The international market is a different story. Tencent Music Entertainment Group (TME) dominates China. (Spotify has taken a minority stake in the company.) Outside of China, Spotify is the clear global market leader, with an estimated 31% market share, ahead of Apple (AAPL), at 17%; Amazon.com (AMZN), at 12%; and Sirius XM Holdings (SIRI), which now owns Pandora, at 11%, according to Credit Suisse . YouTube’s paid music services are still relatively small, but one survey found that free YouTube videos accounted for nearly half of the time that people in 18 countries spent listening to music.
Most of the world doesn’t pay for streaming music, choosing to listen on the radio or to pirate content, which still accounts for 38% of the market, Credit Suisse says. The bullish case for Spotify implies that many of those people can be persuaded to pay up. Even bearish analysts expect the company to more than double its global paid subscriptions over the next five years.
Part of the reason was that companies benefited from this credibility through obscurity. Real estate brokers have access to significantly more data about the specific houses and the general market via a set of data sources called the MLS. Historically, only brokers had access to MLS data, which gave them leverage over their customers and entrenched their importance as market makers. Similarly, lack of visibility into companies allowed bad ones to put on a good face until prospective employees had already joined. And only large companies could pay for data from compensation research providers, giving them advantage over the potential hires they negotiated with. Many incumbents are able to intermediate their markets and unfairly gain an edge from people’s lack of knowledge. And it’s scary to be the first to buck this trend on your own.
Before Zillow and Glassdoor, if you wanted to look up information about a specific home or company, there wasn’t a webpage for it. Barton’s companies created the definitive page for each house and company. Using a combination of data from authoritative sources (like all the various MLS systems) and user-generated data, they created high quality content unique to each company or listing. Being among the first to do this let them do a huge SEO land grab, which has been hard to displace since.
Barton’s companies take industries that are low frequency and use their Data Content Loops and SEO to acquire users for free and engage them more frequently. While most companies in real estate have super high customer acquisition costs, Zillow is able to get potential sellers even before they are ready to sell, so Zillow is already there when the sellers are ready.
Owning demand ultimately becomes its own compounding loop since becoming a trusted brand builds its own network effects. Consistently building this reputation increases people’s trust in them and makes them a go to destination.
Nobody had yet indexed all the homes in the US and brought them online. While sites like Apartments.com had started to do so for rentals, it wasn’t until Zillow (and Trulia) that this was done for homes. There was fertile search real estate to grab and Zillow rushed out to claim it all using the Zestimate as its spearhead.
Many e-commerce companies go through this cycle where their customer acquisition costs look fantastic because early adopters are cheaper to acquire, but then marketing expenses later go through the roof. Ironically, many direct-to-consumer companies in the US have started opening physical stores because that is cheaper marketing than online ads.
Zooplus discussed this on their Q3 2018 call. They said online ad pricing has increased because their competitors are shifting more ad budget to online. Facebook and Google ads are auctions, so more competition means more demand and thus higher prices. Today, 80% of Zooplus’s marketing spend is online ads and Google Shopping. That makes them very susceptible to competitor pressure.
My concern isn’t so much that Zooplus loses share to Amazon, but that Amazon has the scale to price pet food at a lower margin (or loss) if they want to. This could cap Zooplus’s ability to ever earn a profit. Amazon doesn’t need to overtake Zooplus in market share to negatively affect them because Amazon already has enough market share that lowering prices would harm Zooplus. In this scenario, it’s possible that Zooplus keeps their market share, continues to grow along with the online pet supply market, and still never reaches their profitability goal.
Why I don’t think Amazon needs more market share to harm Zooplus is because of the lack of switching costs in Zooplus’s business. Even though Zooplus has a 95% retention rate with its customers, if Amazon lowered their prices 10%, there’s not much that keeps most of Zooplus’s customers using their website. Zooplus seems well aware of this issue and it has tied their hands when it comes to price increases. On the Q2 2018 call, management said they “don’t want to be the first [pet retailer] sticking their head out passing on manufacturer prices increases.”
As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.
