Wealth Advisory Platform SecFi Closes $6 Million Funding Round

Amazon was 3 just years old when it went public in 1997. Uber, by contrast, was a budding preteen by the time it tapped the public markets. It’s not an isolated case: More companies are delaying their debuts in order to avoid the scrutiny that comes with the public sphere—leading to scores of private companies with ballooning valuations in recent years. 

SecFi has stepped in to address the problems of the some of the soon-to-be-rich. They’re a wealth advisory platform that helps private company employees—who are often only wealthy on paper—with loans and liquidity.

SecFi revealed Friday that it had raised $6 million in Series A funding led by Rucker Park Capital, a venture capital firm run by former SoftBank investors, and was joined by investors including including Social Leverage, Serengeti Asset Management, Weekend Fund, Mark Pincus, and Elefund.

SecFi has originated $150 million worth in loans since January 2018, the smallest being around $40,000. Previously, the company had been working solely with individuals. Now, it plans to partner directly with startup companies.

“The proliferation of late-stage capital is here to stay. Though the market has blown out in a significant way, there’s still a lot of capital on the sidelines,” said Rucker Park Capital General Partner Wes Tang-Wymer, adding that his fund invested in SecFi in part due to the trend. “We think SecFi is solving a major pain point in the ecosystem and demystifying equity compensation.”

SecFi is targeting a very specific problem for startup employees. Certainly there are stories of founders, executives, and early employees of startups like Pinterest and Lyft becoming millionaires overnight following an IPO. But before that happens, employees are often only wealthy on paper, with few ways to cash out a portion of their shares or to exercise their options.

SecFi CEO and Founder Wouter Witvoet for instance found out that he would have to pay $2.8 million in taxes to exercise options of a startup he had decided to leave. He was wealthy on paper—not in cash. Ultimately, he was forced to let go of the equity.

And while the Morgan Stanley’s of the world were reportedly wining and dining early employees set to benefit from the recent IPO boom, the bulge bracket wealth managers typically require that clients have a certain level of liquidity. At the same time, startup employee compensation is incredibly confusing, with different tax implications for different kinds of stock options.

Here’s how SecFi’s financing offering works: An early employee is considering exercising her options in, say, DoorDash. She goes to SecFi to figure out how much cash she will need to cover both the options and the taxes, and maybe even to pay off part of her home.

Then she pays a small upfront fee to SecFi to borrow $2 million. She uses $1 million to exercise the options, perhaps $500,000 goes to taxes, and the rest she can choose to use to pay for a house. To be clear, SecFi is not a lender—instead, it partners with a third party to dole out these loans.

In return, a portion of her DoorDash shares become collateral with the third party custodian. It is not until DoorDash IPOs or undergoes a sale that she pays off the loan (interest included, that’s the other way SecFi makes money). The employee will also pay a percentage of the value of the shares to SecFi and the third party custodian, at a specified point down the line.

But there’s a big catch: If the company never IPOs or undergoes an exit, the employee doesn’t have to repay the loan. But, says Witvoet, SecFi has a proprietary underwriting system to pare down the risks: They select companies that they think have the potential to IPO or undergo an exit in five to seven years. The interest rate and other related fees meanwhile are determined based on the riskiness of the company, and how close they are from an IPO.

The recent spate of IPOs including Pinterest, Chewy, and Uber have led to good outcomes, according to the firm. “We had some early successes on repayment, and now we’ve had some come to us and say we have all this newly generated wealth, what do we do with it,” says Witvoet.

And perhaps the good times will continue for at least a while longer. In a glowing sign of this “private-longer” trend, the college-aged Palantir expected to also IPO this year.

More must-read stories from Fortune:

—Meet the A.I. landlord that’s building a single-family-home empire

—You might have longer than you think to invest for retirement

Facebook’s Libra currency could threaten the global financial system

—The surprising way Republicans used to use immigration to boost the economy

—One of Warren Buffet’s favorite metrics is flashing red. Corporate profits are due for a hit

Don’t miss the daily Term Sheet, Fortune‘s newsletter on deals and dealmakers.

As Europe’s Cannabis Industry Opens Up, Established Canadian Companies Are Pouncing

When it comes to Europe’s fledgling cannabis sector, 2019 has seen the arrival of conquerers who have moved at a speed perhaps at odds with their relaxed reputation.

Yes, the Canadian cannabis companies are coming—as hard and as fast as they can manage.

In recent months: Canopy Growth bought German medical cannabis firm C3, Spanish weed producer Cafina, and British skincare and wellness outfit This Works; Tilray cut the ribbon on its €20 million ($22 million) Portuguese research and cultivation campus; and Aurora took over Gaia Pharm (another Portuguese marijuana producer) while also winning a tender to produce and distribute the plant in Germany—and commencing sales of cannabis oils in British and German pharmacies.

The companies are bringing with them a huge advantage: since Canada has legalized marijuana, even for recreational purposes, the country’s industry leaders been able to go public, raise money, and look abroad to expand.

“The Canadian legislative situation has given Canadian companies a big advantage over those based in countries with more restrictive cannabis laws, especially when it comes to accessing capital markets,” said Pierre Debs, Canopy’s European chief.

“No one else is really positioned like [Canadian firms] are, capital-wise and opportunity-wise,” said Jamie Schau, a research manager at cannabis-industry analyst house Brightfield Group. The upper-hand comes with a sense of urgency, says Schua.

After all, “they’re only going to have this first-mover advantage once.”

Medical acceptance

But the market that Canopy, Tilray and Aurora are invading is a complex one. When it comes to cannabis, Europe’s rules remain highly fragmented and largely conservative—despite the Netherlands’, in particular, reputation for coffee shops and relaxed drug laws.

