It’s hard to remember a more dramatic case of market whiplash. Chinese ride-hailing company Didi Chuxing completed its U.S. initial public offering on Wednesday, raising $4.4 billion from global investors at a market cap over $67 billion. Just two days later, on Friday, Chinese regulators announced a probe into the firm’s cybersecurity and ordered Didi’s app removed from local app stores. The app store ban could last 45 days and will prevent the company from acquiring new customers, with a potentially devastating impact given the intensely competitive Chinese ride-hailing market.
Today, the first full day of U.S. trading since the moves were publicized in the U.S., Didi stock fell as much as 25% on the New York Stock Exchange, dipping below its IPO price and cutting its market cap by as much as $22 billion. The surprise haircut could have serious long-term implications for Chinese equity markets because they highlight local political risk. But that political risk might not matter if not for a technical vulnerability shared by tech companies around the world: Their massive dependence on extremely centralized app stores means their lifeblood can be cut off without warning.
It remains unclear exactly what the alternatives are for mobile developers in the short term, but these events yet again drive home the case for what’s known as “Web 3.0.” Largely but not exclusively envisioned as leveraging blockchain technology, Web 3.0 would replace the platform-dependence of today’s web with more open, trustless and permissionless systems.
That would involve its own social and economic tradeoffs, but if it reduced the power of app platforms, it could provide significant resilience for companies now at the mercy of either authoritarian governments or tech giants.
The swiftness and extremity of the move against Didi echoes the past nine months of intense tech backlash from China’s ruling Communist Party. It arguably kicked off with last year’s kiboshing of the Ant Group IPO and the forceful sidelining of CEO Jack Ma. We saw a second major episode in June with bans on bitcoin mining and cryptocurrency transactions. Even Tesla, a U.S. company with previously friendly relations with Beijing, seems increasingly on the receiving end of China’s version of techlash.
The post-IPO timing of the Didi rug pull raises even more pointed questions. It worked out well for Didi, all things considered, because the company gets to keep all that American and international money despite a suddenly extremely different business outlook. Chinese authorities had already pushed Didi to delay its IPO, and given the regulatory environment, Didi must have known serious backlash was possible if it proceeded. Jack Ma’s downfall, after all, followed a similarly defiant lambasting of Chinese financial regulators last October.
Bloomberg’s Shuli Ren hints at the possibility that Didi was somewhat knowing in its IPO defiance, happy to harvest “chives” from ill-informed Western investors ahead of imminent CCP enforcement (though the company has denied foreknowledge of the specific enforcement action). All this led CNBC's Jim Cramer to declare that after this weekend’s events, you’d have to be “a moron” to invest in Chinese tech startups.
But what’s missing from Cramer’s read is that, though Chinese authoritarianism vastly increases the risk, the same thing could happen to many of the world’s biggest tech companies. Facebook, Seamless, Uber and even Twitter’s U.S. business could be crippled if not outright destroyed in a matter of days simply by removing their apps from Google Play and Apple’s App Store, each the overwhelmingly dominant portal for mobile phone apps for the Android and iPhone ecosystems.
(In fact, probably thanks to a desire to wrest control from Apple and Google, China has a much more diverse app store ecosystem than the U.S. For instance, Tencent’s MyApp market has about 25% of the app market. In the U.S., efforts by the likes of Samsung and Amazon to create viable alternatives to the Big Two app stores have basically failed.)
It might seem implausible that a giant company like Uber could be hit by such a severe governmental action in the U.S., and it’s true that unlike China, America offers a robust and transparent system for legal appeal of any such governmental effort. But the app stores have taken dramatic unilateral action under their terms of service, as when Google and Apple banned unmoderated social media platforms Parler and Gab.
Apple even directly leveraged its censorship power for competitive purposes when it pulled Epic Games’ hit "Fortnite" as retaliation for Epic’s attempt to encourage payments that circumvented the App Store and its exorbitant 30% cut of revenue.
These are regulatory and political problems, of course, and some might hope new Federal Trade Commission Chairwoman Lina Khan will apply pressure to encourage alternatives to the Apple/Google duopoly. Those could include mandated improvements to side-loading options on phones, or more drastic moves like breaking up the vertical integration of phone manufacturing and content.
The original internet promised that old gatekeepers would be swept out of the way. Yet here we are with entirely new chokepoints for information and innovation: the app stores. They have become immensely powerful and profitable gatekeepers thanks to vertical integration between hardware, operating systems and software during a period of generally lax antitrust enforcement.
The openness of the Web 3.0 design ethos is aimed at breaking those strangleholds, and there’s ever more evidence that big companies should support the movement – and their right to connect directly with their own customers.