Curated Insights 2018.07.13

Confessions of a digital dinosaur: Esports is the next great traditional sport

Esports is becoming the next great traditional sport because more young people are regularly playing and watching them than any other sport. For young people esports has a tremendous first-mover advantage of being the first digitally native sport.

Matt Kim, an esports reporter offers an interesting perspective. He grew up in Seoul, South Korea where the national sport is esports. “By the time I left South Korea, StarCraft was a dominant pop culture fixture in ways I don’t think a lot of people really understand. It wasn’t just because South Korea was paying professional gamers years before anyone else, or that competitions were broadcast on major television networks. In South Korea, StarCraft was literally everywhere, from branding on clothes to labels on food. It was in everyday conversations with classmates. Posters were plastered across city windows of seemingly infinite PC bangs – cafes where players pay by the hour. Now I’m seeing esports (in the U.S.) in mid-construction where it’s my job to report on its progress. Yet it feels like I’ve already seen the ending, and now I get to witness its engineering in reverse.”

1.2 billion hours were watched of the League of Legends Championships. More than 80 million unique viewers watched one match alone. By comparison, 76 million watched the final episode of Seinfeld, the Super Bowl of traditional television. If this is hard to get your head around, imagine how advertisers are trying to chew on this exponential opportunity while some of their traditional platforms are being spit out with declining viewership.

The video game online streaming audience is more than five times greater than Netflix subscribers, and Twitch dominates this market. According to Cerulli, the average age of a wealth manager is 51. I wonder how many have even heard of Twitch. Twitch is home to more than 2 million broadcasts a month shown to more than 15 million unique daily viewers. Their audience watched 355 billion minutes of Twitch last year. More than 150,000 streamers – the people providing the content – are getting paid from the Twitch platform alone. The total number of creators earning money more than tripled year over year. All with enough left over for Twitch to raise more than $30 million for charities. The revenue side has explosive scale while the cost per broadcast has to be even more enticing to future creators. I met a broadcaster on Twitch who needed a cheap webcam and comfortable chair. Compare that to an itemized cost to produce an average football game on television I found.

Even the cutting edge seems too crowded to one of my favorite thinkers – Daryl Morey, the General Manager of the Houston Rockets – who likes to be even earlier. He has completely revolutionized my favorite game of basketball. But, he’s not done. He now compares the growth opportunity of esports to 1950s basketball. Morey explains, “I say it all the time because it’s true: The three dominant sports in the future are going to be soccer, basketball and esports.”

“I believe esports will rival the biggest traditional sports leagues in terms of future opportunities, and between advertising, ticket sales, licensing, sponsorships and merchandising, there are tremendous growth areas for this nascent industry.” That comes from Steve Borenstein, Chairman of Activision’s esports division, who is the former CEO of ESPN and the NFL Network.

How Amazon steers shoppers to its own products

Amazon’s move into the private label retail space started small and quiet. As the article says, “It started with a simple battery.” Now, AmazonBasics batteries account for a third of online battery sales. To stay competitive, brands like Energizer are paying to advertise at the top of relevant search results. While AmazonBasics only has about 100 products, the room for growth is large, and they have the data to see what products to take private next. “About 70 percent of the word searches done on Amazon’s search browser are for generic goods. That means consumers are typing in “men’s underwear” or “running shoes” rather than asking, specifically, for Hanes or Nike.”


What an Amazon Pharmacy could solve, and what it won’t

In the future, patients could log into their Amazon accounts to track their prescription history, helping them better track their own health care. The company could also offer something like the “you might also like” recommendation engine, but more based on science than browsing history. A patient might indicate he has coronary heart disease and high cholesterol, for example. Amazon would also have data on the patient’s meds, and could recommend alternative treatments. Or Amazon might inform doctors that similar patients are getting a higher dose of the same drug.

Amazon would also have the capacity to collect data on side effects. Clinical trials are not big enough or run over a long enough time period to catch the less common side effects. Those tend to be identified after drugs go on the market and are widely used. But they might be identified faster if patients reported side effects the same way they write reviews of products. Not all reported complaints will be attributable to the drugs, but with enough data, patterns would emerge.

Netflix is a product & technology company (Netflix misunderstandings, pt. 2)

There’s a pernicious and persistent narrative about Netflix where the company’s success is overwhelmingly attributed to the mistakes of its suppliers. Not only did these suppliers (a group that included nearly every major media company) continually sell the most valuable rights to their most valuable content to Netflix, they massively underpriced these deals. As such, the streaming upstart was able to (1) access large volumes of high quality content at a time when it had none of its own; (2) build a business atop the creative successes of its eventual competitors; and (3) benefit from years of relatively uncontested OTT leadership. Hence success!