The U.S. truck driver supply is structurally constrained. According to the Bureau of Labor Statistics, the average age of a U.S. truck driver is 55 years old. The core “trucking generation” aged 45 to 54 accounts for 29.3 percent of the labor force, while 25 to 34-year-olds are just 15.6 percent of truck drivers. We’ve seen trucking companies offering huge cash signing bonuses to licensed commercial drivers, without a noticeable jump in the driver pool. In short, there aren’t enough young drivers coming up to replace the older ones.
The average Landstar BCO driver earned a record $197,000 in gross revenue. Now, that’s before expenses like gas, maintenance, and tires, but still a great income. In fact, it was so good last year that some BCOs decided to take the last few weeks of December off – they’d already made more money than they needed for the year. The agent node of the Landstar network also had a record-setting 2018, with 608 agents generating more than $1 million of revenue – up from 542 in 2017.
Given this success, we think Landstar’s network is strengthening. It’s attracting more truckers and agents – indeed, Landstar recently said both the BCO and agent pipelines are full, despite a tight labor market. This creates a virtuous cycle. When Landstar adds truckers and agents, more shippers make Landstar their first and only call to move their freight. In turn, more shippers attract more truckers and agents to Landstar. And so on. An important point to make about Landstar is that it generates 70% incremental operating profit margins on net revenue and their market share is under 10%. We think they have plenty of room to drive profit growth in the decade to come.
As for recession risk, Landstar is a capital-light business with a mostly variable cost structure. Remember, BCO-derived gross margins remain steady throughout the cycle. Landstar’s gross margins fall in periods of strong demand, as lower-margin brokerage operations account for a greater percentage of revenue. Without the BCO structure, Landstar would be far more sensitive to the ebb and flow of the industrial economy. So, while far from recession proof, Landstar is recession resistant.
The second technological threat is autonomous-driving trucks. While the technology is perhaps already there, we think regulations will require a human driver or engineer to be in the truck cab for some time to come. Airplanes, trains, and other heavy transportation vehicles, for example, use various amounts of “autopilot” but still have captains, conductors, and engineers at the ready. As we’ve seen with autonomous driving automobiles, there’s massive headline risk for any accident related to driverless vehicles, even if, on the whole they are safer than human-driven vehicles. Also, we expect that any initial shipments by autonomous trucks will carry commodity, low-cost items like boxes of diapers and food. Landstar carries a lot of special loads like automotive, machinery, and hazmat, where we think human drivers will remain the standard due to the costly freight and related liabilities.
Disney is taking on Netflix with a new streaming service in the United States. But there’s an even bigger and hotter market where it’s already winning by miles — India. Hotstar, which Disney bought from 21st Century Fox last year, already has nearly as many users as the entire US population. And it’s growing incredibly fast.
The Indian platform now has 300 million monthly active users, Disney (DIS) revealed during its investor day on Thursday. That means its user base has quadrupled in a little over a year — Hotstar had around 75 million monthly active users in India at the end of 2017. Disney is already way out in front thanks to Hotstar. At the end of 2017, the Indian platform dwarfed Amazon and Netflix, which had 11 million and 5 million Indian users respectively, according to Counterpoint Research.
Global chemical giants DowDuPont Inc. and BASF SE are investing millions to ramp up production of an indigestible sugar found naturally in breast milk. Infant formula makers like Nestle SA can’t get enough of the synthetic ingredient. Now the companies are eyeing a potentially bigger customer: adults. DuPont estimates the annual market could reach $1 billion.
Human milk oligosaccharide is the third most common solid in breast milk, after lactose and fat. HMO escapes digestion, allowing it to reach the colon where it feeds beneficial bacteria. HMOs may explain why breast-fed babies tend to fare better than formula-fed, said Rachael Buck, who leads HMO research at Similac formula-maker Abbott Laboratories.
DuPont plans to spend $40 million building out its HMO production capacity this year, its second biggest capital investment after expanding a factory that makes Tyvek. Meanwhile, it’s partnering with Lonza Group AG to make enough product to meet current demand. DuPont will become a stand-alone company when it splits from DowDuPont on June 1.
