Web3 Was Supposed To Save the Internet
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Web3 Was Supposed To Save the Internet

it has a long way to go.

By DAREN FONDA
Tue, May 31, 2022 11:40amGrey Clock 8 min

Early this year when anything still seemed possible for technology companies, futurists and venture capitalists were enthralled with the idea of building a new internet. Web3, as it became known, was poised to recapture the 1990s promise of a decentralized internet, free from gatekeepers and trillion-dollar platforms.

Cryptocurrencies had the starring role in the Web3 dream. Crypto, in theory, could wrest control from giants like Meta Platforms (ticker: FB), Alphabet (GOOGL), Amazon.com (AMZN), and Apple (AAPL). It would shift our online activities to blockchains—handling everything from payments and trading to videogaming, social media, even real estate. It could also shift the economics to users, giving them financial incentives to govern and secure the networks.

A record $25 billion was plowed into crypto start-ups last year, with another $30 billion on track for this year, according to Bank of America. Even the recent downturn in crypto doesn’t seem to have chilled new investment. This past week, venture-capital firm a16z announced a new crypto fund totaling $4.5 billion.

“We think we are now entering the golden era of web3,” a16z partner Chris Dixon wrote in announcing the investment.

And yet Web3 remains a heavy lift—it’s full of contradictions, glitchy technology, regulatory uncertainty, and competing economic interests. There’s debate over who will “own” it—companies backed by Silicon Valley venture capital, or the users themselves. And the crypto markets’ downturn—wiping out more than $1 trillion in value for tokens this year—makes a blockchain-based web even harder to fathom.

In the near term, Web3 may be a casualty of a tech backlash that has sent the Nasdaq Composite index down more than 25% this year. Crypto-related stocks have tanked, including Coinbase Global (COIN) and Microstrategy (MSTR), and payment apps Block (SQ) and PayPal Holdings (PYPL). Among crypto start-ups, investment is harder to come by, and valuations are falling. Morgan Stanley forecasts that failure rates will rise.

Crypto fans talking up Web3 as a revolution face pushback from critics who see it as a marketing gimmick. In the end, Web3 is likely to fall somewhere in between.

“We may have to go through one or two hype cycles before the most important elements of the technology break through,” says Gavin Wood, a co-founder of the Ethereum blockchain and head of another blockchain enterprise called Polkadot. As he sees it, Web3 today is where the internet was in 1998—early in its adoption but with vast potential and boom-bust cycles ahead.

“Web3 is the next generation of the internet with capabilities that go well beyond what we have today,” says Mark Palmer, a digital-asset analyst at brokerage BTIG. “But the citizenry is not rising up to overthrow Web2.”

Understanding Web3 requires a dip in the hot-tub time machine. Web1, the first generation from the 1990s, was based on static pages and directories that served as the first internet indexes. Web1’s dial-up services, browsers, and banner ads evolved into the more modern internet, which came to be known as Web2. Companies like Amazon, Meta, Alphabet, Apple, and Microsoft (MSFT) now oversee the core of our web experiences. Walled gardens like Instagram, YouTube, and Apple’s App Store prevail. Digital assets like videogame avatars and social-media followings sit on platforms owned by the giants.

In some ways, Web3 aims to turn back the clock, cutting out the intermediaries and dispersing apps, services, and digital assets on decentralized networks like Ethereum and other blockchains. Today, those networks are primarily used for trading and lending crypto assets, including new varieties like nonfungible tokens, or NFTs, and stablecoins, which are designed to maintain a fixed value.

But all sorts of other financial products and services could live on blockchains, potentially reducing the economic friction now associated with cross-border payments and transaction fees for goods and services. “Blockchains have the potential to clear and settle transactions in a much more efficient way than traditional technology,” says Sarah Hammer, an adjunct professor at the University of Pennsylvania Law School who specializes in crypto.

One example of Web3 already in practice is Filecoin, a crypto-powered storage network. Rather than storing files on cloud-based servers—where they are ultimately controlled by a handful of big-tech operators—they can be distributed and encrypted on personal hard drives with spare capacity. Testimonies of Holocaust and other genocide survivors are being preserved through Filecoin.

“It’s like Airbnb for file storage,” says Marta Belcher, president and chair of the Filecoin Foundation. “If you have extra space on your hard drive, you can rent it out. We think of it as the foundation for the next generation of the internet.”

