Los Angeles Times - 02.10.2019

C2 WEDNESDAY, OCTOBER 2, 2019 LATIMES.COM/BUSINESS

BUSINESS BEAT

Facebook Inc. Chief Exe-
cutive Mark Zuckerberg
sought to rally employees
amid a litany of challenges
the social media company
has faced over the last year
and a half, speaking can-
didly in two hours of leaked
audio recordings published
by the Verge.
While Zuckerberg often
got laughs and tried to cre-
ate friendly banter with em-
ployees, the mood inside the
company remains anxious,
the Verge reported.
Addressing questions
raised at two open meetings
with employees in July,
Zuckerberg took on subjects
as diverse as plans by U.S.
Sen. Elizabeth Warren
(D-Mass.) to break up the
company if elected presi-
dent, the rocky rollout of al-
ternative currency Libra
and a new product to com-
pete with TikTok.
If Warren were to be
elected, “then I would bet
that we will have a legal chal-
lenge, and I would bet that
we will win the legal chal-
lenge,” Zuckerberg said.
“And does that still suck for
us? Yeah. I mean, I don’t
want to have a major lawsuit
against our own govern-
ment. ... But look, at the end
of the day, if someone’s going
to try to threaten something
that existential, you go to the
mat and fight.”
Warren responded to the
story on Twitter. “I’m not

afraid to hold Big Tech com-

panies like Facebook,

Google, and Amazon ac-

countable,” she tweeted.

“It’s time to #Break-

UpBigTech.”

The meetings took place

after Facebook was fined $5

billion by the Federal Trade

Commission, an amount

largely seen as a slap on the

wrist, as was a settlement

with the Securities and Ex-

change Commission for $100

million. But the scandals

over data privacy laid bare

by the Cambridge Analytica

affair, the near-constant cri-

tiques and demand for testi-

mony at lengthy hearings in

the U.S. and Europe, and an-

titrust investigations on

multiple fronts seem to have

taken a toll. Employees had

questions for Zuckerberg

and worried about Face-

book’s increasingly dim

reputation among their

peers, according to the

Verge.

Zuckerberg explained his

decision not to travel the

world to testify in front of

some foreign governments.

“It just doesn’t make sense

for me to go to hearings in ev-

ery single country that

wants to have me show up,”

he said.

When asked about com-

petition with TikTok, a

popular video and social me-

dia app owned by China’s

ByteDance Inc., Zuckerberg

said Facebook has an an-

swer. “We have a product

called Lasso that’s a stand-

alone app that we’re work-

ing on, trying to get product-

market fit in countries like

Mexico,” Zuckerberg said.

“We’re trying to first see if we

can get it to work in coun-

tries where TikTok isn’t al-

ready big before we go and

compete ... in countries

where they are big.”

Facebook ready

for an antitrust

fight, CEO says

In a leaked recording,

Zuckerberg addresses

candidate Warren’s

proposal to break up

the tech company.

bloomberg

U.S. factory activity hit a
decade low last month in the
face of President Trump’s
trade conflicts, adding to a
weakening picture of the
global economy.
The Institute for Supply
Management, an associ-
ation of purchasing man-
agers, said Tuesday that its
manufacturing index
shrank for a second straight
month, to 47.8, in September,
down from 49.1 in August.
Any reading below 50 signals
that the sector is contract-
ing.
Investors on Wall Street
responded by dumping
stocks, given that the slow-
down in manufacturing
fanned fears that growth
might be slowing more than
expected and could squeeze
corporate earnings.
Trump’s nearly 15-month
trade war with China and his
tariffs on steel, aluminum
and other products were in-
tended to help U.S. manu-
facturers. But his confronta-
tional trade policies have
had the opposite effect and
helped spur the Federal Re-
serve to cut interest rates in
September for a second time
this year.
Weakening business con-
fidence and softening global
demand have hit American
factories hard, prompting
pullbacks in production and
employment. This month’s
ISM measure reported the
lowest level of manufactur-
ing activity since June 2009,
the last month of the Great
Recession.
Manufacturing makes up
only about a tenth of the U.S.
economy, but analysts see
the survey as a warning sign
about the trade conflict. Be-
cause the latest round of
Trump tariffs on Chinese
imports affects many con-
sumer goods, economists

say, weakening business

sentiment could spill over to

slow consumer spending,

which supports the bulk of

the U.S. economy.

Fotios Raptis, a senior

economist at TD Econo-

mics, suggested that the

U.S. economy could be

headed for a downturn if the

manufacturing index

dropped even lower. And

given factory declines over-

seas as well, the global econ-

omy is also at rising risk.

“The U.S. economy is at

the precipice of an econo-

mywide contraction in out-

put,” Raptis said.

The World Trade Organi-

zation said Tuesday that it

expects volumes of traded

goods to rise 1.2% this year,

its weakest pace since 2009.

