feared key financing decisions moving to Milan.

Another attendee, the venture capitalist Christian Miele, a scion of the family famed for its household appliances, said: "No one in the room was in favour of it."

The meeting capped off weeks of pushback against UniCredit.

After UniCredit snapped up HVB, a bank with its roots in Munich dating back to the 1860s, it followed up by slashing the workforce by two thirds and shuttering hundreds of branches, reducing the bank to a shadow of its former self. The shrinking in HVB's workforce accelerated under Orcel since he took over as UniCredit CEO in early 2021.

In a highly unusual move for a bank, Orcel also pushed through a change of HVB's legal form, shedding the "AG" status which protects the independence of the board in favour of a "GmbH" legal form which allows shareholders to guide the board.

Interviews with dozens of national and local politicians, CEOs, trade union and government officials laid bare fears that Commerzbank could be a grim repeat, eroding a lender critical for Mittelstand, hardening resistance to any deal.

TURBULENT TIME

UniCredit's swoop on Commerzbank came at a time of economic and political turmoil in Germany, with the economy grinding to a halt and a political vacuum in Berlin after the collapse of the governing coalition.

This stoked fears that Orcel could take advantage of Germany's weakness to clinch a deal, fuelling concerns of a wider erosion of the country's significance.

Boris Rhein, the premier of Commerzbank's home state of Hesse, recently told a room of CEOs, including Commerzbank's, that the nation's No. 2 bank must not be allowed to be swallowed up.

"We should give wind to the sails of such a flagship and not allow it to run aground," Rhein, who belongs to the Christian Democrats likely to lead Germany's next coalition government, said.

From UniCredit's perspective, HVB's revamp has been a success - resulting in less hierarchy and faster decisions on loan approvals. All the while, HVB, in the words of Orcel, "crushed costs" - to 44 cents for every euro of income by 2023, down from 59 cents in 2005.

A senior UniCredit executive denied that decisions about the financing of German companies were made in Italy or at the group level, noting that the local decision-making process had been empowered over the last three years.

Since taking the reins at UniCredit, Orcel has focused on boosting returns, driving a near five-fold increase in its share price.

In an indication that a Commerzbank takeover for now is on the backburner, Orcel on Monday told analysts that Germany's upcoming early elections meant "there would have been no base or ability to move in the short term. And maybe there won't be an ability to move at all."

"By the time we would have closed the second bid, we would have integrated the first bank," Orcel said.

Italy's third-largest bank Banco BPM (BAMI.MI), opens new tab has been on Orcel's wish list since he became CEO. Buying Banco BPM would help UniCredit reduce the gap with Intesa Sanpaolo (ISP.MI), opens new tab, which in 2020 leapfrogged UniCredit to become Italy's biggest bank.

"He's sending a message to the Germans," said Richard Portes, professor of economics at London Business School. "He can wait for Commerzbank."