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9 min read
1. Why are big industrial conglomerates GE, J&J, and Toshiba breaking up?
  • In the past 2 weeks, 3 iconic diversified conglomerates with a combined 410 years of existence – General Electric (GE), Johnson & Johnson (J&J), and Toshiba – separately announced major organizational splits of their respective businesses.
  • GE announced it will form 3 public companies focused on aviation, healthcare, and power. It plans to undertake two tax-free spin-offs, of GE Healthcare (early 2023) and of a combined GE Renewable Energy, GE Power, and GE Digital (early 2024). The remaining GE company will be focused on aviation (which generated $22B in 2020 revenue) and shaping the “future of flight.” That company will retain a 19.9% stake in GE Healthcare (which generated $18B in 2020 revenue), along with GE’s other assets and liabilities. The largest of the 3 public companies at the outset will be the new energy-focused entity (which had a combined $34B+ in 2020 revenue), though it is reportedly also the weakest of the group.
  • During the heyday of the conglomerate model, GE executives believed there were synergies in management processes like the “GE Way,” as well as shared capabilities and cross-sell opportunities. Once the most valuable company in the world (2000), GE amassed an enormous amount of debt ($524B at its 2008 peak) to support the credit-driven growth of its financing arm GE Capital – debt that brought it dangerously close to collapse after the 2008 crisis. GE has struggled since, selling or spinning off adjacent businesses as it’s pushed to cut debt and costs. With its revenue falling every year since 2016, it was forced to slash its dividend by 92% starting in 2019. The recent split is an attempt at a reset, with the rationale of “[d]eeper operational focus, accountability, and agility”; [t]ailored capital allocation decisions”; and “[s]trategic and financial flexibility.” The move is being viewed favorably by the financial markets.
  • J&J describes the split as driven by the divergence of the divisions’ respective customers and markets. Its rationale includes “management focus, resources, agility and speed”; “focus[ed] capital allocation”; a more targeted investment opportunity” for investors; and “[aligning] corporate and operational structures” to drive growth. The capital allocation priorities of the remaining J&J business will include R&D investment in the higher-margin pharma and medical devices units, as well as dividends and “value-creating acquisitions.”
  • Last Friday, Toshiba – once viewed as a Japanese GEannounced it would reorganize into 3 standalone companies by Mar 2024. Two new companies will be created – Infrastructure Service Co., consisting of Energy Systems & Solutions, Infrastructure Systems & Solutions, Building Solutions, Digital Solutions and Battery businesses ($18B in projected FY2021 revenue); and Device Co.,consisting of Electronic Devices & Storage Solutions ($7.6B in projected FY2021 revenue). The remaining Toshiba business will hold stakes in $10B flash-memory company Kioxia Holdings (formerly Toshiba Memory) and $3.5B office/electronic equipment maker Toshiba Tec.
  • While Toshiba’s standalone businesses will be smaller, they will still be comprised of relatively diverse entities (especially the new Infrastructure business). In the case of Toshiba, the break-up was driven by a corporate governance scandal. It had been mired in controversies since 2015, culminating in activist investor pressure, an independent commission that uncovered government collusion at the highest levels to sway board votes, and the voting out of Toshiba’s chairman earlier this year. In Toshiba’s recent announcement, it described the reorg as continuing its commitment to “improving its corporate governance and regaining trust of its shareholders.”
  • In large part, the break-ups are being driven by under-performance, and the belief that greater focus and strategic flexibility can help divisions find their way through to growth. In a fast-moving environment, having to consider the needs of diverse businesses – and the conflicts of interest among them – can slow down executive decision-making and investment. A more focused business can also help align management incentives, which would otherwise be diluted by tying them to a larger diversified organization.
  • The irony is that, as industrial giants break up, big tech firms are becoming larger and more diversified – “neo-conglomerates” based on a foundation of technology assets and capabilities that can be leveraged across multiple businesses. However, with regulators looking askance at growing big-tech power and antitrust issues like self-preferencing, the open question is whether the advantages of capability and scale can still be enjoyed without requiring close organizational ties.
Related Content:
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  • Jun 25 2021: Do B2B SaaS customers prefer “compound startups”?
2. Blockchain gaming is hot right now – but what exactly is it?
  • The application of blockchain technology to gaming can take several forms, which are not mutually exclusive. First, it can be used in “play-to-earn” models that incent players to stay engaged, keep playing, and make progress. One of the best-known is Axie Infinity, a game in which players buy into a monster-based economy for about $1,500 and use them to earn more in-game crypto tokens that can be exchanged for real money.