After two decades of research, Abbott was first to bring HMOs to the U.S. baby nutrition market in 2016. It’s now expanded to 15 countries. Nestle last year rolled out HMO formula in Gerber and other brands across 40 countries. HMOs nourish bacteria that “train’’ immune system cells, 80 percent of which reside in the gut, said Jose Saavedra, Nestle chief medical officer. The health claims propelled about $600 million in sales of HMO formula last year for each of Abbott and Nestle SA.
Danish biotechnology company Glycom S/A is targeting the adult digestive health market with HMO supplements it began selling in the U.S. and Europe late last year. The company touts its Holigos IBS product as managing symptoms of irritable bowel syndrome, including abdominal pain, constipation diarrhea and bloating. It sells 28 doses on Amazon.com for $50.
Oil had reached a two-year high, and soda bottles are made of PET, which, like all plastics, is basically just processed oil. As the price of “raw” plastic increased, recycled plastic—a natural substitute for manufacturers—became more expensive too. What was good for cities’ recycling programs was bad for the companies that did business with them. The Coca-Cola Company’s Spartanburg, South Carolina, plant, which had opened in 2009 to recycle old soda bottles into new ones, idled as recycled PET plastic prices went through the roof.
Americans are still diligently filling our blue bags with everything we can, but there are fewer places for our dirty goods to go to find redemption. That’s in part thanks to China’s 2017 decision to shut the door on imports of recycled materials, ending a two-decade stretch during which the U.S. came to rely on the country to take and process about 70 percent of its used paper and 40 percent of its used plastic. In 2017, Republic Services, the second-largest waste collector in the U.S., was selling about 35 percent of its recyclables to China. By the end of 2018, China’s National Sword policy, which banned plastics outright and placed strict standards on paper imports, brought that number down to 1 percent.
After China stopped buying, a supply glut sent prices for recycled materials down, and fast. Recyclers found themselves dumping paper in landfills outside Seattle and incinerating plastic in the suburbs of Philadelphia. Glass recycling is local but expensive, and its reuse had often been subsidized by paper and plastic, so with paper and plastic prices in freefall, glass disposal became more of a burden too. In October, Northeastern recyclers were sending just 54 percent of the bottles they collected to processors for reuse. The rest were basically landfilled.
The hunger of Chinese manufacturers for wood pulp, plastic, and aluminum can’t be met by Chinese suppliers or even big commodity exporters like Brazil and Indonesia. Chinese importers solved this problem by buying enormous amounts of recyclables to substitute for raw materials. China went from bringing in 7 million tons of recycled material between 1994 and 1998 to 104 million tons between 2009 and 2013—a 15-fold increase.
In other words, the capitalists killed inflation. In the decades after World War II, Polish economist Michal Kalecki depicted inflation as a product of the struggle between business and labor. If workers manage to extract big wage increases, their employers recoup the costs by putting through price increases, forcing workers to seek even more, and so on in a wage-price spiral. In contrast, if workers have little or no leverage, as is now the case in many industries, the wage-price spiral never gets started.
I observed something fairly early on at Apple, which I didn’t know how to explain then, but I’ve thought a lot about it since. Most things in life have a dynamic range in which [the ratio of] “average” to “best” is at most 2:1. For example, if you go to New York City and get an average taxi cab driver, versus the best taxi cab driver, you’ll probably get to your destination with the best taxi driver 30% faster. And an automobile; what’s the difference between the average car and the best? Maybe 20%? The best CD player versus the average CD player? Maybe 20%? So 2:1 is a big dynamic range for most things in life. Now, in software, and it used to be the case in hardware, the difference between the average software developer and the best is 50:1; maybe even 100:1. Very few things in life are like this, but what I was lucky enough to spend my life doing, which is software, is like this. So I’ve built a lot of my success on finding these truly gifted people, and not settling for “B” and “C” players, but really going for the “A” players. And I found something… I found that when you get enough “A” players together, when you go through the incredible work to find these “A” players, they really like working with each other. Because most have never had the chance to do that before. And they don’t work with “B” and “C” players, so it’s self-policing. They only want to hire “A” players. So you build these pockets of “A” players and it just propagates.
In my experience solving difficult problems, the best talent available rarely led to the best solutions. You needed the best team. And the best team meant you had to exercise judgment and think about the problem. While there was often one individual with the idea that ultimately solved the problem, it wouldn’t have happened without the team. The ideas others spark in us are more than we can spark in ourselves.
