Morning Brew Daily - Adobe Scraps $20B Deal with Figma & Why Apple is Suspending the Next Apple Watch

Episode Date: December 19, 2023

Episode 216: Neal and Toby discuss why Adobe's $20 billion acquisition of Figma fell through and what it means for major mergers moving forward. Plus, why attacks on oil tankers are disrupting trade routes in the Red Sea and sales of the latest Apple Watch are being stopped due to patent issues. Next, US Steel agrees to sell itself for for $14+ billion to their Japanese rival, and Toby shares his favorite trend. Finally, the hammer has come down on a punishment for Southwest's holiday meltdown. Listen to Morning Brew Daily Here: https://link.chtbl.com/MBD Watch Morning Brew Daily Here: https://www.youtube.com/@MorningBrewDailyShow Learn more about your ad choices. Visit megaphone.fm/adchoices

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Good morning brew daily show. I'm Neil Pryman. And I'm Toby Howell. Today, we almost made it through the year without a global supply chain disruption until now. Then the fabled U.S. Steel has a new owner, and they are not from the U.S. It's Tuesday, December 19th. Let's ride. Sometimes you're reminded that we're living on top of a configuration of tectonic plates with a mind of their own.

And that happened early this morning when a volcano erupted in southwestern Iceland, sending lava fountains high into the air and lighting up the night sky. with molten rock. The eruption had been expected for weeks and a nearby town had been evacuated last month in anticipation, but the sudden outburst and the size, I mean, this fissure is 2.5 miles long, took people by surprise. Iceland is prepared for volcanoes better than anyone since it has 32 active volcanoes and one pops off every four to five years. This one isn't expected to threaten life or disrupt air travel like volcanoes have in the past, but authorities still say you shouldn't go near it. The quickest way to get people to come to a volcanic eruption is to tell

people not to get near it. So I'm sure there are going to be some kind of adventurous tourists taking a peek. I remember the volcanic eruption from 2010 that grounded pretty much all of Europe's air travel because the ash cloud was so big. This one is not like that at all. There's pretty much no ash in the air. It is just this really long fish here. Have you seen a volcano like live? Never live. I mean, I've been to Hawaii, but I've never seen any. any active. I think it's on the bucket list. Okay, before we jump into the news, quick shout out to our friends over at Yahoo! Finance. Neil, I, like many people, use Yahoo!

For my fantasy football league, but yesterday, I was going to type in Yahoo! Fantasy Sports into my search bar because it is the playoffs, but Yahoo Finance auto filled there instead. Wow, a symbolic changing of the guard. But wait, how's your fantasy football team doing? Neil, I just lost in the playoffs because Jalen Hurts ripped my soul out, which is why I'm sticking with Yahoo Finance going forward. So if your fantasy football team has met an unceremonious end at the hands of Jalen Hertz like

Tobis, check out the number one place on the internet for financial news and data instead. Head directly to finance.jahoo.com to learn more or download the Yahoo Finance mobile app to get it on your phone. It's time to refresh your yard during spring backyard days at the Home Depot. Get low prices guaranteed on propane grills starting at $179, like the next grill. like the next grill three burner gas grill or get $50 off the select Weber Spirit grill and bring big flavor to your backyard. Then set the scene with Hampton Bay string lights that bring it all together. Shop spring backyard days for seven days at the Home Depot. Now through May 6th, Exclusion supplies to home depot.com slash price match for details.

As everyone listening knows, breakups suck, but I can almost guarantee you that your latest breakup didn't cost you a billion dollars. and if it did, good for you. But that's exactly what Software Behemoth, Adobe, will have to pay Design Tool Figma after their $20 billion takeover bid officially fell apart due to regulatory pressure yesterday. Where did it all go wrong?

This acquisition was supposed to be a shining example of a VC back company, finally getting a big exit the industry solely needed, and was slated to be one of the largest private software takeovers in history. Adobe and Figma seemed perfect for each other, But like all tragic love stories, it was doomed by European regulators. Regulators both at home and across the pond looked at the $272 billion behemoth Adobe plucking up the plucky upstart Figma and likely had flashbacks to Facebook's similar acquisition of Instagram back in the day. So it isn't so much that the deal might be anti-competitive right now, but it certainly could discourage competition down the line. Neil, still, a stunning end to a much hyped acquisition. Yeah, let's go back to 2021. Adobe announced it was going to buy Figma, which has been used by designers all over the globe. It was a surging product, really fast growing. They said they were going to pay $20 billion, which was double Figma's valuation in its last funding round. And people did not like it. Adobe stock plummeted the worst in decades. It dropped 17% because this was considered to be too expensive. And a lot of people in the tech world, did raise alarms around the antitrust considerations here because Adobe, which has Photoshop