Medical marijuana products have recently become legal in Germany, the U.K., Italy, the Netherlands and Portugal, with France and Spain also on track to allow them soon, but they remain banned in many other countries.

That leaves companies confronting a regulatory patchwork, but Toronto-based Tilray said there’s lots of room for growth.

“We expect the European Union to become the largest medical cannabis market in the world. And we expect this to be driven by the availability of medical cannabis through government-subsidized health care systems,” Tilray said in an emailed statement.

Cannabis oil medicine, Bedica THC (L) and Bedrolite CBD (R), used to treat a seven year old with a rare form of epilepsy from Kenilworth, England. Medical marijuana is now legal in the U.K. with a special license. Credit: Jack Taylor—Getty Images

“There’s no doubt in the medical efficacy of cannabis and cannabis-related derivatives,” said Kiran Sidhu, the CEO of Oregon-based cannabis extraction firm Halo Labs, which recently bought a producer in the southern African nation of Lesotho in order to supply the European and African markets. “Where the issue really lies is how long will the snowball [effect] take in Europe that has occurred in the U.S. and Canada.”

However, even as medical marijuana becomes more accepted in certain EU countries, it would be a mistake to draw too close a comparison with the permissive scene in North America.

“The important thing for Europeans to understand is that the actual use of these medicines is far more limited than in some U.S. states or Canada, according to the patient numbers we are seeing,” said Brendan Hughes, the principal scientist for drug legislation at the European Monitoring Centre for Drugs and Drug Addiction (EMCDDA), an EU agency.

A few years ago, the European Medicines Agency authorized the use of GW Pharmaceuticals’ Sativex for multiple sclerosis treatment, but people shouldn’t think that acceptance of that specific medicine means they can smoke a joint for their backache, Hughes said. “There currently seems to be a difference between perception and reality,” he said.

The CBD opportunity

Meanwhile, there is also a booming European trade in products containing cannabidiol (CBD), a non-psychoactive compound in the marijuana plant that is increasingly touted as an ingredient in various wellness products—albeit with little evidence for most of its supposed benefits. This sector also includes smokable plant material that looks an awful lot like regular cannabis, but contains extremely low levels of tetrahydrocannabinol (THC) the compound that gets people high.

Smokable CBD products, with minimal THC content, on sale at the Mary Jane Berlin cannabis expo on June 21, 2019.
Smokable CBD buds, with minimal THC content, on sale at the Mary Jane Berlin cannabis expo on June 21, 2019. Courtesy of David Meyer.

CBD is broadly legal across Europe, where Brightfield reckons the market is worth $416 million this year (compared with $5.7 billion in the U.S.).

However, at the start of this year EU food regulators created stricter guidelines for the sale of foods that contain the substance—like CBD cookies—and different countries are interpreting those guidelines in different ways. EU member states also have different rules about the claims companies can make regarding the benefits of CBD.

“We don’t believe the regulatory outlook is bad, but it is uncertain, and it is rapidly changing as governments try to get their heads around this new market, and to understand the distinction between CBD and cannabis,” said Barnaby Page of CBD sector market intelligence firm CBD-Intel.

Relaxing laws

And then there’s recreational marijuana, which has as yet not been fully legalized in any European country. That is about to change, though: the government of Luxembourg (population just south of 600,000) announced earlier this year that it would fully legalize cannabis consumption by resident adults, with strict controls on its sale. In other words, it is following the Canadian model. The question now is how influential its decision will prove elsewhere in Europe.

Luxembourg borders Belgium, Germany, and France and, although the idea is to ensure weed only gets sold to the locals, the country’s neighbors are concerned about the implications. Police in both Germany and France have expressed concerns that people may buy cannabis in Luxembourg and bring it back across the border, much as they already do with petrol, tobacco and alcohol, thanks to Luxembourg’s low taxes on those products.

However, there is a possibility that the legal situation could change in Germany, too—and that could be a real catalyst for a wider European shift, given Germany’s influential status in the region.

A protestor demanding the legalisation of cannabis smokes a joint in Berlin, Germany.
A protestor demanding the legalization of cannabis smokes a joint in Berlin, Germany. Credit: Paul Zinken—dpa.

The question of legalization in Germany is currently on the table because of the Green party’s surge in popularity. Once something of a fringe party, recent polls suggest the Greens could now seize votes from both left and right and form the next government. And the Greens have long favored regulated marijuana legalization.

“The conditions of the black market are harmful to consumers’ health,” said Kirsten Kappert-Gonther, a Green member of the German parliament and the party’s spokesperson on drug policy. “For the Greens, the reform of drug policy is a major concern. The legalization in Canada and in many states of the U.S. is perceived with interest in Germany. Real improvements require a change of government.”

Navigating Europe

Though laws continent-wide are gradually changing, there are plenty of local companies that say that they will ultimately have the home advantage.

Antonio Costanzo is one European who wants to fend off the North American threat. He’s the CEO of London-based medical cannabis company EMMAC Life Sciences, which was valued at around $96 million at its last fundraising round. For comparison, publicly-traded Canopy has a market cap of over $13 billion, while Aurora is valued at over $7 billion and Tilray at over $4 billion.

Like the Canadian companies, EMMAC has been on a spending spree this year, buying the French and Swiss wellness companies GreenLeaf and Blossom, taking over medical cannabis labs in the U.K. and in Spain, and setting up a joint venture in Italy. Costanzo, who previously served as Uber’s head of public policy after spending a decade in the online gambling industry, says experience with heavily regulated fields in the European context will be key to expanding there.

“We started looking at the European medical cannabis space and thought the biggest challenge was being able to navigate different legislations and…create a single market,” Costanzo said. “The advantage we have, being European, is we know how Europe works… It’s a very local play—you need to speak to regulators in each country.”

