Curated Insights 2018.07.27

 

The oral history of travel’s greatest acquisition Booking.com

We ranked Priceline’s acquisition of Bookings B.V. alone — even when excluding the Active Hotels transaction — as the fifth greatest deal in Internet history, surpassing Google-DoubleClick and Amazon-Zappos in terms of value creation. Priceline’s Active-Bookings acquisitions transformed a travel brand that was running out of capital resources and international expansion options for its Name Your Own Price business. It opened up global opportunities in hotel bookings where Booking.com disclosed the room rates in advance instead of cloaking them in a relatively complicated bidding process.

Geert-Jan: I had very little knowledge about the hotel industry. I was a night porter in a hotel as a student. It gave me some inspiration and at least I knew how the reservation process went because we had people who came in at night who hadn’t booked so they came in for a reservation. I had no clue about commission rates; that’s why I started with 5 percent. To me, it sounded very logical that hotels themselves should know the best room rate they can charge at any time. From the beginning, it was the hotel that decided what the rate should be on the website.

Active Hotels in the UK and Bookings.nl in the Netherlands launched separately using the agency, or pay-at-the-hotel, business model while large U.S.-headquartered companies such as Expedia, Hotels.com, and Priceline.com were having various levels of success in Europe. These major online travel agencies focused on big hotel chains, which weren’t as important in Europe. Expedia and Hotels.com were enamored with the higher-commission merchant model, which required travelers to pre-pay for their hotel stays, and that just wasn’t the way things were done in Europe. Priceline.com was trying its Name Your Own Price bidding model in the UK and elsewhere internationally, and it wasn’t getting traction outside the United States.

Bookings.nl merged with the UK’s Bookings Online in 2000. In 2002, Barry Diller’s USA InterActive/IAC acquired Expedia, and came close to buying Geert-Jan Bruinsma’s Bookings.nl in Amsterdam. Separately, in 2003, IAC/Expedia signed a non-disclosure agreement with the UK’s Active Hotels, but a deal never materialized. Together, these decisions may have arguably amounted to the biggest missed opportunity in online travel history.

In July 2005, Priceline.com acquired Bookings B.V. for $133 million. Although the joint operation and merged companies — Active Hotels and Bookings — would eventually take the name Booking.com, it is interesting to note that Priceline paid more for Active Hotels, buying it in 2004 for $161 million, than it did for Bookings. Now the focus became to integrate the two companies, which at that time had 18,000 properties combined, the largest inventory among online players in Europe. In the grand scheme of things, the integration went remarkably well, although it was at times a tough marriage between Active and Bookings. There were cultural differences and clashes among the teams; most of the Active Hotels leadership left after a year or two. In both deals, management reinvested a portion of the acquisition proceeds back into their respective businesses.


Where to go after product-market fit: An interview with Marc Andreessen

So winning the market is the big thing. The thing that is so essential that people need to understand is that the world is a really big place. The good news is that markets are bigger than ever. There are more consumers on the internet than ever before. There are more businesses that use software than ever before.

Number two is getting to the next product. We are in a product cycle business. Which is to say that every product in tech becomes obsolete, and they become obsolete pretty quickly. If all you do is take your current product to market and win the market, and you don’t do anything else — if you don’t keep innovating — your product will go stale. And somebody will come out with a better product and displace you.

If you do take the market, you tend to have the financial resources to be able to invest heavily in R&D. And you also develop M&A currency, so you can then go buy the second product if you have to. It gives you another option to get to the second product.

The general model for successful tech companies, contrary to myth and legend, is that they become distribution-centric rather than product-centric. They become a distribution channel, so they can get to the world. And then they put many new products through that distribution channel. One of the things that’s most frustrating for a startup is that it will sometimes have a better product but get beaten by a company that has a better distribution channel. In the history of the tech industry, that’s actually been a more common pattern.

But then the third thing you need to do is what I call “everything else,” which is building the company around the product and the distribution engine. That means becoming competent at finance, HR, legal, marketing, PR, investor relations, and recruiting. That’s the stuff that’s the easiest to put to one side — for a little while. If you’ve got a killer product and a great sales engine, you can put that other stuff aside for a while. But the longer you put that stuff aside, the more risk that you develop and the more you expose yourself to catastrophic failure through self-inflicted wounds.