and other design softwares that rule the world, and with Figma's fast-growing web applications for collaboration, there was a lot of alarms raised about whether this could potentially be a monopoly and a world-dominating design software. I think the price ultimately ended up hurting Adobe because it underscored just how badly they wanted a foothold in this new collaborative design space. So it's kind of like dating, Neil. You never want to show if you're too desperate or not. And paying double the last private valuation of Figma

certainly showed that Adobe was desperate for this. And honestly, the companies have tried to argue that they really don't compete. Adobe says they only have one product that's in the same space as Figma, and it hasn't really gained any traction. But honestly, it was the future kind of first stalling of, of anti-competitive practices that this design behemoth that they've created would lead to anti-competitive practices down the line that made regulators kind of put the kibosh on it. It seems like investors aren't too phased about this either. Adobe stock rose yesterday,

and it seems like it is invested in a lot of generative AI capabilities. It has this product suite called Firefly, which it's supported through all of its products, and investors are pretty hyped about that, and they said, maybe, hey, maybe we don't even need Figma. Although, I will say Adobe needs to start showing that those AI tools can actually turn a profit. Adobe forecasted 10% growth next year, which is the same thing that they forecasted for this past year. So they're kind of in this moment where investors are starting to say, all right, you're going to lose out on Figma. Where's the growth coming from? Probably AI, but we're going to need to see you monetize that more effectively going forward.

Meanwhile, this is a big win for regulators. It's been, they've cracked down hard this year on M&A. and then they had Microsoft, one of the biggest defeats was allowing Microsoft to buy Activision for $69 billion. But this is a big win to hang their hat on. Yeah, recently, earlier this week, Illumnia, which is this huge gene sequencing company, said it would sell this cancer test maker that they bought for $7 billion at the behest of regulators. And then if we want to go back to a few years ago, remember meta sold off GIFI that they bought after UK regulators blocked it. So even though there's been some widths for regulators, the most notable one being Activision Microsoft, but they've had a couple wins recently.

Okay, if you had global supply chain disruption on your 2023 bingo card, congrats. You can cover up that square with just a few weeks to spare. Shipping in the Red Sea is grinding to a halt after oil companies and major cargo shiplines said they would avoid the area due to ramped up attacks by Yemen's Houthi rebels on vessels. This has the potential to redraw the map of oil shipments across the world and drive prices much higher, just like the war in Ukraine did last year. A major escalation happened yesterday when British oil giant BP said it would not transit the Red Sea, joining shipping leaders Maersk, Hapagloid, and MSC in diverting its vessels. The problem is a sliver of water known as the Bob Almondab Strait, which ships must go through in order to get from Asia to Europe via the Suez Canal. 10% of all global maritime trade takes this route, but shippers must now look for alternatives

because it's become simply too dangerous. The Iran-back Houthis are prowling these waters and have vowed to attack Israeli ships in solidarity with the Palestinian cause, except shipping companies say they're attacking all kinds of commercial vessels, not just Israeli, which has made the situation untenable. Toby, when the Israel-Hamas war broke out, economists warned of the spillover effects into a regional war that disrupts supply chains and oil markets, and it looks like those concerns are playing out. European natural gas prices jumped as much as 13% yesterday, and oil futures climbed almost 4%. Yeah, many of these shipping companies are being forced to make the decision between safety and

speed, and a lot of them are choosing safety sailing around the southern tip of Africa instead. It's crazy how big of a detour you have to make just for this one sliver of water. And there's this ripple effect, too, because the attacks have made moving. cargo price here, and then rerouting energy shipments, obviously, causing an even bigger headache because now there's fewer oil tankers, and they can't speed up as quickly as container ships. So basically, there's all these ripple effects. Insurance now is a lot more expensive in the area. So it's just become one of these things where one little disruption in one part of the

world can lead to a massive supply chain disruption across the world. I mean, we saw what happened in 2021 when the ever-given block the Suez Canal for just a week. It was causing all kinds of chaos. This has the potential to be even, you know, exponentially more significant than that. It also shows the ability of one kind of paramilitary force to disrupt the global supply chain, because this isn't a government necessarily doing it. These are Houthi rebels doing it via drone attacks and kind of nipping at the heels of some of these container ships, and it's just caused the global container shipping market to change.