Applying pressure

There is also some wariness of foreign companies pressuring European regulators to change their rules. The EMCDDA’s Hughes said he had heard of lobbying taking place at both the national and EU levels.

“As the Canadian industry is federally legal, a few of the big companies are now valued in multiple billions of U.S. dollars,” Hughes said. “We should be aware of the huge financial interests in opening the European market, particularly for recreational use, and the possibility of negotiating relatively loose regulations in order to maximize sales, following the direction of the alcohol and tobacco industries.”

So far, though, Europe doesn’t seem to be the same sort of pressure that’s been seen in the U.S., where legalization has come as the result of voter initiatives—Illinois last month became the first state to take a legislative path to legalization, rather than responding to ballot pressure. In the U.S, the push to legalize is also tightly bound up with protesting high levels of incarceration, particularly of African-Americans, on drug charges for possessing cannabis.

“The intensity and advocacy in the U.S. is higher because you have this social justice and equity component of it. Parts of the population were discriminated against for many decades,” said Chris Burggraeve, a Belgian-American former Coca-Cola marketing executive who heads up an American cannabis and CBD brand called Toast. “Every single candidate for election at any level will need to have a point of view on marijuana because it’s a voters’ issue, whereas in Europe I’m not sure it’s hot enough to be a full voters’ issue.”

EMMAC’s Costanzo agrees that recreational marijuana is unlikely to become widely legal in Europe anytime soon.

“Today, we’re not even looking at this,” he said. “But once it’s legal, we would be crazy not to look at it.”

China’s Unicorns: Galloping Into the Sunset?—Data Sheet

I’m in Utah this morning, in transit from Brainstorm Tech and the brilliant blue skies of the Rockies, back to Hong Kong, where summer swelter is in full swing—and the government has just issued an ominous air pollution warning.

RBC Capital Markets’ Mark Mahaney’s top ten tech trends list is a perennial favorite at Brainstorm Tech, and this year he delighted just about everyone with a list offering one teensy negative (that regulatory risk for tech may be rising), a slew of positives, and an ebullient conclusion that “everything is going over the top” for U.S. tech stocks. (The full presentation, if you haven’t watched it already, is well worth your 11 minutes.)

As Asia Editor, I was equally keen to hear from GGV Capital managing director Hans Tung, who led us on a whirlwind tour of emerging tech markets that, in tone at least, matched Mark’s for optimism. Hans, who was born in Taiwan and trained as engineer at Stanford, is one of the smartest venture investors in the business. Over an 18-year career in investment banking and tech, he’s bagged 15 unicorns, including Airbnb, Beijing Bytedance, Slack, and Xiaomi. Menlo Park, Calif.-based GGV was an early investor in Alibaba, and last year raised $1.88 billion in new funding to bring total assets under management to $6.2 billion.

Hans’ presentation extolled the promise of three major regions—India, Latin American (especially Brazil), and Southeast Asia (especially Indonesia)—that he deems the next hotspots for online growth. “Emerging markets,” he declared, are “where the next billion users are coming from” and “they’re still underinvested.”

That’s a list with which I enthusiastically concur. But one market was conspicuous for its absence: China.

In fairness, while China technically counts as an emerging market, its Internet companies are well-developed; in many ways, they are more sophisticated than U.S. ones. Hans (and a lot of other people) have already made a pile of money betting on them.

Even so, I was struck by the shift in focus. What to make of the fact that one of Silicon Valley’s savviest China investors now seems to be chasing unicorns in markets other than China?

Had Hans compiled a “top ten tech trend list” specifically for China, it might have included a lot more negatives than’s Mark’s U.S. equivalent. This dour assessment in The Diplomat offers a few candidates: widespread layoffs and hiring freezes; faltering sales at Alibaba; net income declines at Tencent and JD.com; a sudden dearth of venture and private equity capital.

The Diplomat acknowledges these travails are partly due to ongoing tech tensions between the United States and China (which don’t show any sign of easing). But even in the absence of the U.S.-China conflict, odds are China’s Internet champions would still have to struggle against a slowing economy. Nor is it obvious (to me at least) how Xi Jinping’s vow to shore up China’s state-owned enterprises and kick China’s dependence on U.S. tech by channeling massive government subsidies to domestic firms will revive the fortunes of China’s start-ups.

All of which should make for lively discussion when we convene the Fortune Global Technology Forum November 7-8 in Guangzhou, China.

Clay Chandler

On Twitter: @claychandler

Email: clay.chandler@fortune.com

The Battle for Cloud-Based Gaming: CEO Daily

Good morning.

Earlier this week at Brainstorm Tech in Aspen, I was accosted by Mark Pincus, founder of Zynga, who lectured me on why Fortune needed to pay more attention to the gaming industry. This morning, I’m happy to oblige: Jonathan Vanian’s deeply-reported piece on the coming battle over cloud-based gaming, featured in the August edition of the magazine, is available online this morning.

Here’s the money line, which justifies Pincus’ case: “Today’s video game industry is a behemoth expected to generate $152 billion worldwide this year, according to market researcher Newzoo. That’s 57% more than the $97 billion generated by the global theatrical and home-movie market last year, and eight times the $19.1 billion generated by the global recorded music market.” We are not just talking games here.

Like the movie, TV and music industries, the gaming industry is now wrestling with the reality that consumers want great entertainment experiences on their smartphones. And with 5G streaming around the corner, the race is on to see who gets this piece right. Microsoft, Google and Amazon—the cloud giants—are all heavyweights in the fight, but a host of others will be battling as well: Activision, Apple, EA, Nintendo, Sony, Ubisoft.  

You can read the story here. News below.

