Curated Insights 2018.08.17

Not enough people are paying attention to this economic trend

Haskel and Westlake outline four reasons why intangible investment behaves differently:

  • It’s a sunk cost. If your investment doesn’t pan out, you don’t have physical assets like machinery that you can sell off to recoup some of your money.
  • It tends to create spillovers that can be taken advantage of by rival companies. Uber’s biggest strength is its network of drivers, but it’s not uncommon to meet an Uber driver who also picks up rides for Lyft.
  • It’s more scalable than a physical asset. After the initial expense of the first unit, products can be replicated ad infinitum for next to nothing.
  • It’s more likely to have valuable synergies with other intangible assets. Haskel and Westlake use the iPod as an example: it combined Apple’s MP3 protocol, miniaturized hard disk design, design skills, and licensing agreements with record labels.

For example, the tools many countries use to measure intangible assets are behind the times, so they’re getting an incomplete picture of the economy. The U.S. didn’t include software in GDP calculations until 1999. Even today, GDP doesn’t count investment in things like market research, branding, and training—intangible assets that companies are spending huge amounts of money on.


How Box conquered the enterprise and became a $1.7 billion company in a decade

However, what most people failed to understand—and continue to misunderstand to this day—is that Dropbox was never launched as a competitor to Box. The use cases were completely different. Box.net and Dropbox may have shared some similar underlying technologies (and an uncomfortably similar name), but the focus of Dropbox was cloud-based file management for the consumer market. Box was focused on file sharing. By the time Dropbox launched in 2007, Box.net had already largely abandoned the consumer market in favor of the enterprise. There were other key differences between the two products, such as the necessity of installing a dedicated Dropbox directory on a user’s local machine versus Box.net’s entirely cloud-based interface. Additionally, the two companies’ target markets and business models couldn’t have been more different.

Levie knew SharePoint was Box’s biggest competitor, so he did what any inventive, irreverent entrepreneur would do—he took out a billboard advertisement on a stretch of highway on Route 101 between San Francisco and Silicon Valley. The ad promised SharePoint users that Box would pay for three months of SharePoint access if they didn’t prefer Box. In February 2009, Box went one step further in its media assault on Microsoft by erecting another billboard, this one highlighting the many aspects of SharePoint that were most unpopular among its user base.

While the enterprise market represented a unique chance for Box to pivot away from the increasingly competitive consumer market, essentially shifting the focus of the entire company was no small undertaking. Until that point, Box had used a freemium business model. This worked fine for the consumer market, but it was completely unsuitable for the enterprise. This meant Box would not only have to radically redesign its product from the ground up but also restructure its entire business model.

By acquiring Increo, Box immediately gained access to Increo’s innovative document collaboration tools. This was crucial. It wasn’t enough for Box to offer cloud-based storage or integrations with Salesforce and Office. It had to offer additional value as competing tools vied for dominance.

The consumerization of enterprise IT driven by Box and other forward-thinking companies wasn’t merely an attempt to cultivate a unique value proposition or drive adoption. It reflected much broader shifts in computing in general. The advent of Web 2.0 apps created a new design paradigm that placed emphasis on ease of use and accessibility across multiple devices over complex file management tools. Smartphones fundamentally changed the way we think of computing. For an enterprise software company like Box to be at the forefront of trends in usability was impressive.

OneCloud was an excellent example of how consumer-focused design informed Box’s broader strategy. The company had built a platform for developers in 2011 known as the Box Innovation Network, which functioned similarly to an app marketplace. OneCloud was an extension of this idea, only it was intended exclusively for mobile devices. This would later become a predictable cycle in Box’s development. New features were added to the product to meet emerging needs, and those features were presented to users in ways that directly mirrored those of consumer apps and sites.

What’s more important, however, is how well Box converted its free users to paid subscribers. Consumer apps like Evernote convert free users to paid plans at a rate of approximately 3%. Box was converting free users to paid plans at a rate closer to 8%, including major corporate customers such as Bank of New York and ambient advertising powerhouse Clear Channel. As a result, Box achieved revenues of more than $11M in 2011.

Because most of Box’s sales calls came from companies that had already been using the product, Box’s sales teams were typically able to close 60% of those deals within two weeks—an impressive figure, especially considering the often months-long sales cycles typically associated with the enterprise market.

Box has done an excellent job of not only carving out its own niche in an increasingly competitive space but also by applying design and UX principles of consumer-focused SaaS products to redefine how enterprise software looks, feels, and works. With its keen focus on usability, ease, and simplicity, Box has become a leading force in the consumerization of the enterprise and has shaped how other enterprise software companies approach their products.

Ad tech firm poised to surge 50%

Bid factoring is essentially a linear equation that enables marketers to apply multipliers to different targeting parameters. This approach makes it easier to value each user individually and dynamically, allowing marketers to more easily reach their target users. Bid factoring saved time for marketers through automation and removed the need to store tons of line item permutations, therefore lowering data storage costs.