Yeah. So if this continues, we might expect prices to rise. We were talking about Costco's earnings yesterday. Well, Costco said that they had not seen any inflation at all quarter over quarter, primarily because cargo shipping rates had come down to normal levels. During the pandemic, they surged. And then finally, we were seeing supply chains, all those wrinkles, kind of ease out. And now this has the potential to drive prices, not just in the oil market, but across a variety

of commodities and goods higher. That being said, it is experts are forecasting that it's unethical. unlikely that it will get to the levels experience during the pandemic. It won't quite get that bad, but still, it will drive these shipping prices up. The U.S. just announced a task force last night called Operation Prosperity Guardian. So they are on, because you don't want to mess with oil prices. The U.S., if you mess with oil shipments, then the U.S. will come and try to figure it out. So we've sent three destroyers into the area to maybe take care of business here. In a shocking move, Apple will stop selling some of its hottest products in the thick of the holiday shopping season.

The company said yesterday it's pulling U.S. sales of its Apple Watch Series 9 and Ultra 2 over a patent dispute with another company that's accusing it of stealing trade secrets related to the blood oxygen feature on the watch. The Thorn and Apple's side, California-based Massimo, took its IP gripes to the U.S. International Trade Commission. and in October, that commission ruled that Apple did indeed infringe on some of the Masimo's patents. Instead of letting regulators take its watches off the market, Apple acknowledged defeat and is pulling those products on its own timeline, which means you have less than a week to buy a Series 9 or Ultra 2 if you were thinking of getting those as holiday gifts. Apple is pulling sales of the watches on its online store on Thursday and at its physical retail locations on Christmas Eve. What happens next is anyone's guess. Apple could try to fix its watches to avoid. any patent infringement. But since it's hardware and not software we're talking about, that might be more challenging. The Biden administration is also conducting a review of the International Trade

Commission's order and could also rule that Apple is in the clear. But as it stands now, a significant and unprecedented blow to Apple during the critical holiday shopping season. Yeah, there was this interview back in with the founder of Massimo in April of this year, kind of describing what it's like for Apple to come knocking. He, this is his quote, When Apple takes an interest in a company, it's the kiss of death. First of all, you get all excited. Then you realize that the long-term plan is to do it themselves and take it all. And this is kind of exactly what happened here.

There are reports that Apple took a meeting with Massimo, then immediately began hiring employees from the company, sometimes doubling their salaries to offer them to come over. And then the following year, Apple launched a watch that could measure blood, oxygen level. So there's this timeline that doesn't look very great for Apple saying, yes, we took. commuting with Massimo, hired a bunch of their employees, filed a bunch of patents, kind of closely monitoring those, and then launched a watch with the same feature. So there's certainly a case here, and we're seeing that because the watches have been taken out of stores. Yeah, you might not think, hey, this is Apple and it's taking its watches off the market. It's not a big deal, right? Apple makes the iPhone. That's its biggest seller. But

wearable segment has become so important to Apple. It generates $40 billion a year in revenue. It's the third largest revenue driver of the entire business. And the watches. make up the vast majority of all of its wearables revenue. So this is a big deal for Apple, even if you might think that the watch Apple Watch is just not an important segment for the company. It really is. Yeah, Apple is definitely not going down without a fight here either. They're kind of pulling a classic Uno Reverse card here where they're appealing the ruling,

and they also filed their own pair of suits against Massimo in October of last year, saying that Massimo is the one who infringed on their patents and are now wrongly trying to use the ITC to kind of keep the product out of consumers' hands. But the timelines don't really match up and they don't favor Apple in this case because Massimo's own complaint stems all the way back to June of 2021. The ones that Apple filed were filed in October. So, again, it is interesting to see kind of the plucky upstart versus the biggest company in the world.

And maybe this is being used as a chance to say, hey, Apple, I know you're the most powerful company on Earth, but you still got to follow the law. All right, Neil, before Massimo gets mad at us for infringing on some of their patents, we're going to take a quick break. Study and play. Come together on a Windows 11 PC. And for a limited time, college students get the best of both worlds. Get the Unreal College deal, everything you need to study and play with select Windows 11 PCs.

