Curated Insights 2019.08.02

Notre-Dame came far closer to collapsing than people knew. This is how it was saved.

The fire warning system at Notre-Dame took dozens of experts six years to put together, and in the end involved thousands of pages of diagrams, maps, spreadsheets and contracts, according to archival documents found in a suburban Paris library by The Times.

The result was a system so arcane that when it was called upon to do the one thing that mattered — warn “fire!” and say where — it produced instead a nearly indecipherable message.

Hidden networks: Network effects that don’t look like network effects

There are a host of companies that build the tool or product before they build the network. Delicious (with bookmarks) or Instagram (with filters) are the classic examples of a “come for the tool, stay for the network” company. But there are also companies building the network before they build the actual product or tool. Think of this as “Come for the network, stay for the tool.”

These companies can be especially formidable because no one understands the power of what they’re doing until it’s too late to compete. The concept is that you start by building a community that acts like a network, with users interacting, engaging, and generally creating value for each other. Eventually, a product is introduced that catalyzes or amplifies the way the network engages. Before the product arrives, there isn’t anything measuring or monetizing the network, so it can be difficult to really see the strength and potential of these networks.

These latent networks are the hardest “hidden network effects” to both predict and execute. Often times these communities are actually an audience rather than a latent network, meaning users derive value from the central node, not the network. When it’s just an audience, the tool or product ends up scaling more like a linear business (e.g., a DTC product) than a network. Differentiating a product-less network from an audience is very difficult. Many a celebrity entrepreneur has believed they had a network that wanted to engage with each other, before realizing that what they actually had was an audience that just wanted a piece of their celebrity heroes.

So what’s the test to tell whether there is a latent network waiting to be activated? A network engages, an audience consumes. Look to see if the network’s users are engaged with each other or just the central node. Ask yourself who is getting additional value when someone new enters this community. If it’s all (or at least some) of the community members, then it’s a network. If it’s just the central node, then it’s probably an audience.

How Etsy crafted an e-commerce comeback

The company is plowing some of its revenue into better online tools for sellers, such as a dashboard to track orders and streamline payments. To grow, “Etsy really needs to offer vendors that support,” says Oweise Khazi, research director at Gartner. And some of Etsy’s most important plans involve its search engine. Fisher, the technology chief, says improved search results added tens of millions of dollars to GMS last year, but there’s room for improvement. Etsy’s search algorithm has long favored lower-priced items, since they tend to sell more frequently. The site now intends to give higher-priced and better-quality goods more weight in search rankings—­making Etsy’s brand more upscale and encouraging shoppers to also consider buying a desk when they’re searching for a desk lamp.

Search tweaks will also help Etsy attack another sore point: shipping. Sellers currently have great leeway to set shipping fees, something that the company believes can turn off buyers. Some 30% of items are eligible for free shipping; Silverman wants to push that figure toward 100%, even at the risk of upsetting sellers. In July, Etsy announced a push to make free shipping standard for orders of $35 or more. Sellers won’t be required to waive shipping fees—but Etsy’s algorithms will give ranking priority to products and sellers that comply, effectively forcing their hand.

Choice Equities on PAR Technology

Par’s third and most interesting business segment is Brink. This unit started in 2014 when PAR acquired Brink Software, a small entrepreneurial operation out of San Diego. The Brink offering accomplishes many of the same POS functions as the legacy hardware business, but the software component is delivered via the cloud and accordingly offers a few critical advantages. For one thing, updating software is seamless with an off-premise offering as it can be initiated from the cloud and updated onsite without any further physical software or hardware add-ons. Additionally, customers get to convert their large and lumpy and sometimes difficult to forecast hardware capex spend to small ongoing monthly payments that are highly forecastable. This business has already turned into a fantastic acquisition, with sales up 25-fold since it was acquired. But we think Brink may be just hitting its stride.

Today Brink has around 8,000 installed restaurants and an impressive customer list. This list includes new customer wins in growing concepts like Sweetgreen, Mod Pizza and Cava but also established concepts like Arby’s and Five Guys. Focusing on the U.S. market first, there are a little over 300,000 quick serve and fast casual restaurants. Brink is currently focused on the Tier 1 and Tier 2 segments, which total ~170,000 locations as their core competency and differentiation comes from not only their ability to serve these multi-location customers successfully, but also their ability to handle these large-scale integrations seamlessly. We note our research indicates Brink is the only cloud POS provider who has successfully completed a 1,000+ store rollout, of which Brink has two to its claim. Given existing relationships with customers with a total restaurant count near 35,000 restaurants today, they appear well positioned to continue to convert both existing and new customers alike to the Brink solution.

Looking out over the next year or two, we think it’s conceivable that Brink could sign up at least 20,000 restaurants. Beyond this, we see upside potential to this number from wins in the tier three category, and looking further out, international expansion. In addition to restaurant growth, we also think Brink could grow their monthly recurring revenue (MRR) per customer. Currently they earn just under ~$200/month from their cloud customers, or around $2,000 in average revenue per user (ARPU). Given the POS offering is typically regarded by restauranteurs as the brain or control center of the restaurant, we believe other add-on functions like food temperature monitoring, delivery optimization or inventory management features could be added into the Brink software package driving MRR higher. And the company is currently planning on introducing a payments solution which would be further additive to MRR.

A review essay of Thomas Piketty’s Capital in the Twenty-First Century

Admittedly, such pessimism sells. For reasons I have never understood, people like to hear that the world is going to hell, and become huffy and scornful when some idiotic optimist intrudes on their pleasure. Yet pessimism has consistently been a poor guide to the modern economic world. We are gigantically richer in body and spirit than we were two centuries ago. In the next half century—if we do not kill the goose that laid the golden eggs by implementing leftwing schemes of planning and redistribution or rightwing schemes of imperialism and warfare, as we did on all counts 1914-1989, following the advice of the the clerisy that markets and democracy are terribly faulted—we can expect the entire world to match Sweden or France.


When the safety net pays for itself

Adults use benefits that end up costing additional money—an extra 60 cents or so on top of the $1 you spent. But health care and education for kids often reduces dependence on aid and lifts earnings. Over time, you get back your $1—plus about 47 cents.

Universal laws of the world

In law, the reason the burden of proof lies with the prosecution is that it’s often impossible to prove something didn’t happen. Outside of the courtroom the opposite rule prevails, and the commentator is allowed to give an opinion but the critic must debunk him with evidence.

There is a thriving market for bad commentary because they give readers intellectual cover against their own biases, prejudices, and incentives. When many people want bad commentary to be right it becomes harder to convince them that it’s wrong.

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