And so at some point, if the early guys don’t get to the other 95% of the market, somebody else is going to go take it away. And whoever has 95% of the market, number one they’re going to get all the value. All the investment returns, all the employee compensation flows to that company. And then number two, that company then accretes resources so they can work backward. In a lot of cases, they end up buying the company that got the early adopters for a small percentage of their equity, and then they just take the whole thing.

One interesting question I have is: Would you rather have another two years’ lead on product, or a two years’ lead on having a state-of-the-art growth effort?

First of all, raising prices is a great way to flesh out whether you actually do have a moat. If you do have a moat, the customers will still buy, because they have to. The definition of a moat is the ability to charge more. And so number one, it’s just a good way to flesh out that topic and really expose it to sunlight. And then number two, companies that charge more can better fund both their distribution efforts and their ongoing R&D efforts. Charging more is a key lever to be able to grow. And the companies that charge more therefore tend to grow faster.

Consumer startups are dead. Long live consumer startups.

The unicorns of the 2013 and 2104 vintages of consumer companies should have matured already, and the number of consumer unicorns won’t change substantially even if we wait several more years. Enough time has passed for hit enterprise startups from 2013 and 2014 to break out, making those vintages mature.

It starts first and foremost with the network effects that the Empire has that translated so well to the smartphone. The world has seen dominant consumer companies before — from Walmart to Disney to Nike to AOL — but never consumer companies that had this ability to connect all their mobile users together for the benefit of the entire ecosystem. More Snapchat users leads to better content shared and choices for people to instantly communicate with (direct network effect). More Apple iPhone users leads to better network infrastructure like 4G that improves the mobile experience (indirect network effect). More Uber drivers leads to cheaper and faster rides for passengers (two sided network effect). And so forth. The Empire grows stronger with every like, share, click, ride, pin, post, watch, buy, publish, and subscribe.

Next, every consumer company obviously needs consumers to be successful, and the Empire has unparalleled distribution advantages. Facebook and Google’s distribution power is obvious and it’s no coincidence that those two companies have 11 products between them that each have more than 1 billion monthly active users. But Netflix and Amazon also have tremendous distribution advantages. Netflix retains their subscribers better than anyone in the business — less than 1% cancel each month, which is about 5 times better than other video subscription services. That allows them to spend more for each subscriber (about $100) than other services because subscribers will stick around longer to payback that marketing expense. Amazon has launched 100 private label brands and grown them quickly because they can redirect shopping traffic towards their own products. For example, Amazon’s private label isn’t just the preferred option when purchasing batteries through Alexa; it’s the only option. So perhaps not as obvious as Facebook and Google, Netflix and Amazon’s distribution powers are just as potent.

Finally, it takes world class product and engineering talent to build great consumer products and the Empire has amassed one of the largest and most talented army of builders in the world. Amazon is the single largest spender in the entire country on research and development at $22.6 billion dollars last year. Apple, Google, and Facebook aren’t far behind as all three rank in the Top 10. And not only is the Empire army the biggest on the field, they are also given unique insights and capabilities that no one else has. For example, Apple iOS application engineers can utilize features of the platform (known as private APIs) that other mobile developers are not allowed to use in their apps.

Google CEO Sundar Pichai revealed a jaw-dropping fact about its translation app that shows how much money is still sitting on the table

The app translates a staggering 143 billion words every day, Pichai said. And, he added, it got a big boost during this summer’s World Cup soccer tournament.

Given that a lot of people most likely use the translation app while traveling, it’s not a stretch to imagine ads for local hotels, restaurants, and other traveler-oriented attractions. Even if a Google Translate user isn’t traveling, the app could offer pitches for travel guides and language schools. And as Google continues to enhance the translation app with new features, the business opportunities are likely to expand. There could even be potential for an enterprise business opportunity, by allowing other companies to leverage the technology into their products.