Long-term business and investing skill is the intersection of getting rich and staying rich. Different generations whose formative experience was calm and growth-oriented may be better at getting rich – they’re willing to take risks. But generations whose upbringing was punctuated by crash and decline may be more attuned to staying rich – conservatism, room for error, and rational pessimism. The best investors find a balance between the two, toggling between the two traits at the right time. But that’s rare. And the reason it’s rare even among smart people is because the psychological scars of our experiences don’t discriminate on IQ. Or more specifically, they sit above IQ in the information hierarchy that people use to make decisions.
It’s never clear one way or another. People with different experience than us aren’t necessarily smarter. They just see the investing world through a different lens.
A 13-year-old girl being killed by a drunk driver is something everyone reading this article will agree is atrocious. Yet virtually all of us will say it’s atrocious without taking further action. But Candace Lightner’s daughter was that 13-year-old girl, so she created Mothers Against Drunk Driving to do something about it. Personal experience is often what pushes you from “I get it” to “I get it so well that I’m going to do something about it.”
Same in investing. Spreadsheets can model the historic frequency of big declines. But they can’t model the feeling of coming home, looking at your kids, and wondering if you’ve made a mistake that will impact their lives. Studying history makes you feel like you understand something. But until you’ve lived through it and personally felt its consequences, you may not understand it enough to change your behavior.
“Personal finance is more personal than it is finance,” says Carl Richards. To each their own. I always try to remember that before criticizing others’ decisions. “Your yesterday was not my yesterday, and your today is not even my today,” writes the book Our Kids.
Behind this $35 billion delivery market isn’t exactly efficiency, though—it’s a fight between Meituan and Alibaba Group Holding Ltd., China’s most valuable company. Alibaba and its various subsidiaries dominate the country’s online retail market for physical goods, but Meituan is leading the way in services. Its namesake app, a sort of mashup of Grubhub, Expedia, MovieTickets.com, Groupon, and Yelp, has 600,000 delivery people serving 400 million customers a year in 2,800 cities. Alibaba is betting it can undercut Meituan to death. Both companies are spending billions in an escalating war of subsidies that might persuade even Jeff Bezos to cut his losses.
“They thought the business was group buying. We thought the business was e-commerce for services.”
Once Wang (of Meituan) had control of the meal delivery market, he began to spend more aggressively. He discounted the food so he could upsell users on hotel bookings and airfare. He was the first in China to make movie ticket sales easy online. Within a few years he’d shifted that market from 10 percent digital to more than 60 percent. By mid-2015, soon after Meituan raised $700 million in venture funding from Alibaba and others, Wang had spent so much money to keep up that he needed another round of venture capital.
Alibaba refused to put more money into Meituan, because the younger company wouldn’t fully integrate its app with Alibaba’s, according to Meituan co-founder Wang Huiwen. Wang Xing worried he’d lose control of the business if that happened. Instead, Meituan brokered a deal with Alibaba’s longtime archrival, Tencent Holdings Ltd., best known for its WeChat super-app. Tencent agreed to lead Meituan’s fundraising by pledging $1 billion, merge Tencent’s own delivery service with Meituan, and let the combined company operate independently. “It was a very easy meeting,” Wang says. “What they had, we needed. What we had, they needed.” When Meituan called a board meeting to make things official, Alibaba got 12 hours’ notice and no choice in the matter, according to people familiar with the proceedings. Wang had what he wanted. He’d also made some fearsome enemies.
Artificial intelligence software helps determine drivers’ itineraries. An average driver makes 25 deliveries a day, up from 17 three years ago; that’s about 20 million daily deliveries across the network. For comparison, Grubhub Inc., the U.S. leader and owner of Seamless, delivers fewer than 500,000 meals a day. Meituan’s scale dwarfs that of India’s dabbawalas, who deliver some 80 million pail lunches a year.
The math, and Meituan’s potential, can be dizzying. China’s urban areas have 2,426 people per square kilometer (6,283 per square mile), almost eight times the comparable U.S. population density. While the U.S. has 10 cities with 1 million or more people, China has 156. Deliveries in China cost about $1, compared with $5 in the U.S., iResearch says. Meituan retained about 63 percent of the country’s meal delivery market at the end of 2018, according to Bernstein Research, even as Alibaba spent billions over the previous several years to capture most of the rest.