Alan Murray



Cloud Gaming Is Big Tech’s New Street Fight

Streaming video games promises to be an all-out brawl among companies with the internet infrastructure to back it up. At stake? Billions of dollars and the future of a fast-growing industry. What, you thought this was a game?

Where is John? That’s the question hanging over you as your team of armored soldiers methodically searches this foreign vessel for a comrade—and war hero—seemingly gone rogue. It’s the year 2558; humans are under attack by alien forces. The last thing you need right now is to have one of your trained killers switch sides.

You cautiously step through the cramped corridors of the spaceship. It’s dark—distressingly so—but for an eerie blue light emanating from the ship’s walls. Your teammates would be in complete silhouette but for the cobalt glints on their weapons. You see shadows you don’t recognize and quietly extend your finger toward your rifle’s trigger. A sapphire streak ripples across its scope.

But they hear you! The aliens’ weapons burst with a kaleidoscope of lethal laser fire that ricochets off the ship’s panels. You sidestep in an effort to get a clear shot—if only you had a little more room—but it’s too late. Before you can return fire, a well-placed beam sends you to a rainbow-colored grave.

Game over. (Start again?)

For nearly two decades, scenes like this one have unfolded in living rooms across the globe, thanks to Microsoft’s long-running video game franchise Halo, playable on the tech giant’s ever-popular Xbox home console. But the rich gameplay described above, which Fortune witnessed during a recent visit to the company’s headquarters in Redmond, Wash., needed no brawny consumer electronics to run with the speed and splendor expected of a modern first-person shooter, as such computationally intensive games are known. It required only a smartphone—in this case, paired with a conventional Xbox controller.

Have smartphones become that good? Not quite. But their tremendous proliferation—more than 5 billion people across the globe own mobile phones, according to 2019 Pew estimates, and more than half of those devices are Internet-connected smartphones—has dramatically changed the way media is consumed. Music, portable since the days of Sony’s Walkman, is now streamed on the go. Movies and television, once limited to larger fixed screens, are now delivered to people’s pockets over the air.

Now video games are preparing to take their turn. If you’re not a gamer, you may not realize just how monumental a metamorphosis streaming promises to be. Today’s video game industry is a behemoth expected to generate $152 billion worldwide this year, according to market researcher Newzoo. That’s 57% more than the $97 billion generated by the global theatrical and home-movie market last year, and eight times the $19.1 billion generated by the global recorded music market. Like those industries, video game makers are grappling with the seemingly boundless potential of streaming, and the race is on to see who gets it right first.

The secret sauce powering all of this media streaming is a technology concept every executive is now familiar with: cloud computing. The off-loading of “compute” to staggeringly large server farms in remote locations, linked to our personal devices with persistent Internet connections, affords each of us on-demand access to supercomputer-level number-crunching power. This capability—plus forecasts that the global gaming industry could reach $196 billion in annual sales by 2022, per Newzoo—is why Microsoft, a gaming-industry stalwart that also happens to be a leading provider of cloud services, is so intrigued by so-called cloud gaming.

It’s also why Halo 5 on a Samsung Galaxy smartphone can still manage such impressive visual pyrotechnics. The demonstration on view in Redmond is really running on the “racks” in a Microsoft data center in Quincy, Wash., 160 miles away. The Quincy facility is one of 13 the company plans to use to host its ambitious Project Xcloud game-streaming service when it begins a public trial this fall.

The last big breakthrough in gaming came a decade ago, when the birth of the smartphone gave rise to rudimentary but wildly popular mobile-first titles like Candy Crush and Angry Birds. “Ultimately the appeal of cloud gaming is the same thing,” says Newzoo analyst Tom Wijman. “You can reach all of this audience without them needing to have a high-end gaming PC or expensive console.”

The folks in Redmond are not alone in their interest. Google, which has fervently expanded its cloud division, announced a cloud-­gaming platform called Stadia that it promises to launch by year’s end. Meanwhile, crosstown rival Amazon, the leading cloud-services company by a country mile, is evaluating how to take its viewing platform Twitch, a top destination for people who watch other people play games, to even greater heights. Behind the big boys, a motley crew of lesser challengers—from Fortune 500 peers like Apple, Nvidia, Walmart, and Verizon to gamemakers like Electronic Arts and Valve to startups like Blade and Parsec—are developing or said to be investigating game-streaming subscription services of their own.

But none of them have cloud-computing muscle like the Big Three, which otherwise use their infrastructure to power the software and services they’re best known for. Whether Amazon, Google, or Microsoft succeeds in crafting the next great console in the sky is almost immaterial. In any case, they’ll all stand to benefit.

Satya Nadella has grown used to the naysayers. For years, Wall Street analysts questioned why Microsoft, the company famous for its Windows operating system and Office business suite, would waste money on something so seemingly trivial as video games. The calls grew louder when Nadella took the company’s helm in July 2014. Still smarting from his predecessor’s missteps in mobile devices, Nadella promised to steer Microsoft away from consumer distractions and toward its highly lucrative business services. Some even urged Microsoft to exit the gaming business altogether. “Four to five years ago, we and others were calling for them to divest that piece of the business,” says Daniel Ives, managing director of Wedbush Securities and a longtime Microsoft observer. That tune has changed: Last year, Microsoft’s gaming revenue—which includes Xbox, Windows games, and a cut of third-party gaming sales—topped $10 billion for the first time.

When I ask Nadella why the company didn’t drop gaming, he chuckles. “There were a lot of things that a lot of people said Microsoft should be doing,” he says. “If I listened to everything that everybody else on the outside asks me to do, there would be very little innovation in this company.”