The prioritization of engagement time over quality is controversial, but there are a few explanations. To start, one has to assume Netflix is correct in observing that, at least in the short-run, watch time has a (much) stronger impact on retention than quality (and of course, the former is a more objective, quantifiable and analyzable metric). This relationship likely stems from the unique dynamics of an unbundled, D2C subscription content service.

This view considers content as fundamentally substitutable – because it’s not an experience being bought (or sold), it’s time. Quality is expressed through viewing volume and, as with most substitutable goods, pricing efficiency is paramount. If the average title generates 100 hours per dollar, then a title that generates only 80 hours costs Netflix 25% of potential viewing hours and thus avoidable subscriber losses and realizable subscriber gains. This dynamic is further bolstered by the role of cost amortization. The decision to make The Crown is an expensive one irrespective of the number of hours produced; set building, costume design, casting, scoring and location scouting are upfront, fixed costs, largely independent of episode count. As such, a 10-episode season typically won’t cost 11% more than a nine-episode one. Given the likelihood that a viewer would watch ten episodes rather than nine if given the choice, elongation drives both net engagement and efficiency gains. And that’s just in adding one episode.

To that same end, Netflix’s obsession with engagement may change as OTT video grows from its infancy into a more competitive puberty. As Netflix edges towards domestic saturation, its revenue growth will primarily be driven by price increases – and a reputation for overlong series and B-grade movies may prove problematic regardless of watch time growth (HBO’s price, after all, is 37% higher despite offering a fraction of the library and achieving even less engagement per customer). In addition, the competition in OTT video is only getting stronger. As new entrants attack the space with different priorities, or higher quality thresholds, Netflix will need to respond. Product will not be enough.


Netflix isn’t being reckless, it’s just playing a game no one else dares (Netflix misunderstandings, pt. 3)

Netflix’s goal is to have more subscribers than any other video service in the world, and to be the primary source of video content for each of these subscribers. The company doesn’t want to be a leader in video, or even the leader in video – it wants to monopolize the consumption of video; to become TV. This ambition has several important consequences, especially relating to the company’s spend.

Online distribution encourages audiences to concentrate their watching time and enables networks to monopolize their viewers’ attention. Much of this comes from the fact that unlike pay TV, most online video subscriptions are sold a la carte and on a month-to-month basis. This has four major implications. First, it’s harder for viewers to discover competing networks or sample their content, as they’re no longer a channel change away. Second, it’s harder for any network to acquire new paying customers, as this requires each would-be subscriber to first decide they’re willing to spend more money each month, then go through the process of signing-up. And even when a paid customer is acquired, retention is a challenge. A few great shows each year isn’t enough to sustain 12 straight months of paid subscriptions and avoid “binge-and-churn” subscriber behavior. Fourth, the viewer experience of managing multiple streaming networks is rough. Unlike pay TV, which bundles all channels onto a single output with a consistent UI and centralized guides, OTT video requires audiences to contend with multiple apps, with different watchlists and interfaces (e.g. some have individual user profiles others don’t; some boast great UIs, others are horrid), not to mention variable definitions of reliability and streaming quality. On top of this, internet-enabled personalization and on-demand distribution allows a digital network to be all things to all people at all times – no longer are dozens of channels needed to satisfy the various interests of a single zip code. And finally, digital networks are free to air any content at any time – and as such, any consumption lubricates additional consumption and prevents consumption of a competitor.

Netflix’s goal is to functionally replace the entire bundle– to have so much content that customers don’t need another general entertainment aggregator, be it Hulu or DirecTV Now. Audiences would still have a few focused carve outs, such as HBO, ESPN or Disney, but rather than enlisting for Discovery + AMC + ABC + Nickelodeon + Showtime etc., the average household would just need Netflix. Not only does the company benefit from a virtuous cycle in pursuit of this goal, this would save the average household hundreds of dollars per year even if Netflix doubled or tripled its monthly fee. This end-state might seem ambitious, but that’s why Netflix’s spend is both substantial and aggressive – the goal isn’t just satisfying current subscribers, it’s to replace almost all its competitors.