Filecoin may just scratch the surface of decentralized technologies. Projects like Helium aim to challenge telecom networks by distributing long-range Wi-Fi hot spots to individuals, giving financial incentives and payments for data traffic in tokens. NFTs allow for property rights, licensing agreements, and royalties to be traced and tracked. That opens up avenues for NFTs to become conduits for things like mortgages, car ownership titles, diplomas, and concert tickets. “There’s an infinite number of things you can do with a computer, and that’s equivalent to what you can do with an NFT,” says Gui Karyo, chief information officer of Dapper Labs, a leading NFT company.

Ideally, Web3 advocates say, the technology will lay the foundations for a more egalitarian web where the “rents” now charged by intermediaries will be more widely distributed. “We should be moving to an internet where your digital property rights are genuine—you’re not a serf on Jack Dorsey’s or Mark Zuckerberg’s plantation; you own your homestead,” says Nic Carter, a venture-capital investor in Web3 start-ups at Castle Island Ventures.

Silicon Valley’s biggest and most successful venture-capital firms are investing heavily. “Programmable blockchains are sufficiently advanced, and a diverse range of apps have reached tens of millions of users,” a16z’s Dixon said in a post this past week. Tokens also give users “property rights: the ability to own a piece of the internet,” he said in an previous post on Web3.

Web3 overlaps with the metaverse, another of tech’s hottest topics before the recent selloff. The metaverse foresees a new internet based on virtual realities, online avatars, and new ways for people to socialize and work.

Facebook rebranded itself as Meta Platforms, betting that its Instagram, Facebook, and WhatsApp could become Web2 relics without help from blockchains, cryptos, and NFTs, which could grant consumers more control of their digital lives. Meta is now working on incorporating NFTs into Instagram. The currencies of digital worlds, whether for gaming, social, or e-commerce, are likely to be stablecoins—digital tokens aimed at holding a peg to a dollar.

Yet Facebook’s move is a reminder that the Web2 giants aren’t sitting still. In the end, Web3 is unlikely to displace them. Indeed, there’s good reason to think Web3 won’t be all that decentralized. For one, it’s being funded by many of the same entities that built Web2.

A16z, formally called Andreessen Horowitz, was an early investor in many Web2 stalwarts, including Facebook, Box, Lyft, and Pinterest.

Now, the firm owns stakes in dozens of crypto start-ups, including OpenSea and Dapper Labs, along with decentralized-finance, or DeFi, platforms including Ava Labs, Uniswap Labs, dYdX, and Compound. These DeFi platforms consist of “smart contracts” that set the conditions of a trade, cutting out intermediaries like a brokerage or centralized exchange.

VC firms aren’t making investments based on sheer goodwill. They expect returns on capital and are likely to maintain stakes through token ownership or warrants. The platforms themselves may be decentralized, in the sense that anyone with some technical skills can write a “permissionless” smart contract and execute a trade without a broker/dealer. But that doesn’t mean the platform isn’t owned or governed by a corporate entity.

That rubs some tech gurus the wrong way. Twitter co-founder Jack Dorsey stirred up an online frenzy last December when he tweeted, “You don’t own ‘web3.’ The VCs and their LPs do,” referring to venture-capital firms and their investors known as limited partners. “It’s ultimately a centralized entity with a different label.”

Representatives for Dorsey and a16z declined to comment.

Crypto is proving enticing to VC firms partly because of the attractive “tokenomics.” For a traditional VC deal, the path from initial funding to exit usually takes five to seven years. In crypto, that timeline can be compressed to just two years, with VCs exiting their investment when a token goes live on an exchange or takes off on a DeFi platform.

“You have a very short time to liquidity—often it’s like 24 months—so even if the business doesn’t pan out, you can still exit,” says Carter. “That’s why crypto is so popular with VCs; even your losers can get liquidity, and you can exit before a product comes out.”

The nebulous nature of Web3 is also alluring for early backers. “There’s no definition, and that’s deliberate,” says Carter, who backs crypto start-ups. “If something is poorly defined, as an entrepreneur you can claim you’re building it even if you’re not. The lack of codification works to the benefit of people in the industry.”