To be fair, in years past, Nadella had been hesitant to call gaming business core to Microsoft’s overall strategy. Despite its success, gaming represents about a tenth of Microsoft’s annual revenue. Cloud-computing growth is a big reason that the company’s market capitalization topped $1 trillion this year; its “intelligent cloud” unit, which includes its Azure cloud-computing service, generates as much revenue in a quarter as the gaming group generates in a year. (Hasta la vista, Halo!)

But what if you could hitch gaming’s fortunes to Microsoft’s potent cloud engine? Well, now you’re talking. Nadella’s blockbuster $2.5 billion acquisition of the enormously popular world-building game Minecraft in 2014 was a “bit of a head-scratcher” when it was first announced, says analyst Ives, but it’s now clear that the CEO was “planting the seed of how he viewed gaming as part of the broader business.” Microsoft wouldn’t just retain video games. Much as the company managed with Windows and Office, it would use the flywheel of its cloud-computing infrastructure to dramatically boost the scale of its gaming business—and the fortunes of every video game publisher it works with—far beyond what was previously possible.

Today, gaming is unquestionably “core”; in late 2017, Nadella elevated gaming lead Phil Spencer to the company’s executive leadership team to underscore the point. And executives are bullish on the prospects of cloud-driven gameplay. Julia White, who leads product management for Microsoft’s cloud platform, estimates that the business of selling Azure services to video game publishers is worth $70 billion—about as much as publicly traded transportation darling Uber. Most of today’s Internet-connected video games are developed in, and operated from, private data centers run by game publishers, she says. Technology trends in other industries suggest that won’t last. “Even though game developers are in a very different business,” she says, “they face the same trials and tribulations of a commercial bank or a retail company going to the cloud.”

To the cloudmaster go the spoils: In January, the Xbox maker shocked the gaming world by landing longtime console adversary Sony (of PlayStation fame) as an Azure customer with a promise to collaborate on future unspecified gaming projects. It was as if General Motors and Ford had announced a partnership to take on Tesla—an unmistakable sign that the competitive landscape would rapidly and dramatically change.

It was also an indication that Nadella’s mission for Microsoft would be more expansive than it originally appeared. When I ask him why Microsoft is working so hard to build a consumer entertainment service when it has positioned itself as an enterprise software company, he replies, “It’s a bigger business, right? It’s bigger than any other segment. Why would I not do gaming? It fits with what we do. It has connective tissue to the common platform. We have a point of view that what we can do is unique.”

The problem: so does every other player in this game.

For 39,000 viewers tuned into Twitch, Elvis might as well have entered the building. Richard Tyler Blevins, the 28-year-old celebrity “streamer” known to fans by his moniker Ninja, has logged on to the service to play a few public rounds of the popular “battle royale” game Fortnite with his buddy. As his avatar runs and leaps through the game’s virtual environment, weapon in hand, Blevins barks commands like an NFL quarterback at the snap—and his Twitch viewers hang on every mundanity. Their comments rush by in the chat window accompanying Ninja’s feed. Some viewers respond to every move Blevins’s character makes (“get that delay ninja”); others practically ignore the show to talk among themselves. (One thread of conversation among many: Why Finding Nemo was a “pretty good” Pixar movie.)

In other words, just another day on Twitch. Viewers—overwhelmingly male and mostly 34 or younger—watched a breathtaking 9.36 billion hours of gameplay on the platform last year, according to estimates by production company StreamElements. Twitch launched in 2011 as a spinoff of streaming video site ­Justin.tv, a pioneer in user-­generated content. In 2014, Amazon reportedly spent $970 million to acquire the site, besting YouTube-owner Google in a bidding war. Wedbush analyst Michael Pachter estimates that Twitch brought in $400 million in revenue last year.

Twitch, which is housed in Amazon Web Services, the online retailer’s cloud-computing unit, has rapidly become a cornerstone of the company’s broader video gaming strategy. AWS, as Amazon Web Services is known, is already selling computing resources and developer tools to video game publishers. It’s also rumored to be working on a service that would allow it to stream video games themselves rather than merely video of people playing them. (The company declined to comment, though recent job listings for technical roles for “an unannounced AAA games business” suggest its intentions. Like minor league baseball, “AAA” denotes the highest level of play in terms of budget and production.)

Bonnie Ross, head of Microsoft-owned game studio 343 Industries, mugs with a statue of Master Chief, the protagonist of its Halo series, at the studio’s headquarters in Redmond, Wash. Photo by Chona Kasinger

Two major milestones in the gaming industry set the stage for a cloudy future. The first: The massive success of Epic Games’ Fortnite, which brought in an estimated $2.4 billion in sales last year and now claims 250 million registered players. Fortnite demonstrated that “cross-platform” games, playable across competing devices from Microsoft, Sony, Apple, and others, could amass audiences far larger than those of the previous era, when titles were limited to specific ecosystems. “Fortnite was critical in getting the message across to all platforms that they have to lower the barrier of entry to their respective walled gardens,” says Joost van Dreunen, head of games for market researcher SuperData.

The second? Twitch. The service demonstrated that people were just as happy to watch and cheer people playing games—call it the kid-sibling phenomenon—as they were to play the games themselves. That kind of interactivity proved that engagement and gameplay were not one and the same. The dynamic expands the addressable viewership for a given title. “Viewing is eclipsing gaming, and a lot of youth of today would say they played the game when they really viewed the game,” says Bonnie Ross, head of 343 Industries, the Microsoft studio that develops Halo.

For Microsoft’s part, the company never saw the spectatorship aspect coming. “Amazon has Microsoft on a treadmill,” a former executive says. Two years after Amazon bought Twitch, Microsoft acquired competing service Beam for an undisclosed amount. Rechristened Mixer, it has become the means by which Xbox customers can watch one another play games, logging 39.6 million hours of viewing in 2018, per StreamElements—a whopping 179% more than the previous year but still a distant third to Amazon’s Twitch and Google’s YouTube Live.