The future of media

In 2018 alone, Netflix CEO Reed Hastings said Netflix will spend over $10 billion on new content, release 80 new films, and premier an astonishing 700 new television shows. For context, the top six movie studios released 75 movies in 2017—combined. From a customer’s point of view, this an unprecedented value proposition: For the price of two lattes per month, you gain access to some of highest-rated and most-watched television shows and movies on the planet. From the industry perspective, this is what drives studio executives and networks insane: Netflix uses its war chest of capital to buy and finance new projects, often out-bidding other buyers of content and acquiring international rights.

By owning the direct relationship between customer and content, Netflix and the other subscription-based streamers have an incredible advantage. In any business, customers go to the providers with the best value proposition—and right now, over-the-top (OTT) streaming has the best value. Netflix wouldn’t dare sully the viewing experience with clunky, annoying advertisements. And because of their subscriber-based business model, they don’t have to.

In 2019, for instance, Disney plans to launch its own direct-to-consumer subscription service. Time will tell if this will work, but it’s our view that it’s too little too late. Yes, Disney holds the keys to lucrative properties within Pixar, Marvel, LucasFilm, etc. And launching the service with a Star Wars movie or television show will certain get some traction. But by 2019, that “distribution ship” will likely have already sailed. Netflix and Amazon will have hundreds of millions in combined viewers, and Disney will be starting from scratch. While the Mouse House may certainly find a core audience hungry for their content, its own subscription service may not justify itself—and it would not be shocking to find Disney looking for a distribution partner in someone like Amazon, who will already has over 100 million Prime subscribers.

Airbnb offers investors a unique stay

Airbnb was conceptualized in August 2007 as an alternative to hotel lodging. We calculate it is now the largest player in the $150 billion alternative accommodation booking market with a high teens share, up from about 4% in 2014. We estimate that roughly half of the market’s bookings occur online, with Airbnb holding around 35% online share today versus about 10% in 2014.

We believe a premium is warranted based on several attractive features Airbnb offers investors, including (1) a powerful and rare network advantage that should drive continued share gains in a rapidly growing alternative accommodation market; (2) an opportunity to expand its network and addressable market into hotel, experiences, corporate, and transportation; and (3) strong profitability prospects driven by high consumer awareness, allowing the company to leverage top-line growth. We believe Airbnb’s IPO should be on the radar screens for investors seeking exposure to a company positioned to gain share in the nearly $700 billion global online travel market, which we estimate will grow 9.4% annually on average over the next five years.

We estimate that Booking Holdings is already second behind Airbnb in the private accommodation market, having expanded its online share to roughly 20% last year from the midteens in 2015 driven by industry-leading supply and demand ((over 5 million alternative accommodation listings and around 450 million monthly visitors). We expect Booking to continue to see share gains at the expense of smaller competitors as it invests further in its non-hotel network with the goal to become the leader in the market. We estimate that its alternative accommodation booking growth rate can begin to eclipse Airbnb’s in 2020, as Booking’s investments and powerful network advantage take hold.

We think Airbnb can gain traction in the corporate booking market, which we estimate at around $1.1 trillion, as its partnerships and initiatives reduce the back-office and safety concerns of many global firms, aiding its network advantage and growth opportunity. The company has announced several major partnerships in the past few years.

The global air and ground transportation markets are large at around $600 billion and $100 billion, respectively, but the consolidation and efficiency of the industry offers only low-single-digit take rates (compared with teens and 20% for lodging and experiences, respectively). We wouldn’t expect transportation attached rates on Airbnb lodging bookings to be more than a single-digit level, since the company can’t offer any differentiated experience. Also, travelers love to shop around for the best deal, especially in a commoditized environment like transportation. We expect just 1%-2% of Airbnb’s total revenue to come from the segment in 2022, following an anticipated launch into these markets in 2019.


EBay paid $573M to buy Japanese e-commerce platform Qoo10, filing reveals

The acquisition of Qoo10 underscores how eBay is at the same time pulling back from general plays while doubling down on more targeted opportunities. Earlier this year, the company gave up its stake in Flipkart as part of its acquisition by Walmart, but at the same time committed to investing in a new, standalone eBay operation in India, using some of the $1.1 billion in proceeds it made from selling its Flipkart stake to Walmart.