The spoils of the crypto boom may already be accruing to the founders and early backers, leaving later entrants holding the bag. That’s apparent in the many projects that shut down or fizzle after their tokens go live on an exchange. The most public failure happened this month when an “algorithmic” stablecoin, TerraUSD, and a related token called LUNA collapsed, wiping out $40 billion dollars in value. Terra’s problems heighten concerns that crypto markets remain packed with dodgy projects and speculative excesses.

The potential windfall for VC firms doesn’t change the main argument from Web3 proponents, which is that blockchains can democratize networks, both economically and through their governance. Two blockchain innovations are making that possible.

Major blockchain networks like Ethereum that would form the basis for Web3 run on a system of processing transactions called “proof of stake.” Anyone who owns a blockchain’s native tokens can pledge or delegate them to the network operators that process and secure the blockchain’s transactions. In return, those stakeholders receive a cut of the transaction fees. The idea is to disperse ownership and let anyone participate in a network’s economics and growth, similar to owning shares of a software company that runs a widely used operating system. Proof of stake consumes far less electricity than first-generation blockchains like Bitcoin. They’re known as “proof of work,” because the network requires a massive amount of computing power to secure and process transactions.

Blockchains can also be democratized through decentralized autonomous organizations, or DAOs, which grant token owners a vote on how to assess transaction fees or to invest the group’s assets (one DAO tried unsuccessfully last year to buy a rare copy of the U.S. Constitution).

Here again, though, the financial interests complicate matters. Founders and early investors tend to control most of the tokens and oversee the DAO, similar to how a start-up’s equity is concentrated in a small group of investors before it goes public.

Some software engineers view Web3 as a step back from the original idea of Bitcoin—a peer-to-peer payment network operated by individuals worldwide. “The things calling themselves DAOs are often neither decentralized nor autonomous—the founders call all the shots,” says Molly White, a software engineer and author of a critical blog, Web3 Is Going Just Great. “This idea that Web3 will be egalitarian, with no one controlling the wealth, is an enormous contradiction.”

The web’s incumbents are far more likely to incorporate Web3 than sit by while the technology renders them obsolete. “It doesn’t seem like Amazon faces any meaningful Web3 threats right now,” said Ryan Selkis, CEO of crypto data firm Messari, in a recent report. “Google search and Microsoft Office may have impregnable walls,” he added. Apple is still dominant in hardware, first and foremost.”

Legally, Web3 is unsettling. Governments aren’t eager to allow financial products and services to shift from regulated brokerages, exchanges, and banks onto DeFi networks. Some legal scholars argue that DeFi is “Shadow Banking 2.0,” a high-tech version of the loosely regulated securities and other products that led to the financial collapse of 2008-09. “DeFi doesn’t so much disintermediate finance as replace trust in regulated banks with trust in new intermediaries who are often unidentified and unregulated,” said Hilary Allen, a law professor at American University, in a recent paper.

Bitcoiners espouse libertarian economics, yet Web3 has Marxist ideas of collective ownership and distributed profits, according to some views.

That’s not to say that Web3 is all decentralisation theatre, manifestos, and speculation. The idea that an online bookstore would transform into a cloud giant wasn’t apparent when Amazon first issued stock in 1997; Facebook didn’t exist back then, and TikTok was associated with a clock. Coders are working hard to build Web3, and the capital flowing in will support lots more apps, services, and development.

But it does face a Catch-22; without corporate and legal wrappers, Web3 is unlikely to attract institutions and individuals en masse. Companies will get involved for the profits. That means the hope for a flat web topography could keep drifting away.

The most likely impact is that the promise of a potential Web3 brings us something more like Web2.5, in which the web’s current landlords face pressure to lower rents and open up their walled gardens. In the end, that may motivate everyone to stick with the comforts of the internet we have today.

 

 



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Nike Reverses Course as Innovation Stalls and Rivals Gain Ground

Shoe giant stumbled as CEO John Donahoe pulled away from retailers and relied on old hits. Now it says it’s refocusing on cutting-edge footwear for athletes.

By INTI PACHECO
Tue, Apr 23, 2024 10 min

In late February, Nike boss John Donahoe led a virtual all-hands meeting where he delivered a message to his staff: The company wasn’t performing at its best and he held himself accountable.

Two weeks earlier, Nike had announced it would lay off more than 1,600 employees .