The summer sun blazes above the thousands of coders assembled for Google’s ­annual I/O developer conference in Mountain View, Calif., but the anxiety on display in the long line has little to do with the weather. The event’s attendees, who base their livelihoods on building software for as many users as possible, are keen to hear Google’s sales pitch for why they should create games for Stadia, an experimental cloud-gaming service that the search giant promises to debut in November.

Like most Silicon Valley presentations, the executives onstage overwhelm with ambitious assurances of technical prowess. Stadia’s complex cloud architecture will prevent the nasty networking hiccups that cause online gamers to throw down their controllers in frustration, Google’s representatives say. All gamers will need to do is open a tab in the Chrome web browser; with just a few clicks, they can play a high-speed, high-resolution title such as ­Assassin’s Creed Odyssey.

Like their counterparts at Microsoft and Amazon, Google brass believe their vast data center empire gives them an edge on the technical demands of streaming high-end video game titles without interruption. Like its peers, Google has encouraged its consumer gaming and enterprise cloud groups to work together to ensure Stadia launches without the problems that have traditionally plagued online games.

Thomas Kurian, a longtime Oracle executive who is now chief executive of Google’s cloud business, says the company’s enterprise engineers built the networking technology that powers Stadia. Cloud gaming is a way for Google to penetrate a ­multibillion-dollar industry, Kurian says. “Our hope is that it’s expanding the market, not just being a replacement market,” he says. “For every person in the world that games on a professional desktop, there are probably three who can’t afford one.”

In other words: Why fight over a quarter of the market when the rest is greenfield? John Justice, a Microsoft veteran who now leads product development for Google Stadia, agrees. Gamers no longer want to “buy an expensive box every few years,” he says. Stadia, and services like it, are more accessible destinations to engage with games without the high barriers of entry found in the traditional console market.

Even the pricing plays a part: Though Stadia’s $129 bundle plus $9.99 monthly subscription has already been announced, Google says it is also evaluating a free version, with lower-quality graphics, that would debut later. Though the technological trajectory is clear, it’s still “early days” for the business model behind cloud gaming, Justice says. “Some people really do want transaction models, and some people want subscription models,” he says. “I don’t think we will say we will only go with one.”

It could take years to iron out the details. Though consumers would love a gaming model akin to Netflix or Spotify—pay a monthly fee, play titles to your heart’s content—it’s not yet clear that cloud providers have the leverage over game publishers to make that happen. Publishers have seen how platform pressures have changed the business of movies, music, magazines, and more. They don’t want to give up a share of their sales unless they’re certain that there are many more to be had in the long run.

Ubisoft, the French publisher best known for the Assassin’s Creed series, isn’t terribly concerned. “That’s less interesting to us,” says Chris Early, an Ubisoft executive who manages partnerships and revenue. The company in June revealed its own subscription service, called Uplay+, that is playable on personal computers and spans more than 100 titles in its own catalog, including Far Cry and Prince of Persia. It costs $14.99 a month and will also be available on Stadia next year. At this moment, “it makes less sense for a publisher to be part of an aggregated subscription model,” says Early. There are many proposals for how to sustainably monetize cloud gaming, he adds, but it remains unclear “who is going to pay whom.”

For now, publishers are focused on figuring out whether today’s successful titles make sense in the cloud—or whether all-new titles, native to the format, will replace familiar franchises. The interactivity of Twitch and the novelty of so-called freemium mobile games, like Candy Crush, showed that technological leaps could open new paths to gaming engagement. The possibilities that could emerge from running games on the same infrastructure that supports today’s artificial intelligence are something that technologists can only fathom.

“There will probably be evolutions of game design that we can’t even imagine yet,” says Early, “and they’re going to take advantage of the increase of cloud compute.”

Back in Redmond, I stop by Microsoft’s 343 Industries game studio, where employees welcome me to a visitor center—a shrine, really—celebrating the company’s Halo franchise, which has racked up $6 billion in sales since its debut. Statues depicting its heroes and villains tower over my head—a gallery of Greek gods, so to speak, for the gaming set. There are glass museum cases everywhere packed with memorabilia. On one wall is a rack of replicas of the virtual weaponry from the game, as intimidating in person as they appear on the screen. Bright orange tags with the word “prop” hang from their triggers in case someone takes the “incineration cannon” a little too seriously.

Founded in 2007 and named after a Halo character, 343 Industries is one of the older members of the Microsoft game portfolio. Last year alone, Microsoft acquired six game studios; at this year’s E3 industry confab, the company announced that it had picked up one more. Today, its Xbox Game Studios division is a federation of 15 semiautonomous studios that the company believes will be a key asset in the cloud-gaming wars—particularly against Amazon and Google, which lack strong titles of their own.

Not everyone sees it that way. Though Microsoft has won plaudits for successive editions of Halo and the Forza car-racing series, analysts have pointed to the titles’ relative age—Halo debuted in 2001; Forza first appeared four years later—as evidence that Microsoft’s homegrown studios have run out of ideas. “We have work to do there,” acknowledged Spencer, the Microsoft gaming chief. “We haven’t done our best work over the last few years with our first-party output.”

Frames from Halo Infinite, the forthcoming edition of the sci-fi game series, and Forza Horizon 4, a popular car-racing series. Both are published by Microsoft. Courtesy of Xbox Game Studios

That must change if Microsoft, the only video game veteran among the Big Three consumer cloud companies, hopes to maintain its natural advantage against Amazon and Google. After all, in video games, as in other parts of the media industry, content is king—which is why Microsoft’s rivals have moved to hire gaming veterans from top shops such as Electronic Arts (Madden NFL, Need for Speed) and 2K Games (Civilization, NBA 2K20) in an effort to build their own franchises. It is an uncanny echo of the moves by Amazon and Google to build their own premium programming, for Prime and YouTube, respectively, to compete with Netflix.