But eBay isn’t going to go head-to-head with those two. Instead, its India operations will focus on cross-border sales, so essentially looking to connect buyers and sellers in the country with opportunities overseas within its network. That’s the same model it has used to effect in other parts of the world, so its acquisition of Qoo10 and its other international services will be a key part of that India strategy, and vice versa.


How e-commerce is transforming rural China | The New Yorker

Establishing this reputation has required JD to adopt a strategy radically different from that of its greatest rival, Alibaba, which is essentially the eBay of China—a platform connecting customers to a vast network of third-party sellers. Although there are an increasing number of third-party sellers on JD’s site, the core of its business, like Amazon’s, involves managing the entire supply chain. It buys from manufacturers, stocks inventory in warehouses, and invests billions of dollars in development, including a kind of in-house FedEx, called JD Logistics. There are now nearly eighty-five thousand delivery personnel like Xia, and several thousand depots, from large hubs to tiny outlets like the one in Xinhuang. “The couriers are the faces of JD,” Liu said. “They come to your home. You have to trust them.” The success of this network, combined with the notorious unreliability of the Chinese postal service, means that JD Logistics is now itself a product—a service that other e-commerce players pay to use.

Chen explained that JD’s burgeoning focus on luxury was a consequence not only of the rise of a moneyed middle class but also of the middle class’s relative youth. Buyers of big-ticket items are five to ten years younger than their Western counterparts. “Most of them experience, and learn about, luxury brands over the phone,” she said. “So digital becomes increasingly important.”


Is JD.com the future of Chinese e-commerce?

When breaking down the costs to fulfill an order from the warehouse to the customer’s front door, about 30-35% of costs go to warehousing, another 20-25% to transporting products from the warehouse to local delivery hubs, and 40-45% to last-mile delivery, which is mostly human labor costs and transportation costs. However, this cost structure is mostly indicative of urban, densely populated regions that have large fulfillment centers and dedicated last-mile delivery staffs. Most rural cities are quite different in that they don’t have sophisticated layers of network infrastructure. For example, large fulfillment centers are replaced by small delivery depots or mom-and-pop shops acting as pick-up centers. Since most consumers pick up their packages at these centralized locations, large last-mile delivery staffs are not required. It’s hard to say if drones would result in cutting logistics costs 70% on its own, but overall the fulfillment process could achieve significant savings.

JD has always approached its business from a customer’s perspective, utilizing an integrated retail and logistics model to provide a superior experience. In JD’s early days, 70% of customer complaints involved delivery service, since China’s logistics infrastructure was essentially nonexistent. To solve this issue, JD founder Richard Liu decided to take operations in-house, recognizing this would be a critical differentiator in providing the best customer experience. JD now delivers 90%+ of direct retail orders within 24 hours, an unfathomable achievement in markets outside of China. But as other businesses eventually catch up, the question turns to where future differentiation will lie.

By integrating deeper into the supply side, JD can continue to structurally lower its cost of goods and average selling prices. While Alibaba can spur competition between merchants, lowering their gross margins in the meantime, the fragmented nature of the supply side means there isn’t structural pressure to the cost of goods side of Alibaba’s model, meaning prices can only fall so much. As JD’s lowers prices, receives inventory on more of a “just-in-time” basis, it will turn inventory quicker meaning it can lower prices even more.

The incredible rise of Pinduoduo, China’s newest force in e-commerce

Pinduoduo’s C2B model allows it to ship directly from the manufacturers eliminates layers of distributors, not only reduces the price tag for buyers but also raises the profit of manufacturers. This approach is particularly effective for the sales of perishable agricultural and fresh products, where the speed for matching supply and demand is critical.

Lesser-known brands were chosen over famous brands to erase any premium that comes from branding. Additionally, the costs for advertising and marketing are also lowered through user sharing to social media. The approach is both cost-saving and effective. Through social sharing, users are sending the product information precisely to friends and groups that may have similar income and consumption preferences. Viral marketing is a more clever way to build the identity of all the lesser-known brands on its platform. Financially, the platform could even out part of discounts with less marketing budgets.