  • Another model is the use of NFTs to facilitate ownership of in-game items (e.g. swords). In-game purchases are not new – the market is expected to reach $61B this year globally. Traditionally, they’ve equated to renting (vs. buying), without transferable value after the initial purchase. With NFTs, publishers hope to enable gamers to retain ownership of items, sell them to other gamers, and even transfer them between games. Players can garner real-world value from their investment in a game, and publishers can see network effects that encourage game adoption. Animoca is an NFT game studio that owns the popular Sandbox title, which monetizes in-game assets like land and equipment, and just reached a $2.2B valuation last month.
  • These models are facilitated by tokenization – the introduction of in-game digital currency that can be used for different types of transactions. An in-game currency can help publishers keep money in the game, and motivate players to keep coming back. Blockchain-gaming enthusiasts believe that tokenization can be an entry point for the unbanked into decentralized finance (NFT games like Axie Infinity, for instance, are growing rapidly in emerging markets). Over time, as in-game economies become more robust and their currencies become more interoperable, it could open the door to a more interconnected “metaverse.”
  • The energy in the space is driving the emergence of startups looking to provide blockchain-gaming infrastructure. Last week, Forte – which provides a backend platform to 25+ game publishers that helps them incorporate blockchain (e.g. crypto wallets) and NFTs into their games – closed a $725M funding round. Mythical Games (see above) is also exploring licensing its platform to other game publishers that want to create games with playable NFT characters. Another startup, Zebedee, raised $11.5M in Sep 2021 for its suite of tools to help developers integrate Bitcoin payments into their games.
  • Environmental and performance considerations associated with crypto mining and blockchain also need to be addressed. Lately, more blockchains are moving towards the more energy-efficient “proof of stake” (vs. “proof of work”), and more startups are providing sidechains that can offload transactions and help reduce the computing load.
  • Industry players are joining forces to help move blockchain gaming forward. Game7 is a new $500M DAO (decentralized autonomous organization) consortium dedicated to accelerating blockchain gaming. Backed by Forte and large decentralized treasury BitDAO, the fund will be allocated to R&D, tools and regulatory compliance (15%); developer education (5%); and direct funding to game studios and DAOs (80%).
  • The amount of direct funding to game studios is a recognition that there has to be a quality game to play in order to attract users. Crypto-native companies have a near-term capability advantage but gaming-native companies that have experience in developing high-quality AAA games may ultimately win the day in blockchain gaming. If done effectively, a studio could use blockchain to keep gamers within its ecosystem of games, moving across a studio's different games with their owned digital goods. It all hinges, however, on whether the gaming-native publishers can move fast enough.
Related Content:
  • Jul 30 2021 (3 Shifts): Facebook wants to be a “metaverse company” and the outlook on virtual worlds
  • Mar 5 2021 (3 Shifts): What are NFTs and why are they booming?
3. The multi-billion dollar land grab of legalized sports betting
  • Last week, New York state regulators approved 9 mobile sports-betting businesses to operate in the state, including FanDuel, DraftKings and BetMGM. New Yorkers will now be able to legally make bets on their phones, whereas before they had to place bets in person at casinos. Sports-betting operators’ revenue will be taxed at a healthy 51%, eventually generating an estimated annual $482M in tax revenue for New York from a projected $1B sports betting market.
  • In May 2018, the US Supreme Court struck down the federal ban on states authorizing sports betting, effectively opening the door for state-authorized online betting. Since then, sports betting has quadrupled in size. In just the month of Jun 2021 – before football season had even started – the bets placed across all active betting states totaled $3.7B. 45M+ Americans are expected to bet $20B+ on NFL games this year – nearly 3x the $7.5B bet during the 2020-2021 season. Of those, nearly 20M Americans will place a bet online (up 73% over 2020).
  • The opportunity is sizable and growing. Globally, the sports betting market generated $131B in revenue in 2020. Goldman Sachs is projecting 40% annual growth in online sports betting through 2033.
  • Some gaming platforms are taking the tack of diversifying into media as a way to draw users in. For instance, Penn National Gaming acquired media platform Barstool Sports in 2020 at a $450M valuation. Earlier this month, it was reported that both DraftKings and FanDuel had been in talks to acquire sports website The Athletic, which is reportedly seeking a valuation of $750M+.
  • Sports betting isn’t the only form of online gambling picking up momentum. Earlier this week, Jackpocket, whose app lets users play official state lotteries in 10 states, raised $120M to expand into real-money mobile gaming (e.g. social casino games) as well as raffles, sweepstakes, and bingo. The froth is on for legalized online gambling, and we can expect players to get aggressive on ways to drive users to their respective platforms and betting books.
Related Content:
  • Dec 18 2020 (3 Shifts): Are Robinhood and the Fed propping up bubbles?
  • Jul 31 2020 (3 Shifts): “Blank-check companies” – also known as SPACs – are booming this year
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