Curated Insights 2019.11.22

The new dot com bubble is here: it’s called online advertising

The benchmarks that advertising companies use – intended to measure the number of clicks, sales and downloads that occur after an ad is viewed – are fundamentally misleading. None of these benchmarks distinguish between the selection effect (clicks, purchases and downloads that are happening anyway) and the advertising effect (clicks, purchases and downloads that would not have happened without ads).

It gets worse: the brightest minds of this generation are creating algorithms which only increase the effects of selection. Consider the following: if Amazon buys clicks from Facebook and Google, the advertising platforms’ algorithms will seek out Amazon clickers. And who is most likely to click on Amazon? Presumably Amazon’s regular customers. In that case the algorithms are generating clicks, but not necessarily extra clicks.

I had never really thought about this. Algorithmic targeting may be technologically ingenious, but if you’re targeting the wrong thing then it’s of no use to advertisers. Most advertising platforms can’t tell clients whether their algorithms are just putting fully-automated teenagers in the waiting area (increasing the selection effect) or whether they’re bringing in people who wouldn’t have come in otherwise (increasing the advertising effect).

What powered such a great decade for stocks? This formula explains it all

Shockingly, a vast majority of the gains over the past decade can be explained almost exclusively by improving fundamentals. Earnings growth and dividends explain nearly 97% of the annual returns for the 2010s. So the change in valuations have played a minor role in explaining the gains during this cycle.

The 1980s and 1990s both experienced a massive repricing in terms of valuations outpacing the underlying corporate fundamentals. The 2000s saw a correction in terms of both fundamentals and sentiment because of the strong performance in those prior decades.

The mining of media (or the “streaming wars” are just a battle)

Today, however, the marginal cost of distributing content to an incremental consumer is approximately zero. And the consequence here is profound. Under this model, the unit economics of all viewers/subscribers improve as you add more viewers/subscribers (e.g. a $100MM show costs $100MM irrespective of how many users you have, but the per user cost goes down). This doesn’t mean giving away said service for free or at an artificially low price solve for profitability. However, it does mean that the more people who have your service, the less you require from each subscriber to generate a profit. And if you have a guaranteed business model – say, selling another iPhone, Showtime subscription, ad impression, datapoint, or two-year wireless subscriptions – there are incentives to maximize your userbase (more people you can upsell to) and the amortization of fixed costs (the higher your unit contribution).

Alibaba aims to deliver with $16bn courier venture

When it set up Cainiao six years ago, Alibaba was an asset-light company, spending only Rmb2.5bn that year. The logistics arm was a joint venture alongside a group of Chinese courier firms, a retailer, and a property company. In 2016, a group of private investors poured in a further Rmb10bn.

The original plan was to use Alibaba’s data in partnership with the networks of the courier companies. “We established Cainiao because we hope to use the power of our infrastructure, and the power of our data, to help these delivery companies, to provide better service to consumers,” said Jiang Fan, president of Tmall and Taobao.

But today, Alibaba is moving, like Amazon, to build out its own delivery platform, acquiring stakes in delivery companies, running a network of warehouses and installing 40,000 lockers across China so that customers can pick up their parcels.

In part, it has been forced to improve delivery by its rival JD.com, which has offered same day delivery in some Chinese cities for years. By contrast, shoppers have complained that items bought from Alibaba’s Tmall and Taobao platforms could be stuck in transit for days and battered by the time they arrived at your door.

The beauty of Singles Day

In fact, Estée Lauder broke its 2018 sales record a mere 25 minutes after pre-sales for the e-commerce festival started, and was the first brand in the history of 11.11 to reach one billion RMB in pre-orders alone. Meanwhile, the beauty brand that landed at the top of the list by midnight on November 12 was L’Oréal Paris, which surpassed Estée Lauder along with L’Oréal Group-owned Lancôme in the final 11.11 beauty ranking. These two brands, along with fourth-place Olay, also achieved over 1 billion RMB GMV in sales.


Why Nike quit Amazon, but doubles down on Tmall

Nike may have chosen to forgo its partnership with Amazon, but working with local e-tailers has become vital for consumer brands in China. 100% of activewear brands now sell on Tmall, and 82% sell on rival JD.com. As traffic to Baidu continues to decline and consumers begin their purchase journey on Tmall, the ecosystem is increasingly important as a content and marketing platform. According to Gartner L2’s most recent data, 96% of index activewear brands include video on Tmall, and 65% feature celebrity content on the platform. 83% of tracked activewear brands feature a “brand zone” at the top of search results, where brands put marketing messages front-and-center to crowd out third-party sellers.

Balsa shortage threatens wind power rollout

Better known for its use in model aircraft, table-tennis bats and surfboards, balsa is a key component of many wind turbine blade cores because it is both strong and lightweight. Prices have almost doubled in the past 12 months and suppliers are warning that the balsa shortage threatens a bottleneck in new wind farm developments next year. The wood is grown almost exclusively in Ecuador, Indonesia and Papua New Guinea. Producers in the Latin American country have benefited from the shortage, saying prices are likely to keep rising next year.

BlueMountain: the hedge fund that lost its way

As it outlined its conviction to investors last December, BlueMountain said the shares could be worth $60 because the market was overestimating the utility’s wild fire liabilities. BlueMountain’s opening $200m bet on PG&E had been at an average share price of close to $46. Last November, it added another 3.7m shares at an average share price of about $24, regulatory filings show. Late last month PG&E shares slumped to a record low of below $4 after the company cut off power to almost 3m Californians in an attempt to avoid the risk of more wild fires. Analysts at Citigroup have warned that the stock may become worthless.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.