In addition, surveys of

purchasing firms compiled

by the data firm IHS Markit

point toward declines in

manufacturing in South Ko-

rea, Japan, Indonesia and

Malaysia, all of them export-

reliant countries. The

British factory sector has

also remained in negative

terrain for five consecutive

months, its longest stretch

since the financial crisis.

On Twitter, Trump kept

up his steady attacks on the

Fed, which he has regularly

criticized for not reducing

rates more aggressively. But

the ISM report suggests

that Trump’s tariffs, and

other nations’ retaliatory

tariffs, have played a far

greater role than the Fed in

damping manufacturing ac-

tivity.

Timothy Fiore, head of

ISM’s Manufacturing Busi-

ness Survey Committee,

pointed to the 2.3-percent-

age-point drop in a measure

of new export orders, its

lowest level since March

2009.

The ISM survey also in-

cludes comments from its

members, and three of the 10

manufacturers quoted said

the tariffs are hurting their

business. None blamed a

strong dollar or the Fed.

Most economists also point

to the trade fight for manu-

facturers’ problems.

Manufacturing

hits a decade low

Index signals further

contraction amid a

trade war, stoking

economic fears.

associated press

Novartis and Microsoft

on Tuesday announced they

are joining forces to apply ar-

tificial intelligence to some

of the most intractable prob-

lems in healthcare, in one of

the most expansive tie-ups

between Big Pharma and

Big Tech.

Under one part of the

five-year agreement, which

will be reviewed annually,

Microsoft will work on new

tools intended to make it

easier to apply AI to all areas

of the Swiss pharmaceutical

company’s business, includ-

ing finance and manufactur-

ing.

A second part of the work

will focus on using deep

learning — the technique

that has brought the biggest

recent advances in AI — to

improve the speed and pre-

cision with which Novartis

develops new medicines.

Novartis Chief Executive

Vas Narasimhan said AI

could hold particular prom-

ise in the field of person-

alized medicine, helping to

identify subgroups of pa-

tients most likely to benefit

from new treatments.

The pharmaceutical in-

dustry, initially slow to rec-

ognize the potential of dig-

ital technologies, has been

picking up the pace in recent

years, with companies in-

cluding GlaxoSmithKline

and Sanofi exploring how

big data can accelerate re-

search and development.

Novartis grasped the

possibilities earlier than

many of its rivals, and

Narasimhan, who took the

helm almost two years ago,

has set a goal of turning it

into a data science company.

He said it had pooled its in-

ternal information into

three large data “lakes,”

overcoming the barriers

that often make it hard to

combine different data sets,

and employs about 800 data

scientists and biostatisti-

cians.

Narasimhan said he

hoped the collaboration

with Microsoft would set his

company apart from its ri-

vals. “My aspiration is to

lead in the space,” he said,

laying out a vision in which

AI would power research,

development, manufactur-

ing, finance, sales and mar-

keting, and procurement. “If

we can scale the technology

across the value chain of the

company, that will, I hope,

lead to a significant differen-

tiation over time.”

The companies will ini-

tially focus on three areas:

personalized therapies for

the eye disease macular de-

generation, cell and gene

therapy, and drug design.

Joint research will take

place at the Novartis cam-

pus in Switzerland and the

company’s global service

center in Dublin, Ireland. It

will also involve Microsoft’s

research labs in Cambridge,

England, under Christopher

Bishop, one of the U.K.’s

foremost machine learning

experts.

The cost of discovering

and commercializing a new

drug has barely shifted in

decades, taking an average

of 14 years and requiring as

much as $2.5 billion.

Setting a three-year

timeline for the collabora-

tion to show “tangible im-

pact” across the business,

Narasimhan said, “I hope ...

we can make bringing down

the costs of drug discovery

and drug development a re-

ality.”

He added: “We believe

that by applying AI methods

to our large clinical and pre-

clinical data sets, we should

be able to identify the ‘super-

responding’ patient popula-

tions, or patient populations

that uniquely respond to dif-

ferent medicines, which

then could lead to further

testing.”

In the future, this could

generate more personalized

medicines and enable No-

vartis to build “a better value

proposition to healthcare

systems,” he said.

© The Financial Times Ltd.

2019. All rights reserved. FT
      and Financial Times are
      trademarks of the Financial
      Times Ltd. Not to be
      redistributed, copied or
      modified in any way.

Novartis and Microsoft team up on AI

NOVARTISCEO Vas Narasimhan, right, shown in

2018, wants his company to focus on data science.

Ruben SprichAFP/Getty Images

Drugmaker will get

help in manufacturing,

finance, research.

By Sarah Neville

and Richard Waters

Not too long ago, Charles

Schwab Corp. helped to

usher in the golden age of

low-cost, online stock trad-

ing.

Now, the brokerage may

help to kill off the fee-based

business model altogether.

On Tuesday, Schwab

said it will eliminate trading

commissions on all U.S.

stocks and exchange traded

funds.