When Green started The Trade Desk, his goal was to “build a company for the next 100 years.” He did not want to follow the same mistakes that other companies in the space made such as having a conflict of interest by being on both the buy and sell side. Green decided to build a demand side platform because he believed the demand side of the advertising transaction will always have the advantage. In advertising it will always be a buyer’s market because it is easy to add supply by having an extra impression on a web page or additional 30-second spot to a commercial break to meet increased demand. This basic economic reality means advertising supply is more elastic than demand and will forever put the buy side in the power position.

The Trade Desk would also be transparent and not charge unsustainable take rates. Green believed once the digital advertising industry matures, total transaction costs to purchase a digital ad would be $0.20-$0.30 for every $1.00 spent, with roughly $0.15-$0.20 going to the DSP and $0.05-$0.10 being split between the SSP and the ad exchange. The Trade Desk could have charged much higher take rates but decided to charge customers what it believed would be the fair end-state price for their services. While take rates could become lower as competition potentially increases, similar to what happened with discount stock brokerages, barriers to entry and the DSP’s ability to provide increasing value to advertisers overtime should preserve prices.

As the ad market has grown, the number of auctions has increased exponentially. In order for a DSP to win an auction, it now takes many more looks. For each ad campaign, costs have increased while revenues remained fairly flat, increasing operating leverage. DSPs that have half the ad spend as The Trade Desk will struggle because they will incur the same amount of expense per ad campaign but monetize less, making it much more difficult to be profitable if you are a smaller player and don’t have the scale.

Every day The Trade Desk’s customers log into their platform to use the data and analysis to value ad inventory and run marketing campaigns. Advertisers provide their customer data and publishers provide their user data, which The Trade Desk uses to help advertisers value media for their specific needs. As The Trade Desk accumulates more data over time, its insight and analysis add more value to its customers, creating a self-reinforcing virtuous cycle.


Nvidia’s new Turing architecture is all about real-time ray tracing and AI

Nvidia describes the new Turing architecture as “the greatest leap since the invention of the CUDA GPU in 2006.”

“Hybrid rendering will change the industry, opening up amazing possibilities that enhance our lives with more beautiful designs, richer entertainment and more interactive experiences,” said Nvidia CEO Jensen Huang. “The arrival of real-time ray tracing is the Holy Grail of our industry.”

The new RT cores can accelerate ray tracing by up to 25 times compared to Nvidia’s Pascal architecture, and Nvidia claims 10 GigaRays a second for the maximum performance.

With NGX, Nvidia today also launched a new platform that aims to bring AI into the graphics pipelines. “NGX technology brings capabilities such as taking a standard camera feed and creating super slow motion like you’d get from a $100,000+ specialized camera,” the company explains, and also notes that filmmakers could use this technology to easily remove wires from photographs or replace missing pixels with the right background.


Tesla’s autonomous opportunity is severely underappreciated

We estimate that net revenue for autonomous platform providers – those companies that own the software technology stack for autonomous ride-hailing services – should exceed $2 trillion by 2030, roughly equal to our expectations for automaker revenue at that time. Unlike their auto-manufacturing peers, however, autonomous platform providers should see software-like margins, be less capital-intensive, and enjoy network-effect-driven regional competitive dominance. So, while autonomous platform providers may generate the same revenue as automotive manufacturers, ARK believes these providers will generate six times the operating earnings and consequently will prove to be substantially more valuable. In fact, ARK estimates autonomous platforms will be worth more than the entire $4 trillion global energy sector.

An enhanced Autopilot package with the ability to self-drive costs $5,000 upfront or $6,000 for customers who choose to wait and buy later. Payment for this feature alone can be thought of as nearly pure profit on every Tesla sold. In addition, once Tesla launches the Tesla Network, its autonomous ride-hailing network, it could collect platform fees, similar to Uber’s model today, from every autonomous ride charged to the consumer. Given a rate of $1 per mile to the end consumer and over 100,000 miles per year per vehicle, Tesla could benefit from $20,000 in high-margin platform fees per car per year. Over a five-year lifetime, a single Model 3 could generate $40,000 in net cash flow. Even investors optimistic about Tesla’s prospects project the Model 3 cash flow at $4,000 and one-time in nature. In effect, each Model 3 sale could generate 10 times more cash flow than investors currently understand.

Google’s targeted ads are coming to a billboard near you

Digital outdoor ad spending is growing at 15 percent annually, and will overtake traditional outdoor outlays by 2020, according to PwC. But Google is the 800-pound gorilla that’s not yet in the room. It would give the company another major edge over Facebook, which doesn’t have the same access to location-based mobile data.


Alibaba tweaks a controversial legal structure

There are three problems with VIEs. First, key-man risk. If the people with nominal title die, divorce or disappear, it is not certain that their heirs and successors can be bound to follow the same contracts. Second, it is not clear if the structure is even legal. China’s courts have set few reliable precedents on VIEs and the official position is one of toleration rather than approval. Third, VIEs allow China’s leading tech firms to be listed abroad, preventing mainlanders from easily owning their shares and participating in their success.