Now, as the CEO spoke at the meeting, critical comments started to fill the chat window on the Zoom call while more than 20,000 employees watched.

“Accountability: I do not think that word means what you think it means,” an employee wrote. “If this is cost cutting, how about a CEO salary cut?” another wrote. Soon a cascade of laughing emojis filled the screen.

Some colleagues warned others that their posts weren’t anonymous and the chat might be monitored. The attacks went on for several minutes. “I hope Phil is watching and reading this,” an employee wrote, referencing the retired Nike co-founder Phil Knight .

The virtual protest illustrated the depths of the dissatisfaction within the sneaker giant and concern for its strategy. “How did we actually get here?” wrote one product manager.

Since the pandemic, Nike has lost ground in its critical running category while it focused on pumping out old hits and preparing for an e-commerce revolution that never came. The moves, current and former employees say, have eroded a culture of innovation and edginess that made Nike one of the world’s best-known brands.

Donahoe had told The Wall Street Journal in 2020 that his No. 1 priority when taking over the company was “don’t screw it up.” Four years later, the company is unwinding key elements of the CEO’s strategy that have backfired as a growing number of upstarts nip at its heels.

Among the reversals: As Covid raged and more shopping moved online, Nike cut ties with longtime retail partners such as DSW and Urban Outfitters and tried selling more merchandise directly to consumers. It is now asking some of those stores for help clearing out its overstuffed shelves and warehouses.

“I would say we got some things right and some things wrong,” Donahoe said Thursday, in an interview at Nike’s Beaverton, Ore., headquarters.

Losing its roots

The strategic missteps have animated a debate inside the company about its identity. In its zeal to boost digital sales, some current and former employees say, Nike veered from its roots as a maker of cutting-edge footwear for serious athletes. It has opened itself to competition from newcomers such as On and Hoka, which have borrowed from the playbook that fuelled Nike’s rise—including focusing on sport over lifestyle, and taking risks on innovation.

Nike’s once torrid growth has stalled . Sales for the quarter ended Feb. 29 were flat compared with a year earlier, and shares in the company have declined 24% over the past year, compared with a 19% gain in the S&P 500.

Donahoe in the interview acknowledged the brand lost its “sharp edge” in sports and needed to boost its “disruptive innovation pipeline.” The CEO said the brand’s marketing got fragmented and that with people going back to bricks-and-mortar stores, it was clear Nike needed to invest in its retail partners.

Nike executives said in interviews that the company became too cautious after the pandemic and overly reliant on older products that were reliable sellers. They said the company has made significant changes in recent months to refocus it on putting out cutting-edge footwear.

“We were serving consumers what they know and love,” said John Hoke , Nike’s recently named chief innovation officer. “The job is to of course do that but also to show them something new, take them someplace new.”

Donahoe said Nike is going through a period of adversity and layoffs that has created uncertainty, but that the company will get through it. “Our employees have been through a lot,” he said. “Nike is actually at its best, like a great sports team, when our backs are against the wall.”

Knight, who is chairman emeritus of the board and the company’s largest shareholder, said in a statement that Donahoe has his “unwavering support.”

Donahoe said employees’ responses to the all-hands meeting reflected one of Nike’s biggest strengths: how much its staff cares about the company. “We welcome and encourage that,” Donahoe said.

Shift into digital

Donahoe took over Nike just before the pandemic, at a delicate time. Though he inherited a market leader and one of the world’s best-known brands, Nike was seeking a refresh after it dealt with complaints about its workplace culture that led to a management shake-up .

The Evanston, Ill., native had been CEO of eBay , where he doubled the e-commerce platform’s revenue during a seven-year stint that ended in 2015. After a sabbatical—during which he says he had a life-altering experience at a 10-day Buddhist silent meditation retreat—Donahoe went on to run cloud-computing company ServiceNow .

When he took the helm of Nike in early 2020, his marching orders from Mark Parker , his predecessor and current executive chairman, and Knight were clear. He was to turn the world’s biggest shoe maker into a tech company more directly connected to consumers through its own apps, which in turn collect valuable data from shoppers.

Parker said when he stepped down that Donahoe was the right candidate to lead Nike’s digital transformation.

Donahoe was just the fourth CEO in the company’s more than 50-year history. The only other outsider to get the job said he was ousted in 2006 after a short stint because he focused too much on the numbers .