 

BlackRock ready to spread its web across Europe

Having started as part of private equity company Blackstone 30 years ago, BlackRock is the world’s largest money manager with 70 offices globally. It manages $6.3tn assets on behalf of clients in 100 countries.

Europe, the Middle East and Africa accounts for 28 per cent of its total assets under management. The region’s 3,800 staff make up 27 per cent of its global workforce while the $4.1bn of revenue from Emea was 30 per cent of BlackRock’s total last year.

BlackRock has built connections with financial adviser networks tied to banks and insurers and believes it can offer complementary products. Domestic financial institutions do not see it as a significant threat when compared with local rivals.

ARK Disrupt Issue 134: eSports, AI, crypto, fintech, balloons, & CRISPR

Twitch’s viewership in June approached 800 million hours, or 9 billion hours at an annual run-rate. How much could 9 billion hours of viewership be worth? A lot!

NFL broadcast rights provide some good perspective. The NFL enjoys roughly 6 billion in hours viewed annually,1 and in 2013 it sold nine years of broadcast rights for roughly $40 billion.2 We expect Twitch’s viewership to be double that of the NFL by next January and to double again within our five-year investment time horizon. What would broadcasters pay for the perpetual rights to four NFLs, especially if they didn’t have to ship crews and cameras all over the country and could monetize the content more efficiently?

Video game streaming is linked to monetization in a way not possible for traditional sports. Viewers pay subscriptions and sometimes tip individual streamers—from which Twitch extracts a platform fee—and, in real time, streamers can thank their viewers for contributions. On their channels, streamers often interact with viewers, sometimes taking direction from them. With stronger social and economic network effects, Twitch’s engagement and monetization should be able to top that of traditional broadcast channels.

While Google has said that Loon should be able to deliver internet service for $5 per month per user, ARK estimates that it could offer even lower prices, say $4 per month. At that rate, if Loon were able to deliver internet access today to everyone in the world with enough income to afford it, its subscription revenue could approach $130 billion, roughly equivalent to estimates for Alphabet’s total sales in 2019.3 More realistically, Loon will share this market with other forms of internet delivery, such as low earth orbit satellites, but Alphabet’s opportunity is vast nonetheless.

DAU/MAU is an important metric to measure engagement, but here’s where it fails

If your product is a high-frequency, high-retention product that’s ultimately going to be ads supported, DAU/MAU should be your guiding light. But if you can monetize well, develop network effects, or quite frankly, your natural cadence isn’t going to be high – then just measure something else! It’s impossible to battle nature… just find the right metric for you that’s telling you that your product is providing value to your users.

Retailers ubiquitously choose Instagram over Snapchat. Nearly all retailers tracked in Gartner L2’s Digital IQ Index: Specialty Retail air Instagram Stories; in contrast, only 4% were active on Snapchat during the study period.

Restaurants must embrace online delivery, and fast

Just 1.6 percent of all restaurant industry transactions in 2017 were conducted online for delivery, according to a report by Cowen Inc. restaurant industry analyst Andrew Charles. The same analysis estimates that online delivery accounted for $19.7 billion in gross merchandise volume, or 3.7 percent, of U.S. restaurant sales in 2017. That’s roughly in line with the proportion of retail sales that had moved online by 2008. And we all know how different the mall landscape is now compared to 10 years ago.

And restaurants may even find themselves wanting to change their menus. Uber Eats has been using its data to help local restaurants launch delivery-only menus. In Chicago, it found people were searching for suddenly popular Hawaiian poke, but there weren’t many options. So Uber Eats reached out to neighborhood sushi spots, which would already have some of the same ingredients, and asked them to try making the dish for the app. Imagine how transformative those kinds of insights could be if applied at the scale of a chain restaurant.

Delicious new protein source, starting with a salmon burger: Terramino Foods

Animal farming takes up over 70% of the planet’s agricultural land, and 70% of the world’s available freshwater and energy consumption. Animal production consumes more than 1/3 of raw materials and fossil fuels in the US. It is responsible for 18% of the total release of greenhouse gases , 9% of global CO2, 80% of ammonia emissions in the U.S. come from animal waste.