Netflix and the rise of global scale media (or how media learned to love its customers)

Two important results of this has been the ability to raise its prices 3 times in the past 4 years without materially impacting its long-term growth rate, demonstrating just how much consumer surplus it provides the customer relative to the value it captures via pricing, while also bringing down its churn rate over time, demonstrating increasing customer satisfaction with its service. The large value gap also means that Netflix has additional pricing power in the future it can take to improve its margins.

Netflix has also created the capability to source content globally (sometimes required by regulation in certain locales) and redistributing it to subscribers in foreign geographies that would never have sought it out for lack of awareness. This data driven targeting/marketing capability uniquely provides Netflix’s the capability to drive viewer demand for its content investments across a global audience (increasing scale of demand) while increasing both the pool of its content supply (lowering overall cost) while better pricing the value of each piece of content pays.

JOHN MALONE: It’s way too late… So, you know, his scale, the ability to create content to scale. I mean, if you think about it, three years ago, HBO was the biggest, most powerful thing in the– in the– premium entertainment category. They spent I think two and– $2 billion to $2.5 billion on content. They’re now dwarfed. And beside that, HBO is essentially only a domestic distributor. So they don’t have the global platform under them. And, while they can syndicate or sell their content to foreign distributors, it– it– it is not nearly as strong a business model as being able to know the customer, deliver the stuff directly, and control the pricing at which your product is delivered. So– and having all the information about the consumer and their habits– which in Reed’s case, he’s not using for advertising at this point, but he certainly can use that to optimize his programming. So I– I think he’s done a brilliant job of– of building that business. Scale is– is very, very powerful when you’re producing something that has a high fixed and very low variable cost. So when you get to a point where your marginal cost is $0, profitability is enormous as you scale up.”

China’s risqué live-streaming apps are now objectifying men too

Live-streaming is expected to nearly double from this year to 126.8 billion yuan ($19 billion) in China by 2022, according to a research report from internet consultant IResearch. YY and Momo both take about 60 percent of the cut of tips that live-streamers make.

Already, YY has lifted the revenue contribution from female users by 10 percentage points to about 40 percent this year from when it first started the business, Li said. On Momo, women account for only about 25 percent of users and men remain the main source of tipping. Yet the company is working to create services that will make female users more open to using its platform including women-oriented gaming, cosmetics and fashion channels, according to Jia Wei, vice president of Momo and general manager of live-streaming.

JD.com estimates that women’s spending power will reach 4.5 trillion yuan ($676 billion) in China by 2019.

Can live streaming make money? Takeaways from Huya’s May IPO

According to an earlier PricewaterhouseCoopers report on trends in the sector, China and the Asia-Pacific region are becoming the largest consumer markets for online gaming and will maintain a steady compound annual growth rate (13.9%), with total revenue for the sector reaching US$195 million by 2021. Looking at the driving force behind this propulsion in value, PricewaterhouseCoopers predicts that by 2021, the value of advertising from live stream media will reach US$84 million, and events revenue will reach US$54 million. Player fees alone will net US$31 million. Ultimately, the rise of eSports in China is related to the booming video game market. In 2016, the Chinese video game sector was worth US$15.4 billion. By 2021, it is expected to challenge today’s largest market, the US, for first place, with expected revenues of $26.2 billion.


Activision is ‘best positioned’ for the coming billion-dollar eSports bonanza

eSports are expected to generate direct revenue of over $900 million this year and cross the $1 billion threshold in 2019, Post said. But those figures may just be scratching the surface. Over time, and using a traditional sports analogy, we believe eSports advertising (streaming, sponsorship), ticket sales, promotions, and merchandise sales could reach $15 billion.

Intel acquires eASIC to take its chipsets deeper into IoT and other future technologies

“We’re seeing the largest adoption of FPGA ever because of explosion of data and cloud services, and we think this will give us a lot of differentiation versus the likes of Xilinx,” which is one of Intel’s biggest competitors in FPGA. “We’ll be able to offer an end-to-end lifecycle that fits today’s changing workloads and infrastructure. No one on the marketplace will have this.” FPGA designs allow companies to quickly modify chip architectures, but they also require a lot of power. eASIC chips are more efficient, and they can be configured quickly from the outset (but cannot be modified).


Morningstar targets slice of $19tn market with in-house funds

The group’s highly-prized industry ratings system is influential in determining the fate of fund management companies. A poor rating, or negative report from an analyst, can often trigger sharp outflows, while top-rated funds draw huge inflows.

Morningstar said its mutual funds would not be qualitatively rated by its own analysts but they would be eligible for an in-house algorithmically-assigned star rating after a three-year performance record, at which time they would become a client of the group’s research arm.