Donahoe started out with a 100-day global listening tour that was cut short after a month when the pandemic hit.

Covid lockdowns fuelled a surge in online shopping. Digital channels accounted for 30% of Nike’s sales in May 2020, about three years ahead of schedule.

Donahoe saw it as an acceleration of an inevitable shift and adjusted Nike’s plans accordingly. A few months in, he redoubled the company’s bet that it could make more money by selling products directly to consumers through its stores and digital channels. He said he believed digital sales would reach 50% of the business, and Nike should transform faster to define the marketplace of the future. It was time to act.

By late 2020, Nike dropped about a third of its sales partners and sold less merchandise to clients such as Foot Locker , DSW and Macy’s . There had been a plan to phase out wholesale clients since 2017, but with digital sales growing quickly, Donahoe said there was a need for urgency.

Executives were divided over whether Nike’s own stores, which include both factory outlets and specialty shops selling higher-priced new releases, could fill the sales void left by the retailers the company was cutting out.

In meetings, finance chief Matt Friend and Nike president Heidi O’Neill supported the aggressive exit from retail that Donahoe was pushing, while others favored a slower transition, people familiar with the matter said.

Some executives felt the specialty stores in particular worked better as marketing tools and that cutting off so many retailers so fast would backfire, the people said. Donahoe and his allies prevailed.

Nike teams were tasked to come up with a new global supply-chain process. Selling directly to consumers increased the company’s liabilities, including by shifting storage and shipping costs from wholesalers to Nike. The company would also absorb the losses from discounts if the merchandise didn’t sell quickly and inventory piled up.

One of the casualties of Donahoe’s 2020 transformation was a multibillion-dollar operation dedicated to developing footwear sold for under $100. The company deprioritised more-affordable footwear that usually sold to the sales partners that Nike was leaving behind. The move left Nike skewed toward higher-priced shoes.

The first evidence of cracks in Nike’s new approach appeared early last year when Foot Locker Chief Executive Mary Dillon said during an earnings call the brand had reversed course and was sending the retailer a wider assortment of Nike products. By the summer, Macy’s and DSW were saying the same thing.

The message was clear: Nike needed help selling merchandise.

Nike veterans said cutting off wholesale clients was one of the biggest mistakes the company has ever made. After digital sales hit the 30% of the total mark early in the pandemic, they dropped back, and haven’t reached that level since—let alone the 50% target Donahoe had foreseen.

Donahoe said in the interview the goal at the time was to lean more on specific partners, such as Dick’s Sporting Goods and JD Sports , which he considers to be more aligned with Nike, rather than make a dramatic shift in strategy. Nike deprioritised making lower-priced shoes because of supply-chain disruptions during the pandemic, but it is now making more of those products, he said.

“I don’t see it as a reversal of the strategy,” Donahoe said of the return to more retail chains. “I see it as an adjustment.”

Rising competition

Competitors have been using the sneaker giant’s playbook at its expense. Smaller brands like On, Hoka and New Balance have captured significant pieces of the market for both hard-core and everyday runners—and their popularity is spreading to the mainstream.

Often quoting Knight, the Nike co-founder, former employees said the principle always was to first capture the market for hard-core athletes with innovative performance gear, and the casual consumer would follow.

In early February, Hoka owner Deckers Outdoor tapped Nike alums to take over both the parent company and the shoe brand. Hoka had $1.4 billion in sales for the year through March 2023, compared with about $352 million three years earlier.

Hoka didn’t respond to requests for comment.

“When you’re the biggest, there’s always going to be people coming after you,” Donahoe said. Competitors give Nike an incentive to try to understand what consumers want and to figure out how to come up with something bold and different, he said.

Nike still dwarfs its competition . During Donahoe’s tenure, Nike sales have grown 31% to $51 billion in 2023. That is more than double the results of Adidas, its closest competitor by far. New Balance reported sales reached $6.5 billion last year, and upstart On almost hit the $2 billion mark.

The race to hit revenue targets came at a cost for Nike. Executives turned to the brand’s lucrative franchises, including Air Jordan and Dunk, and ramped up the releases. The strategy diluted the exclusivity prized by die-hard Nike sneaker shoppers.