Alibaba’s proposed change is aimed at tackling the first problem, key-man risk. At the moment four of its five VIEs are nominally owned by Jack Ma, the firm’s leader, and Simon Xie, a co-founder and former employee. After the restructuring, the two men will no longer be the dominant counterparties. Instead the VIEs will be owned by two layers of holding companies, which will sign contracts with Alibaba. These holding companies will ultimately be nominally owned by a broader group of Alibaba’s senior Chinese staff. The idea is that if anyone gets run over by a bus, then the scheme will not be disrupted, because nominal control is spread among a wider group of people. The new approach is far from perfect but it is an improvement. If all goes to plan it will be completed by 2019. Other tech firms may feel pressure to follow.

$1b+ market map: The world’s 260 unicorn companies in one infographic
60+ startups disrupting IKEA in one market map

SoftBank’s Son says WeWork is his ‘next Alibaba’

It is rare for Son, who casts a wide net with his startup investments, to commit so much resources to a single company. But he said WeWork is more than just a renter of office space: it is “something completely new that uses technology to build and network communities.”

The use of shared space to forge connections is not unique to WeWork. The company’s edge lies in the steady flow of data it collects on members, which is shared with other locations and can be accessed by users of the WeWork app around the world. The idea is that more data means more innovation — a model that underlies Son’s excitement about the company.

What MoviePass can teach us about the future of subscription businesses

Pricing is so powerful that playing with it requires great skill and precision. MoviePass should have done its price experimentation at the outset and on a local basis. It could have optimized the price points and tested alternative pricing models quietly, instead of jerking millions of customers around. Even a slight tweak — such as moving to a club pricing model like Costco’s — might have solved its cash-flow problems.

These kinds of tweaks could also have enabled the company to consider regional pricing strategies, given that its cost of goods (the full price of movie tickets, which it pays theater operators) varies from $8 in Nebraska to over $15 in New York. This case is also a good reminder that the United States has local profit pools. It is silly to think that a one-size-fits-all national strategy is the right approach for a market as ethnically and economically diverse as the United States.

MoviePass failed to recognize how the behavior of superconsumers, customers who are highly engaged with a category and a brand, differs from that of average consumers — and how, if not anticipated, this difference can create problems for a company’s cost model. It can especially be a problem if the company uses a “buffet” model of fixed price and unlimited quantities, as MoviePass did.

Quantum computers today aren’t very useful. That could change

Quantum computers are, however, far more prone to errors than binary machines. Instead of using electric signals to generate a series of zeros and ones like a conventional computer, quantum computers rely on the real-world, mechanical behavior of photons, which are packets of microwave energy. The machines require a complex, multi-layered refrigeration process that brings quantum chips to a temperature just above absolute zero. By eliminating certain particles and other potential interference, the remaining photons are used to solve computational problems. The true magic of this system is how photons can become entangled and produce different but related results. Scientists only partially understand why it works the way it does.

A quantum chip doesn’t look like much with the naked eye. Through an optical microscope, though, you can see the quantum logic gate that makes everything possible. The team here is working on a process of stringing together 16-qubit chips to execute on the 128-qubit design. Essential to this is a new kind of quantum chip that communicates results in three dimensions instead of the current two, which allows Rigetti to fit the chips together like puzzle pieces and turn them into a single, more powerful computer. “What we’re working on next is something that can be scaled and tiled indefinitely,” Bestwick said.

Why the future belongs to ‘challenge-driven leaders’

The consensus view of Mr. Marchionne, relayed by hundreds of tributes, is that he possessed an unusual blend of vision, technical expertise, analytical rigor, open-mindedness and candor. The remembrances also agreed on something else: he was a bona fide eccentric. “God bless you, Sergio,” Morgan Stanley analyst Adam Jonas told Mr. Marchionne during a January conference call. “We’re never going to see anyone like you again.”

The trajectory of great ideas

“Being right is the enemy of staying right because it leads you to forget the way the world works.” – Jason Zweig. Buddhism has a concept called beginner’s mind, which is an active openness to trying new things and studying new ideas, unburdened by past preconceptions, like a beginner would. Knowing you have a competitive advantage is often the enemy of beginner’s mind, because doing well reduces the incentive to explore other ideas, especially when those ideas conflict with your proven strategy. Which is dangerous. Being locked into a single view is fatal in an economy where reversion to the mean and competition constantly dismantles old strategies.

Survivorship bias on wheels

One last thing: When it was introduced as new in 1984, the 1985 Testarossa listed for $90,000 (but dealers charged huge premiums over list due to “Ferrari fever.”) You can still find Testarossas for that original list price — meaning the net returns over 43 years has been precisely zero — before maintenance, storage and repair costs.

As a comparison, in 1985, the benchmark S&P500 was about 200, and it closed yesterday at 2,821.93. That generated an average annual return of about 8.5%, returning 1,400% price appreciation since then, and, with dividends reinvested, over 3,000% total return (in nominal terms, like the chart above, neither is adjusted for inflation).

Selecting investments after the fact is easy; ask yourself this question: What car do you want to buy as an investment for the next 34 years to be sold in 2052?


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