Curated Insights 2019.03.08

The difference between the natural world and the investment world

You have to understand that there are no physical laws at work in investing. And the future is uncertain, and vague, and random. And psychology dominates.

Richard Feynman said, “Physics would be much harder if electrons had feelings.” You come in the room, you flip up the switch, and the lights go on. Every time! Why is that? Because the electrons flow from the switch to the lights. They never flow the other way. They never go on strike. They never fall asleep. They never say, ‘Ah today I don’t feel like flowing from the switch to the light.’ That’s physical science.

You have to understand the distinction between your field [architecture] and the field of investing, where there are no laws. There are only tendencies.

Facebook’s privacy cake

Why can Facebook deliver most of the value? Because they are still Facebook! They still have the core Facebook app, Instagram, ‘Like’-buttons scattered across the web — none of that is going away with this announcement. They can very much afford a privacy-centric messaging offering in a way that any would-be challenger could not. Privacy, it turns out, is a competitive advantage for Facebook, not the cudgel the company’s critics hoped it might be.

Why can Facebook deliver most of the value? Because they are still Facebook! They still have the core Facebook app, Instagram, ‘Like’-buttons scattered across the web — none of that is going away with this announcement. They can very much afford a privacy-centric messaging offering in a way that any would-be challenger could not. Privacy, it turns out, is a competitive advantage for Facebook, not the cudgel the company’s critics hoped it might be.


Zillow’s billion dollar seller lead opportunity

Here’s the kicker: Zillow claims about 45 percent of consumers that go through the Zillow Offers funnel end up listing their home. That’s a high conversion rate reflective of a high intent to sell; about 10 times higher than Opcity’s conversion rate. Assuming a 1 percent referral fee, a $250,000 home, and a conversion rate of 45 percent, those 19,800 leads are worth $22 million in revenue to Zillow, almost all profit. Compare that to the estimated profit of its iBuyer business (1.5 percent net profit), which, on 200 houses, is $750,000. The value of the seller leads is worth almost 30 times the profit from flipping houses!


Will Zillow Homes build a durable competitive advantage in the iBuyer market?

Let’s parse through these claims. The argument for Zillow to do their own mortgage lending sounds logical. A traditional home sale results in a 6% fee paid to the realtor. On the other hand, the typical iBuyer charges a seller fee of around 7-9%. However, if Zillow earns an additional 3% by attaching the mortgage, they can decrease their seller fee to be right in line with, or even cheaper than, the traditional realtor model. Home buyers have to get a mortgage anyway, so they shouldn’t care too much if it’s through Zillow—as long as the rates are competitive.

The combination of lower customer acquisition costs and increased monetization per customer could potentially be deadly. If both come to fruition, Zillow can underprice other iBuyers on their seller fee and/or pay more per house than their competitors can afford. It’s even possible that Zillow pays full market price for homes and earns enough just from selling the high-quality leads to agents. In this scenario, I’m not sure how others could compete. No one else owns almost 50% of all real estate web traffic that includes home buyers, home sellers, and real estate agents.

However, if Zillow is forced to pay for customers, or their competitors get enough local traffic organically, Zillow may not be able to earn high returns on capital in this new segment. If seller leads don’t pan out, or if those leads simply cannibalize Zillow’s traditional premier agent business, they may monetize customers at the same rate as other iBuyers. In this scenario, Zillow would simply be one of many in a commoditized industry.

How badly are we being ripped off on eyewear? Former industry execs tell all

When he was in the business, in the 1980s and ’90s, Dahan said it cost him between $10 and $16 to manufacture a pair of quality plastic or metal frames. Lenses, he said, might cost about $5 a pair to produce. With fancy coatings, that could boost the price all the way to $15. He said LensCrafters would turn around and charge $99 for completed glasses that cost $20 or $30 to make — and this was well below what many independent opticians charged. Nowadays, he said, those same glasses at LensCrafters might cost hundreds of dollars.

Butler said he recently visited factories in China where many glasses for the U.S. market are manufactured. Improved technology has made prices even lower than what Dahan recalled. “You can get amazingly good frames, with a Warby Parker level of quality, for $4 to $8,” Butler said. “For $15, you can get designer-quality frames, like what you’d get from Prada.” And lenses? “You can buy absolutely first-quality lenses for $1.25 apiece,” Butler said. Yet those same frames and lenses might sell in the United States for $800.

The Netflix of China might just be wishful thinking

Competition to attract new users means that subscription prices aren’t likely to go up any time soon. Pay television service in China isn’t much more expensive than an online video account, making it harder to encourage people to switch, Dai says. Netflix, charging about $10 a month, doesn’t face that challenge because pay TV in the U.S. costs about $90, he says. Over the past two years, revenue per user at iQIYI, the only one of the three publicly traded in the U.S., has fallen about 12.5% due to promotions to drive up subscriptions.

Although Chinese TV series are still much cheaper to make than U.S. shows—production costs for a top series are about $600,000 per hour, compared with $6-10 million for U.S. prime-time content, Daid wrote in his research note—content costs reached 84% of iQIYI’s revenue in 2018. The figure for Netflix is 48%.

Advertising revenue is destined to drop. That’s a function of the way the Chinese platforms work. Unlike Netflix, which has never had advertisements on its site, ad income makes up almost half of the revenue of Chinese online video platforms. Subscribers can skip ads shown to nonsubscribers before a show starts. If 85% of Chinese households signs up for online-video services—Dai’s assumption—only 15% will be left to watch the ads. At iQIYI, subscriptions have already surpassed ads as a source of revenue, accounting for 43% of the total in 2018, compared with 37% for advertising.

Tariff-Man Trump to preside over $100 billion jump in trade gap

The main long-term driver of persistent trade deficits since 1975 has been the gap between the U.S.’s low savings rate and its attractiveness as an investment destination, fueled partly by the dollar’s role as the world’s reserve currency. That in turn leads to a stronger dollar, which in itself helps increase the trade deficit by lowering the real cost of imports and increasing the local-currency cost of American goods in overseas markets.

Investors are losing millions on overpriced Chinese art

The art-purchase-and-lease offer is particularly appealing for people looking for a high-return alternative investment, but find the world of galleries, art fairs and auction houses intimidating. That’s where the model works, it preys on people by speaking to them in a vocabulary they understand and offering to be a trusted guide through this very opaque market, so buyers probably let their guard down,” says Edie Hu, art advisory specialist at Citi Private Bank in Hong Kong. “There is a mystique to the art market and all of a sudden you have someone who brings it down to your level. Nobody from galleries or auction houses talks about return on investment.”

AFG has set up a booth each year at the Asia Contemporary Art Show in Hong Kong alongside other galleries, and has held lucky draws to win a painting, according to d’Angelique, who said she was contacted by phone “in minutes” after filling out an online survey in 2012 to enter the contest.

She said she doesn’t believe her painting was ever rented out and AFG simply overcharged her and paid the lease premium from the sale proceeds. The leasing contract was drawn up between her and AFG, not a corporate renter. She said AFG wouldn’t tell her who would be leasing her painting.

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