Donahoe said in the interview that Nike ramped up production to meet demand on its SNKRS app, which fans use to buy the latest limited releases. In early 2021, Nike was meeting less than 5% of the demand for some releases on the app and consumers were frustrated, Donahoe said, adding the goal is to meet something closer to 20% of demand for the exclusive styles.

Now, sneaker resellers say they have seen release after release of Nike’s limited-edition kicks that don’t sell out on the SNKRS app, and that in the secondary market—a space that the brand closely monitors —prices are tanking.

Nike executives in March said they would pull back on franchise releases.

Donahoe said “franchise management has always been something Nike has done.”

Nike’s digital sales, a figure that includes direct and partner e-commerce sales, declined for the quarter ended Feb. 29. Friend, the finance chief, told analysts in March that Nike expects total sales to decline at least until the end of this year.

Struggle for innovation

The pursuit of sales growth from limited-edition sneaker releases led Nike to neglect its running category, long considered the core product of the company, former employees said.

This month in Paris, Nike unveiled its new product line for the Olympics, including running shoes with a new cushioning system that uses the company’s Air technology.

In interviews at the event, executives said the company had become somewhat risk-averse during the pandemic, when working remotely stifled creativity. Martin Lotti, chief design officer, said the company had spent too much time looking to its past.

“If you drive a car just by looking in the rear view mirror, that’s not a good thing,” Lotti said. “The bigger opportunity is the windshield.”

Current and former Nike executives believe the future of the company is in its app ecosystem , like the Nike Training and Running Club or its SNKRS app, and the data it can harness from them to help design and sell products. Inside the company, leaders have long tried to draw comparisons to Apple when talking about Nike’s innovation and design culture.

The sneaker giant has been acquiring smaller data analytics startups for at least a decade. Two years ago, it also bet on the NFT craze .

One of Nike’s biggest tech investments is a multibillion-dollar process to migrate multiple software programs into one single system. The new platform, known as S/4HANA, is still not operational and is three years behind schedule. The software is designed to help day-to-day operations, such as procurement and inventory management, and speed up digital sales.

As part of its accelerated focus on digital sales, Nike hired about 3,500 people to join what the company calls its global technology group, which includes consumer insights and data analytics. Executives at the time said they were investing in “demand sensing,” “insight gathering” and a new inventory system.

Former Nike employees with knowledge of the consumer insights strategy said executives misinterpreted the data in ways that overestimated demand for retro franchises.

During February’s round of layoffs executives trimmed layers of management across the company’s insights and analytics teams. A large technology innovation team, tasked with developing software to implement Apple’s new Vision Pro augmented reality system in day-to-day design tasks, and a separate artificial intelligence team were also eliminated.

Executives at Nike say it is entering a “supercycle” of innovation and that the new Air line of products enhances athlete performance.

At the Olympics preview event this month, the company took over the historic Palais Brongniart in central Paris with a three-day event to unveil its new Air line. Guests wandered through a museum-like, conveyor-belt installation highlighting Nike’s product evolutions and research and development programs. Athletes including runners Sha’Carri Richardson and Eliud Kipchoge modeled the new gear. Retired tennis great Serena Williams narrated the company’s lavish introduction video before appearing on stage.

Outside, 30-foot orange statues of Nike-sponsored athletes including LeBron James, Kylian Mbappé and Victor Wembanyama stood guard.

Donahoe’s relationship with Knight goes back to the early 1990s, when he was a Bain consultant on Nike projects. He joined the Nike board in 2014 and is one of the directors of an entity Knight created called Swoosh LLC, which holds roughly $22 billion worth of Nike shares and controls a majority of Nike’s board seats. Donahoe calls Knight his “greatest hero in business.”

The current CEO said he meets with his predecessor, Parker, every week.

Donahoe said that he and Parker share an approach to management he calls “servant leadership” that was embodied by some of his sports heroes, including basketball coaches Phil Jackson, John Thompson, Mike Krzyzewski and Tara VanDerveer.

“It’s never been about me. It’s about your players. And are you doing everything you can to allow your players to make the adjustments to win? And when you have a win it’s about the players and when you have a loss you say it’s on me, right?,” he said. “And that’s what I’ve always tried to embody, including during this period of time.”

This week, Donahoe is facing another test: the company is notifying several hundred more workers whose jobs are being cut.

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