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after U.S. Steel agreed to sell itself to Japan's Nippon Steel for $14.1 billion. This caps off months of speculation around the fate of the once proud American heavyweight and ends its run as an independent company stretching back to the days of Andrew Carnegie's Industrial Empire. What's U.S. Steel's loss is Nippon's gain, though. It's now the world's third largest steelmaker, but the timing of the steel is a little tough for U.S. steel, especially because the government has been heavily supporting domestic steel production for the last two administrations. Trump slapped a 25% tariff on steel imports from Japan and the EU, while the Biden administration

has included provisions in an Infrastructure Act that requires all steel used and covered projects to be produced in the U.S. But ultimately, it's just been tough to consider. compete with the extremely low-priced subsidized metals coming out of foreign competitors like China. Neil, it's hard not to look at the symbolism behind this, a company founded by J.P. Morgan, Charles Schwab, and Andrew Carnegie, now moving under Japanese ownership. Yeah, it was interesting to read on the history of U.S. Steel.

It was once the largest company on the planet. It was the first company to be valued at $1 billion. And like you said, it was created by people whose names are on $500 billion companies today, like Charles Schwab, like J.P. Morgan. It created so many of the buildings and industrial backbone of the United States during the 20th century was so influential in world wars and supplying the military. And, you know, things change. Things change. Things change. I know. The biggest thing, it's just been very tough to compete with kind of the prices that foreign metal producers can offer. I also want to talk about just the optics of this in terms of our relationship with,

our allies, honestly, because this is an example of a policy called friend-shoring, which is a strategy backed by Treasury Secretary Janet Yellen. It basically says refocus our manufacturing supply chains with our geopolitical allies and economic allies. So much of recent policy has been devoted towards boosting American industry. So it will be interesting to see how this is kind of politically perceived, because even though Japan is an ally, it is interesting to see us sell a bastion of American industry to a foreign ally and how that is perceived domestically. Well, it's not being perceived well. I mean,

you had the senators from Pennsylvania and Ohio, John Federman and J.D. Vans, saying they're going to do everything they can to block it. J.D. Vance said a critical piece of Americans' defense industrial base was auctioned off to foreigners for cash. So even if it's an ally like Japan, these two guys, and I'm sure some others in the Rust Belt are going to do everything they can to stop this deal from happening. Plus, you have workers who are very upset because they weren't consulted, and they wanted to be sold to another American Steel Company, Cleveland Cliffs. So there is a lot of opposition to this deal, and so it's not exactly clear whether it's going to go through or not. Ultimately, though, so that Cleveland Cliffs deal that you mentioned, they valued, they offered $35 a share for U.S. Steel. the current deal values U.S. Steel at $55 a share.

So it's very hard for shareholders to say no to that premium. And so I think ultimately, even though it made kind of the union, the steel union in the U.S. a little angry, there's not a ton of leverage you have when you were presented with such a good deal from a shareholder's value perspective. Okay, I can't believe I'm about to say this, but meta's new smart classes might be cool now. And I'm going to tell you why in this week's edition of Toby's trends, where I, a bright-eyed Gen Zier, educate my millennial co-host, Neil, on a new trend that has caught the youth eyes. From the days of Google Glass, smart glasses just have not been cool.

The cameras are weird and slightly creepy, and no one is really sure how to use them. That is until this recent trend where creators are filming themselves dancing in a mirror while wearing meta's Ray-brand smart glasses. Now, here's the thing, Neil. No one really knows if this is because Meadow was paying them or if this trend sprang up organically, but it is blowing up. Jules Turpac on Twitter was the first to notice it and pointed out that one video has over 125 million views, which on today's TikTok is extremely impressive. So the trend I'm putting forth today, Neil, is this the time that smart glasses finally go mainstream?

It just appears like this is a product made specifically for influencers, right? because you can kind of record you, yourself going around in the world without having to reach to your phone. And that's been the unlock that people love about this. Yeah, it's certainly one of those things that influencers primarily are going to use them. So I've actually had a chance to play around with them. And from a normal person's perspective, the only thing that it really gives you is the ability to listen to music, which is a good ability because suddenly you don't have to walk around with AirPods in. There's little speakers in the glasses themselves that work very well.

actually, and there is AI built in as well, but primarily these are geared towards creators. And so I was saying, thinking about this trend, I was saying that, oh, if it's only appealing to creators, then no, this isn't their mainstream moment. But then you remember that so many people out there want to be creators today, it's literally the number one thing that kids want to be is be a YouTuber. So if that's not mainstream, then I don't really know what it is. So I can see both sides that maybe you or me aren't going to be wearing these down the street, but someone who is a fledgling influencer certainly will be.