Globally, fish account for approximately 4 of every 10lbs of animal products consumed. To meet the growing demand, 90% of global fish stocks are overfished. Global fisheries are expected to collapse by 2048. And there is growing risk in human health with high levels of mercury, PCBs, dioxins and other health containments.

But unlike chicken, pork and beef alternatives becoming more available, seafood alternatives are virtually non-existent. Alternative seafood options are very limited even at Whole Foods, and the taste and quality for these select products are subpar. We’ve realized there’s a gaping hole in alternative seafoods.

Escalating the US trade war is not in China’s interest. Reform is what it must do

The economic significance of the tariffs has been hugely exaggerated: 25 per cent on US$34 billion is an extra US$8.5 billion. China’s exports are likely to top US$2.4 trillion in 2018. The tariff impact is therefore symbolic. Even the 10 per cent tariff on US$200 billion only amounts to an additional US$20 billion. The numbers are not big, in relative terms.

The tariffs shouldn’t significantly affect China’s competitiveness. China’s labour cost is less than one-fifth of the OECD level. Adding 10 or 25 per cent to it won’t affect China’s competitive position relative to the US or other developed economies. While some production could relocate to other emerging economies, they just don’t have the scale to take over significant value chains from China.

The best option is to reform now and appreciate the currency later. The current trade dispute could be used as a catalyst to initiate reforms. If others complain that China’s industrial policy contains excessive government subsidies, why not scale them back and rely more on the market to create business and advance innovation? What have the subsidies done for the economy so far? After pouring in tens of billions of dollars, has China produced one significant innovation? The chances are that the market can do better.

Why we need to update financial reporting for the digital era

Digital companies, however, consider scientists’ and software workers’ and product development teams’ time to be the company’s most valuable resource. They believe that they can always raise financial capital to meet their funding shortfall or use company stock or options to pay for acquisitions and employee wages. The CEO’s principal aim therefore is not necessarily to judiciously allocate financial capital but to allocate precious scientific and human resources to the most promising projects and to pull back and redeploy those resources in a timely manner when the prospects of specific projects dim.

Digital companies, in contrast, chase risky projects that have lottery-like payoffs. An idea with uncertain prospects but with at least some conceivable chance of reaching a billion dollars in revenue is considered far more valuable than a project with net present value of few hundred million dollars but no chance of massive upside.

As firms become increasingly difficult to value and more and more companies report negative earnings, analysts perform multiple adjustments to recreate companies’ financials in their internal assessments. For example, they capitalize a part of R&D expenditures that can enhance firm’s future competitive ability and deduct a part of capital investments that merely maintain firms’ competitive ability. This is an outcome of the growing divergence between what companies consider as value-creating metrics and those reported as profits in the GAAP.

For instance, standard-setters might want to encourage disclosures related to (i) value per customer; (ii) earnings or revenue outcomes or other specific metrics related to specific projects in progress; and (iii) data on how the R&D and software talent of digital firms is being deployed. Relying on firms’ voluntary initiatives is unlikely to work because executives told us time and again that they will not disclose sensitive information, unless their competition is forced to do the same.

A whiff of rotten eggs may augur an oil shock

For years, cargo ships have been powered by about 4 million barrels a day of the dirtiest, bottom-of-the-barrel fraction of crude, a tarry substance known as bunker fuel or residual fuel oil. That’s set to change in less than 18 months, after the International Maritime Organization adopted rules that would keep the sulfur content of the bunker fuel on standard ships below 0.5 percent from Jan. 1, 2020.

The likelier outcome is that refiners will blend each barrel with about three of lower-sulfur fractions — principally gasoil or middle distillate, essentially the same stuff as automotive diesel — to get the proportion down from 2015’s average of 2.45 percent. But that, of course, will require an additional 2 million barrels a day or so of lower-sulfur fuel, and it’s not clear that the world’s refiners can shift so fast.

That, and the widening discount of January 2020 fuel oil over Brent, gives weight to a more pessimistic analysis: Shortages in the heaviest fractions of the barrel will drive up the prices of gasoil, jet fuel and gasoline, boosting the cost of crude itself until the market rebalances.

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