Having started life as a boutique research provider that compiled data on 400 mutual funds three decades ago, Morningstar has become a powerhouse of the asset management industry, employing 5,000 staff, overseeing more than $200bn of assets and publishing data on 233,000 mutual funds.

Harvard study: Heat slows down the brain by 13%

The study has socioeconomic findings, too: if you’re too poor to afford air-conditioning you might fall behind at work or at school. In fact, studies are proving this repeatedly.

America, by and large, has an obsession with A/C… 87% of American homes have A/C. There are currently 1.6 billion A/C units in the world, and that figure is expected to be five times greater by 2050 as climate change takes its toll.

Curated Insights 2018.07.06

What would happen if China started selling off its Treasury portfolio?

And the perennial threat that China would sell its Treasuries. That could happen as a byproduct of a decision by China to push its currency down—if China signals that it wants a weaker currency, the market would sell yuan for dollars, and controlling the pace of depreciation would require that China sell reserves. Or could happen even if China maintained its current basket peg and shifted its portfolio around—selling Treasury notes for bills, or selling Treasuries and buying (gulp) Bunds (if it can find them—it might end up buying French bonds instead) or JGBs.

If Treasury sales came in the context of a decision by China that it wanted a weaker currency to offset the economic impact of Trump’s tariffs (or simply a decision by the PBOC that it needed to loosen monetary policy in response to a slowing Chinese economy, and thus to no longer follow the Fed), the disinflationary impulse from a weaker yuan (and a broader fall in most Asian currencies and a rise in the dollar) would likely be more powerful than the mechanical impact of Treasury sales. That is the lesson of 2015-16.

Treasuries sales in a sense are easy to counter, as the Fed is very comfortable buying and selling Treasuries for its own account. I have often said that the U.S. ultimately holds the high cards here: the Fed is the one actor in the world that can buy more than China can ever sell.

Who has the best business model (and it’s not Google or Facebook)

Staying on the topic of streaming video, this is a relevant example of how shared-value transactions gives Amazon a potential structural advantage over the leader in the space: Netflix. Success in streaming video requires great video content, and Netflix will spend $8 billion this year buying video rights. The way Netflix funds this hefty content bill is that they have 120 million customers who pay them $10 each month directly, and then they take half of that fee collected from every subscriber and spend it on content. So every subscriber pays for content equally (about $5 per user per month) as Netflix earns the exact same amount from their best users as their worst users.

Amazon too will spend a significant sum buying video content (about $5 billion this year). But their content bill is paid entirely differently. Instead of only depending on a percentage of Prime membership fees (which are the same for every user) to fund their content budget, Amazon can pay for content using revenue from purchases of books, diapers, toilet paper, laundry detergent, and more (and this spend is most definitely not the same for every user). As Bezos has said: “When we win a Golden Globe, it helps us sell more shoes”. Amazon’s best users are able to purchase significantly more goods than their average user, and these funds can be indirectly applied to fund video content that everyone shares value from.


Dropbox vs. Box: The story of enterprise SaaS multiples

By digging deeper into the operating margins, we find that the difference between the two companies seems to come down to the approaches of their growth strategies. Dropbox has grown primarily through a highly efficient marketing function and self-serve model, while Box has grown through a traditional, and more expensive, enterprise sales model.

This story hides some major issues with Dropbox. Their strategy for years has been to go after the consumer cloud storage market, which never made sense, as that market is highly competitive and has limited revenue potential. Box decided long ago to pivot to the enterprise, while Dropbox went through numerous failed acquisitions and internal initiatives, attempting to build products in everything from email to payments. They built a strong consumer brand in the process but ultimately decided to double down on enterprise. We think it’s too late.

The cloud storage and file hosting industry, including all the related services, doesn’t seem to be protected by a particularly wide moat. All of the major technology names are active in this field as well, including Amazon, Google, Microsoft, and Apple. All of these companies have the added advantage of pre-existing customer relationships. The main advantage Dropbox would need is the ability to provide differentiated services to enterprises. However, we haven’t seen evidence of Dropbox’s ability to effectively build differentiated enterprise products. As they are forced to expand their market, we believe they will face stiff competition that will make it more difficult to grow. On the other hand, the 500 million users may be the key to unlocking growth within enterprises that enterprise sales teams couldn’t effectively crack.

The Airbnb challenger you’ve never heard of (by name)

Airbnb has reportedly spent only $300 million on marketing since its inception in 2008. “We don’t acquire customers by buying them. We acquire customers by providing a superior experience and having offerings around the world,” a spokesperson emailed.