The announcement —

which was quickly matched

by rival TD Ameritrade

Holding Corp. after markets

closed — sent shock waves

across Wall Street. Shares of

E*Trade Financial Corp.

slumped 16%, while TD

Ameritrade lost more than a

quarter of its market value.

Schwab’s share price took a

hit, tumbling nearly 10%.

The gambit is just the lat-

est in an intensifying, indus-

trywide war over fees for

such things as stock trades,

index funds and financial

advice. And it’s squeezing

not only the likes of Schwab,

but also BlackRock Inc. and

Fidelity Investments.

These types of aggressive

price cuts — admittedly a

small boon for ordinary

Americans routinely nickel-

and-dimed by financial

firms — have some ob-

servers wondering whether

anyone can win in a business

where more and more serv-

ices are handed out for free.

For Schwab, it’s a bold

but risky move. The firm,

which relies less on trading

commissions than its com-

petitors, is betting it can off-

set any decline of revenue by

attracting more clients. It

can then use their assets to

generate interest income, an

essential feature of its busi-

ness that’s come under pres-

sure recently as interest

rates have declined.

Schwab’s online clients

will qualify for zero commis-

sions, down from $4.95 a

trade, starting Monday, the

firm said in a statement. It

will continue to charge 65

cents a contract for options

trades.

“Maybe because of the in-

ception and growth spurt of

online brokers during the

dot-com boom, there’s a ro-

manticization of the individ-

ual trader,” said Michael

Wong, an analyst at Morn-

ingstar Inc. “There’s still a

mind-set among the invest-

ing public around the impor-

tance of commissions,”

which is less important to

Schwab.

Although trading costs

have declined across the

board, Schwab comes from a

position of relative strength.

The firm takes in just 7% of

its net revenue from com-

missions. That’s far less

than Interactive Brokers

Group Inc. or TD Ameri-

trade, which both collect

more than a third from trad-

ing fees.

Schwab estimated it

could lose as much as $400

million in revenue a year

from its zero-fee offering.

Wong said that in the cur-

rent rate environment, the

firm would need about $20

billion or more in new depos-

its to offset that loss. Cur-

rently, more than half of

Schwab’s net revenue comes

from interest earned on its

assets. The firm, which over-

saw $3.72 trillion as of Aug. 31,

took in almost $20 billion in

net new assets that month.

Schwab last cut its trad-

ing commissions in Febru-

ary 2017, when it reduced

them to $4.95 a trade from

$6.95 to match Fidelity.

Since then, assets at the firm

have grown by about $800

billion from a combination of

market gains and net in-

flows.

Nevertheless, the com-

pany is looking for ways to

reduce costs internally. Last

month, Schwab said it would

cut 600 jobs, or about 3% of

its workforce, because of the

“increasingly challenging

economic environment.”

Its latest move builds on

an increasingly aggressive,

slash-and-burn approach to

price reductions.

Late Tuesday, TD Ameri-

trade said it would match

Schwab’s no-fee trading of-

fer at a cost of as much as

$240 million a quarter, or

roughly 16% of its net reve-

nue. Interactive Brokers an-

nounced just last week that

it would provide free trades.

And in recent months, Fidel-

ity, Vanguard Group and JP-

Morgan Chase & Co. have all

taken steps to eliminate fees

and commissions on some

offerings.

Schwab Chief Financial

Officer Peter Crawford said

zero commissions are an in-

evitable industry trend.

Schwab is just trying to get

ahead of that.

“We are seeing new firms

trying to enter our market —

using zero or low equity com-

missions as a lever,” Craw-

ford wrote. “We’re not feeling

competitive pressure from

these firms ... yet. But we

don’t want to fall into the

trap that a myriad of other

firms in a variety of indus-

tries have fallen into and

wait too long to respond to

new entrants. It has seemed

inevitable that commissions

would head towards zero, so

why wait?”

Billionaire founder and

Chairman Charles Schwab

said: “Eliminating commis-

sions ensures my ultimate

vision is realized — making

investing accessible to all.”

The developments show

just how online stock trad-

ing is becoming a commodi-

tized business. As a result,

Devin Ryan, an analyst at

JMP Securities, said broker-

ages will need to use their

platforms to generate reve-

nue from other services.

Those include securities

lending, charging asset

managers fees to offer their

funds, and advisory services.

“They have to give a lot

away for free to charge for

parts of their platform that

are less commoditized,”

Ryan said. Firms such as TD

Ameritrade might start

charging subscription fees

for access to data, options

and margin accounts.

Gittelsohn and Massa write

for Bloomberg.

CHARLES SCHWAB,founder and chairman of Charles Schwab Corp., shown in March 2018, said in a state-

ment, “Eliminating commissions ensures my ultimate vision is realized — making investing accessible to all.”

Richard DrewAssociated Press

Schwab’s fee cut may doom

the brokerage model it built

By John Gittelsohn

and Annie Massa