But Rome wasn’t built in a day. Seven years after establishing a gaming group in 2012, Amazon laid off dozens of game developers as it reorganized itself for a cloud-based future. (Amazon downplayed the news. “Amazon is deeply committed to games and continues to invest heavily in Amazon Game Studios, Twitch, Twitch Prime, AWS, our retail businesses, and other areas within Amazon,” a spokesperson tells Fortune.)

Van Dreunen, the SuperData analyst, believes it will take up to five years before cloud-driven efforts by the Big Three will significantly affect the traditional gaming industry. Until then, look for cloud computing’s leaders to continue investing in their data center infrastructure to support the “gradual rollout” of cloud-gaming services, he says.

Why would Amazon, Google, and Microsoft make so much noise about a future that’s so far away? It’s all a part of the “land and expand” business model familiar to the technology industry, says analyst Pachter: Give a speech, plant a flag, hope that early momentum snowballs into an insurmountable competitive advantage. After all, “Facebook wasn’t a billion-dollar idea until it was,” he says. “Uber wasn’t a billion-dollar idea until it was.”

Microsoft, in particular, has no intention of missing out. The company still regrets losing the mobile war to Google and its Android operating system. (Microsoft “missed being the dominant mobile operating system by a very tiny amount,” cofounder Bill Gates lamented earlier this year.) To underperform in an area where it has a head start of almost two decades would be, in a word, unconscionable.

Time to suit up, then. “We’re in gaming for gaming’s sake,” Nadella says. “It’s not a means to some other end.”

A version of this article appears in the August 2019 issue of Fortune with the headline “Big Tech’s New Street Fight.”

More must-read stories from Fortune:

Netflix isn’t in trouble without Friends. It just needs to work harder

—Could A24’s The Farewell be this summer’s biggest indie success story?

Classic rock is reanimating Summer 2019’s movies

How Marvel pictures the future post Spider-Man and Endgame

—Listen to our new audio briefing, Fortune 500 Daily

Follow Fortune on Flipboard to stay up-to-date on the latest news and analysis.

Trump Says U.S. Destroyed Iranian Drone. Iran Says It Didn’t Happen

Iran on Friday denied President Donald Trump’s statement that a U.S. warship destroyed an Iranian drone near the Persian Gulf after it threatened the ship — an incident that marked a new escalation of tensions between the countries less than a month after Iran downed an American drone in the same waterway and Trump came close to retaliating with a military strike.

The Iranian military said all its drones had returned safely to their bases and denied there was any confrontation with a U.S. vessel the previous day.

“We have not lost any drone in the Strait of Hormuz nor anywhere else,” tweeted Deputy Foreign Minister Abbas Araghchi.

The strait is at the mouth of the Persian Gulf and serves as the passageway for a fifth of all global crude exports; a clash there highlights the risk of war between Iran and the U.S.

Trump on Thursday said the USS Boxer took defensive action after an Iranian drone closed to within 1,000 yards of the warship and ignored multiple calls to stand down.

Trump blamed Iran for a “provocative and hostile” action and said the U.S. responded in self-defense. Iran’s foreign minister, Mohammad Javad Zarif, told reporters as he arrived for a meeting at the United Nations that “we have no information about losing a drone today.”

Iran’s Revolutionary Guard said on its website Friday that it would release images from the drone — taken both before and after the U.S. claimed it was downed.

The Guard said the drone had been carrying out regular surveillance when the USS Boxer arrived, and transmitted photos of the ship. The statement added that Guard forces continue to carefully monitor all movements of foreigners — especially “the terrorist forces” of the U.S. and the British in the strategic Strait of Hormuz and Persian Gulf.

The Guard did not say when the images would be released.

After Trump pulled the U.S. out of the Iran nuclear deal last year and imposed economic sanctions on Tehran, the Iranians have pushed back on the military front, shooting down a U.S. drone on June 20.

Also in the past weeks, the Persian Gulf region has seen six attacks on oil tankers that the U.S. has blamed on Iran, and a tense encounter between the Guard and the British navy. Iran has denied involvement in the attacks or the British naval encounter.

The U.S. has also sent thousands of additional troops and increased its security presence in the region.

Adding to the economic pressure on Tehran, the Treasury Department said Thursday it was imposing sanctions on what it called a network of front companies and agents involved in helping Iran buy sensitive materials for its nuclear program. It said the targeted individuals and entities are based in Iran, China and Belgium.

The Pentagon said Thursday’s incident happened at 10 a.m. local time in international waters while the Boxer was transiting the waterway to enter the Persian Gulf. The Boxer is among several U.S. Navy ships in the area, including the USS Abraham Lincoln, an aircraft carrier that has been operating in the nearby North Arabian Sea for weeks.

Neither Trump nor the Pentagon spelled out how the Boxer destroyed the drone. CNN reported that the ship used electronic jamming to bring it down rather than hitting it with a missile.

In Tehran, the semi-official Tasnim news agency quoted military spokesman Gen. Abolfazl Shekari as saying that “all Iranian drones that are in the Persian Gulf and the Strait of Hormuz, including the one which the U.S. president mentioned, have … returned to their bases.”

The Iranians and Americans have had close encounters in the Strait of Hormuz in the past, and it’s not unprecedented for Iran to fly a drone near a U.S. warship.