Booking spent $4.5 billion on marketing last year alone. Yet Fogel admits that it still lags in consumer awareness. The brand is much better known in Europe, where it was founded. “The product is just as good here as anywhere else … and therefore we should have much more [awareness],” he says, noting that Booking.com only came to the US in 2013. Booking Holdings’ other brands, like Priceline and Kayak, have loyal bases of users, Fogel says. But Booking.com makes up the vast majority of the company’s revenue, and the name change from Priceline to Booking Holdings shows what executives consider their crown jewel.

Airbnb is fighting back with two high-end tiers of hotel-like offerings and luxury accommodations, Airbnb Plus and Beyond by Airbnb. The company emphasizes that 3.5 million of its listings are exclusive and that business travel now makes up 15 percent of its bookings. Beyond that, Airbnb has been selling tourist activities to its customers through its Experiences product for two years.


A $6 billion China startup wants to be the Amazon of health care

WeDoctor’s data comes from several sources, but one of the most important is the hundreds of hospitals in its network whose doctors plug information into a central database — with consent from patients who may want to switch care-givers. They could also upload their own records. The company then profiles users, classifying them in buckets based on age, gender, region or symptoms. That’s a potent advertising aid to drugmakers and insurers, Chen says. That leeway to commercialize patient information comes with caveats: WeDoctor stresses data is anonymous and it doesn’t share it with third parties.

That’s just one piece of the money-making puzzle. WeDoctor also takes a cut on consultation fees via its app or smart speaker. The 4,000 yuan box has a screen in the front and comes with a year’s access to doctors online.

Those clinics complement “online hospitals.” WeDoctor’s won licenses to operate 10 such platforms that offer real-time chats with doctors. This also lets the best clinicians, usually working out of big hospitals that keep fees artificially low, to earn more on the side. Top doctors can demand 3,000 yuan per session, WeDoctor says.

WeChat Impact Report 2018 shows impressive social impact

WeChat-driven information consumption reached RMB 209. 7 billion
WeChat accounted for 34% of the total data traffic of users
WeChat drove RMB 333.9 billion traditional consumption, covering travel, food, shopping, tourism, etc.
WeChat contributed the employment of 20.3 million persons in 2017, more than twice the 2014 figure
The number of stores accepting WeChat Payment in Japan was multiplied by 35 in 2017

China isn’t playing tech catch up – it’s leapfrog and it may get dirty

According to business managers, many of those three million annual science and technology graduates lack crucial analytical and communication skills, and are barely employable. Similarly, a large proportion of those 430,000 research papers have little or no scientific value. And many of China’s 1.4 million yearly patent applications are destined to prove worthless. In fact, fewer than 20 per cent of China’s applications even claim to be for new inventions; the vast majority are for lower-tier design or utility model patents, which typically cover minor incremental changes to existing products.

Inventive economies generate handsome international income streams by licensing their technologies to foreign companies, which then pay them intellectual property royalties. In 2016, China earned just US$1 billion from the rest of the world in intellectual property payments. In contrast it paid out US$24 billion (and according to many critics, it should have paid a great deal more). Now compare those numbers with the equivalent figures for the US, which last year earned US$128 billion from licensing its intellectual property to other countries, while paying out US$48 billion. Meanwhile, Japan earned US$35 billion, and paid out US$18 billion.

The thought father: Nobel Prize-winning psychologist Daniel Kahneman on luck

One of the most amusing episodes in the book comes when Kahneman visits a Wall Street investment firm. After analysing their reports, he calculated that the traders, who were highly prized for their ability to “read” the markets, performed no better than they would have done if they made their decisions at random. The bonuses that they received were, therefore, rewards for luck, even though they found ways of interpreting it as skill. “They were really quite angry when I told them that,” he laughs. “But the evidence is unequivocal — there is a great deal more luck than skill involved in the achievements of people getting very rich.”


Better ways to learn

“When you are cramming for a test, you are holding that information in your head for a limited amount of time,” Mr. Carey says. “But you haven’t signaled to the brain in a strong way that’s it’s really valuable.”

One way to signal to the brain that information is important is to talk about it. Ask a young student to play “teacher” based on the information they have studied. Self-testing and writing down information on flashcards also reinforces learning.

“Sleep is the finisher on learning,” Mr. Carey says. “The brain is ready to process and categorize and solidify what you’ve been studying. Once you get tired, your brain is saying it’s had enough.”