Do you think it's a problem that you can't see the person? Because when you put on the glasses and you're recording, you're just looking at it from the person's point of view. And so all of these videos that I watched have mirrors in there. So I want to sell mirrors because you have to actually look into a mirror to be able to see the person. I feel like just going through someone's, just watching the world through someone's eyes is not as compelling as seeing the person.

themselves do it. Yeah. Well, I can't believe the takeaway from this is that mirrors are so hot right now, but I see what you're saying. I do think that, I mean, people have taken selfies for ages via mirror, but also I do think that you are right in the sense that just seeing a POV of someone maybe isn't as compelling as seeing the actual person filming themselves, which is why this particular trend, via instead of live streaming your friend caught on and not something else. But the takeaway is that meta-ray bands are maybe cool. Yeah, they are cool because, again, they're raybans. They look just like Raybans. That's a huge factor that Snapchat, that Google Glass especially never nailed is that they never made the glasses look cool. So

it is interesting to see Raybans specifically catch on because they're still cool. And if trendsetters do this, then maybe the rest of the population will follow. So we will keep an eye on that. You know the kid who mouths off in soccer practice and then the coach makes them run wind sprints and do 100 pushups just to make an example out of them in front of everyone? That is what the U.S. government just did with Southwest Airlines. The Department of Transportation ordered Southwest to pay $140 million for the mayhem. It caused travelers last winter, a penalty that is 30 times larger than any it is handed down for consumer protections violations. The message to Southwest and other airlines, don't ever think about messing up this bad again. Just to jog your memory, winter storms almost exactly a year ago,

basically broke Southwest, causing it to scrub nearly 17,000 flights and leave about 2 million customers in the lurch as they were traveling home for the holidays. No other airline had close to as bad of a problem as Southwest, which compounded the issues by failing to provide adequate customer service, not alerting travelers of flight changes, and delaying some refunds. In all, the debacle cost it $1.2 billion, not including the bill it was handed yesterday. In the past year, Southwest execs have said they've made major operations changes are in a much better spot this year. It's not so much that the delays happen is that Southwest failed to kind of adequately provide proper customer service, flight notifications, and refunds to its passengers. One thing about this

deal that I love, though, is of the 140 million, they're paying $35 million to the government, but they're also earmarking aside $95 million for future delays. And so that is going to be great from a consumer perspective because the flights affected are usually ones delayed by more than three hours. I am not kidding. I think I've had seven in the last year alone that have been delayed by more than three hours. Unfortunately, they're all on JetBlue, not Southwest. So I was thinking this is certainly going to be paid out to customers. Yeah, Toby, you have the worst air travel problems because I was looking at the data through the first eight months of this year, flights have been great.

I mean, 1.7% of flights were canceled compared to 3% from the year earlier. So, you know, there hasn't been a lot of disruption in air travel this year, except you happen to be on every single one of those flights that's delayed or cancel. I know. It's usually actually, it's Sarasota to LaGuardia has been a real problem one for me, but I was also going home for Thanksgiving this year. I don't know if I told you this. They rebooked the aircraft, and the aircraft was only available that had 10 less rows in it.

So they had to rebook 10 rows of it. So they had to rebook 10 rows of people. By the end of the time, they were offering $4,000 vouchers, which I have genuinely never see. But when you overbooked by 10 rows, you're literally offering people like almost a free car in a house by that point. So yes, in total of the airline industry,

bringing it back to the actual news, it has been doing a lot better. I just got that bad luck. Yeah. So Southwest is like, we're going to take so many steps to make sure this doesn't happen. But again, a lot of the problems happened at Denver airport where they just didn't have

enough de-isers. They basically didn't keep the planes warm enough overnight, which we know from when your heater is broken. Another thing that they did was play war game. So they would sit 60 employees around a table, bring in a meteorologist and have the meteorologist just make up a weather forecast, and then the employees would have to create basically a system for dealing with whatever forecast they were dealt to simulate what it would happen in the real world. I wonder bringing it back to the top of the show.

Did they ever have to deal with volcanic disruptions from Iceland? We'll have to see about that. All right, that is a wrap for our show this Tuesday. Have a wonderful day. I'm officially worried about the Eagles, Toby. Feel free to send your thoughts on the show or say what's up. At our email address, Morningbrewdaily at Morningbrew.com. Let's roll the credits.

Emily Miliron is our editor and producer. Samantha Velas and Raymond Lou are associate producers. Eugenua Ogu is our technical director. Billy Minino is on audio, the merger of hair, and makeup has been called off under regulatory pressure. Devin Emery is our chief content officer and our shows of production of Morning Brew. Great show today, Neil.

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