In December, about 30 Iranian Revolutionary Guard vessels trailed the USS John C. Stennis aircraft carrier and its strike group through the strait as Associated Press journalists on board watched. One small vessel launched what appeared to be a commercial-grade drone to film the U.S. ships.

Other transits have seen the Iranians fire rockets away from American warships or test-fire their machine guns. The Guard’s small fast boats often cut in front of the massive carriers, running dangerously close to running into them in “swarm attacks.” The Guard boats are often armed with bomb-carrying drones and sea-to-sea and surface-to-sea missiles.

Thursday’s incident was the latest in a series of events that raised U.S.-Iran tensions since early May when Washington accused Tehran of threatening U.S. forces and interests in Iraq and in the Gulf.

In response, the U.S. accelerated the deployment of the Lincoln and its strike group to the Arabian Sea and deployed four B-52 long-range bombers to the Gulf state of Qatar. It has since deployed additional Patriot air defense missile batteries in the Gulf region.

Shortly after Iran shot down a U.S. Navy drone aircraft in June, Trump ordered a retaliatory military strike but called it off at the last moment, saying the risk of casualties was disproportionate to the downing by Iran, which did not cost any U.S. lives.

Iran claimed the U.S. drone violated its airspace; the Pentagon denied this.

Zarif said Thursday that Iran and the U.S. were only “a few minutes away from a war” after Iran downed the American drone. He spoke to U.S.-based media on the sidelines of his visit to the U.N.

“We live in a very dangerous environment,” he said. “The United States has pushed itself and the rest of the world into probably the brink of an abyss.”

Zarif blamed Washington for the escalation and accused the Trump administration of “trying to starve our people” and “deplete our treasury” through economic sanctions.

Earlier Thursday, Iran said the Guard seized a foreign oil tanker and its crew of 12 for smuggling fuel out of the country, and hours later released video showing the vessel to be a United Arab Emirates-based ship that had vanished in Iranian waters over the weekend.

The announcement cleared up the fate of the missing ship but raised a host of other questions and heightened worries about the free flow of traffic in one of the world’s most critical petroleum shipping routes.

More must-read stories from Fortune:

—What to expect from the second Democratic debate

—When it comes to politics, Americans are divided. Can data change that?

—Elizabeth Warren declares war on private equity ‘vampires’ in 2020 plan

Trump outspent every other political campaign on Facebook. Here’s who those ads targeted

—Sex toys allowed, not massages, in fine print of Trump tax break

Get up to speed on your morning commute with Fortune’s CEO Daily newsletter.

Eugene Scalia: What to Know About Trump’s Pick for Labor Secretary

President Donald Trump has selected lawyer Eugene Scalia, the son of the late Supreme Court Justice Antonin Scalia, to be his new labor secretary.

Trump tweeted news of the planned nomination on Thursday evening, less than a week after his previous secretary, Alexander Acosta, resigned amid renewed criticism of his handling of a 2008 secret plea deal with wealthy financier Jeffrey Epstein. The financier was indicted earlier this month for sexually abusing underage girls.

“Gene has led a life of great success in the legal and labor field and is highly respected not only as a lawyer, but as a lawyer with great experience” working “with labor and everyone else,” Trump wrote of Scalia, who is currently a partner in the Washington office of the Gibson, Dunn & Crutcher firm.

In private practice, Scalia has been known for his challenges to federal regulations on behalf of corporate clients. Scalia’s law firm biography cites his “success bringing legal challenges to federal agency actions.”

If confirmed, Scalia will be returning to the department where he previously served as solicitor in President George W. Bush’s administration, overseeing litigation and legal advice on rulemakings and administrative law. He has also worked for the U.S. Department of Justice. From 1992-93, Scalia served as a special assistant to Attorney General William Barr during his first stint as attorney general.

Trump had previously announced that Acosta would be succeeded in an acting capacity by his deputy, Patrick Pizzella.

Within hours of Trump’s announcement, divisions surfaced between Republicans and Democrats about Scalia’s nomination.

Senate Democratic leader Chuck Schumer of New York tweeted that Trump was “missing an opportunity to nominate a fighter for workers, like a union member, to be America’s next Labor Secretary. Instead, he has again chosen someone who has proven to put corporate interests over those of worker rights.”

Republican Sen. Tom Cotton of Arkansas tweeted that Scalia was “an outstanding lawyer who has vigorously defended the Constitution over a long career in government and private practice. I’m confident he’ll be a champion for working Americans against red tape and burdensome regulation as Labor Secretary.”

Scalia did not respond to a request for comment Thursday.

Acosta’s resignation extended the record turnover at the highest levels of Trump’s administration, with acting secretaries at key departments, including Defense and Homeland Security. Roughly two-thirds of the Cabinet has turned over by the two-and-a-half year mark of Trump’s term.

More must-read stories from Fortune:

—What to expect from the second Democratic debate

—When it comes to politics, Americans are divided. Can data change that?

—Elizabeth Warren declares war on private equity ‘vampires’ in 2020 plan

Trump outspent every other political campaign on Facebook. Here’s who those ads targeted

—Sex toys allowed, not massages, in fine print of Trump tax break

Get up to speed on your morning commute with Fortune’s CEO Daily newsletter.

Bias busters: Knowing when to kill a project

You’re keen on encouraging innovation and letting a thousand flowers bloom, but how do you sort the weeds from the seeds?

Packaging solutions: Poised to take off?

Major trends are reshaping packaging solutions—and that could open new opportunities for players that are prepared to move fast.

The Legacy of ‘Orange Is the New Black:’ The Broadsheet

Good morning, Broadsheet readers! Mellody Hobson chimes in from her ‘corner office,’ Ivanka stays silent, and we reflect on how the women of ‘Orange Is the New Black’ changed the culture. Have a wonderful weekend.