In the past, other listing portal competitors were relatively undifferentiated. Zillow has been the clear market leader, and there was no credible threat that could unseat it from its powerful position. However, the entry of iBuyers with a service that made instant offers on a home – online – was novel and compelling, just like the Zestimate in 2006. Suddenly, more and more consumers were beginning their home selling process not on Zillow, but on other web sites like Opendoor and Offerpad. This was a key existential threat for Zillow. The iBuyer business model is Zestimate 2.0 – the natural starting point for determining your home’s value. What’s more accurate than an actual offer on your home?
The exchange-traded fund industry has a competition problem. The $4 trillion industry has been unevenly bifurcated for years: Just three firms have steadily held on to 80% of ETF assets in some 600 products. That leaves another 1,600 ETFs and more than 100 firms competing like gunslingers in the Wild West. And there’s a new sheriff in town.
The Big Three— BlackRock ’s iShares, Vanguard Group, and State Street ’s Global Advisors—all have a comprehensive line of funds at hard-to-beat prices. In other words, for the most part, the ETF industry is dominated by good products offered by good companies. But the rest of the asset-management industry, along with the Securities and Exchange Commission, is now asking whether that concentration of power will snuff out innovation, or lead to a dearth of choices for investors.
Most simply, ROIC measures how many incremental dollars of earnings a company earns by reinvesting their earnings. As a simple illustration, a company with an average 10% ROIC needs to invest 50% of their earnings to grow 5% (10%*50%=5%). A company with a 50% ROIC only needs to reinvest 10% of earnings to grow 5% (50%*10%=5%). In the former case, $0.50 of every dollar of earnings is not needed to fund growth, while in the latter case $0.90 is not needed to fund growth. This means that the higher ROIC company will generate 80% more free cash flow than the average ROIC company making the company 80% more valuable. This is why we focus on ROIC in our analysis. High ROIC businesses are significantly more valuable than average ROIC companies even when they produce the same level of growth.
The transfer of ownership for Crackle, however, arrives at a time when ad-free streaming services like this are seeing newfound interest, with Amazon’s launch of IMDb’s FreeDive, Roku’s The Roku Channel, Walmart’s Vudu, Viacom’s new addition Pluto, Tubi and others now making gains.
As part of the deal, Sony will contribute to the new venture its U.S. assets, including the Crackle brand, user base and ad rep business, according to The Hollywood Reporter. It also will license to Crackle Plus movies and TV shows from the Sony Pictures Entertainment library, as well as Crackle’s original programming, like its shows “Start Up” and “The Oath,” for example.
CSS Entertainment will bring six of its ad-supported networks — including Popcornflix, Popcornflix Kids, Popcornflix Comedy, Frightpix, Espanolflix and Truli, plus its subscription service Pivotshare — to Crackle Plus.
The combination will lead Crackle Plus to become one of the largest ad-supported video-on-demand platforms in the U.S., the companies claim, with nearly 10 million monthly active users and 26 million registered users. The new service will also have access to more than 38,000 combined hours of programming, more than 90 content partnerships and more than 100 networks.
So Andreessen Horowitz spent the spring embarking on one of its more disagreeable moves so far: The firm renounced its VC exemptions and registered as a financial advisor, with paperwork completed in March. It’s a costly, painful move that requires hiring compliance officers, audits for each employee and a ban on its investors talking up the portfolio or fund performance in public—even on its own podcast. The benefit: The firm’s partners can share deals freely again, with a real estate expert tag-teaming a deal with a crypto expert on, say, a blockchain startup for home buying, Haun says.
And it’ll come in handy when the firm announces a new growth fund—expected to close in the coming weeks, a source says—that will add a fresh $2 billion to $2.5 billion for its newest partner, David George, to invest across the portfolio and in other larger, high-growth companies. Under the new rules, that fund will be able to buy up shares from founders and early investors—or trade public stocks. Along with a fund announced last year that connects African-American leaders to startups, the new growth fund will give Andreessen Horowitz four specialized funds, with more potentially to follow.