Curated Insights 2020.03.20

Spotify: The ambient media company

We believe the market that we’re going after is going to be at least a billion, probably two or three billion people around the world. And if we are going to win that market, I think we’d have to be at least a third of that market. So we’re talking about somewhere between 10x – 15x of opportunity left.

The battle for sustained success in the ambient media landscape will come down, in many ways, to balance. Balancing long term vision with the ability to react nimbly to near term developments. Balancing the need to address users at scale with the importance of the human element in creation and curation. And, for many companies, balancing commitment and investment to audio with broader business initiatives. On all three counts, Spotify comes out ahead.

If it takes a number of months or potentially years to make your money back, that gives investors time to take advantage of higher expected returns. For those who are net savers, this means plenty of time to deploy capital at lower prices than we were being offered in recent months. For those with diversified portfolios who won’t be making new contributions, this means opportunities to slowly rebalance into the pain.

Curated Insights 2020.03.06

Andreesen-Horowitz craps on “AI” startups from a great height

This is something which is true of pretty much all machine learning with heavy compute and data problems. The pricing structure of “cloud” bullshit is designed to extract maximum blood from people with heavy data or compute requirements. Cloud companies would prefer to sell the time on a piece of hardware to 5 or 10 customers. If you’re lucky enough to have a startup that runs on a few million rows worth of data and a GBM or Random Forest, it’s probably not true at all, but precious few startups are so lucky. Those who use the latest DL woo on the huge data sets they require will have huge compute bills unless they buy their own hardware. For reasons that make no sense to me, most of them don’t buy hardware.


Email addresses and razor blades

Here there is one angle where this deal looks a bit like Harry’s: one of Credit Karma’s free offerings is a free tax filing service; that is obviously a threat to TurboTax, Intuit’s biggest money-maker (which has a free version it hopes you never find). It is even possible that the FTC seeks to block the deal on these grounds. I suspect, though, that Credit Karma and Intuit will simply agree to spin off the tax filing unit, because that is not Credit Karma’s true value.

What is actually valuable are Credit Karma’s users — 90 million of them in the U.S. alone, 50% of which are millenials. Those 90 million users don’t just visit Credit Karma directly, they have already shared substantial amounts of their personal financial data, and have consented to receiving emails about their credit scores. They are, in other words, the best possible customer acquisition channel for a company like Intuit, and for all of the reasons I just recounted, customer acquisition is the most valuable part of the digital value chain. Intuit will gladly suffer a tax filing competitor as long as it has the best possible channel to acquire the next generation of tax filers.

This gets at the real commonality between Harry’s and Credit Karma: Harry’s is less valuable than it might have been because of Facebook and Google’s dominance of digital advertising; Credit Karma is more valuable than it might seem because they offer a way to acquire customers without depending on Facebook and Google. This is a particularly notable insight given the FTC’s involvement in the Harry’s acquisition, and potential involvement in Credit Karma: one potential outcome of the greater competition that may have arisen in digital advertising absent Facebook’s acquisition of Instagram and Google’s acquisition of DoubleClick would be increased viability for DTC companies, and decreased value for simply aggregating an audience with no direct business model.

Latin America’s Despegar wants to double bookings by 2025: How realistic is that?

You might assume that a small agency like Despegar would be even more reliant on gaming Google’s search engine than global giants. Yet Despegar only relies on Google for only 12 percent of its site traffic, Scokin said. Despegar is most likely less dependent on Google for free customer referrals than companies like Expedia and TripAdvisor, though those latter companies don’t break out their numbers. That freedom reduces its exposure to Google’s rising cost for advertisers.

Despegar said it has worked hard at boosting other forms of unpaid traffic, such as brand advertising that encourages consumers to download its mobile app and book directly. Expedia, which holds a minority stake in Despegar, could, like other Western travel brands, learn from Despegar’s modest exposure to Google. In the past two years, Despegar’s overall marketing costs as a percentage of all gross bookings have dropped.

Despegar has decided not to offer a paid subscription service for added benefits the way MakeMyTrip has with its Double Black program, where users can avoid cancellation fees for bookings by paying an annual fee. Given the potential for subscriptions in travel, as smaller European player eDreams has shown, that might prove to be a mistake. In other words, too many Despegar customers can’t afford to buy their trips outright. That fact, combined with how Despegar has significantly changed its cost model and revenue model, may make it trickier to predict how future economic turmoil might impact the company.


Investing in challenger to dominant Tetra Pak – Greatview Aseptic

In 1952 the Swedish businessman Ruben Rausing convinced a local dairy company that his peculiar tetrahedral shaped cardboard beverage carton was the way of the future. The rest as you say, is history. Aseptic packaging as it is called became the most popular way globally to sell milk products but also many other beverages, the packaging being superior in both preserving the drinks taste and ease of transportation. Later on the Tetra Brik was invented and the company Rausing created with these innovative products became Tetra Pak (part of Tetra Laval). The company today has 11.2bn EUR of Net sales. The case of Tetra Pak is interesting because the company has over the years had no to little competition in many markets – a dream situation for any company to be in. But how was it possible to be so successful and why did not more competition come in? Firstly it came down to patents, which gave the company a monopoly position in the early years. Secondly the company has and continues to be extremely well run with a clever sales strategy. Tetra Pak sell the filling machines that creates the packaging, to the beverages producers at a low price. Then making the margins on selling the cardboard box paper used by the machines, which of course will be continuously ordered. The contracts for the machines tied the customer to not buy the cardboard paper from anyone else. In this way the customers were tied to Tetra Pak and had to invest in new lines of machines, to switch to a competitor, obviously at high switching costs. In 2002 it was estimated that Tetra Pak still had 85% market share globally, but around this time things slowly started to change, partly due to regulatory intervention but also due to beverages producers who helped create companies like Greatview Aseptic Packaging.

Deglobalization is the most powerful theme in the world

“Deglobalization is the most powerful theme in the world,” said the investor. “It will reshape politics, economics and markets in profound ways.” The process has only just begun. “Everyone built global supply chains to produce goods for the US consumer.” In making those capital commitments, they assumed the geopolitical landscape and international trade relations in coming decades will remain unchanged. The process hollowed out middle America, while enriching the coasts. “It was inevitable that a leader came along to say this is not okay.” But globalization has advanced past the point where supply chains can be severed abruptly without inflicting catastrophic damage on the US economy. “That leader would have to give US corporations time to disassemble their supply chains and rearchitect their means of production closer to home, while preventing the Chinese economy from imploding and sparking a global depression.” The trade war was the warning shot to American CEOs that began the process. The battle with Huawei over 5G supremacy extended the battle lines to encompass the cybersphere.

The coronavirus will accelerate this trend. “What is unfolding in a slow-motion war, where there will be massive destruction of fixed-asset investments. And not just in China, but in Germany, Europe, and nations that supply many of the intermediate goods.” The impact will not leave American companies unscathed in that they too will suffer capital losses on existing supply chain infrastructure. But the US will suffer far less than nations that oriented their economies toward exporting to the American consumer. “And if real interest rates truly mediate the demand for investment capital and the supply of savings, then two things are likely: (1) as in any war, governments will continue to suppress real interest rates to mitigate the pain from the destruction of savings (obsolescence of supply chain capital investments), and (2) that suppression will meet its match as demand for capital (to rebuild North American supply chains) will ultimately lead to a rise in the real rate of interest.”